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Public Bill Committee Debates

The Government Resources and Accounts Act 2000 (Audit of Non-profit-making Companies) Order 2009



The Committee consisted of the following Members:

Chairman: Hywel Williams
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Buck, Ms Karen (Regent's Park and Kensington, North) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Duddridge, James (Rochford and Southend, East) (Con)
Eagle, Angela (Exchequer Secretary to the Treasury)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Malins, Mr. Humfrey (Woking) (Con)
Osborne, Sandra (Ayr, Carrick and Cumnock) (Lab)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Roy, Lindsay (Glenrothes) (Lab)
Tipping, Paddy (Sherwood) (Lab)
Wood, Mike (Batley and Spen) (Lab)
Young, Sir George (North-West Hampshire) (Con)
Rhiannon Hollis, Committee Clerk
† attended the Committee

Fourth Delegated Legislation Committee

Wednesday 25 February 2009

[Hywel Williams in the Chair]

The Government Resources and Accounts Act 2000 (Audit of Non-profit-making Companies) Order 2009

2.30 pm
The Exchequer Secretary to the Treasury (Angela Eagle): I beg to move,
That the Committee has considered the draft Government Resources and Accounts Act 2000 (Audit of Non-profit-making Companies) Order 2009.
It is a pleasure to serve under your chairmanship this afternoon, Mr. Williams.
The draft order is made under the Government Resources and Accounts Act 2000 and is intended to give the Comptroller and Auditor General public audit responsibility for 26 non-departmental public body companies and NDPB subsidiary companies.
Hon. Members may recall that in 2003 the Government implemented key recommendations made by Lord Sharman on audit and accountability in central Government. In particular, the Government responded to concerns expressed in Parliament by strengthening the statutory powers of the Comptroller and Auditor General in two ways. First, the CAG was made the statutory auditor of certain non-company NDPBs where he was not already the statutory auditor. Secondly, the CAG received greater powers of access to documents held by bodies in receipt of grants or in relation to contracts with organisations of which the CAG is the statutory auditor. Since then, we have ensured that all non-company NDPBs are subject to the audit of the CAG, either through their establishing legislation or through orders made under the Government Resources and Accounts Act.
The Government also accepted Lord Sharman’s recommendation that company NDPBs should be subject to CAG audit, but until recently company law created obstacles to the CAG auditing companies. Provisions in the Companies Act 2006 clear the way for him to do so with effect from the 2008-09 financial year. There are separate provisions in the Companies Act for profit- making and non-profit-making NDPB companies. The draft order is concerned only with the non-profit-making companies.
In that context, section 482 of the Companies Act allows non-profit-making companies to have a public audit by the CAG under the Government Resources and Accounts Act, instead of the requirements of a statutory company audit. To take advantage of the exemption, non-profit-making companies must have been designated in an order made under the Government Resources and Accounts Act. The purpose of the draft order is, therefore, to make the companies listed in the schedule subject to public audit.
To take advantage of the exemption, further conditions are set out in the Companies Act. The company must be non-profit-making; where the company is a parent company or a subsidiary of a parent company, every group undertaking must also be non-profit-making; and the balance sheet must contain the statement required by section 475(2) of the 2006 Act that it is exempt from the requirements of part 16 under section 482 of the Act—a rather technical definition of non-profit-making for those purposes.
All 26 NDPB companies listed in the draft order are companies limited by guarantee. Each has confirmed that it is non-profit-making, is not part of a group that contains profit-making companies and is willing to include a statement in its balance sheets to that effect. By making those non-profit-making companies subject to public audit by the CAG, the Government are delivering the greater public accountability that Lord Sharman recommended for such companies—that is, the Government are ensuring that it is for Parliament, not the company or the relevant Minister, to decide whether a body is to be audited by the CAG. I hope all hon. Members will welcome that.
Strictly speaking, there was no need to carry out an impact assessment to accompany the draft order, because the costs fall below the £5 million threshold. However, we believe that NDPB companies are substantially similar to ordinary executive, non-company NDPBs, and that giving the CAG public audit responsibilities for NDPB companies constituted a step change in his responsibilities, so it seemed sensible to revisit the assumptions made in the regulatory impact assessment that accompanied the Government Resources and Accounts Act 2000 (Audit of Public Bodies) Order 2003, which gave the Comptroller and Auditor General audit responsibility for the first batch of—completely coincidentally—26 non-company executive NDPBs. We felt that that would provide a useful template for the likely impact of the requirement for CAG audit of NDPBs in general.
The impact assessment, which is included in today’s papers, included a survey of the executive NDPBs covered by the 2003 order. The results of the survey show that most were happy to have the CAG as their auditor. They believed that he provided a professional service and good value for money, and that CAG audit fees were generally comparable with those charged by private audit firms, partly because many audits have been put out to tender. NDPBs told us that putting audits out to tender enables the CAG to benefit from best practice in the private sector, too. The results of the survey show a positive view of the CAG and his staff, and we have no hesitation in endorsing the policy that the CAG should be the auditor of all NDPBs, as the Sharman report suggested.
Sir George Young (North-West Hampshire) (Con): Will the Minister clarify when the order will come into effect? Article 1 says that it
“comes into force on the day after the day on which it is made.”
However, on the front page, “Made” is followed by three asterisks. When does it commence?
Angela Eagle: If the right hon. Gentleman looks at the list of public bodies at the back of the explanatory memorandum or in the order, he will see that it will take two financial years to get all 26 companies audited, although the vast majority will be done in this financial year. It is effective immediately.
2.37 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship once again, Mr. Williams.
I thank the Minister for her explanation of the order. I have one or two questions to ask her, which might be helpful to the Committee. This is not the first time that the Minister and I have debated orders made under the Government Resources and Accounts Act. We debated one about a year ago, in March 2008. That order related to a number of NDPBs falling within the CAG regime. I asked whether there were more bodies in the pipeline, and the Minister responded:
“We are currently preparing a draft order that will subject between 40 and 50 non-departmental public body companies—or company subsidiaries—to audit”—[Official Report, Fifth Delegated Legislation Committee, 18 March 2008; c.6.]
However, as the Minister said, 26 bodies are covered by the draft order, not the 40 to 50 she mentioned last year. Perhaps I am being over-precise, but I would be grateful if she explained what has happened to the other 14 to 24. I make no criticism, but in March 2008, the Minister said that a draft order was being prepared. Preparation has clearly been thorough as it has taken some months to bring the draft order before the Committee. Perhaps she could explain the reasons behind that.
I would also like to know the response of the various NDPBs that come within the scope of the draft order, and their response to the proposal that they fall within the CAG regime. I note that the explanatory memorandum makes reference to the consultation process that has been undertaken with the companies, stating simply that they have been consulted. It does not say whether the response to the consultation was positive or negative. I merely speculate, but I wonder whether some of the 40 to 50 companies that the Minister mentioned last year have been consulted and some have said more strongly than others that they do not want to be regulated.
Angela Eagle indicated dissent.
Mr. Gauke: The hon. Lady indicates from a sedentary position that that is not so, but I should be grateful if she commented.
I see that the survey of the bodies that fall within the regime noted that the fees for smaller NDPBs were regarded as too high, as stated in the impact assessment. Many of the companies listed in the draft order are on the smallish side compared with some of the bodies that are currently audited by the CAG, and it would be helpful to know whether there is any concern that the CAG regime works better for larger organisations. Given that the order seems to be applying the regime to organisations that are a little smaller, has concern been expressed about such circumstances?
My right hon. Friend the Member for North-West Hampshire asked when the order comes into effect. The Minister said that the auditing of 22 of the 26 companies by the CAG and the National Audit Office will begin for 2008-09, and the auditing of the four remaining companies will start for 2009-10. Is the delay in respect of the four companies due to the fact that it will take some time before they meet the eligibility criteria to which the Minister referred, or it is because they have existing contracts with auditors and want to allow them to run to an end—a matter that is mentioned in the explanatory notes?
Last year, when I asked the Minister about the value for money provided by the NAO, her response was that, so pleased were a number of NDPBs with the NAO’s service that they wished to use the NAO to audit their trading subsidiaries, which are profit-making organisations. Those trading subsidiaries do not fall within the scope of the order, but the explanatory memorandum makes it clear that, in addition to the provisions of the Companies Act 2006 that apply to non-profit-making organisations, provisions under sections 1226 to 1238 of the Act allow the CAG to carry out company audits of NDPBs that are profit-making companies. The explanatory memorandum says that those companies are not covered in the instrument because they retain the power to appoint their own auditors. I should be grateful for clarification of the circumstances in which a profit-making company that is a subsidiary within an NDPB can be audited by the CAG.
Subject to the answers to those questions, we have no objection to the order. We look forward to hearing the Minister’s reply.
2.45 pm
Mr. Peter Bone (Wellingborough) (Con): It is a pleasure to serve under your chairmanship, Mr. Williams. I declare an interest as a fellow of the Institute of Chartered Accountants in England and Wales.
From the notes we have been given relating to the 2003 Order, it appears that two thirds of the audits were contracted out to private companies anyway and that fees increased by an average of 25 per cent. If all that the draft order does is add additional fees and bureaucracy, I am not sure that we will achieve much.
One of the concerns in the auditing world is about the rotation of auditors. It has been found in a number of cases that, if the same auditor is left in place, year after year, they get very cosy and do not spot problems, so auditors are now rotated. However, if all these companies are to be audited by a Government agency, there is a danger that problems will not be spotted. What is the Minister’s opinion?
2.46 pm
Dr. John Pugh (Southport) (LD): We are in favour of the transparency and clarity that an SI such as this one introduces. To some extent, this is a catch-up exercise, because all future legislation will make clear that NDPBs that are not profit-making will be obliged under statute to report to the CAG.
There is one slight problem of definition. I did not hit upon it while looking at the draft order, but the explanatory notes sent me in that direction. Paragraph 7.3 of the explanatory notes states:
“There are separate provisions in CA 2006 for profit-making NDPBs and those that are not for profit.”
The phrase “not for profit” is used as opposed to “non-profit-making”. I wonder whether there is some subtle, metaphysical distinction that eludes me.
 
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