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Baroness Noakes: Before the noble Lord, Lord Clement-Jones, decides what to do with his amendment, I should like to raise two points with the Minister. I should say first that I am grateful to him for taking these issues away.

The Minister said that if the NAO were appointed, there would be a conflict of interest. I cannot see how the NAO could have a conflict of interest if it were auditing an NHS trust. I think the Comptroller and Auditor-General might find that a rather strange statement.

Secondly, the Minister talked about the advice he had received that the regulator could approve recognised supervisory bodies. Recognised supervisory bodies are set up and approved by the Department of Trade and Industry. There is a long and complex process around that, with lots of checks and balances and oversight. I suggest that the noble Lord might get his officials to research that in a little more detail when he comes back unless he has further information now.

Lord Warner: I am certainly not going to engage in a debate on the latter point with the noble Baroness, as she knows much more about it than I do, but I will take the point away and seek further advice.

If the NAO were to audit NHS foundation trusts, we believe that there would be the possibility of a potential conflict of interest. Under paragraph 22(3) of Schedule 1, the Comptroller and Auditor-General will have rights of access to NHS foundation trust accounts after audit and can report to Parliament on

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these accounts in the auditor's report. It would seem pretty odd if the NAO audited a trust and then had a right to report on its accounts to Parliament.

Baroness Noakes: I suggest to the Minister that that is not a conflict of interest. If the Comptroller and Auditor-General or NAO were appointed, the latter section to which he referred might need modification, but I do not believe that there would be a conflict of interest.

Lord Clement-Jones: In contrast to the noble Baroness, Lady Noakes, I will not get any more technical. The Minister has replied in terms that I understood. The crucial factor is the way that foundation trusts are classified as central government bodies. We must find a way of making sure that the audit process is robust. I thank the Minister for his assurance that he will take that away and think about it, although he is giving no undertakings that the Audit Commission will have further involvement. It is a view well shared in the House that there is considerable confidence in the Audit Commission, and that would be a sensible way forward. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 67 to 69 not moved.]

Baroness Noakes moved Amendment No. 70:

    Page 112, leave out line 5 and insert "act as an audit committee with the following functions—

(a) to monitor the integrity of the accounts of the corporation, including reviewing significant financial reporting judgements;
(b) to review the corporation's internal control system and risk management systems;
(c) to monitor and review the effectiveness of the corporation's internal audit functions; and
(d) to monitor the exercise of the auditor's functions, including monitoring and reviewing the auditor's independence, objectivity and effectiveness."

The noble Baroness said: Amendment No. 70 would amend paragraph 22(4) of Schedule 1, which sets up a committee of the board of directors to monitor the exercise of the auditor's functions. That sounds like an audit committee, a requirement for which has existed in the private sector for well over a decade and also in the public sector, particularly for NHS bodies.

The Minister will not be interested in this, but in recent times the combined code on corporate governance has reflected amendments from a review not by Mr Higgs but by Sir Robert Smith on the work and tasks undertaken by audit committees.

I said a moment ago that paragraph 22(4) had included something that sounded like an audit committee, and that is what paragraph 27 of the Explanatory Notes refers to. But I regret to say that whoever has drafted this sub-paragraph has no idea what an audit committee is.

The wording of Amendment No. 70 follows fairly closely the main requirements of the latest combined code—although I have shortened it a bit and it is not very different from what existed before. However, the

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whole point about audit committees is that they do not simply sit on top of the external auditors; they consider all the issues related to financial reporting, internal control and risk and they oversee the internal audit function. Internal control, for example, is not a function of the external auditors, who will look only at key aspects of internal financial controls related to the financial statements.

Audit committees in the private sector have very heavy workloads. As the chairman or a member of several, I bear the scars. Paragraph 22(4) does not begin to cover the ground that a foundation trust audit committee should encompass. I hope that the Government will look again at this. I beg to move.

5.45 p.m.

Lord Blackwell: I support my noble friend's amendment. Clearly audit committees in the private sector are governed by the combined code. If we are told that the combined code is not relevant to these NHS trusts, there needs to be an equivalent code setting out what the audit committee should encompass.

My noble friend has covered the major points but I believe that the Minister should consider one other—the particular function in public organisations of the chief accounting officer. Although this point has puzzled me in regard to all public sector organisations, I make it in this context with regard to these specific organisations. Ultimately, it is the chief accounting officer who submits the report on the appropriateness and integrity of the accounts. As far as I can see, in most public sector organisations, the audit committee, however it is constituted, has no formal role in approving the report of the chief accounting officer. So it can do lots of monitoring and reviewing, but it has no formal locus on the report that is submitted. I therefore wonder whether in considering this amendment, the Minister will also consider that there needs to be a paragraph (e),

    "to review and approve the report of the chief accounting officer".

Lord Warner: NHS foundation trusts will be expected to apply best practice in corporate governance, taking account of recommendations and best practice in both the public and private sector. For example, the Audit Commission has examined the role of non-executives and the Financial Reporting Council has, as the noble Baroness said, revised the combined code of corporate governance in the light of the Higgs report. We accept that good practice has to be appropriately used by foundation trusts. The Secretary of State in approving applications, and the independent regulator in authorising applications, will be able to ensure that each applicant has developed appropriate governance proposals as set out in the constitution. So that is our position. I do not want there to be any misunderstanding about that or to give any suggestion that we do not approve of extremely good audit practice by foundation trusts.

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I accept that the proposals set out in Amendment No. 70 reflect the combined code and the recommendations by Sir Robert Smith on audit committees. We have no quarrel with that at all. As such, we expect that NHS foundation trusts will provide for their audit committee to have similar functions. However, we have doubts about whether it is appropriate to specify those in legislation. As I understand it, they are not specified in legislation for companies. There needs to be flexibility to take account of the fact that, as we have seen in recent years, best practice advice will change with time and with different types of organisation and should not be enshrined in primary legislation. We do not think that that is much different from the present arrangements in current NHS bodies. In the light of those assurance, I hope that the noble Baroness will be willing to withdraw the amendment.

Baroness Noakes: I thank the Minister. However, I think that he has missed the point that I was trying to make. Paragraph 21(4) states:

    "The corporation is to establish a committee of non-executive directors to monitor the exercise of the auditor's functions".

That is very narrow. If that said something like, "to monitor the internal financial controls and audit related thereto", there might not be so much of a difference between us. However, that is the narrowest description of an audit committee that I have seen. The description does not seem to lead either applicant trusts, the regulator or the Secretary of State to examine the right issues. If it should not be so prescriptive as to follow current guidance, perhaps we should say something like, "to establish an audit committee in line with best practice". However, this formulation is wrong. I hope that the Minister will re-examine the issue. I am sure that we will return to it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Earl Howe moved Amendment No. 71:

    Page 112, line 8, leave out "with the approval of the Treasury"

The noble Earl said: In moving Amendment No. 71, I wish to speak also to Amendments Nos. 73 and 74. It is important that we touch at least briefly on the provisions in Schedule 1 which deal with the content and format of a foundation trust's annual accounts.

We see here in the clearest possible terms one of the fault lines in the oft repeated claim that the regulator will be independent of government. One might think that the way in which a foundation trust prepares its annual accounts should be up to it, subject to appropriate directions from the regulator, but not a bit of it. The regulator cannot specify anything to do with the methods and principles according to which the accounts are prepared or the information that appears in the accounts or the form in which they are kept and presented without the prior approval of the Treasury.

I am sure the Minister will say that that is all part and parcel of ensuring proper accountability for public money in public sector bodies. I have no problem with the concept of proper accountability but if the rhetoric were really true that the regulator is to be truly

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independent there is an easy way to preserve proper financial accountability, and that is to give him a general duty to ensure that the accounts of each foundation trust reflect the principles required by the Treasury for the purposes of financial transparency.

Clause 3 defines the regulator's general duties. It is a short step from those general duties to the kind of duties that I have just described. But that is not the approach that we have here. The Treasury has to have, apparently, a direct role written on the face of the Bill relating to the minutiae of the accounting process. That is one example—a small one perhaps—of the way in which Ministers will continue to exert control over foundation trusts. In my humble view it is wholly avoidable. I beg to move.

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