Draft Local Audit (Delegation of Functions) and Statutory Audit (Delegation of Functions) Order 2014
The Committee consisted of the following Members:
† Burns, Mr Simon (Chelmsford) (Con)
† de Bois, Nick (Enfield North) (Con)
Donohoe, Mr Brian H. (Central Ayrshire) (Lab)
† Garnier, Mark (Wyre Forest) (Con)
† Glen, John (Salisbury) (Con)
† Griffiths, Andrew (Burton) (Con)
Hamilton, Fabian (Leeds North East) (Lab)
† Huppert, Dr Julian (Cambridge) (LD)
† James, Mrs Siân C. (Swansea East) (Lab)
† Jones, Susan Elan (Clwyd South) (Lab)
Kelly, Chris (Dudley South) (Con)
† Lewis, Brandon (Parliamentary Under-Secretary of State for Communities and Local Government)
† Perry, Claire (Devizes) (Con)
† Robinson, Mr Geoffrey (Coventry North West) (Lab)
† Simpson, David (Upper Bann) (DUP)
Watson, Mr Tom (West Bromwich East) (Lab)
Mark Oxborough, Committee Clerk
† attended the Committee
Eighth Delegated Legislation Committee
Wednesday 9 July 2014
[Jim Dobbin in the Chair]
Draft Local Audit (Delegation of Functions) and Statutory Audit (Delegation of Functions) Order 2014
8.55 am
The Parliamentary Under-Secretary of State for Communities and Local Government (Brandon Lewis): I beg to move,
That the Committee has considered the draft Local Audit (Delegation of Functions) and Statutory Audit (Delegation of Functions) Order 2014.
This order is one of a number of statutory instruments that will put in place new arrangements for the audit of relevant authorities, as set out in the Local Audit and Accountability Act 2014. The order delegates certain powers of the Secretary of State for Communities and Local Government relating to the eligibility and regulation of local auditors to the Financial Reporting Council, the independent regulator responsible for the oversight and development of corporate governance standards. The Financial Reporting Council is a company limited by guarantee, by it is partly funded by Government and its board of directors is appointed by the Secretary of State for Business, Innovation and Skills.
The functions we are delegating include authorising professional accountancy bodies to act as recognised supervisory bodies for local audit; authorising professional accountancy bodies to offer a local audit qualification; undertaking significant public interest disciplinary cases and, where appropriate, imposing a range of sanctions on those auditors found to have committed misconduct; carrying out an additional level of oversight and monitoring of audits of significant local public bodies, defined by regulations as major local audits; and reporting to Parliament annually in relation to inspections. The order closely follows the Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc) Order 2012. Indeed, article 10 makes a small amendment to the 2012 order to ensure that the same consultation period applies to consultations carried out by the Financial Reporting Council, whether the consultation relates to company audit or local audit.
I have no wish to take up hon. Members’ time by rehearsing the various arguments for the abolition of the Audit Commission during this Session. We rehearsed those arguments in the House and in Committee late last year and early this year. However, it is my view that the arrangements we are putting in place 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. These arrangements will also remove unnecessary duplication from the system, as audit firms currently have to work under two regulatory systems: one set by the Audit Commission and one set by the Companies Act 2006.
By largely replicating the Companies Act regulatory regime for local audit, we are simplifying the rules that apply.That is not to say that we are removing necessary safeguards or compromising the quality of audit. The work of the auditors will not change. The National Audit Office will set out what auditors should do to fulfil their statutory duties and, as set out in this order, where appropriate, the Financial Reporting Council and professional accountancy bodies will monitor the quality of audit, as they already do for the private sector.
Without the order, the Secretary of State for Communities and Local Government would retain oversight of the whole regulatory framework for local auditors, thus continuing an anomalous position and a dual regulatory regime. The powers being delegated to the Financial Reporting Council mirror those delegated by the Secretary of State for Business, Innovation and Skills to the FRC for oversight of the regulation of statutory audit. Through this order, the FRC will take on the responsibility for authorising professional accountancy bodies to act as recognised supervisory bodies. Those bodies will, in turn, have responsibility for deciding which firms are eligible to undertake local public audit and for monitoring compliance with the rules and practices that they have established and also with auditing standards.
The Financial Reporting Council will also have responsibility for the recognition and supervision of audit qualifications not recognised by the Companies Act 2006. In approving an additional qualification, the Financial Reporting Council will need to assess whether it meets the minimum requirements, as set out in the Local Audit (Professional Qualifications and Major Local Audit) Regulations, which were laid before the House on 27 June and are subject to the negative resolution procedure.
The Financial Reporting Council will also have responsibility for monitoring major local audits. The Secretary of State for Communities and Local Government has specified in the regulations which relevant authorities will have their audits defined as major local audits. Briefly, an audit will be considered a major local audit if the relevant authority’s total income or total expenditure is above £500 million, or if it has local government pension funds with assets in excess of £1 billion or more than 20,000 members. The Financial Reporting Council will also, subject to consultation, be able to give a direction to a relevant authority specifying that its audit will be a major local audit.
Let me be clear about the process we have taken with consultation. Before the introduction of the 2014 Act, we consulted on both the broad policy approach and, in more depth, the proposed framework through publication of the draft Bill. Hon. Members may recall that we had a pre-legislative scrutiny Committee, which provided valuable scrutiny of the draft Bill. During the Bill’s passage through Parliament, we provided draft regulations on key provisions to the Public Bill Committee and carried out an interactive public consultation exercise last autumn. More than 130 replies were received and the regulatory framework was commented on by 62 responses, including from the Local Government Association. It acknowledged that the qualification and regulation of auditors was a matter for the accountancy
and audit profession, although it emphasised that the functions delegated to the Financial Reporting Council should be restricted to matters of professional practice rather than local authority audit policy.Nearly 80% of the responses were in favour of the approach proposed for the regulatory framework, reflecting the work we undertook before consulting, such as having regard to the existing statutory framework and engaging with key stakeholders through a working group to ensure the proposals reflected their views. The majority viewed the local audit professional qualifications and major local audit regulations as providing an appropriate framework to allow a body to develop a suitable qualification for local audit, and 63% agreed that the proposed thresholds were appropriate to capture the audits of significant local bodies.
Following comments made during the consultation about the role of the Financial Reporting Council, we have made minor changes to the order. It now includes a requirement that the Financial Reporting Council consult any bodies that fall outside the definition of a major local audit, but whose audits it decides should be subject to additional monitoring and treated as one. Given those points, I commend the order to the Committee.
9.2 am
Lyn Brown (West Ham) (Lab): It is a pleasure to serve under your chairmanship, Mr Dobbin, especially as this is the first time I have spoken in a Statutory Instrument Committee from the Front Bench.
We have consulted with the Local Government Authority, the Financial Reporting Council, and the Institute of Chartered Accountants in England and Wales. All have told us that they are broadly happy with the order, so I do not intend to speak for long. For comfort, I will state now that we do not oppose the order. However, I want to repeat some of the concerns aired during the passage of the Local Audit and Accountability Act 2014 by my hon. Friend the Member for Corby (Andy Sawford). He would normally be in his place on the Front Bench, but today he is at the Local Government Association conference in Bournemouth, highlighting the fabulous work of Labour councils across the country and meeting lots of the new Labour councillors, following our success in the May elections.
The order transfers regulatory powers from the Secretary of State to the Financial Reporting Council. In doing so, it broadly follows the wording of the Companies Act 2006, which seems the most sensible and efficient way of doing things. However, the extra duties on the FRC will obviously impose new costs, particularly for undertaking inspections of the firms auditing local bodies. As the FRC already works with many of those firms and previously worked with the Audit Commission during the old system of local audit, the costs will not be extreme, but it will none the less incur new costs. How much additional cost will be incurred by the FRC? Who will foot the bill? In all likelihood, it will be the body audited—and therefore the taxpayer—picking up the bill.
During the passage of the Local Audit and Accountability Act 2014 through Parliament, the Minister said he believed that the new system of local audit would save £730 million over five years. In that £730 million,
did he take account of the additional fees incurred by the FRC and does he still believe that the £730 million target will be met?The Government also argued during the passage of the 2014 Act that the new regime would unlock a new market in local audit. At the time, however, there was very little sign that such a market was developing outside the usual big players. I am sure that many Members will agree that the bigger the monopoly those firms have, the less competition there is to drive down fees. I would be grateful if the Minister could provide an update on the discussions he or his officials are having with auditing firms to promote the creation of that market and tell us how many different firms he or his officials have met thus far.
Finally, I would be grateful if the Minister could update the Committee on the progress he is making with the LGA on the creation of the opt-in centralised arrangements for local audit. As we said throughout the Local Audit and Accountability Bill Committee, we do object to the abolition of the Audit Commission, nor do we—[ Interruption. ] We do not object to the abolition of the Audit Commission—it was late last night; what can I say? We do not object to the abolition of the Audit Commission, nor do we want another version of it to be created, but we do want to see a successful, sector-led opt-in option available to authorities that, as we said in Committee, might struggle to attract audit firms at a fair price. We do not oppose this statutory instrument, but we remain unconvinced that the Government’s suggested savings of £730 million over the next five years will materialise.
9.7 am
Brandon Lewis: The hon. Lady is quite right: the Local Government Association is meeting in Bournemouth at the moment. I was there yesterday and spoke to the conference, and I will go back there after the Committee. I felt it was important to come back and do my duty in the House this morning, so I came back last night and will head off to Bournemouth directly from the Committee. I appreciate the hon. Lady’s brevity, which will allow me to get to Bournemouth as early as possible.
There are a great number of councillors in Bournemouth showing the superb work they do. I have two points to make about that. First, by far the majority of councillors are still Conservative. It is important to remember that we have the largest number of councillors in local government. Secondly, the local audit changes will allow councils to save substantial amounts of money while still highlighting to residents their great work in delivering good, efficient front-line services—or at least, good Conservative councils will do that.
The hon. Lady is quite right to say that we outlined expected savings of £730 million, and we expect those to be delivered. I will go further and say that the target is to save some £1.2 billion over 10 years, and I have every reason to believe that that target will be reached. Through the Audit Commission, we saw the build-up of a huge amount of bureaucracy and red tape, and councils often did things to suit the Audit Commission and not necessarily their residents. We rehearsed all those debates in the Public Bill Committee, and the hon. Lady is quite right to say that the Opposition agreed that the Audit Commission had come to its natural end. The Financial
Reporting Council is funded in part by professional council bodies, and through fees and levies that it collects on a voluntary basis from those who benefit from its activities, including public sector organisations such as local government bodies. We believe that the savings we have outlined to the public purse of £730 million, rising to £1.2 billion, recognise that fact.The order is an important initial step towards implementing the new regulatory framework for local audit set out in the 2014 Act. I want to emphasise the iterative approach that the Government have taken throughout the development and enactment of the new local audit framework to ensure that it is robust yet streamlined. That is why the framework will be able to provide savings of £1.2 billion to the taxpayer over 10 years. The order, which is only part of that new streamlined framework, will reduce duplication in the existing system while putting in place a regulatory framework that audit firms understand well. As the market develops, we expect to see an increase in competition and in firms’ ability to access the market.
I have been talking to the LGA about its plans. We were very happy to facilitate the LGA arranging to be the relevant sector-led body, and we will be in close contact with it over the next few months about the work it is doing in that area. However, that is something for the sector itself to develop.
The order will provide the Financial Reporting Council with the delegated powers that it needs to carry out certain duties in preparation for its new role. An example is the ability to specify that a professional accountancy body is a recognised supervisory body for local audit, thus enabling such a body to register audit firms wishing to audit relevant local authorities in the new framework. The order will also enable the Financial Reporting Council to put in place guidance and regulations relating to its role in the new regime and to ensure that it is fully prepared to take on the duties.
In relation to the companies looking to come into the market, my officials have met and are continuing to have discussions with the large audit firms, including Deloitte and PricewaterhouseCoopers. As the new regulatory framework comes into effect, those meetings will continue, and our communication strategy allows for increasing contact with audit firms during the next two years. We are continuing to engage regularly with the audit firms and key stakeholders while developing the new framework. I therefore commend the order to the Committee.