Memorandum submitted by the Audit Commission
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 LeadershipQuality 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.
CLAUSE 1-20: CAPITAL
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.
CLAUSE 21-22: ACCOUNTING
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
willsubject to a consultation process and the Parliamentary
approval proceduresintroduce 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
CLAUSE 25-29: FINANCIAL
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 struckultimately 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.
CLAUSE 45-46: BEST
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.
CLAUSE 50-67: BUSINESS
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.
CLAUSE 100-104: CHARGING
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.
CLAUSE 105-106: COMPREHENSIVE
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.
CLAUSE 105: CATEGORISATION
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.
CLAUSE 106: EXERCISE
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
Vary requirements for performance
indicators and standards, best value reviews, and best value performance
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.
CLAUSE 107-108: AUDITOR'S
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.
CLAUSE 109: AUDIT
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
CLAUSE 110: DELEGATION
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.