Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum submitted by the Audit Commission (LGB 41)


  1.  The Audit Commission for local authorities and the NHS in England and Wales is an independent body established under the provisions of the Local Government Finance Act 1982 and the NHS and Community Care Act 1990. Its duties are to appoint auditors to all local and health authorities and to help them bring about improvements in economy, efficiency and effectiveness directly through the audit process and through value for money studies. It also has a duty to carry out Best Value inspections of certain local government services and functions. We are pleased to make this submission to the Transport, Local Government & the Regions Select Committee as part of its inquiry into the Draft Local Government Bill.

2.  Following the publication of the Local Government White Paper Strong Local Leadership—Quality Public Services in December 2001, the Audit Commission has been working to develop and deliver Comprehensive Performance Assessments (CPA) for all upper tier authorities this year, and for district councils in 2003. In addition to this submission, which gives our views on relevant clauses of the draft Bill specifically, we would be happy to supply the committee with further information about the CPA process separately if that would be of help.


3.  We welcome the replacement of the current capital control system with one that is based on the local determination of an affordable level of borrowing. This approach should provide more flexibility for authorities to manage their resources to meet the needs of their communities supported by high standards of financial management.

4.  The Bill recognises the importance of clarifying the powers of authorities when setting out the framework for the management of their resources. We welcome the restatement of authorities' power to borrow and the confirmation of authorities' power to invest. In our view the effectiveness of the new system is dependent upon the cohesion between primary legislation, statutory guidance and relevant codes of practice in forming a clear framework for the management of an authority's resources whilst protecting the public interest. We will continue to play an active role on CIPFA's Prudential Code Steering Group to contribute to the development of such a framework.


5.  In our view local authorities should be required wherever possible to follow the UK generally accepted accounting practice (GAAP) in compiling their accounts. Any deviations from UK GAAP should be kept to an absolute minimum. To this end we support fully the efforts of CIPFA/LASAAC to keep under review the local authority statement of recommended practice (SORP). We would also wish to see the accounts of local authorities incorporated into the whole of government accounts.

6.  We are liaising with the Office of the Deputy Prime Minister about drawing up revised regulations to replace the current Accounts and Audit Regulations 1996, which govern the form of local authority financial statements. These regulations will—subject to a consultation process and the Parliamentary approval procedures—introduce a number of important changes, such as bringing forward the timetable for the preparation and approval of the accounts. We are supportive of these changes, a number of which we considered in our 2001 "think piece" A new framework of financial reporting and accountability in local government.


7.  Our auditors are often asked by authorities for their view on what constitutes a recommended minimum level of reserves. To date auditors have resisted making recommendations about minimum levels because it is rightly the responsibility of authorities to determine this for themselves based on a risk assessment of their operational and business needs. However, as part of our recent development of the comprehensive assessment process we have suggested that authorities might want to regard 5 per cent of net forecast operating expenditure as a guide for minimum levels of reserves. But we much prefer authorities to have a financial risk management process operating which they use to demonstrate their reasoning for the particular level of reserves which they have chosen.

8.  We can see the desirability for the government to have the flexibility to be able, in exceptional cases, to set a minimum level of reserves in support of intervention. But, for the majority of authorities the expectation that they should themselves determine an appropriate level of reserves, albeit more transparently than at the moment, should be the norm.

9.  The provisions relating to the chief finance officer reporting on the adequacy of reserves and the robustness of budget estimates are consistent with the chief finance officer's responsibilities. However, the government should consider further how an appropriate balance between the responsibilities of an individual officer and those of the corporate body as a whole should be struck—ultimately it should be the responsibility of the authority as a whole to ensure the robustness of budget estimates. The government should also consider whether to be more prescriptive about requiring the chief finance officer to be a chief officer. Some authorities operate with a section 151 officer at third tier level which could be seen as being inconsistent with the responsibilities being placed on this officer.


10.  At the moment there are 41 parish councils in England designated as best value authorities on the basis of having budgeted income over £500,000 for any of the financial years commencing in 1997, 1998 and 1999. There are several parishes which were below this threshold in 1999 but have since exceeded the threshold but which have not had the duty of best value extended to them. (In Wales the threshold was set at £1m budgeted income in 1999, which excluded all Community Councils).

11.  There is scope for rationalising the application of the statutory best value regime upon parish councils towards a lighter touch approach.


12.  We support the concept of business improvement district (BID) and would wish to see the administrative and financial arrangements kept as simple as possible while maintaining proper accountability for the collection and use of these funds. To this end we support strongly the proposal for a separate BID account and suggest that the regulations require authorities to include all costs associated with the creation and operation of the BID within this account.


13.  We welcome the new power for best value authorities to charge for discretionary services as being an important step to maximise the resources available and broadening the services to the community.

14.  We welcome the clarification provided by the Bill on the powers of authorities to provide functions on a commercial basis. This supports the movement towards diversifying the service delivery arrangements of authorities as part of achieving continuous improvement. However, we suggest that orders issued under section 102 pay appropriate attention to the management of financial risks that working on a commercial basis can bring.

15.  Our management paper Getting the groundwork right: Financial Health for Local Authority Trading Units could be useful in developing criteria that must be met by a best value authority wishing to engage in trading activity. These criteria could usefully include the requirement for the development of business cases, risk identification and management, approval by members, reporting requirements and the management capacity that the authority has to have available.

16.  In relation to clause 102, we believe that there would be benefit in clarifying the reference in this section to "ordinary" functions of local authorities.


17.  The process of CPA is carried out under Audit Commission Act 1998 and Local Government Act 1999 powers. Clauses 105 and 106 enable consequences to follow from the categorisations: the categorisations themselves do not bring about consequences.

18.  The draft Bill only covers CPA consequences that require primary legislation. There are other freedoms and flexibilities that do not require primary legislation. The ODPM plans to consult local government on a wider set of freedoms and flexibilities, including those that do not require primary legislation.


18.  This requires reports on performance to be made "from time to time". This allows flexibility in the timing of CPA and means it would not have to happen at specified intervals. Subsection 2 says that a report must categorise "every local authority"—this may prove to be unduly restrictive since there may be circumstances where the Audit Commission wishes to categorise a subset of authorities.

19.  Subsection 5 requires the Secretary of State to follow the Audit Commission categorisations when determining the categorisation under subsection 4. This means there cannot be political interference in the categorisations (although clause 105 (4), as currently drafted, appears to allow the Secretary of State not to make an order at all). It also means that any appeal mechanisms that were to be considered would have to be to the Audit Commission.


  20.  Clause 106 (1) and (2) give the Secretary of State the power to remove controls on local authorities and grant additional powers to them, based on the categorisations under clause 105. These are existing powers under the 1999 and 2000 LG Acts plus proposed new powers under clause 101 to 103 of this Bill; but under these proposals, the powers can be exercised differently depending on the category (or description) an authority falls in. Schedule 2 also allows the powers to be applied to individual authorities (eg in fulfilment of a Local Public Service Agreement).

21.  The powers covered by clause 106 (2) and Schedule 2 (which amends the relevant primary legislation) are as follows:

—  Vary requirements for performance indicators and standards, best value reviews, and best value performance plans;

—  Modify existing primary legislation or introduce new powers in order to promote best value;

—  Apply varying requirements in relation to non-commercial considerations on contracts;

—  Place limits on the power of social, economic and environmental well-being;

—  Modify existing primary legislation in order to promote use of the well-being power;

—  Modify the requirement in primary legislation to produce plans;

—  Apply the new powers to trade and charge (introduced in clause's 101, 102, and 103 of the Bill) in different ways to different categories of authorities.

22.  Clause 106 (4) allows the Secretary of State to extend the list of powers which can be exercised with regard to the category an authority is placed in (subject to placing an order before Parliament). This is a catch all which allows further powers to be used on the basis of the category an authority falls in without having to resort to primary legislation.

  23.  We support the reduction in time to one month, particularly as there is the provision in clause 11 (6) of the Audit Commission Act 1998 for an extension where appropriate.

24.  With regard to provisions in clause 108 for making a non-immediate report available to a member of the public, in our view the responsibility for this should rest with the local authority. This would make it likely that the report is indeed "local" to the person concerned. Better perhaps to repeat the essence of clause 13 (2) of the 1998 Act. It might then be appropriate to specify that this responsibility for the Council extends for a fixed period of time, perhaps two years after the report is produced.


  25.  The move to 31 March will help the Commission with its aim of joining up audit and inspection activities and so help to reduce the burden of regulation. It will also make its easier to plan resources and report on performance as the year end will coincide with the Government's and all our audited/inspected bodies.


  26.  The problem currently facing the Audit Commission is that the lack of a specific power leads to delays and inefficiencies because of the requirement for many relatively mundane and small-scale decisions to be taken by the members of the Commission. This clause will enable the Commission to delegate many such decisions to officials.


  27.  The Audit Commission is delighted to make this written submission to the Select Committee as part of its inquiry into the Draft Local Government Bill. We would be happy to expand on it in oral evidence if the committee would find that useful.

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