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Baroness Noakes: I thank the noble Lord, Lord Livsey of Talgarth, for his contribution and the Minister for his reply, which in some measure explains what subsection (3) is about—in particular, ensuring that all those mentioned can enter into such arrangements. It is curious that arrangements have been entered into for many years, certainly involving the Comptroller and Auditor General, about which I know a little, without any such formal power. I am fairly sure that the Audit Commission too has been entering such arrangements. We tabled the amendment because it looked like such an unusual provision to include in legislation.
That also raises the question of what happens to the bodies that are not named here. The implication is that the Auditor General can enter into arrangements only under either subsection (1) or subsection (3). Many bodies are not covered by those subsections. I mentioned a supreme audit institution, the equivalent of the Comptroller and Auditor General or the National Audit Office, in France or Germany. That would not be covered, and therefore it would be improper for the Auditor General for Wales to enter into any such arrangements.
One problem with trying to write things down is that one therefore ends up with the problem of what is not written down. I would like to think about the Minister's reply in a little more detail. At one level, it seemed to explain why the subsection is needed, but
that raised a lot of other questions in my mind. I would like to think about it further. I beg leave to withdraw the amendment.Amendment, by leave, withdrawn.
Baroness Noakes moved Amendment No. 5:
- Page 3, line 42, at end insert—
The noble Baroness said: We stay with this clause and come to the issue of the independence of the Auditor General for Wales, to which the noble Lord, Lord Livsey of Talgarth, referred in his comments on the previous amendment. Amendment No. 5 inserts a new subsection into new Section 96C of the Government of Wales Act 1998 inserted by Clause 2. This new subsection states that arrangements that the Auditor General for Wales makes with the various bodies and for the various purposes in subsections (1) to (3) must not impair the independence of the Auditor General. At present, the Auditor General for Wales is prohibited by Section 92 of the Government of Wales Act 1998 from entering into any arrangements for the Assembly that involve the Auditor General or the Assembly carrying out each other's functions or providing each other with administrative or similar services.
Clause 9 removes that prohibition, and instead creates the wide-ranging powers in new Section 96C, which will allow the Auditor General to work in and for any of the bodies for which he will have responsibility for auditing under the Bill. Without further restriction, that raises some issues regarding the independence of the Auditor General. We debated that at Second Reading, and I explained that auditor independence, whether of public or private sector auditors, can be impaired by the provision of non-audit services or by having to audit one's own work. That is allowed under new Section 96C. The Committee may well be aware that auditor independence is one of the hottest issues in the private sector. We must be sure that we achieve the highest standards in the public sector.
At Second Reading, the Minister said that it will be for the Auditor General to ensure that no conflict of interest arises. The Minister then said,
I should be surprised if there was anything between me and the Auditor General for Wales on the issue of independence. I do not believe that he or any of his successors would voluntarily impair their independence. The Explanatory Notes to Clause 9 mention protocols to ensure that no conflict of interest arises. My solution is to place in the Bill a clear obligation on the Auditor General to satisfy himself that the arrangements entered into—I am not trying to prohibit such arrangements—do not impair independence. Protocols could then follow, and would be sensible, but they would be firmly rooted in a clear statutory requirement.
The Bill marks a considerable shift from the Government of Wales Act 1998, with its blanket prohibition on working for the Assembly, and moves virtually to a free for all. We do not oppose the basic liberalisation implicit in new Section 96C, as that is likely to provide healthy flexibility for the Auditor General. We believe that it is unwise to move without a clear and explicit reference to the crucial issue of audit independence. I beg to move.
Lord Livsey of Talgarth: I have already made a point about independence. I am pleased that the noble Baroness, Lady Noakes, said that there is a need for flexibility to be spelt out. Given that we are creating an Auditor General for Wales in one body, I wonder whether the need to specify in new Section 96C(3) various professionals who can assist—such as a qualified auditor or an accountancy body—is affected by possible restrictions of finance. I do not know, but I know that it is common practice in Wales for professionally qualified people to work together, often because of lack of resources. I would like the Minister to comment on that.
Lord Davies of Oldham: I am grateful to both noble Lords for their contributions to the amendment. I am grateful in particular to the noble Lord, Lord Livsey, because he has expressed certain reservations which we share. We do not believe that a statutory duty is necessary to ensure that the Auditor General upholds the highest standards of independence. After all, the amendment would place the Auditor General under a statutory duty to satisfy himself that his independence in conducting audits is not impaired as a result of him entering into co-operative arrangements, including co-operative arrangements with the National Assembly provided for in the clause.
The Auditor General of course abides by the Auditing Practices Board guidance on standards of independence. Objectivity and independence are two of the key ethical principles that govern auditors' professional responsibilities.
My understanding is that the board is in discussion with the national audit agencies, which include the Auditor General for Wales and his staff, on the adoption of ethical standards that the board proposes to introduce later this year. The likelihood is that the standards will be adopted and will apply to all auditors practising in the public sector as well as the private
The Auditor General also has in place local protocols that ensure independence and guard against conflict of interest. For instance, in the case of a secondment of National Audit Office staff at a client organisation, the member of staff will, upon return to the NAO, not perform any audit functions in respect of that body for a period of three years. It will be open to the Auditor General to consider existing arrangements and strengthen them if he considers it necessary.
The noble Baroness argued persuasively that these protocols could be developed subsequent to the statutory provision and within that framework. However, we believe that all desirable public safeguards will be achieved through this process and we do not believe that this statutory duty is necessary. For that reason, I ask the noble Baroness to withdraw her amendment.
Baroness Noakes: I thank the noble Lord, Lord Livsey, for his support for the concept. I also thank the Minister for his reply, which was not a surprise. I reiterate that I tabled the amendment because of a change in the law. Having moved from a restrictive position to something which would have allowed activities that would open up the possibility of impaired independence, I considered that we needed something else.
If it were beyond peradventure that the Auditor General for Wales was subject to a clearly defined body of ethical principles, the concerns might be allayed, but that is not the case. The Auditing Practices Board—these bodies change their names over time—does not automatically cover a body such as the Auditor General for Wales or the related audit office. The Auditing Practices Board applies to certain qualified accounting bodies and does not apply directly to national public audit bodies.
I understand that the Government do not believe there should be a statutory duty, but as that duty would result only in what would be the outcome in any event, I cannot see what harm the amendment would do. Indeed, I believe that it would strengthen the hand of those who believe in high-quality public audit—that includes the Auditor General for Wales—to have firm protocols and guidelines linked to those which exist for private sector audit activities.
I will leave the matter for the time being, saying that I was disappointed in the Minister's response. It is an area where it looks as though there is one rule for the private sector and one rule for the public sector. We should be proclaiming loudly and clearly that the core of our arrangements to public audit is that impaired independence is not acceptable. We should not leave the matter to arrangements which may or may not
Amendment, by leave, withdrawn.
Clause 3 [Studies for improving economy etc in services]:
"( ) Arrangements may not be made under subsection (1) or (3) unless the Auditor General for Wales has satisfied himself that the independence of any audits carried out by him or by a person appointed by him is not impaired by the arrangements."
"It is not necessary to limit Clause 2 to situations that would not give rise to conflicts of interest, as that may be too restrictive".—[Official Report, 9/12/03; col. 729.]
I profoundly disagree. We must preserve the integrity of public audit, and we must ensure that auditor independence is not impaired. I do not express this in terms of conflict of interest, because a genuine conflict is most unlikely. I use the more neutral term, "impairment of independence". That means not only actual impairment, but perceived impairment, because perception is just as important as fact when dealing with the independence of an auditor.
4.30 p.m.
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