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

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Angela Eagle indicated dissent.
Dr. Pugh: The Minister shakes her head, so I shall proceed with the other remarks I was going to make.
The principles behind the measure are wholly accepted. It is interesting to see in the impact assessment that public sector delivery via the CAG is cheaper than the private sector. It is most encouraging to see that public services are disciplined and can exceed the quality of service delivered by private consultants. That could be a precedent for the future.
There is every case for having everything out in the open, because we are talking about bodies—some of them slightly obscure—that spend something like £150 million of taxpayers’ money. I look forward to Public Accounts Committee sessions in the future.
Mr. Bone: I am listening with great interest. The hon. Gentleman says that the public sector fees have gone down, but according to a note that I have, fees have increased by approximately 25 per cent. from those paid to the private sector auditors before the CAG took over.
Dr. Pugh: I am speaking from memory of what I read in the round. I think that it says somewhere in the impact assessment that those people who have used the CAG services were satisfied and thought that they gave value for money, compared with what they previously got from the private sector.
None the less, it will be interesting to look into how The School Food Trust and Investors in People UK spend their money—that is highly laudable. As I understand it, profit-making NDPBs and bodies that do not meet the condition in article 5(c) of the draft order are exempt from the procedure of CAG audit. I have a couple of questions about that. Presumably the article 5(c) condition regarding the declaration on the accounts of the organisation is not a matter of discretion. I assume that a body cannot evade the scrutiny of the CAG simply by not making the appropriate reference or annotation in its account. I should like the Minister’s confirmation of that.
Presumably there is a good number of hybrid companies around, which are partly profit-making and partly non-profit-making, or perhaps consist of a non-profit-making holding company with a profit-making subsidiary. How much public money are such organisations disposing of or managing on our behalf? That question can be phrased with regard to the different categories: those that are hybrids and those that are genuinely profit-making in terms of aspiration.
It is clear in the notes that there is the possibility and the hope that many of the profit-making organisations that have public money as their major resource will opt for the CAG to examine their accounts from time to time. Is simply an aspiration or does it genuinely happen in practice? Clearly, they need not choose that option and they may prefer not to. We should know from the track record to date the extent to which they are availing themselves of the CAG service. We would obviously prefer that they opted for the CAG service and were therefore open to public scrutiny.
I have the CDC’s report here. It talks about its financial reporting and compares it to private sector standards. Remember, the CDC is an organisation that throws around £2.7 billion, a large amount of which is raised on private markets, but nonetheless is done as a proxy arm of Government. The report says:
“A key indicator for CDC, with analysis supplied to DFID”
is the total return on their profit. It goes on:
“there is no explanation of the calculation.”
When it comes to portfolio and rate of return, it says:
“CDC does not publish the formula, but may be overstating performance”.
The portfolio multiple of costs, which is another key indicator, is:
“Only covered in quarterly reporting to DFID”.
That is wholly inadequate, partly because the CDC is an organisation that has subsidiaries—
The Chairman: Order. The hon. Gentleman should confine himself to the terms of the debate.
Dr. Pugh: I shall finish my sentence, if I may. The organisation has subsidiaries in tax havens, and I want to know how such organisations are positioned.
2.53 pm
Angela Eagle: I hope that I shall be able to satisfy the Committee that the draft order makes a beneficial change that ought to be welcomed on all sides. The hon. Member for South-West Hertfordshire asked a series of questions that I will try to answer and hopefully reassure him on the points he raised. I will then deal with the other points as they came up.
The hon. Gentleman rightly pointed out that we discussed 40 or 50 bodies when we considered a similar order last year. He asked why are 26 listed in the draft order and not 40 or 50; and why has it taken so long to produce? The answer is, in part, that we had to check against criteria for non-profit-making as defined in EU law—to comply with EU auditing directives—precisely how the Companies Act 2006 definitions apply in each case. The 26 bodies to be added for audit by the CAG are those that genuinely qualify as non-profit-making. The others are part of a group of companies, some of which are profit-making and therefore not eligible to be included, and fall on various sides of the arrangements. I hope that answers two of the hon. Gentleman’s questions on timing.
It has been a complex process to go through each organisation and check all those things. The hon. Member for Southport was right to say that this is a clearing-up exercise. As a result of the Sharman report, Parliament rightly decided that in future, when any such organisations were set up, the requirement for public audit would be in the legislation that created the organisation, rather than left unset. To the extent of the draft order, we have to go back and look at the legacy of existing companies and shift toward public audit, but we will not have to do that regularly. Once the backlog is cleared, all future developments will be dealt with as a matter of course.
The NAO has company agreements audit a further 24 companies that are profit-making. That is now allowed by the changes to the Companies Act 2006, which enabled profit-making companies, if they were NDPBs, to be subject to public audit. That is a matter of parliamentary oversight and not a mechanism for companies that are profit-making to get out of their audit responsibilities. However, there were some technical complexities relating to EU audit directives, which had to be put right in the 2006 Act, so it has taken slightly longer than we would have liked to get to the present stage. Again, I hope that the hon. Member for South-West Hertfordshire is reassured that the profit-making side of NDPBs is also coming on board—24 of them to date, and more to follow when we get the agreement.
On when the order will come into effect, I gave the answer: in the financial year 2008-09, which is when the Companies Act changes come into effect. We could not do it before, but we can do it now, and the current financial year will be the first year of the new operation.
The hon. Gentleman also asked about consultation and wondered what its results were, since they were only alluded to in the explanatory notes of the order. We consulted all 26 companies involved; only one expressed concerned about the cost of CAG audits. That company was able to negotiate a revised fee as a result of its complaints, which it appears to have done successfully. All other companies were happy with the implied cost.
The right hon. Member for North-West Hampshire asked about precisely when the order will come into effect, referring to the asterisks. I tried to give him an answer immediately and I hope that he was satisfied with that answer, before slipping out of the room. The order is a draft until it is approved by both Houses, and it will come into effect after that. That is why there is a slight nuance about the dates. The order is subject to parliamentary approval, but it will, as I have said, cover the financial year 2008-09, and work will commence immediately.
The hon. Member for Wellingborough mentioned additional fees and bureaucracy. The changes in fees have taken place over a number of years—at least three. The 25 per cent. increase that he talked about is the difference between the fees as they were three years ago and those that are projected now. Everybody whom we have consulted who will pay, with the exception of the company I mentioned, accepts them as a good price and value for money. The response from the research that we did on those that have been subjected to public audit as a result of the Sharman changes to date has not shown any worries about the fees. It is obviously a reasonable deal, and the NDPBs are paying the market price.
The hon. Gentleman also commented that the National Audit Office was a Government agency or body, but it is not. It reports directly to Parliament. It is not a part of Government, but an instrument of independent audit. Yes, it provides public audit, but accountability is to the House, and I assume that he supports that.
The hon. Member for Southport talked about the technical definition of non-profit-making—he went through the requirements of the Companies Act. He talked about the declaration on the balance sheet and asked me to confirm whether there was some way for a non-profit-making NDPB to fall between the cracks of audit by using technical means, such as not putting a declaration on its balance sheet that it is eligible.
The legislation shows that Parliament intends that that the CAG expects directors to make the statement that they are eligible for the public audit where the conditions are met—the conditions are set out in some detail in the 2006 Act. All 26 of the non-profit-making companies listed in the draft order have made that statement—all will be subject to audit. If they were unable to make the statement, either they would be subject to private sector audit or, if they were profit-making or hybrid in some way, we would expect them to subject themselves to CAG audit anyway.
We have made the required changes by having an oversight committee for CAG. so that he qualifies under the EU directive to audit profit-making bodies in certain cases—that is, the NDPBs. That furthers Parliament’s clear intention and the Government’s intention on accepting the Sharman report recommendations that public audit ought to be available for those bodies that have been created out of the public sector, be they profit-making or non-profit-making. We are a step closer to that with today’s draft order.
The hon. Gentleman mentioned the Commonwealth Development Corporation before he was interrupted—with some justification, I might add, Mr. Williams. It is not an NDPB and Government policy post-Sharman report is to draw the line at NDPBs. The hon. Gentleman can complain about that, which I am sure he will continue to do, perhaps in the Public Accounts Committee debates that we have on the Floor of the House. I look forward to joining the next one, which I think is 12 or 13 March—I cannot quite remember; it is coming up soon. However, that is not relevant to the draft order.
I hope that the Committee is persuaded that the draft order is worth approving. I commend it to the Committee.
Question put and agreed to.
That the Committee has considered the draft Government Resources and Accounts Act 2000 (Audit of Non-profit-making Companies) Order 2009.
3.3 pm
Committee rose.
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Prepared 26 February 2009