Draft Local Audit Bill ad hoc CommitteeMemorandum submitted by the Department of Health

1. Introduction

1.1 The Government published the draft Local Audit Bill in July 2012 and in the accompanying Command Paper, included a commitment to publish the detailed audit arrangements for local health bodies, with the intention to include them in the final Bill.

2. Local Health Bodies Intended to be Subject to Audit Under the New Local Public Audit Framework, Either in Part or in Full

2.1 This paper sets out the proposed audit arrangements for Clinical Commissioning Groups and highlights the changes to the current audit arrangements for NHS Trusts and Foundation Trusts.

2.2 The audit arrangements for Clinical Commissioning Groups and NHS Trusts are intended to be included in full in the final Local Audit Bill, including any necessary amendments to the National Health Service Act 2006, which governs the constitution of these NHS bodies. It is also intended that the final Bill will include some provisions for Foundation Trusts, in addition to the existing provisions of the National Health Service Act 2006.

2.3 Strategic Health Authorities and Primary Care Trusts will be abolished by the Health and Social Care Act 2012 and are therefore are not required to be covered in this paper.

3. Clinical Commissioning Groups

3.1 Under the National Health Service Act 2006, as amended by the Health and Social Care Act 2012, the National Health Service Commissioning Board will fund Clinical Commissioning Groups and give directions about the form and content of their accounts. Clinical Commissioning Groups will submit their annual accounts to the National Health Service Commissioning Board, for consolidation.

3.2 We propose that the audit arrangements for Clinical Commissioning Groups will follow the proposals for other local principal bodies subject to audit under the draft Local Audit Bill, but with some differences. The main differences are identified below in italics. These differences arise due to the status of Clinical Commissioning Groups, and the fact that they have an existing statutory requirement to have an Audit Committee.

3.3 Appointment etc of Auditors

3.3.1 We propose that Clinical Commissioning Groups will appoint their own auditors, based on recommendations from their audit committee, from a list held by a recognised supervisory body. For this purpose, the audit committee1 will carry out the functions of the independent auditor panel, as proposed in the draft Local Audit Bill.

3.3.2 The draft Local Audit Bill proposes the provision of powers to the Secretary of State to direct the audited body to appoint an auditor or to appoint an auditor directly, if they fail to appoint an auditor by 31 December preceding the year to be audited. We propose that Clinical Commissioning Groups are subject to this proposed provision but in the first instance, would report the failure to the National Health Service Commissioning Board.

3.3.3 The draft Local Audit Bill proposes a provision for the Secretary of State to make regulations that set out the procedures for dealing with resignation or removal of an auditor. We propose that this will also apply to Clinical Commissioning Groups with the audit committee taking the role of the independent auditor panel, and in the first instance, Clinical Commissioning Groups will refer issues of removal or resignation to the National Health Service Commissioning Board.

3.4 Eligibility and Regulation of auditors

3.4.1 The Government has proposed that the Financial Reporting Council will be responsible for oversight of the regulation of local public audit and have the delegated authority to authorise professional accountancy bodies to be recognised supervisory bodies in respect of local audit.

3.4.2 It is proposed in the draft Local Audit Bill that the recognised supervisory bodies will have delegated authority to put in place rules and practices covering the eligibility of firms to be appointed as auditors of principal bodies.

3.4.3 It is also proposed in the draft Local Audit Bill that the recognised supervisory bodies will have responsibility for monitoring the quality of audits undertaken by their member firms. The Financial Reporting Council will have responsibility for monitoring the quality of “major audits”.

3.4.4 We propose that Clinical Commissioning Group audits will follow the eligibility, regulation, monitoring and quality assurance arrangements proposed in the draft Local Audit Bill for other local bodies.

3.5 Conduct of Audit

3.5.1 We propose that Clinical Commissioning Groups will follow the proposals in the draft Local Audit Bill, in respect of the code of audit practice and therefore it is proposed that the National Audit Office should prepare the code.

3.5.2 It is proposed that the audit duties will be consistent with the proposed auditor duties for other principal bodies, as set out in the draft Local Audit Bill, with the exception of any differences shown in italics.

3.5.3 We propose that the final Bill requires auditors of Clinical Commissioning Groups to also provide a true and fair view opinion on the financial statements. Although this is not on the face of the draft Local Audit Bill, this is achieved for principal local government bodies through a combination of the draft Bill, the proposed supporting secondary legislation, and the code of audit practice.

3.5.4 We propose that the auditors of Clinical Commissioning Groups will consider whether there are proper arrangements for securing economy, efficiency and effectiveness in their use of resources, but will only report, by exception, where there are concerns that the arrangements are insufficient.

3.5.5 We propose that Clinical Commissioning Groups will also have a regularity opinion. This outlines whether an organisation’s income and expenditure has been applied as intended by Parliament, and if financial transactions conform to the rules set by the authorities that govern them.

3.5.6 We propose for Clinical Commissioning Groups that the proposed provisions in the draft Local Audit Bill relating to the supply of public interest reports will also apply, subject to existing exemptions that apply to NHS bodies. Additionally, we propose the auditor must send a copy of the report to the National Health Service Commissioning Board.

3.5.7 We propose for Clinical Commissioning Groups, that the proposals in the draft Local Audit Bill will apply in respect of provisions for prevention of unlawful expenditure, subject to existing exemptions that apply to NHS bodies. Additionally, we propose that the auditor will send a copy of the advisory notice to the National Health Service Commissioning Board.

3.5.8 We propose not to apply the proposals in the draft Local Audit Bill in respect of allowing public inspection of accounts, raise objections or question the auditor. The ability for members of the public to raise concerns is covered in the National Health Service Act 2006, as amended by the Health and Social Care Act 2012.

4. National Health Service Trusts

4.1 The Government’s intention is that all National Health Service Trusts in England should become Foundation Trusts by April 20142. This is before the new local public audit framework is likely to take effect. At that point, the Government would commence the provisions of section 179 of the Health and Social Care Act 2012 abolishing National Health Service Trusts in England. However, we propose the final Bill provides transitional arrangements should any National Health Service Trust still remain. This may be either because the general abolition has not been effected by that date, or individual National Health Service Trusts continue to exist after general abolition, under the transitional arrangements in the Health and Social Care Act.

4.2 We propose that the audit arrangements for National Health Service Trusts will follow the proposals for other local principal bodies subject to audit under the draft Local Audit Bill, but with some differences. The main differences are identified below in italics. These differences arise due to the status of National Health Service Trusts and the fact that they have a requirement to have an Audit Committee.

4.3 Appointment etc. of Auditors

4.3.1 We propose that National Health Service Trusts will appoint their own auditors, based on recommendations from their audit committee, from a list held by a recognised supervisory body. For this purpose, the audit committee3 will carry out the functions of the independent auditor panel, as proposed in the draft Local Audit Bill.

4.3.2 The draft Local Audit Bill proposes the provision of powers to the Secretary of State to direct the audited body to appoint an auditor, or to appoint an auditor directly, if they fail to appoint an auditor by 31 December preceding the year to be audited. We propose that National Health Service Trusts are subject to this proposed provision but in the first instance, would report the failure to the National Health Service Trust Development Authority.

4.3.3 The draft Local Audit Bill proposes a provision for the Secretary of State to make regulations that set out the procedures for dealing with resignation or removal of an auditor. We propose that this will also apply to National Health Service Trusts with the audit committee taking the role of the independent auditor panel, and in the first instance, National Health Service Trusts will refer issues of removal or resignation to the National Health Service Trust Development Authority.

4.4 Eligibility and Regulation of auditors

4.4.1 The Government has proposed that the Financial Reporting Council will be responsible for oversight of the regulation of local public audit and have the delegated authority to authorise professional accountancy bodies to be recognised supervisory bodies in respect of local audit.

4.4.2 It is proposed in the draft Local Audit Bill that the recognised supervisory bodies will have delegated authority to put in place rules and practices covering the eligibility of firms to be appointed as auditors of principal bodies.

4.4.3 It is also proposed in the draft Local Audit Bill that the recognised supervisory bodies will have responsibility for monitoring the quality of audits undertaken by their member firms. The Financial Reporting Council will have responsibility for monitoring the quality of “major audits”.

4.4.4 We propose that National Health Service Trust audits will follow the eligibility, regulation, monitoring and quality assurance arrangements proposed in the draft Local Audit Bill for other local bodies.

4.5 Conduct of Audit

4.5.1 We propose that National Health Service Trusts will follow the proposals in the draft Local Audit Bill, in respect of the code of audit practice and therefore it is proposed that the National Audit Office should prepare the code.

4.5.2 It is proposed that the audit duties will be consistent with the proposed auditor duties for other principal bodies, as set out in the draft Local Audit Bill, with the exception of any differences shown in italics.

4.5.3 We propose that the final Bill requires auditors of National Health Service Trusts to also continue to provide a true and fair view opinion on the financial statements. Although this is not on the face of the draft Local Audit Bill, this is achieved for principal local government bodies through a combination of the draft Bill, the proposed supporting secondary legislation, and the code of audit practice.

4.5.4 We propose that National Health Service Trusts will follow the proposals in the draft Local Audit Bill in respect of the conclusion on whether there are proper arrangements for securing economy, efficiency and effectiveness in their use of resources.

4.5.5 We propose for National Health Service Trusts that the proposed provisions in the draft Local Audit Bill relating to the supply of public interest reports will apply, subject to existing exemptions that apply to NHS bodies. Additionally, we propose the auditor must send a copy of the report to the National Health Service Trust Development Authority.

4.5.6 We propose for National Health Service Trusts, that the proposals in the draft Local Audit Bill will apply in respect of provisions for prevention of unlawful expenditure, subject to existing exemptions that apply to NHS bodies. Additionally, we propose that the auditor will send a copy of the advisory notice to the National Health Service Trust Development Authority.

4.5.7 We propose not to apply the proposals in the draft Local Audit Bill in respect of allowing public inspection of accounts, raise objections or question the auditor. The ability for members of the public to raise concerns is covered in the National Health Service Act 2006, as amended by the Health and Social Care Act 2012.

5. NHS Foundation Trusts

5.1 The audit arrangements for Foundation Trusts are covered in the National Health Service Act 2006.

5.2 We propose that Foundation Trusts will continue to follow the National Health Service Act 2006 in respect of their audit arrangements, with the exception of the regulation of auditors and the code of audit practice.

5.3 Regulation of auditors

5.3.1 We propose that Foundation Trust audits will follow the regulation and quality assurance arrangements proposed in the draft Local Audit Bill for other principal bodies.

5.3.2 The Government has proposed that the Financial Reporting Council will be responsible for oversight of the regulation of local public audit and have the delegated authority to authorise professional accountancy bodies to be recognised supervisory bodies in respect of local audit.

5.3.3 It is also proposed in the draft Local Audit Bill that the recognised supervisory bodies will have responsibility for monitoring the quality of audits undertaken by their member firms. The Financial Reporting Council will have responsibility for monitoring the quality of “major audits”.

5.4 Conduct of Audit

5.4.1 We propose that Foundation Trusts will follow the proposals in the draft Local Audit Bill, in respect of the code of audit practice and therefore it is proposed that the National Audit Office should prepare the code.

5.4.2 This will ensure consistency across all local health bodies, and will ensure that there is a separation between the body responsible for setting the code (the National Audit Office) and the body responsible for the Foundation Trust accountancy framework (Monitor).

November 2012

1 Audit Committees will be made up of an independent Chairman who will also be a lay member of the Clinical Commissioning Group governing body. Clinical Commissioning Groups are autonomous bodies and it will be up to the Clinical Commissioning Group to decide the remaining members.

2 The April 2014 date is not a fixed date. It is a firm policy intention but it is possible that the abolishment of NHS trusts legislation will take place on a date which is later than April 2014.

3 Audit Committees members will all be non-executive directors of the National Health Service Trust but will be appointed by the National Health Service Trust Development Authority.

Prepared 16th January 2013