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Lord Warner: While I stand by what I said in my original response, I can see the force of the arguments put by my noble friend Lord Hunt and the noble Lord, Lord Clement-Jones, about perceptions. It is certainly not our purpose to diminish the role of the board of governors.

In the light of those particular arguments, I should like to take this issue away and reflect a little further on it. I shall see whether we can respond appropriately before the Bill is considered on Report.

Lord Clement-Jones: That is most helpful, as was the intervention of the noble Lord, Lord Hunt. The noble Lord and I tend to have a similar vision of the way in which the board of governors and the board of directors are to interact, but one does not have to share that vision in order to be absolutely certain about the need to know exactly where each individual member of the board of governors is coming from in terms of their interests.

I am very pleased with the Minister's response and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 63, 64 and 65 not moved.]

The Deputy Chairman of Committees: If Amendment No. 66 is agreed to, I shall not be able to call Amendments Nos. 67 to 70 inclusive by reason of pre-emption.

Lord Clement-Jones moved Amendment No. 66:

"A public benefit organisation shall be audited by an auditor appointed by the Audit Commission."

The noble Lord said: Given that the noble Baroness, Lady Noakes, is sitting so close by, it is with some trepidation that I enter into the realms of public finance. Although my amendment may appear minor,

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it is highly significant and certainly one that accords strongly with a number of different reports on public finance which have recently been produced.

I start at the Statistics Commission, whose reports I am sure the Minister reads with great regularity. In July of this year that office announced that foundation trusts would be provisionally classified in the public sector as central government bodies. A provisional classification is good enough for our purposes. That is a significant statement from the audit point of view.

That classification will bring in its train the fact that the principles of public audit should apply to the auditing of foundation trusts. Those principles are clearly set out in a number of documents and are interpreted in different ways, but the first principle is that public sector auditors should be independent of the organisations being audited. The second principle refers to the scope of public audit, covering the audit of financial statements, regularity, propriety and value for money. The third principle concerns the ability of public auditors to make their audits available to the public and to democratically elected representatives. Those principles are clear. Further, an extremely comprehensive report has been produced by my noble friend Lord Sharman on the whole area of the review board and accountability to central government.

This suggested addition for a requirement to have auditors approved by the Audit Commission is intended to bring foundation hospitals four-square within the principles of public audit. Under the terms of the Bill as drafted, it seems that currently foundation trusts will fall outside those principles. I do not know whether the Department of Health gave much thought to the way in which foundation hospital accounting structures were to be established, but Members on these Benches feel that there is a flaw here which could easily be corrected by ensuring that the auditors of foundation hospitals are approved by the Audit Commission. That body is extremely used to dealing with this area. If it did not undertake the audit itself, it would certainly be in the right position to recommend the appropriate auditors for the foundation hospitals. I beg to move.

5.30 p.m.

Baroness Noakes: I shall speak to Amendments Nos. 67, 68 and 69, which are in this group. It may be easier for the Committee if I first speak to Amendment No. 68, because it follows on naturally from the amendment just moved by the noble Lord, Lord Clement-Jones.

That amendment would place the appointment of the auditor in the hands of the Audit Commission. I can see that it is a logical amendment which, in effect, preserves the current audit arrangements for NHS trusts. However, we prefer the Government's basic approach to place the decision in the hands of the foundation trusts, thereby making them much more like the university sector. The appointment will of course be made by the board of governors rather than the board of directors, thereby achieving independence of appointment, which is one of the principles of public audit to which the noble Lord, Lord Clement-Jones, referred.

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While we like flexibility and freedom of appointment, we do not like the drafting of paragraph 21(3) at all. First, it does not confine the appointment to people who are properly qualified to carry out audits. It refers to persons with specified qualifications from various accounting bodies listed in the Audit Commission Act 1998. This means that I could be appointed an auditor of a foundation trust. I am a member of the Institute of Chartered Accountants in England and Wales and would thus qualify as a foundation trust auditor even though I am not approved by the Institute of Chartered Accountants to act as an auditor under the Companies Act. Our formulation, which refers to persons eligible for appointment under Section 25 of the Companies Act 1989, gets around this problem by ensuring that only properly qualified accountants can qualify. Therefore I did not need to declare an interest when I started to speak to the amendment because I am trying to do myself out of a job.

We agree with the Liberal Democrats to the extent that the Audit Commission is a possible appointee, but we also see a possibility for appointing the National Audit Office, the skills of which are highly regarded the world over. The NAO will, in any event, have access to foundation trusts, so it could be logical and efficient for a foundation trust to have the possibility of selecting the NAO as its auditor.

Amendment No. 67 would expand paragraph 21(2) so that it is clear that an auditor should be appointed every year. This is in line with the position under the Companies Act, although I know that that will not impress the Minister. At present, it would appear that the auditor is appointed sine die, which cannot be right. There should be some kind of formal process to evaluate the auditor's appointment, and we suggest that annually is the correct interval. The amendment also makes provision for a vacancy arising so that a new auditor can be appointed if an auditor resigns. This does happen, whether through disagreements or through mergers of accounting firms.

Amendment No. 69 would delete paragraph 21(3)(b), which allows the regulator to approve other bodies of accountants to provide auditors. This is nonsensical. How is the regulator to have the competence to determine whether a new body of accountants can provide adequate auditors? The Department of Trade and Industry currently holds this role for auditors appointed under the Companies Act. I am sure that, if asked, it would tell the Department of Health that this is a highly complex area. For example, it usually takes several years to approve foreign qualifications, even from countries such as the US, as being capable of meeting the standards required under UK legislation. Our formulation in Amendment No. 69, combined with Amendment No. 68, would in effect leave the task to the DTI. Sub-paragraph (b) is not only unnecessary, but a minefield for the department.

Lord Warner: I am sure that the House would be saddened if the considerable financial skills of the noble Baroness, Lady Noakes, were unavailable to

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NHS foundation trusts. Certainly I would not wish to say or do anything to prevent those skills becoming available.

Amendment No. 66 overlaps to some extent with some of the other amendments. In line with the devolution of responsibility and accountability, and with the greater freedoms for NHS foundation trusts that we have discussed, the Bill provides for those trusts—like universities and further education bodies—to appoint their own auditors. I am grateful for the support given to that position by the noble Baroness, Lady Noakes.

The Government are absolutely clear that this principle should be adhered to and they do not consider that it is incompatible with robust audit regimes. Paragraph 21(3) provides for reputable sources of auditors for NHS foundation trusts, and I shall come back to that issue later. However, I understand that the amendments are, to some extent, motivated by a concern that audit regimes should be robust. I am certainly willing to consider further whether there are additional requirements we might specify to ensure that an NHS foundation trust appoints an appropriate person or body as auditor, and to come back on Report with any appropriate amendment.

At this stage, I would not rule out more involvement of the Audit Commission, but I would not rule it in either. I certainly have doubts about any suggestion that NAO involvement is appropriate given its responsibilities, in effect, to stand above this. There is a potential conflict of interest in that area.

I emphasise again—I want to be very clear about this—that it is for the NHS foundation trusts to make the decisions on which specific auditors they choose, however the boundaries may be set for the source from which they make that choice. We are absolutely clear about that.

On Amendment No. 67, if auditors fail to exercise their function satisfactorily, there must be a mechanism for removing them from post. From experience in public bodies I know this to be essential. The board of governors is responsible for the appointment of the auditor and should therefore be responsible for the removal of the auditor. The amendment to paragraph 21(2) is unacceptable as it would take away the power to remove an auditor who is not up to the job.

The suggested new sub-paragraph (3) appears to be aimed at ensuring that a trust does not operate without an auditor. As such, we believe that it is unnecessary. Sub-paragraph (1) makes it clear that an NHS foundation trust must have an auditor, and foundation trusts will therefore need to have arrangements to ensure that a new auditor is appointed on removal of the existing auditor. This can be achieved by requiring the auditor to give notice at an interval long enough for a new appointment to be arranged.

The audit provisions which are of concern to the noble Baroness, Lady Noakes, and are the subject of Amendments Nos. 68 and 69, have been modelled in

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part on the provision of the Audit Commission Act 1998, reflecting the fact that they are public sector bodies. Auditors from the private sector appointed to audit public bodies under the Audit Commission Act must be members of the bodies listed in that Act or another body approved by the Secretary of State.

Similarly, auditors appointed by an NHS foundation trust must be members of the bodies listed in that Act, or another body approved by the independent regulator. The independent regulator can take advice on audit-approved bodies, taking account of who the DTI, for the Companies Act, and the Audit Commission, for public bodies, have advice on.

Our advice is that applying the Companies Act provisions on auditor qualifications might weaken the safeguards we have put in place for audit of NHS foundation trusts. I am advised that the Companies Act provisions require auditors to be members of a "recognised supervisory body", but the independent regulator can ensure that any recognised supervisory body is appropriate before allowing its members to audit NHS foundation trusts, using the sources of advice that I have described.

That is our current position, so we would not favour Amendments Nos. 68 and 69. But, as I said, we will be looking again at the provisions, and I will check this area again before I come back on Report.

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