Local Audit and Accountability Bill [HL]

Lord Palmer of Childs Hill Excerpts

Wednesday 22nd May 2013 Lords Chamber

[Lord Palmer of Childs Hill]

My Lords, following on from that resounding vote of confidence, I need to declare an interest, although I think that my interest has already been declared for me by my noble friend Lord Tope, my friend of 27 years and currently on Barnet Council. I am probably the only Member of your Lordships’ House who still chairs an audit committee of a London borough. As my noble friend said, I was rather stupidly elected last night and, as noble Lords possibly know, the protocol in most boroughs and local authorities is that it is an opposition councillor who fulfils that post. That is what we did when we were in power, and I am glad to see that this is what has happened in the borough of Barnet when the Conservatives are in power.

I understand the desire to put the publicity code on a statutory basis, to prevent councils wasting public money on council-produced newspapers and magazines, often containing political propaganda, even at the level of, “Aren't we doing well?”—and very often it is purely at that sort of level. Putting it on a statutory basis, as framed, is unnecessary and heavy-handed. Local authorities need to communicate and local newspapers are useful, but are not as effective as they were. In my locality I find that I no longer know who the editor is, or even if there is one. I do not recognise the names of the local journalists, who are reduced in number, mainly office-based and changing with great rapidity. The journal, be it local authority or commercial, is in the end only as good as the guy delivering it—or not delivering it, as the case may be. London boroughs support commercial newspapers; I think that my noble friend Lord Tope referred to a figure of £26 million nationally. Some £4 million per annum in London is spent on advertising.

I believe that this aspect of the Bill is aimed at that small minority of councils that misuse public money for overtly political purposes. I hope that the Minister will confirm that during the passage of the Bill we can come up with a less heavy-handed way of dealing with this. My noble friends Lord Tope and Lady Eaton both referred to this. The Minister said this Government are against top-down government, but what is this if not top-down government?

I now turn to the abolition of the much-reduced-in-size Audit Commission, and the setting up of a system of locally appointed external auditors. A main concern of the Bill is the preserving of auditor independence. Currently, it is the Audit Commission that appoints external auditors and that is seen as preserving auditor independence. It prevents cherry-picking of audit opinions and helps the interaction with the local authority start on a level playing field. There might also be a concern from auditors, who quite naturally might believe that issuing unfavourable audit opinions may adversely impact on their ability to obtain contracts in the future, as the very people that they might criticise in their audit opinions will have a say in their future appointments.

The Bill attempts to cover this through an independent panel to appoint auditors, but, again, these panellists—as has been mentioned by other noble Lords—will need to be skilful individuals who understand what is important in terms of external auditor characteristics and can assess value for money. Moreover, these panels will be joint panels, appointing to a number of local authorities, and will—with difficulty—need to ensure that conflicts of interests are resolved. The conflict I envision is between internal audit and external audit. In the London Borough of Barnet, one major accounting firm has been appointed by the Audit Commission to carry out the audit while locally, the internal audit team is enhanced by a contract with a separate team from a major accounting firm. Therefore, if this goes out to an independent panel, one can see pretty clearly that there could be conflicts where an internal auditor might have to resign in order to be the external auditor. It is incredibly complex.

The Bill concentrates on the appointment of external auditors, but the reality—and I am speaking as the current chair of an audit committee—is that external audit at a reasonable cost is only as good as the internal audit team of that local authority. In carrying out the external audit, the auditor will first look at the internal audit process and determine what reliance could be placed on it. I cannot see any comment on this in the Bill.

Then there is the process and transparency of the authority’s audit committee. In Barnet, we have a committee of Labour councillors, Conservative councillors, two independents who are not councillors and me, a Liberal Democrat opposition councillor, as chairman. We involve the public, many of whom are investigative bloggers, who have a space in the agenda to ask questions and supplementary questions, which I must admit officers sometimes find extremely uncomfortable. At the last meeting, there were 15 questions plus supplementary questions which I, as chairman, had to answer, even though I am not a member of the administration. The audit committee sessions are often recorded on video by these members of the public and appear on their blog sites, Facebook and the like. I must tell your Lordships that I find this a great benefit because it is actually challenging and brings transparency, however much at times it might seem uncomfortable.

A considerable amount of audit of process is done by the internal team which, if necessary, buys in extra accountancy capacity. Any service area of the council that is seen to have produced less than a satisfactory grading is then required to send its service area director and/or assistant director to come and explain how they intend to tackle the problem. It is not a blame culture: if the report at the next meeting is still unsatisfactory, they have to come back to be grilled again by the audit committee, which is all-party and no-party. I am pleased to say that it is rarely necessary for a director or assistant director to come back. We give them time between the meetings, and, invariably, the satisfactory grading is achieved by that method.

The noble Lord, Lord Christopher, said that this was not to do with potholes, which concern most people. This shows he does not know what happens on an audit committee. If there was a problem with potholes, it would at least be brought up by members of the public, if nobody else. It would be addressed by the audit committee. The director and assistant director of that service area would be called to that committee to explain and, by the next meeting, one would have to have some resolution of that problem. That is what the audit committee of a local authority does.

The noble Lord, Lord Christopher, also mentioned the millions of pounds lost through incorrect investment. We have experience of that in the London Borough of Barnet. A former Conservative administration borrowed money at a good rate of interest; the noble Lord mentioned the same thing. It invested £27.4 million in Icelandic banks. That was not a good decision. What happened? How was this dealt with? Not by the Audit Commission. It was dealt with by a combination of local authorities led by Kent County Council, which combined to deal with the Icelandic Government and banks. Most of that money, amazingly, is coming back—they are actually very lucky. It was nothing to do with the Audit Commission. It was, and can be, done locally. The noble Lord, Lord Christopher, also mentioned value for money as a criterion. That criterion will be dealt with by the National Audit Office under the new regulations.

The theory for the changes in where the audit committee procures audit services to the Companies Act model is that they will increase competition, reduce fees and increase quality. My question is whether it will. I am not convinced. The noble Lord, Lord McKenzie, spoke about the transfer of audits from the Audit Commission to other firms of accountants. Is it not amazing that the Audit Commission, which used to do a lot of the audits itself, has over the past few years transferred 70% of audits to audit firms? The noble Lord, Lord McKenzie, raises the point that few of those firms have had that. He also mentioned that the firm in addition to the four main firms was Grant Thornton, which is still very large. Is it not amazing that, to my knowledge, Grant Thornton got the maximum number of audits permitted of those direct audits lost by the Audit Commission? It took on a lot.

I welcome the expansion to other firms. As a practising chartered accountant, a local councillor and someone dealing with people in business, I can say that a large organisation such as a local authority has to be extremely courageous, as Sir Humphrey would probably have said, to go anywhere other than the larger firms. Although it might seem a good deal—maybe it is more cost-effective and you will get a good deal—if something goes wrong, you will be criticised very fiercely for not having gone to KPMG or PricewaterhouseCoopers. Many local authorities will naturally take the safe course of going to one of the larger firms. We must consider during the passage of the Bill how we can make it easier for that to happen.

I was somewhat appalled when my noble friend Lord Tope said that we have another 24 hours of this Bill; I am only relieved that it is not all in one sitting. I look forward to the Bill being amended and improved during that process.