Local Audit and Accountability Bill [HL]

Lord True Excerpts

Wednesday 19th June 2013 Grand Committee

[The Earl of Lytton]

My Lords, I have an amendment coming up, Amendment 14BBA, but had I known how the discussion on this amendment moved by the noble Lord, Lord McKenzie, would proceed, I would have asked for it to be grouped with these amendments, so it is possibly better that I make my comments now and consolidate the entire process somewhat. Otherwise, I fear that Amendment 14BB will have stolen a large part of my thunder, apart from anything else.

I queried the majority of independent members issue on Second Reading. I am mindful of what the Minister said on Monday: that the panel would not need to be large but that independence was important. I can certainly relate to the question of whether you have a committee and a panel as a term of art, with the duplication that that involves, to which I referred earlier. I think that the principle of an independent chairman is a given, but it appears to me from my much lesser knowledge of these procedures than that of other noble Lords that some councils might have few politically independent members. I do not know how many would have none at all, but there must be some. Even political independence, it seems to me, is no guarantee of freedom from bias, if that is the point that the Bill is intended to address. The subtitle of my amendment would be, “Precisely what do we mean by independent in this context?”. That ought to be explained.

Picking up on the point made by the noble Baroness, Lady Eaton, it seems to me that objectivity and competence, rather than independence, would be a better test for this purpose. I am bound to admit that I am at a loss to know which would be the more readily capable of definition and, if necessary, enforcement, so to some extent I can see it from the Government’s side. I think we are all agreed that we are trying to get a true and fair picture of an authority’s financial affairs. Up to a point, that works back to the basis of oversight from within the council.

Apart from asking the Minister whether she can enlighten the Committee on the question of independence, I remind your Lordships, who all know it far better than I do, of the veritable layer cake of qualifications and eligibility criteria that already applies to audit and to auditors, to which the Bill in this respect risks adding further complexity. I relate to the points made by the noble Baroness, Lady Eaton, about the independence and objectivity of auditors as professional people embedded in their culture, training and ability to retain their professional status. As a member of another profession altogether, I very much relate to that. Ultimately, it is the auditor who is doing the scrutiny, not the committee or panel. They are there simply to select—if selection be needed; we will get to that later. If the auditor is given the proper tools and the freedom to act and attacks it with the independence of mind necessary, that is the fundamental safeguard sought by the Bill.

[Lord True]

My Lords, I declare an interest myself, as leader of a local authority, and apologise for not being able to take part in these proceedings before. I shall make a very small point, which need not be clarified now but perhaps could be before Report.

I have a great deal of sympathy with the tenor of comments being made universally around the Committee about the risks of overlapping. I strongly follow the noble Earl’s comments about the importance of the integrity and role of audit as it is practised by local authority officers at the moment. I was going to raise my query later, but I shall follow the noble Earl, because it affects independence, which is the subject of this amendment. Paragraph 2(2)(b) of Schedule 4 would not disqualify somebody from being a member if,

“the panel member has not been an officer or employee of an entity connected with the authority within that period”—

that is, for five years.

The only thing that needs to be made clear and perhaps can be made clear on Report is whether that means the authority or the individual. Let us posit a case of somebody who has been an officer of a body and has gained a great deal of lifetime experience, and has retired early, perhaps eight years ago—we do not want any age complication, so let us just say that he no longer works for that authority. After his departure, some years later, that body becomes a connected authority, whereas he has had no connection with it for some time. His experience might be useful, and one does not want to exclude potential individuals by idle wording. I take it that the Bill means that somebody who has been working for, or connected with, the authority in the past five years should be excluded. However, the way in which it is written could mean that if you have worked at any time for a body that becomes connected in the previous five years, you would be excluded. I think that the second category might be considered, as somebody could be useful in pursuing this role.

[Lord Wallace of Saltaire]

My Lords, the definition of independence is set out in Schedule 4, which says that a person is independent if they are not a member or officer of the authority and have not been within the past five years, or a “relative or close friend” of such a person. Questions of objectivity and competence, particularly competence, are, apart from qualifications in accountancy, a little more subjective. Professional competence is defined by qualifications rather than by other things.

The intention here is to allow flexibility rather than to be too prescriptive. I am told that 80% of local authorities already have audit committees; 31% have at least one independent member and 15% have more than two independent members. If panels can be constituted from members of the audit committee, that is fine, provided that they are independently chaired and have an independent majority. There could be two independent members of the local audit committee, plus one other, to make the specific appointment for external audit. I assume we all accept that there is a difference between the continuing internal audit process and the appointment of external auditors. We are trying not to be too prescriptive on this, but that is the distinction that we are drawing.

There are concerns that audit committees will get in a muddle about having audit panels alongside them, but that is not at all necessary, particularly in larger authorities. We are not convinced that we need to make audit committees a statutory requirement in local government, although, of course, practice is such that the overwhelming majority of large and small local authorities have audit committees. Local authority audit committees may wish to set up a small auditor panel, which may be connected with the audit committee, provided that it has an independent chair and an independent majority. There can be important links between the role of a panel and the audit committee, but their specific roles are distinct.

We do not think that there is a wider case for imposing statutory majority independent audit committees on local government for internal audit, for some of the reasons mentioned, but for a panel that appoints the external auditors that case should stand. Under the accounts and audit regulations, local authorities are already required to ensure that a committee, or a meeting of the whole body, reviews arrangements for the internal control and effectiveness of internal audit, approves the annual governance statement and considers and approves the statement of accounts. That is what the audit committees in most local authorities already do, usually led by back-bench councillors and, as noble Lords have said, very often by opposition councillors. However, the Government are not prescriptive about the precise structure that local bodies use to meet these requirements. Based on these existing functions, guidance from the Chartered Institute of Public Finance and Accountancy suggests that members of audit committees should be independent of the executive but need not be fully independent of the council.

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On the possible concerns about smaller authorities, I agree with the general principle that arrangements need to be proportionate. In most cases, I expect that such bodies will participate in central procurement arrangements, so they will not need to have a panel. Where a smaller authority decides not to participate in such arrangements and makes its own appointment, it is right that a majority panel should oversee auditor independence. As I have said, the Bill therefore provides flexibility to allow authorities to minimise any burden. A smaller body might, for example, choose to share an auditor panel with a larger neighbouring authority where they would otherwise struggle to find independent members. With those reassurances, I hope that we have satisfied the noble Earl’s concerns and that he will not press his amendment.

[Lord True]

My Lords, I do not wish to detain the Committee. I just hope to have a response in writing before Report. My point about paragraph 2(2)(b) to Schedule 4 was simply whether it meant that,

“the panel member has not been an officer or employee”,

within the past five years,

“of an entity connected with the authority within”,

the past five years, rather than, as it reads,

“the panel member has not been an officer or employee of an entity connected with the authority within”,

the past five years: namely, that he could never have worked for that authority at any time in his life. That is the point that I was hoping to clarify, but it can be clarified in writing.

[Baroness Eaton]

Perhaps I may raise one small issue about the independent members of an audit panel. I do not see, unless I have missed it, how the process is expected to take place, and I have some concerns about the clarity of the job description and expectations. In some local authorities, particularly in the appointment of people such as coroners, these have not always been as transparent as they should be. It would be helpful if we knew what process is expected for authorities to achieve the genuine independence and quality suitable for the needs of the panel.

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[Lord Wallace of Saltaire]

My Lords, we are, in a sense, continuing the previous debate. Before I directly address the amendment in terms of defining “independent”, I shall speak with another hat on. As noble Lords will know, I speak for the Cabinet Office on issues of civil society and I am struck by the fact that the largest single part of the population that is becoming more active in all civil society activities is the fit retired. There is a very large and growing element there and it is precisely the area from which local bodies are likely to find the independent members that they are looking for. Looking around this room, I note that many of us would fit into that category but, unfortunately, we are not retired. Therefore we have less time than we would otherwise like to have. The noble Lord, Lord Tope, is particularly fit, although I like to think that I am fitter than he is.

We are happy to look into the question of how one defines “close friend” and of course we will have discussions on a range of these issues between Committee and Report. However, I reiterate that a third of audit committees already have independent members and 15% have two independent members. We see the independent panels which will appoint external auditors as not having the heavy weight of work that audit committees have but as fulfilling a rather more distinctive function.

The proposal in the amendment for mandatory audit committees is addressed more directly in other amendments but, as I understand it, this specific amendment is intended to ensure that, as well as being independent of the authority, members of an auditor panel or audit committee do not have wider conflicts of interest that might compromise their independence. I agree that potential conflicts of interest should of course be taken into account in appointing members of auditor panels. However, the Bill already includes a duty for relevant authorities to have regard to guidance issued by the Secretary of State in relation to their independent auditor panels.

We intend that such guidance will cover exactly these sorts of issues, such as how auditor panels will operate and who should sit on them. We intend to work closely with the sector and interested parties on developing such guidance and identifying what wider interests should be considered in appointing members of a panel. I hope these reassurances are sufficient for the noble Lord to withdraw his amendment, or perhaps to ask for further discussion between the Committee and Report stages.

[Lord True]

My Lords, I should apologise to the Committee. It was probably my fault that we got confused. I was following my noble friend Lord Lytton and my eyes went to page 40, and we therefore drifted on to the next group.

Perhaps I may ask a brief question. The noble Lord, Lord Beecham, raised the question of a “close friend”—it is good to know that the noble Lord has many close friends—and he is right to be concerned about the definition. Where is the question of political friendship dealt with in this? While it is good practice in local authorities, including my own, to have an opposition chairman—we are conscious of the political issue—is the situation of independents having close political associations but not close personal ones dealt with, in this or other legislation, in a way which would enable the work of panels not to be distorted by political considerations? In some authorities which are perhaps not as well governed as others, those kinds of considerations can be just as important as personal friendships.

[Lord Wallace of Saltaire]

My Lords, we are willing to look at that as well and I will write to the noble Lord. After all, we are talking about panels that may consist of two independents and one member of the audit committee. We are not talking about a vast number of people to be found outside. However, my understanding is that “independent” will exclude close political friendship. My experience of close political friendship also tends to mean close personal friendship, but we could discuss that in the bar or on another occasion.

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Moved by

[Lord True]

14BS*: Clause 11, page 8, line 23, leave out “other than a health service body”

[Lord True]

My Lords, I need not speak at length on this because I made a relatively lengthy intervention at Second Reading setting out the reasons for my concern about the need to be assured of proper public accountability for the actions of NHS bodies. I think that public accountability is important, and there is material in the Bill about what should be done with reports, but it is essential that a body cannot just receive a report and sit on it.

Reference has been made to a case in which a primary care trust lost £28 million. At Second Reading, I described to noble Lords what happened. A supervisory body called in an auditor but the audit report was not ultimately published. Instead, a commentary was published with various recommendations—some good and some bad—but it was written on the basis that, as no one had really lost any money, we could all proceed and other bodies would make up the money. It was entirely unsatisfactory.

Since speaking at Second Reading, I have been contacted by the leader of another local authority, who thought that I was rather mild in what I said and felt that I should probably have named some names in connection with this affair. I have reflected on that. I think that my decision not to do that at Second Reading was right, and I maintain that position. Since Second Reading, I am very grateful to have had the opportunity to meet with my noble friend Lady Hanham and with officials from the Department of Health. My noble friend had very kindly drawn the attention of her colleagues in the Department of Health to this issue.

We have a fast-evolving world in health and local government, and these worlds are now encouraged to overlap. Indeed, my own authority, along with another local authority, is currently negotiating with clinical commissioning groups and, we hope, a foundation trust to set up an integrated commissioning organisation. That is the way in which the Government wish everyone to go within eight years. Alongside that, other elements of the health service will continue.

I believe that we now have the very odd situation where there is one strand of law which is semi-engaged in this legislation and which derives from the National Health Service Act 2006, as amended in 2012, and a whole strand of local authority-related legislation concerning audit and accountability. As the two empires come together, so should those two worlds come together. In my judgment, they need not necessarily be identical, but the noble Lord, Lord McKenzie, made a fair point when he said that the clinical commissioning group is being treated very differently in this Act from the way in which local authorities are treated. I do not make a case for identity but I do for accountability.

Local authorities have a public responsibility to ensure that what is done in their area is done for the good of their local populations, and that it is done effectively and openly, as we would expect it to be done ourselves. I made the point at Second Reading that there were various issues relating not only to audit but to scrutiny and its important role. I would like to think that while it may not be possible to achieve it in the short term, as I understand it from my discussions so far with my noble friend, in the time that this Bill is before Parliament—perhaps even when it is in the other place—it might be possible to think with a little more foresight about how we are going to adjust to this world and ensure full accountability. It is simply not acceptable that a body existing in an area and other parts of the health service, as happened in the case that I reported to noble Lords at Second Reading, should simply refuse to respond to questions from a public authority about the use of resources, certainly considering the scale involved.

We have to find a method somehow, whether or not it is through guidance—and there is existing guidance—although I would perhaps prefer it to be stronger than that. This Bill should provide us with opportunities, as local accountability is not just about local authorities and neither is this legislation. I am encouraged by what my noble friend has said so far. We may be able to find some improved structures, which may be simplified in some respects, as other noble Lords have said in Committee. They should be structures which ensure proper behaviour in the first place, effective independent audit and effective and open accountability. All those strands need to be addressed. If an internal audit document is published with a commentary and then scrutiny is refused, it is not a satisfactory outcome where there is evidence of large-scale ineptitude. That is a kind way of putting it regarding the use of £28 million of public resources. I am sure that there are other examples.

I am not going to repeat all the circumstances of the case but I urge the Committee to see those great public entities of local government and the National Health Service as two great elements of the state, providing vital services to our country and overlapping in many ways. We should therefore find the opportunity to construct an architecture that meets those three strands: effective and proper governance; effective and ultimately independent audit, although internal audit is vital in all those things and I do not denigrate it; and the strand of openness and, ultimately, scrutiny. This is really a probing amendment although my noble friend encouraged me to think that were this to be laid, she might perhaps be able to give some encouragement to me and to the Committee that the Government would be prepared to look at these matters in the months ahead. I beg to move.

[Lord McKenzie of Luton]

I would simply urge the Minister to give some encouragement to the noble Lord, Lord True, who has raised a very important point, as he did at earlier stages in our deliberations. I hope that the Minister can help him at least a bit.

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[Lord True]

My Lords, I am very grateful for what my noble friend has said. Certainly, I would be extremely interested in seeing this guidance in draft. I am sure that the leaders of the other five local authorities involved might also be interested as well, and perhaps other people in the local government world. I do not know whether it might be possible to extend that offer but, as far as I am concerned, I accept the courteous proposal and am very grateful for it.

As for the individual case, my noble friend referred to the 2006 legislation. The blunt truth is that the body concerned was happy to volunteer one individual, but the unfortunate thing was that that individual was not involved at all. Those who were involved—some of whom no longer worked for the body and therefore could not be volunteered by the body—need to be accountable. Others declined to be presented. Effectively, the authority was told that it could have this individual, but those who had actually given the instructions and done things were not available.

I would have to examine very carefully the wording of the guidance and the regulations to ensure that that situation could not be replicated. What we do not want is a kind of legalese compliance—that of saying, “We sent someone along who stonewalled at the scrutiny committee, but you have to be satisfied with that, not act unreasonably and not want to actually hear from the people who were involved”. That is a very important rider. It is very easy to say that the body can do something, but scrutiny must go to the individual. It is no good the Government saying, “You can talk to the Chancellor of the Exchequer”, when it is actually the Minister of Defence whom you want to talk to. That is an issue that I would want to elucidate in the discussions that my noble friend has kindly offered with officials.

I am very grateful for what she said and for the earlier discussion. With a warning that I will be coming to look in those corners, I beg leave to withdraw the amendment.

Amendment 14BS withdrawn.

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[Lord McKenzie of Luton]

My Lords, Clause 16 concerns the resignation and removal of the local auditor, and the amendment refers in particular to circumstances relating to the removal of a local auditor, although on reflection it could refer equally well to circumstances in which a local auditor resigns.

The purpose is to ensure that the procedure specifically encompasses the right of a local auditor to make representations to the auditor panel or supervisory body, or the audit committee, if that is what is in place, and that might encompass a right to make representation to members. The removal or resignation of an auditor is a serious business. Under the Companies Act 2006, an extensive process is set down where somebody is removed or resigns. These include, in the first case, the right to make representations to members when removed and a statement of circumstances when resigning. It is these Companies Act processes which the Government are seeking to import into the Bill, and we support that.

Under the current regime, there is no need for regulation on the removal or resignation of local public auditors because it is the Audit Commission that appoints and removes them. However, a change in auditor could be straightforward—arising, say, from a new potential conflict of interest—or it might be indicative of a fundamental difference of view as to the accounts, where an auditor feels that they can no longer carry out the audit effectively because of concerns over the governance of the body or a fundamental breakdown in the relationship. Ensuring that there is a right for auditors to make their case at an appropriate level is therefore very important.

The Bill includes, at Clause 16, regulation-making powers which cover a range of issues. Doubtless, the Minister will say that they are broad enough to cover the thrust of this amendment. So be it, but perhaps we can hear from the Minister what the plans are in respect of resignation and removal to cover circumstances where the appointment has been made by the local body, jointly with another body, or in transition by the Audit Commission. I beg to move.

[Lord True]

My Lords, the noble Lord makes an extremely important point which in certain circumstances could touch on issues of public accountability, although referred to on another matter. It may well be that he could be satisfied in that Clause 16(3)(d), at the top of page 12, allows a regulation-making power in relation to,

“the role of the relevant authority’s auditor panel or … supervisory body”.

On this issue of a right of audience, or a right to make representations, my noble friend might well be able in discussion to consider including the point which the noble Lord has raised. It is a significant one and he is right to refer to Companies Act procedures. Perhaps it could be clarified whether it is potentially encompassed in that area, which might help some of us on the Committee.

[Baroness Hanham]

My Lords, Amendment 14E would add to the regulation-making powers under Clause 16(1)(b), which relate to the circumstances of an auditor being removed, as the noble Lord said, by a local public body before their term of office expires. It would enable regulations giving local auditors the right to make representations to the authority’s auditor panel or to the auditors’ “recognised supervisory body” in those circumstances. The noble Lord asked what would happen if it was the Audit Commission; as we have already said, that commission will have an interim body between it being abolished in 2015 and when this changes. That will be a responsible transfer, which is the main thing.

We are sympathetic to the intention of this amendment, which is to ensure proper scrutiny of the removal of an auditor. However, as the noble Lord suspected, we consider this amendment to be unnecessary. Subsection (3)(c) already provides a regulation-making power about,

“the steps that may be taken by the local auditor in connection with the local auditor’s removal from that office”.

As set out in our consultation paper on the draft Bill last year, we intend by regulations to enable the auditor to respond to a relevant authority’s notice of intention to remove them, with that response to be considered by the relevant authority’s auditor panel. So the auditor panel now has a role in overseeing that in an independent way.

The auditor panel would then be required to advise the authority on the proposal to remove the auditor. In light of the auditor’s response, we intend that the authority’s final decision to remove the auditor would be subject to that advice. As with appointment, we intend that where a body does not follow the audit panel’s advice it would need to publish the reasons for not doing so. We also intend to require that the recognised supervisory body is notified of a removal. Therefore, we do not consider that it is necessary to include this additional wording in the Bill. We think that there are enough safeguards in it. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.