Local Audit and Accountability Bill [HL]

Lord Wallace of Saltaire Excerpts

Wednesday 19th June 2013 Grand Committee

[Lord McKenzie of Luton]

My Lords, this is a very straightforward amendment, which is intended to ensure that the Secretary of State will consult before producing regulations under paragraph 4 of Schedule 3. Perhaps the Minister will take the opportunity to share with us what the broad content of the regulations will cover, or say when we might expect to receive a draft. I beg to move.

[Lord Wallace of Saltaire]

Here I am acting as the Minister, jumping to my fifth subject today, although I am happy to do so. As has just been explained, Amendment 14ZD would require the Secretary of State to consult relevant authorities and representatives of local government before exercising powers as set out in Schedule 3 to make further provision about the appointment of an auditor to certain bodies.

We are sympathetic to the concerns behind the amendment, which we understand are to ensure that bodies are suitably consulted before further provision is made on auditor appointment. Perhaps it would be helpful if I clarify the scope and purpose of this power, which I understand to be the purpose of this probing amendment. The power is limited to bodies not covered by paragraphs 1 to 3 of Schedule 3. It therefore does not apply to local authorities, police bodies, or the GLA.

Schedule 3 already makes provision in relation to these bodies to ensure that the appointment process reflects their specific governance arrangements. In the case of local authorities, it prevents the delegation of the appointment decision below full council. This ensures that the appointment of the auditor is made in a transparent manner and with proper accountability. The power at paragraph 4 is simply intended to allow the Secretary of State to make similar minor provisions for other bodies covered by the Bill to support accountability. This might mean preventing the delegation of the appointment decision for other bodies as set out, as the noble Lord will know, in Schedule 2.

As set out in the statement of intent that the Government laid earlier this week, we will work with delivery partners and interested parties to consider what specific provisions are needed. With these reassurances on the scope and purpose of the clause, and on our intent to consult affected bodies, I hope that this provides sufficient additional information for the noble Lord to be able to withdraw his amendment.

[Lord McKenzie of Luton]

I am grateful to the noble Lord for that response. I certainly intend to withdraw the amendment. However, perhaps he could be a little more specific about the other bodies covered by this. I am not sure that I fully grasped his point about particular bodies. Does he have an example?

[Lord Wallace of Saltaire]

Schedule 2 sets out a range of other bodies. The minor bodies that are set out range from waste management boards to drainage boards to parish councils and to others but do not include the major local authorities or the GLA et cetera. Schedule 4 relates to Schedule 2. I hope that is clear.

[Lord McKenzie of Luton]

I am grateful for that further exemplary clarification. I have not had a chance to read the statement of intent in detail yet, which came on Monday when we were in Committee. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Beecham]

Perhaps I may just ask whether it would remain open to authorities to combine in placing audit contracts. The Audit Commission identified substantial savings having been made by central commissioning, and it anticipated that if extended to the remaining 30% of contracts, a significant further saving of some £400 million over five years could be made. I am not necessarily saying that that is the way to go but, under the provisions of the Bill and this whole appointment process, would it still be open for such an approach to be adopted by authorities coming together, for example, in a particular region or a particular class of authority, obviously with the support of their independent panels? Would it still be open to them to move in that direction, getting a sort of bulk purchase by agreement rather than it being imposed externally? It would be helpful to have some assurance on that.

[Lord Wallace of Saltaire]

My Lords, I am happy to give that assurance. That is entirely acceptable and to be expected within the Bill. Often small authorities in particular will find it convenient and useful to combine how they approach this matter. However, as the noble Lord has just said, this is by voluntary co-operation rather than by imposition from the centre.

I have to reprimand the noble Lord, Lord Tope, for making exactly the first point that I was going to make, thus cutting down on what I have to say.

[Lord Tope]

I have never achieved that before.

--- Later in debate ---

[Lord Beecham]

I have not achieved it yet.

[Lord Wallace of Saltaire]

The Government understand and support the intentions behind the amendment—to ensure that there is transparency over the appointment of the auditor—but they are not convinced that this is the sort of thing that needs to be in the Bill. The Bill already includes a requirement for the notice to include the advice of the auditor panel, which is required to advise on the selection and appointment of the auditor. This might cover issues such as the length of the appointment and the process for appointment. Under the Bill, auditor panels must have regard to guidance issued by the Secretary of State on their functions. We expect that such statutory guidance, or wider guidance on best practice, might cover the sorts of issues that should be included in any advice from the panel.

With those reassurances, I hope that the noble Lord will be willing to withdraw the amendment.

[Lord McKenzie of Luton]

I am grateful to the Minister. I certainly do not intend to press the amendment. I say to the noble Lord, Lord Tope, that I did not honestly expect the Minister to rush to accept the wording; it was a mechanism to open up a debate, particularly about the process and there being transparency in the extent to which other firms are invited in—in a beauty parade or whatever the mechanism is. That may be some measure of the determination of the local authority, if it has one, to broaden and open up the market. However, I entirely accept that that will be the expectation and that it will be set down in some of the guidance that will flow from this Bill. Accordingly, I beg leave to withdraw the amendment.

--- Later in debate ---

[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.

--- Later in debate ---

[Lord Wallace of Saltaire]

My Lords, we will move on to the question of health bodies in our discussion of further amendments, and I hope that the noble Lord will allow us to return to the issue when we deal with them.

In answer to the noble Lord, Lord True, the Bill would not prevent someone who had worked for the local authority but had finished working for the local authority more than five years ago acting as an independent member of the panel. That is certainly my reading, and I state that as the Government’s clear understanding of the position.

On the question of a close friend—I appreciate that the noble Lord, Lord Beecham, is querying this—I am told that the phrase is already in the Localism Act. It is, to some extent, a matter of perception, but we all understand, from having dealt with local authorities over a long period, that this is one of the areas where one needs to make sure that panels look independent and are assured to be independent. Where someone seems like a close friend, it is clear that we will give guidance that that sort of person ought not to be appointed to a panel in that area.

There is more on the definitions in the letter of intent that was circulated on Monday, which I hope noble Lords have seen, and there will be more in the guidance provided to local bodies. I hope that provides sufficient reassurance for the amendment to be withdrawn.

[Lord Tope]

My Lords, I am slightly confused, because the group of amendments with which we are dealing is about the relationship between audit committees and auditor panels. The noble Lord, Lord McKenzie, as the mover of the amendments, will comment on that in a moment. However, I am quite sure that we will return to this issue, if only to seek clarification about the distinction and whether the two bodies should be, or have to be, separate. My noble friend Lord Wallace seemed almost to be saying that the auditor panel could in effect be a subcommittee of the audit committee. I do not think that that was quite what he meant, but maybe it was. We still need to clarify that role.

My confusion started when my noble friend went on to reply to Amendment 14BBA, which is not only in the name of the noble Earl, Lord Lytton, but in mine. That amendment has not been moved yet, so I am not quite sure whether we are dealing with it. If we are, and for the sake of preventing us from dealing with it later on—if and when it ever gets moved—perhaps I might say that the noble Earl is vastly more expert than me on the case of small bodies, such as parish councils and the like. However, the amendment comes from the Local Government Association, which represents primarily the larger authorities that do have these concerns. Personally, I have no great problem with majority independent members, but the LGA is concerned about it on a number of grounds.

First, the LGA quite rightly makes the point about the professional integrity of auditors, which the noble Baroness, Lady Eaton, has already made, as has the noble Lord, Lord True, and others, and which I think we all accept. They are already fully regulated, quite rightly and properly, and therefore the perception of independence is, in a sense, already covered to a considerable extent by the regulation.

Secondly, there is the rather more important, practical problem of whether in some areas it will be possible to find a significant number of truly independent people. That does not mean somebody elected to the council as being independent of a political party; it means somebody who is truly independent of the council in a way that is defined in the schedule. In some areas, it may not be possible to find sufficient people of relevant experience. That does not mean that they have a professional qualification necessarily, but that they have relevant experience and are also able and willing to put in the necessary time to serve on this. That may be less of a concern in some London boroughs that many of us know. However, I can well see that in more rural areas or smaller district councils, it may well be quite a significant difficulty. That is part of the concern that the LGA was raising and which we need to include in this debate, whichever amendment we are debating at this moment.

--- Later in debate ---

[The Deputy Chairman of Committees (Lord Haskel)]

I have to inform your Lordships that if Amendment 14BB is agreed I cannot call Amendment 14BBA on the supplementary list because of pre-emption.

[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.

[Lord Palmer of Childs Hill]

My Lords, perhaps I can come back on that because I am probably the only person in your Lordships’ House who is a chairman of an audit committee. The present situation in many audit committees, of which mine is one, where the chairman is a member of an opposition party, which I am, gives an incredible independence. You are not part of the ruling party and when we were in power we did the same the other way round.

As the noble Lord mentioned, we already have two independent members, which is very good. However, the trouble is that if you appoint an independent chairman or chairwoman of the committee, that person could well have a political affiliation. Therefore, when the controlling party in that local authority was looking for an independent chair of that committee or panel, not unnaturally it would look to people whom they know or know of. The current situation where the person is of an opposition party, where that is relevant, seems to get over that point because that person is not a close political friend. I just wanted to pick up that point from my personal experience as something to think about that when we are considering this point.

--- Later in debate ---

[Lord Wallace of Saltaire]

My Lords, I am very happy to look at this again between Committee and Report and make sure that the definition is as clear as it can be.

[Lord McKenzie of Luton]

My Lords, I am grateful to the Minister for that response and for the undertaking to look at this again. The points that have been made around the Committee today emphasise that there is less clarity than there should be on how this is all meant to operate and some of the nuances that could flow from just a strict reading of the legislation as it is.

I understand the point about making a judgment about whether someone was independent from an authority because of a business relationship. As the Minister said, you would seek to deal with that through guidance and it would be an issue as to whether they should be appointed to serve on the committee or the panel. In a sense, we are differentiating between someone who is not independent in that category and someone who is a relative, where they are not precluded from being appointed to the panel or committee. However, there cannot be too many of them or the requirement for a majority to be independent would break down. I am not quite sure of the logic in that. However, rather than stretch the debate this afternoon, I ask the Minister to look at that as part of the broader discussion. Maybe we could have a meeting of all noble Lords who have contributed before we get to Report because it would be difficult to repeat this discussion at Report without some interim deliberations. Having said that, I beg leave to withdraw the amendment.