Draft Local Audit Bill ad hoc CommitteeMemorandum submitted by County Councils Network (CCN)

Draft Local Audit Bill 2012

About the CCN

1. The County Councils Network (CCN) is a cross party special interest group of the Local Government Association which speaks, develops policy and shares good practice for the County group of local authorities, whether unitary or upper tier.

2. CCN’s 36 member councils, with over 2,500 councillors, serve 46% of the population across 85% of England. This includes the overwhelming majority of rural England. CCN therefore welcomes the inquiry into rural communities, and is pleased to submit evidence to the Select Committee.

3. A number of CCN members may be responding individually to the call for evidence, and the CCN would draw the committee’s attention to these responses, providing a local perspective on the issues raised. We would also direct the Committee to the submission made by the Local Government Association (LGA).

4. CCN also submitted written evidence to the CLG Select Committee Inquiry into the Audit and Inspection of Local Authorities in 2011, and was invited to give oral evidence to the Committee on 7 May 2011. We would also draw the Committee’s attention to our consultation response to the “Future of Local Public Audit” submitted in the summer of 2011 and to our consultation response to the “Draft Local Audit Bill” of August 2012. All of these submissions outline the CCN’s position in relation to the basic principles of audit and inspection.

Key Points

5. CCN has a well developed policy position on audit and inspection based on the belief that the primary accountability of local government is to local people. Accordingly the CCN believes that it should be for democratically elected councillors to determine how limited resources can best be used to meet the needs and priorities of their citizens and communities. Accordingly, audit should focus on the accuracy of accounts and matters of probity and not stray into making wider value for money judgements.

6. CCN agrees with the basic concepts and requirements set out in the draft Bill and the greater harmonisation of audit requirements with those of the wider business community. The simplification of the general accounting and audit requirements is also welcomed; local people and communities should be the primary audience for audit. A simpler and more easily understandable framework for published accounts supports greater transparency and local accountability to local people.

7. Local Government is the most efficient and well managed part of the public sector and is continuing to improve whilst also addressing the challenges that the current financial and economic climate bring. Much of this continuous improvement has been achieved through the efforts of local authorities themselves; therefore we support the moves to greater sector led improvement. We also welcome the reduction in the regulatory and inspection burden placed upon CCN member authorities with the consequent reduction in the financial burden that this also allows.

8. CCN supports greater public transparency and many CCN member authorities are now publishing details of public expenditure in addition to that over the £500 threshold. Furthermore, CCN member authorities have published performance information in a variety of ways for over 10 years and continue to do so. Indeed many local authorities are refining reporting arrangements so that they are accessible to both residents and elected members; utilising a wide range of formats, including the use of the LG Inform solution.

9. We support the proposal that local authorities should be responsible for appointing their own external auditors. We also support the principle that there should be appropriate safeguards to maintain the independence of the audit/auditor and to ensure that public trust in the process and outcomes is preserved. This builds upon the openness and transparency that is already at the heart of local government and the democratic nature of local government. The proposals for the appointment of auditors—specifically the appointment of Auditor Panels and the additional bureaucracy that this will bring are a concern.

10. Whilst we welcome the proposals to allow existing audit committees to become the recognised Auditor Panel where they meet the new legislative requirements outlined in the draft Bill, we continue to assert that the proposals for the role, composition and structure of the Auditor Panels are and remain excessive, unnecessary and counterproductive. Moreover, CCN considers that they continue to demonstrate a misunderstanding of the relationship between Executive and non Executive Councillors under current governance arrangements or where councils choose to return to the committee system.

The Appointment of Auditors

11. The membership of the Audit Committee is normally drawn from Members who are not part of the Executive. Furthermore, the Chairing arrangements generally reinforce this independence from the Executive (for example where the constitution requires the Chairman to be a member of the largest opposition party). These arrangements also embed local democratic accountability—a fundamental element that would be lost through the appointment of independent Auditor Panels. Owing to this, we feel that the proposals for the appointment of auditors would in fact, be contrary to the independence, transparency and accountability that the Draft Local Audit Bill aims to bring.

12. In addition, the proposals contained within the draft Bill would see local authorities being treated differently from large companies, health bodies and even Parliament in terms of audit arrangements. The current guidance for large corporations and health bodies recommends that their audit committees comprise at least three non-executive directors. The Public Accounts Committee of the House of Commons is comprised wholly of elected members from the House.

13. In view of this, CCN considers that the practice for companies, health bodies and indeed for Parliament is equivalent to the current and effective Audit Committee systems in place in the majority of local authorities.

14. The draft Bill fails to recognise the equivalence of these arrangements and continues to suggest that an audit committee can only be independent if it includes a majority of members (including the Chairman and the Vice Chairman) who are independent of the local authority. It is logical to ask why this arrangement is thought necessary for local authorities, but not for other organisations, including Parliament? As they stand the proposals contained within the draft Bill appear to contradict the Government’s belief that there should be a consistent regulatory regime for audit, covering the private sector and local public bodies.

15. CCN maintains that there are sufficient safeguards in the process for selection to be included on the list of approved auditors, underpinned by the codes of audit practice, supporting guidance and the role of supervisory bodies, to make this requirement unnecessary.

16. There is also a clear contradiction in the requirements placed upon local authorities for the new Standards and Ethics Committees being established to be chaired by a serving councillor, rather than continue with the previous system of independent chairmen. If such a regulatory function allows for “self-policing” in one major area, why not allow the existing audit committee system to remain in place for the appointment of auditors?

17. In addition to the principles outlined above, CCN continues to have concerns about the practical issues about the establishment of Auditor Panels that need to be considered and would lead to problems in implementation. These include a likely shortage of suitably qualified of suitably qualified independent people who would be willing to volunteer for these roles, particularly in the absence of significant remuneration, and the resources required for the processes of advertisement, recruitment, selection and retention.

18. Furthermore, the doubts about the effectiveness and value of the Auditor Panels, as outlined in the draft Bill are reinforced by the requirement that, to be classified as independent, a panel member “must not have been a member or officer of the body within the last five years, and must not at that time be a relative or close friend of a member or officer of the body”. This may further limit the possibility of finding suitably qualified and interested candidates.

19. The draft Bill is therefore, overly prescriptive in terms of the role and composition of Auditor Panels and CCN would like to see the final Bill reflect these concerns and allow for greater local flexibility—and in particular the arrangements for the appointment of auditors.

The National Audit Office

20. The much-welcomed reduction in the overall inspection regime for local government has helped to lessen the burden upon the sector. CCN does however, have specific concerns about the proposed role of the National Audit Office (NAO) and we feel that care needs to be taken to avoid “mission creep”—ie expanding its remit beyond the existing or proposed boundaries and adding to the burden in years to come. CCN fully supports the wider sector-led improvement work now being undertaken and does not wish to see this work undermined.

21. There is growing concern across the local government sector that the proposals contained within the draft Bill to produce studies around local government improvement could duplicate and impinge upon this sector-led improvement work. It should also be increasingly unnecessary given the arrangements that are now in place to address underperformance across the local government sector.

22. Furthermore, part of the current system of controls and checks and balances upon local government expenditure is the publication each year of system accountability statements. The NAO plays an important role centrally in ensuring that this is the case; however as the amount of funding that local government receives from central government is decreasing, the degree of control that the Government can legitimately exercise over local authority audit is also reduced.

23. CCN therefore supports the Local Government Association in calling for the provisions in the Bill to enable the National Audit Office to “identify improvements that may be made by all English local authorities, or all English local authorities of a particular description” to be dropped. In addition we support the LGA’s call for clear limits on the number of studies that the National Audit Office is able to carry out into the way that departments fund local authorities, and for the scope of such studies to be decided in consultation with the Sector.

Further Information

24. The CCN would be pleased to submit further detail about any of these points at the Committee’s convenience, whether as further written information, or as part of an oral evidence session.

October 2012

Prepared 16th January 2013