Draft Local Audit (Appointing Person) Regulations 2015
Draft Local Audit (Smaller Authorities) Regulations 2015
The Committee consisted of the following Members:
† Blomfield, Paul (Sheffield Central) (Lab)
Cooper, Rosie (West Lancashire) (Lab)
† Crockart, Mike (Edinburgh West) (LD)
† Cunningham, Mr Jim (Coventry South) (Lab)
† Ellis, Michael (Northampton North) (Con)
† Glindon, Mrs Mary (North Tyneside) (Lab)
† Hopkins, Kris (Parliamentary Under-Secretary of State for Communities and Local Government)
† Jones, Susan Elan (Clwyd South) (Lab)
† Kelly, Chris (Dudley South) (Con)
† Lancaster, Mark (Lord Commissioner of Her Majesty's Treasury)
† Lansley, Mr Andrew (South Cambridgeshire) (Con)
† Lazarowicz, Mark (Edinburgh North and Leith) (Lab/Co-op)
Neill, Robert (Bromley and Chislehurst) (Con)
† Robathan, Mr Andrew (South Leicestershire) (Con)
† Sawford, Andy (Corby) (Lab/Co-op)
Simpson, David (Upper Bann) (DUP)
† Sturdy, Julian (York Outer) (Con)
† Wright, Simon (Norwich South) (LD)
Mark Oxborough, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Wednesday 21 January 2015
[Hywel Williams in the Chair]
Draft Local Audit (Appointing Person) Regulations 2015
8.55 am
The Parliamentary Under-Secretary of State for Communities and Local Government (Kris Hopkins): I beg to move,
That the Committee has considered the draft Local Audit (Appointing Person) Regulations 2015.
The Chair: With this it will be convenient to consider the draft Local Audit (Smaller Authorities) Regulations 2015.
Kris Hopkins: It is a pleasure to serve under your chairmanship, Mr Williams, at such an early time in the day. The regulations are among a number of statutory instruments necessary for the audit of relevant authorities in the new regime introduced by the Local Audit and Accountability Act 2014, which abolishes the Audit Commission and gives greater responsibility for auditor appointment to local public bodies.
I will not take up Members’ valuable time by repeating the arguments put forward during the passage of the 2014 Act. There was broad support across the House for making collective procurement of audit services available to local public bodies. The arrangements we are putting in place—including the regulations—will create a more efficient audit system, giving greater responsibility to local bodies while providing greater opportunities for local people to hold those bodies to account.
Before going into the detail of the regulations, I will explain the background. From 2017, a local public body will have to appoint its own auditor, unless it chooses to opt in to the collective procurement arrangements provided for by the regulations. The 2014 Act already allows local public bodies to get together jointly to procure audit services. During its passage through Parliament, we amended the Bill to make broader collective procurement arrangements available in light of appetite from the sector for that. That is very different from what the Audit Commission did. Authorities can choose to opt in to the arrangements, rather than their being imposed from above. The remit of the appointing body is clearly defined, and is concerned with appointing auditors and managing contracts.
I will deal with the Local Audit (Appointing Person) Regulations 2015 first. We consulted on a draft of the regulations. Responses were broadly content with the provisions, including those we asked specific questions about: that the decision by local bodies to opt in must be taken at full council and that the maximum period of the appointing body’s responsibility should be set at five years.
My officials have kept closely in touch with representatives of the local authority sector, and we understand that there is still a real appetite out there for a collective procurement process. The regulations will make the collective procurement of audit services available to the sector, while meeting the objectives of accountability, transparency, continued auditor independence and audit quality. To achieve that, the regulations provide the Secretary of State the opportunity to specify an appointing body in a transparent manner; allow more than one appointing body to be specified to allow for specialisation in audit procurement for different groups of authorities; set out how authorities can opt in and later opt out from the appointing body’s arrangements; require the appointing body to consult authorities on audit fee scales; define the appointing body’s roles in relation to auditor appointment, resignation or removal; set out how the appointing body monitors auditor independence and compliance with contractual obligations and deals with any disputes or complaints relating to audit work or audit contracts; and, provide that an authority opted in to the arrangements will not be required to have an independent auditor panel.
The regulations also provide that the appointing body’s services will be available as an additional option to the Secretary of State, if an authority that has not opted into the collective procurement arrangements also fails to appoint its own auditor.
The Local Audit (Smaller Authorities) Regulations 2015 have a similar objective to the first set of regulations, but relate to smaller local public bodies. The regulations provide for the collective procurement of audit services for smaller bodies, with the same guiding principles as the regulations for principal authorities: transparency and accountability in decisions on how a body’s auditor is appointed and continued effective, independent assessment of the accounts of authorities subject to that audit. As with an appointing body for principal authorities, the body’s remit is clearly defined and will be focused on achieving good value for money in audit procurements. If it does not, smaller authorities are unlikely to use the services.
There is a key difference between the collective procurement arrangements for larger and smaller authorities. Principal authorities must choose to opt in to take advantage of their appointing body’s arrangements. Smaller authorities, however, must actively opt out of their appointing body’s arrangements if they prefer to appoint their own auditors. That is because there are so many smaller authorities—nearly 10,000—and we expect that the majority will want to remain opted in. It is more cost-effective and efficient to opt them in as default. A smaller authority will be free to opt out if it chooses to do so. The regulations will also make some audit provisions specific to smaller local public bodies. An authority with a turnover between £25,000 and £6.5 million must appoint an auditor or have one appointed to it to provide a limited assurance on a financial statement.
The regulations also provide that bodies with a turnover of less than £25,000 are not normally subject to audit engagement, but must comply with enhanced transparency requirements. We have taken a risk-based approach to the exemption for the smallest bodies. The exemption will not apply when such a body is new, where it is subject to a public interest report or where an item in its
accounts has been declared unlawful. That provides assurance to local people about the spending of those smaller local public bodies, while being cost-effective and proportionate to the scale of that spending. We have consulted the National Audit Office on that approach, and it is content.We undertook two rounds of consultation on the regulations. The first, in autumn 2013, was on an initial draft. Again, respondents were broadly content with the regulations, including the provisions that a smaller authority should not be forcibly opted out by the appointing body; that the appointing body should publish a list of appointing bodies; that the Secretary of State should have power to opt in a smaller authority that has failed to appoint an auditor; and that below-£25,000 authorities should not be exempt from a limited assurance audit if they are newly formed, have had an item in their accounts declared unlawful or have been subject of a public interest report in the previous year.
We undertook a second round of consultation in summer 2014. In particular, we asked whether the draft regulations met the objectives of transparency, quality and cost-effectiveness. Most of those expressing a preference agreed, however chief among their concerns were that the regulations are complex and that smaller authorities might be unaware of the new requirements. We recognise the complexity of the regulations and the challenge to many smaller authorities of interpreting their effect. We have therefore redrafted the regulations to simplify and clarify where we can. We are publishing a brief and accessible guide to the audit and transparency requirements applicable to smaller authorities, which we have shared with the Committee in draft. The guide reflects considerable consultation with the sector. The regulations also require a smaller authority whose turnover is below £25,000 and is thus exempt from the requirement for a limited assurance audit to self-certify by letting the appointing body know that and by publishing the fact.
In conclusion, the regulations will enable the sector to bring forward collective procurement bodies which offer an opportunity for savings through large-scale procurements, while meeting our objectives for the new regime of efficient, independent and good quality audit. Audits will therefore help local people to hold councils to account for their spending decisions and ensure that they deliver value for money. I commend the regulations to the House.
9.5 am
Andy Sawford (Corby) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr Williams. These are important pieces of secondary legislation which will, I hope, assure the public in years to come that local authorities are being properly audited. I served on the Committee that considered the Local Audit and Accountability Bill. Today is one of those rare days for the Opposition where we celebrate a significant victory for our side. The Minister will know that, in the teeth of Government opposition, we argued sitting after sitting in Committee that it would be in the interests of the public and local authorities, as well as in the interests of proper audit accountability and good use of public money, to have a sector-led body that would capture some of the things lost when the Audit Commission was abolished.
We did not seek to preserve the Audit Commission. We recognised that it had significantly overreached its role, but we lamented the loss of those aspects of its work that were the vision of its founder, Lord Heseltine: to promote good value for money across public bodies—particularly, in the case of that Bill, local authorities—while sharing good practice across local authorities and benchmarking their spending to enable the public to see that public money was being well spent.
We argued for a significant role for the National Audit Office. It is disappointing to see that the Government have not yet set out more clearly how the NAO will carry out the role of benchmarking local authorities’ performance in terms of expenditure of public money and showing where good practice lies. We also argued that the sector could do that too and that some of the tools previously at the disposal of local authorities through the work of the Audit Commission to see how they could better use public money needed to be maintained.
Mr Jim Cunningham (Coventry South) (Lab): When the Audit Commission was first set up, Coventry was one of the first authorities that was looked at, along with Leicester. Comparisons were made, but it was not only about auditing; it was about the quality of service—for example, rent levels and issues such as that.
Andy Sawford: My hon. Friend has considerable experience in this area and, of course, a long relationship with his local authority. While aspects of the Audit Commission’s role in later years were, in some ways, part of a framework that constrained local authorities’ ability really to respond to particular local circumstances, many other aspects of its role were valued by Members in this place, by the public and, indeed, by local authorities themselves. Local authorities recognised that parts of the Audit Commission’s work were of value to them and to the public they served.
We will not oppose the regulations. I am sure that the Minister is not surprised at that. We supported the sector-led body and we also supported measures that would allow smaller local bodies to have a proportionate audit regime. I pay tribute to the work of Members of the House of Lords who also made that case and strongly scrutinised the legislation. The Government recognised that were they not to accept the wisdom of the case being made by the Opposition, by the Lords, by local government and by other bodies with an interest in this sphere, this could lead in the end to ping-pong with the House of Lords and to the defeat of the Government. Indeed, some of the Government’s own Members raised concerns in Committee.
As we said during the passage of the Bill, we hope that the sector-led body will not seek to recreate those aspects of the Audit Commission that none of us will miss. However, we think it right that local authorities should be allowed to opt in to arrangements to procure audit. Analysis by the Local Government Association during the Bill’s passage showed that a form of central procurement and appointment would save the public purse more than £200 million over five years compared with local appointment. It is very welcome that the Government listened to those calls. It is also welcome that the Government are working with the National Association of Local Councils, which made a strong contribution to the debate in the Lords and, indeed, in
the Commons. We are grateful for its advice, and I know it was consulted. The Minister says that the matter has twice been out for consultation, and I pay tribute to the work that he and his officials have done to engage the sector in developing the regulations.I appreciate the Minister’s update on how the work is coming along. Will he give us some dates when he expects to announce that the sector-led bodies are up and running and open to local authorities to opt in? Does he have a progress report so that we can understand how the process is developing in practical terms? We understand how the regulations that will create the legal framework have been developed, but in practical terms, how are the partners working together and what is the status of developing the sector-led options for local authorities? It will not be long before they need to think about whether to opt in and start to make those decisions.
We support the intentions of the officials because we want to see the bodies established, but we are concerned that sometimes language can be a difficulty. There are concerns from organisations such as the Institute of Chartered Accountants in England and Wales about the proposals to redefine the terms “audit” and “audit work”, that are necessary for this to go forward. Those are well known and legally defined terms. To include in those terms, the term “limited assurance” is a concern. We understand that the Government are grappling with how to create a framework for the public sector that is in line with the Companies Act, but there are differences in public sector audit.
The ICAEW says that if the Government create this new definition of audit, which is not recognised by any professional body or audit firm, it could leave smaller bodies without any registered or regulated accountancy firms willing to sign off their accounts. Have any professional bodies agreed to acknowledge those terms? Will the training for those involved in public sector audit provide a full understanding of the meaning of the terminology, so that it will become part of the language, the lexicon, of those involved in accountancy and a recognised term in public sector audit?
The ICAEW argues that it could leave smaller bodies more vulnerable to fraud and financial errors, and we should be concerned about that. It could create an expectations gap between what the law requires and what can be delivered. There are also concerns for the public as it could undermine the public perception of an audit and create confusion in the profession and the local government sector. It could undermine the policy intention of creating a more proportionate regime for smaller bodies and increase costs to them and to taxpayers. It could leave firms without any professional indemnity insurance for this work.
I understand what the Government are trying to do but I urge the Minister to engage with these concerns. I appreciate he has been through two rounds of consultation. We urged that the Local Government Association, National Association of Local Councils and other bodies be very involved in drawing up the regulations. However, I wonder whether he and his officials need one more go, engaging with the accountancy profession, so that they are comfortable with the way that the regulations are implemented and the language used. Will the Minister undertake to ask his officials to meet the ICAEW to
hear and address those concerns? I am sure they can be addressed but I would be grateful if the Minister made that offer.There are a couple of other issues on which I would like the Minister’s guidance. First, the larger authorities that opt in to the sector-led body will no longer be required to set up their own local audit panel. I do not recall that being discussed on Report. I wonder whether the removal of the requirement to set up a panel will encourage more authorities to opt in to the sector-led body, and whether that is the Government’s intention. I can see it would be attractive for local authorities not to have to undertake the bureaucracy of setting up their own panel if they opted in. I want to confirm that is the Minister’s intention.
We raised many questions with the former Minister in Committee about how authorities might struggle to fill the positions on their local audit panels and what might be the cost of remuneration and the expenses of panels. Will the Minister tell us what local authorities are telling him, and what assessment he and his Department have made, about setting up the audit panels? What is the latest assessment of the cost implications? What work has been done on ensuring that there will be people to fill the roles on the panels?
How is the market in local audit developing? That is a key concern. How many new or existing firms that have never been involved in local audit are bidding for local audit contracts? I was at an event here last week when the chief executive of the Chartered Institute of Public Finance and Accountancy remarked on the changes to the audit regime and on its impact on standards in local authorities and public assurance. He said that foundation trusts have, for a long time, had similar arrangements by which they can appoint their own auditors, but there has never been a public interest report about a foundation trust. That spoke to the concerns that we raised in Committee that, in a sense, there could be mutuality in the relationship between auditors and the local authorities that they audit, which may not always mean that they act in the public’s best interest. We heard assurances that chartered accountants have a code of practice and integrity, which they would bring to bear in carrying out their role, but there is a commercial imperative to maintain the relationship.
What progress has the Minister made in ensuring that there will be a lively market? Part of the guarantee was that there will be competition and a market that the public will be able to see in operation, meaning that it is not in the interests of an auditor not to carry out their role effectively; there would be a reputational issue for an auditor if they were seen to have not carried out their role effectively. Will the Minister update us on that?
Is the Secretary of State, having realised that members of the public are not going to join their local audit panels and that the market in local auditing is not materialising as quickly as he wishes, now trying to nudge local authorities, through the regulations, towards opting into the sector-led body? If he is, that shows that the Government are seeing sense about something that we have long argued for. I hope that our many hours in Committee and on the Floor of the House arguing for that sensible approach are supported again today. Sometimes the Opposition’s challenge and scrutiny can
bear fruit. We certainly will not be opposing the regulations, but I would welcome the Minister’s response to my points.9.17 am
Kris Hopkins: First, I recognise the great modesty with which the hon. Gentleman spoke. As a consequence of the Audit Commission’s demise and changes that we have made, about £757 million will be saved from 2012 to 2017. Over 10 years, its demise will save about £1.3 billion, so it was the right thing to do. I appreciate that the hon. Gentleman recognises that. We need to ensure that the public have confidence that there is a mechanism by which spending and choices that local councils and officials make are transparent, open and accountable. I know that from my time as a local authority leader, when there was no option to bring in other bodies that could challenge in a more cost-effective and efficient way, rather than the great monolith of the Audit Commission with its bureaucracy and the huge cost and burden that it placed on local authorities. The mechanism is about making that process more efficient.
The hon. Gentleman is right about the enormous amount of work that staff and officials have undertaken. It is hard enough reading out a long, bureaucratic, detailed speech; the officials have spent a huge amount of time going through the minutiae of the Act and implementing each part of it. Politicians should recognise the enormous work that has gone on in the Department and in local authorities.
With regards to implementation, the regulations will come into effect in 2017, but small authorities will effectively have their bodies working by the end of the year. The Local Government Association is working in conjunction with them to drive that forward.
On limited companies, the hon. Gentleman is right to recognise that some people have questioned the terminology and language. It is our responsibility to ensure that we clarify that. We have been engaging with the companies that he mentioned, and the relationships are positive. On the whole, the vast majority of audit firms understand the process that we have put in front of them and are participating in it. They have made valuable contributions during the consultation process. Where there are still questions to answer, we will write to people, and I am more than happy to write to the hon. Gentleman about the path of future work and to define things such as limited companies and the associated responsibilities.
Andy Sawford: Will the Minister’s officials meet representatives of the Institute of Chartered Accountants in England and Wales? I read its concerns and was quite surprised by their strength, but I think that his officials
will be able to address them. It would be helpful for all concerned—including local authorities—if that meeting took place, there was dialogue, and the concerns were addressed.Kris Hopkins: I reassure the hon. Gentleman that we have met and engaged positively with the Institute of Chartered Accountants several times. That dialogue will continue, and if the hon. Gentleman knows of a specific issue that has not been raised or addressed, we are more than willing to continue the discussion.
The hon. Gentleman raised the issue of the regulatory role of the NAO. We will be publishing the associated guidance. The NAO will effectively undertake a regulatory role. We are happy to write to the hon. Gentleman and other colleagues to ensure that they understand the process.
On the issue of a panel or opting in to the process, it is for local authorities to make that determination, but there are clear options: they can appoint their own through a panel or opt in to the process.
The hon. Gentleman discussed the market. At the start of the sitting, I mentioned that previously local authorities did not have an opportunity to choose who came in to monitor their activities. The new scheme opens up a huge market and an opportunity to be competitive. I am sure that the industry recognises that the procurement process opens up the potential for undertaking the audit of some 10,000 smaller bodies, as well as a significant number of larger authorities. They are gearing themselves up.
The hon. Gentleman asked about issues of integrity and incompetence and whether an audit company might be too close to a particular body, and he mentioned the code. There is an issue of reputation for not only the local authority but the auditor. A robust relationship is put in place. Also, I am sure that individual councillors will challenge the activity and behaviour of auditors to ensure that there is a clear divide between the institutions. With that, I thank the hon. Gentleman for his questions.
Draft Local Audit (Smaller Authorities) Regulations 2015
That the Committee has considered the draft Local Audit (Smaller Authorities) Regulations 2015.—(Kris Hopkins.)