Local Audit and Accountability Bill [Lords]

Public Bill Committee, 7 November 2013.

Clause 7 - Appointment of local auditor

Andy Sawford (Labour, Corby)

I beg to move amendment 92, in clause 7, page 5, line 39, after ‘auditor’, insert:

‘except where the auditor has been appointed for two terms served consecutively.’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 93, in clause 7, page 6, line 19, at end add—

‘(9) The Secretary of State may by regulations—

(a) provide for the appointment, by a person specified by the Secretary of State, of an auditor in relation to the audit of the accounts of a relevant authority;

(b) make provision about the procedure for specifying a person and for a person’s specification to come to an end in specified circumstances;

(c) make provision about the consequences of a person’s specification coming to an end, including for the exercise of functions by the Secretary of State and the transfer of the person’s rights and liabilities arising by virtue of the regulations to the Secretary of State or another specified person;

(d) confer functions on a specified person, including power to specify a scale or scales of fees to be payable by relevant authorities to which arrangements within paragraph (a) apply;

(e) require a specified person to consult relevant authorities, relevant authorities of a specified description or representatives of relevant authorities before specifying a scale or scales of fees.

(10) Regulations under subsection (9) may, in particular—

(a) make provision about the relevant authorities to which arrangements within subsection (9)(a) apply, including provision for them to apply to an authority that has opted into them or has not opted out of them;

(b) make provision about the procedure by which an authority may opt into or out of those arrangements;

(c) make provision about the administration of those arrangements, including for the making of payments in specified circumstances by the relevant authorities to which they apply to a fund of a specified kind for the purposes of meeting auditors’ costs of a specified kind.’.

Government amendments 62 and 63.

Government new clause 1—Appointment of auditor by specified person.

Clause stand part.

Andy Sawford (Labour, Corby)

It is a pleasure to be here under your chairmanship again, Sir Edward. I start by thanking the Minister for the helpful letter he sent me further to Tuesday’s sittings. I assure him that we will look at that consultation—indeed, my hon. Friend the Member for City of Durham will return to such health service issues at a later stage.

As the Minister and hon. Members will be aware, the amendment follows a debate in the Lords. It was led by my noble Friend Lord Beecham, who proposed an amendment to limit the appointment of auditors to a single five-year term. His argument was twofold. First, he questioned whether the audit market was healthy and competitive. Secondly, he made a crucial point about the independent nature of audit and whether that could be assisted by a refresh of auditors every five years, so that a fresh pair of eyes would be on the local authorities’ books.

My noble Friend received substantial reassurances from Baroness Hanham, who was replying for the Government in the Lords, although she did note the Competition Commission report on the need for mandatory auditor rotation. Although my noble Friend was not entirely satisfied, he withdrew the amendment with a view to further discussions today.

We have decided to table an amendment that would limit the terms of appointment to no more than two consecutive terms. We reflected on the reasonable assurances given by the Minister in the House of Lords, but we are still concerned about the relationship with the auditor and the operation of the market.

The auditor should be independent. Independent audit of local government and other local bodies responsible for public funds has existed in England for more than 150 years. The District Auditors’ Society emerged in 1846, followed by the District Auditors Act 1879. Over those 150 years, the principles of public audit and the ways in which that differs from private sector audit have been established, including by the Public Audit Forum in 1998 and Lord Sharman’s 2001 report.

The first and most important principle of public audit is that auditors are independent of the audited body. We will discuss later the way in which the Government seek to safeguard that independence. Views are mixed, but the Government have considered that range of views and have, for example, set out arrangements for independent audit panels as one way to safeguard independence. Later, we will debate how effectively they will be able to do that, but one issue on independence is the relationship between the firm providing the audit and the local authority.

That relationship is partly safeguarded by exempting individuals who may have a conflict of interest from being involved in appointing the auditor. However, in practice, once the auditor is appointed, those working relationships need to be formed. In fact, for effective audit, it is a good thing for there to be a working relationship between the local authority’s audit committee, the finance officer and his or her team, the chief executive, the cabinet member with the finance portfolio and the auditors themselves. That is why we consider that after a 10-year period, if consecutive appointment had taken place at the end of the first term, it would be time—

James Morris (Conservative, Halesowen and Rowley Regis)

I am not an expert in auditing or accounting, but what is the difference between what the hon. Gentleman is describing and what is described in the impact assessment? It says in relation to appointing auditors on a five-yearly basis:

“While the same firm may be re-appointed following competition, the existing ethical standards

will continue to apply, including Ethical Standard 3: long association with audit engagement”.

What is the difference between what the hon. Gentleman is proposing and the existing ethical standards?

Andy Sawford (Labour, Corby)

I thank the hon. Gentleman, who makes an insightful and helpful contribution. He is right to point out that those reassurances are offered in the impact assessment. However, as with many of our amendments, where there is broad agreement in principle we seek to make clear the intent behind the Bill.

We completely endorse the principle, and that is why we think it right to set out a 10-year term. This is not the hard position adopted in the House of Lords: that a fixed five-year term should be it. A 10-year term might allow the firm to bid again, and it mightmake a very competitive bid; we would not want to exclude it. As Baroness Hanham said, there could be a downside to excluding a firm from bidding again, although we think that to continue the relationship to 15 years would be too long an association. The hon. Gentleman makes an important and helpful point. I hope that he will consider supporting our amendment to limit the relationship to 10 years, so that we can be absolutely sure that an association will not develop in a way that is, frankly, unhealthy.

When my noble Friend Lord Beecham spoke to his different amendment in the House of Lords, he referred to such a relationship being “too cosy”. While we would not want to impugn the genuine motives of either the auditors or the local authority in seeking to develop a good working relationship, we can all see that a situation might develop where, over 10 years, those relationships become a little too close in some cases.

There might be turnover in the personnel of an audit firm and the relationships could be refreshed in that way. There might be an effective audit committee and an independent audit panel at the time of the reappointment after five years that takes real care to safeguard independence. However, we cannot know for certain, under the Bill as it stands, that the relationship will not have become too close in years 11, 12, 13, 14 or 15.

There is another point about the fresh pair of eyes. The world of public audit is changing so rapidly; that is my experience, having worked with local councils. Having a fresh pair of eyes after a decade of audit seems a good idea. It will bring probity and fresh approaches to audit and be useful in finding out whether the council or other relevant authority provides real value for money. We all want to make sure that auditors can effectively carry out their role in ensuring value for money.

I shall briefly speak about the other issue that concerned my noble Friend Lord Beecham, to which my hon. Friend the Member for Derby North referred in Tuesday’s sessions. It involves the competitiveness or otherwise of the audit market and the role of the private sector, and how that might develop. The number of firms successfully competing in the public sector audit market is very small: 70% of the local government market has historically been with the Audit Commission and only five other firms have been involved in the remaining 30%. In the example of foundation trusts, only six companies provide audit services.

There is limited choice and competition. We know that from evidence—to the draft Local Audit Bill ad hoc Committee, for example—including factual evidence in both the private sector market, where there is the domination of the big four, and in relation to foundation trusts, a market in which only six companies act.

Duncan Hames (Liberal Democrat, Chippenham)

We would also see that domination in the previous arrangements in the large amount of work that was notionally done by the Audit Commission but that was outsourced, in fact, to the very same firms, in the way that the hon. Gentleman describes.

Andy Sawford (Labour, Corby)

I thank the hon. Gentleman for that helpful intervention. We can, of course, look back at the record, whether in the context of the Audit Commission, private sector auditing or foundation trusts, and find ample evidence that we should be concerned that the market is dominated by too few providers.

We have discussed whether we would go about things as the Government are, and whether it is premature to abolish the Audit Commission, but at this stage we all want the Government’s model to work effectively to provide good-value independent auditing. We should all be concerned about securing a lively audit market.

One reason for our amendment about the 10-year period is concern that the lack of competition in the market could mean that, by default, after a period of 10 years an auditor might be the only—or the only viable—provider at a reasonable although not particularly competitive price available to be appointed by a relevant authority.

In some ways, although our 10-year time frame is principally about the independence of the auditor, we hope it will also be a driver to create greater competition in the market, not least because other providers will know that the contract will become available, and will not simply go to the current provider, as so often happens in the private sector. It happened in the case pointed out by the hon. Member for Chippenham—the monopoly of the Audit Commission making the arrangements.

Our approach would create a pressure in the system for greater competition. We will debate later other amendments about, for example, the backstop with the Secretary of State, to make sure that an auditor can be appointed. We are asking the Government to accept that that should be within 10% of the average cost for all auditors.

We hope that in those ways we can drive competition in the market and make it more viable and attractive for new entrants and other bidders, who may not be so active in a region or among a group of relevant authorities, to consider bidding for a contract. They would know that a 10-year term was coming to an end.

Those are the two driving forces behind the amendment. I hope that, given the impact assessment points about long association, the Government will support it. We have thought about reasonable compromise and balance, and have reflected on the House of Lords debate and the possibility that five years would be too short a term. We have tried to set out a good way forward, with principles of independence and good competition that I am sure all hon. Members would support.

Amendment 93 relates to the scheme for councils to opt into national procurement arrangements, and would provide for those arrangements, but I note that Government new clause 1 sets out such arrangements more extensively. We have had the advice of the brilliant Public Bill Office in Parliament, but the Government will have had the benefit of advice from draftsmen in the Department and others concerned with the rest of the Bill.

We therefore broadly welcome the new clause. We welcome the principle of an opt-in arrangement for local authorities for joint national procurement. While the Bill was being considered in the House of Lords, my noble Friends and organisations outside this place concerned with the Bill, such as the Local Government Association, called for amendments to allow councils to continue to procure external audit nationally and thus avoid the need to establish independent appointment panels. Those might for some councils prove too costly and bureaucratic, and it might be impractical for them to ensure that people were available to be members of the panel.

We can all see that a council such as Kent county council, with its large budget, or Birmingham city council, might find competitive the model by which they could appoint directly through an independent panel. There might be many bidders, not least because there will be organisations based in the area or which have a track record of operating there, and the size of the contract may well make it worth companies’ while to put together competitive bids.

We can foresee a different situation, however, for smaller authorities. For example, I represent a two-tier area, and two of the three councils are small borough and district councils; it may not be cost-efficient or practical for them to bring together an independent audit panel. Under the Bill as it previously stood, those authorities could have considered joint arrangements. We support new clause 1 because we hope that it is the Government’s intention to go further than that by creating a national panel.

Modelling suggests that central procurement and appointment would save the public purse more than £200 million over a five-year period, compared with local appointment. The Government’s impact assessment recognises that councils will incur additional compliance costs when they appoint their own auditors, and it estimates those costs at £3.73 million. Given that cost to local authorities, there could be substantial leeway as regards resources that might be available to support the setting up of a national body.

We all want to make good progress in Committee, so in the interests of expediency, I will say to the Minister that I understand from my dialogue with the Local Government Association, and from his assurances to me in private, that the LGA has considered new clause 1 and is content with it, so I do not intend to go into every detail of how the new clause will operate, although I hope that he will explain to the Committee how he envisages it operating.

Will the Minister also give us certain assurances on this issue? For example, the first Opposition amendment we discussed in Committee, amendment 72, asked for this matter to be set out in regulations by the time that the Audit Commission is abolished in 2015; the Government argued that that was unnecessary, but said that instead a dialogue would proceed. Part of the Minister’s argument against the amendment was that it is not yet clear who will provide the framework for the national procurement body, so will he tell us who he envisages providing that? Does he think it will be the Local Government Association?

I intend no mischief at this time, although I may make some at another time, given that Councillor Harry Phibbs’s latest list of ways to save money includes—besides not mowing the grass and getting sheep to do it instead—the idea that councils should leave the Local Government Association. I encourage councils to play their part in the LGA, because as a localist, I think it is important that the local government sector has a strong national voice. The Government looked to the LGA to play an important role in developing the proposals in the Bill and in many other aspects of their programme for local government over recent years, including the Localism Act 2012.

Will the Minister assure us that he will work closely with the LGA, that he will view it as the appropriate and leading body in helping to shape the framework for the new national procurement arrangements, and that those conversations with the LGA will proceed at pace? That will enable councils and other relevant authorities to make an informed decision about whether they will need to establish an independent audit panel prior to the need for renewal of audit in 2017. If a council needs to set up an independent audit panel, it will need to know that some years beforehand, to start to make arrangements.

It is a shame that the Minister would not commit to having this point made clear by 2015, as by then councils will want to know whether the national procurement model will be viable, whether it will work for them, and whether they want to engage with it or set up an independent audit panel. From his conversations, or his officials’ conversations, with the LGA and directly with local government, does he know what proportion of councils have indicated an interest in participating in the national procurement scheme? Anecdotally, I know that there are many, and that members of the LGA, which includes most local authorities, want the option to participate in the scheme. I hope that the Minister will take the scheme forward enthusiastically, rather than reluctantly.

We broadly support new clause 1, although I hope that the Minister will give us some assurances on the issue. We are putting trust in his conversations with local government; we are not privy to those, and have no guarantees on them. I hope that, in a reciprocal spirit, he will see the common-sense approach that we have taken in amendment 92 and commit to supporting the limit of 10 years, so that there is not too long an association between auditors and local authorities.

Chris Williamson (Labour, Derby North)

I support the erudite observations of my hon. Friend, who makes a good deal of sense. I hope that the Minister will take on board his comments about reciprocally agreeing to support our sensible amendment on appointing auditors for no more than two terms. That seems entirely reasonable, not least because of the potential for a cosy relationship. My hon. Friend the Member for Corby referred to our noble Friend Lord Beecham using the phrase “too cosy a relationship” when debating the clause in the other place.

It is appropriate to quote from a document produced by Transparency International, which has looked in detail at the Bill and has highlighted a number of concerns. Hopefully, those will be taken on board by the Minister, particularly in his response to our amendment. The document says:

“The critical role of the Audit Commission in detecting and investigating corruption in local authorities, by appointing and supporting independent external auditors, was eloquently described by Lord Scott of Foscote in a December 2001 speech following the Homes for Votes scandal”—

I think I referred to that in an earlier contribution on the Bill. Lord Scott said:

“When detected and exposed it must be expected, or at least it must be hoped, that political corruption will receive its just deserts at the polls. Detection and exposure is, however, often difficult and, where it happens, is usually attributable to determined efforts by political opponents or by investigative journalists or by both in tandem. But, where local government is concerned, there is an additional very important bulwark guarding against misconduct. The Local Government Finance Act 1982…required the annual accounts of a local authority to be audited by an independent auditor appointed by the Audit Commission”.

Lord Scott said that the

“statutory provisions…provided an institutional means whereby political corruption consisting of the use of municipal powers for party political advantage might be detected and cauterized by public exposure.”

Andrew Griffiths (Conservative, Burton)

The hon. Gentleman refers to the Westminster homes for votes scandal, which is something that we all have great concerns about. However, does he not agree that the scandal was not exposed by the Audit Commission, but by a private audit company, Touche Ross?

Chris Williamson (Labour, Derby North)

I hear the hon. Gentleman’s point, but I believe that the oversight and back-stop of the Audit Commission gave the independent auditor the comfort blanket that it needed to get involved and expose that appalling scandal back in the 1980s. Our concern, and the reason why we believe that the appointment of the auditors under the new arrangements should be for no more than two terms, is to avoid, as my noble Friend Lord Beecham said, too cosy a relationship building up, which might make that kind of exposure less likely. I believe that the circumstances that led to that exposure were made possible by the existence of the overarching Audit Commission.

Andy Sawford (Labour, Corby)

As ever, Government Members’ insight is helpful to us in making our point, which is that it was important that the private sector auditors in the homes-for-votes scandal did not have too cosy a relationship with the local authority, and felt able to provide effective independent scrutiny of it. That speaks to the very point that my hon. Friend is making.

Chris Williamson (Labour, Derby North)

My hon. Friend makes a decisive intervention. I hope that we will reach agreement across the Committee on the amendment that he has spoken to so eloquently. The hon. Member for Burton spoke about the scandal relating to Westminster council; I am sure that no Government Members would wish to make it more difficult to expose such abuses in the future.

The Minister and Government Members have talked about alleged savings that will be made as a consequence of their proposal. Those are debatable, but I shall not rehearse the arguments that we advanced on that point. I will, however, refer again to the document produced by Transparency International, which says that any savings that may be made as a consequence of the Government’s proposition should be

“weighed against how much money might be lost through increased fraud and corruption if the new system proves inadequate.”

That speaks precisely to the point that my hon. Friend the Member for Corby made. Clearly, we must make certain that any measures introduced to replace the existing system ensure that appalling situations such as that in Westminster are rooted out or, preferably, prevented.

On the professed savings that may or may not be made, the Chancellor, in his speech on the spending review earlier this year, set out a number of principles, one of which was reform

“to get more from every pound we spend”.

Based on that principle that the Chancellor set out, I am pleased to see—I hope that the Minister will give us an assurance on this point—that Government new clause 1 will ensure that local authorities that want to opt into a national scheme are empowered to do that because of the savings that they believe they can secure in such an arrangement, rather than having to rely on individual arrangements, which seemed to be the Government’s preferred way forward at first.

The Chancellor also said in his statement that

“Local government will have to make further savings”,

and that the Secretary of State for Communities and Local Government was

“a model of lean government”.—[Official Report, 26 June 2013; Vol. 565, c. 303-305.]

If the Communities Secretary is indeed a model of lean government, it would be appropriate to ensure that the limited resources available to local authorities were spent in the wisest way possible, and that measures were not put in place that led to additional, unnecessary, burdensome costs being put on local authorities when they are desperate to find the resources to maintain essential front-line services for the people whom they serve.

Paul Blomfield (Labour, Sheffield Central)

My hon. Friend makes a particularly important and pertinent point. Does he not find it ironic that a Government who are appealing so strongly for local authorities to achieve financial savings by sharing services and pooling activities at authority level seem so intent on discouraging a sharing and pooling approach on the procurement of audits?

Chris Williamson (Labour, Derby North)

My hon. Friend is absolutely right about this curious state of affairs. We touched on that in our debate on another part of the Bill on Tuesday. My real fear, which I hope that the Minister can allay, is that the Government are applying double standards: it seems to me that one standard applies to the public sector, but a lower one applies when the private sector is involved. Here we might have another case, as my hon. Friend said, to add to the one I mentioned on Tuesday, namely the privatisation of the utility companies leading to consumers being ripped off left, right and centre. As I pointed out then, we do not want the Government, whether by design or by mistake, again to create a system in which a lower standard applies, so effectively establishing a money-making cartel for vested interests in the private sector. That cannot be right. Irrespective of our political differences, surely no Committee member would say that it was right to create a lower standard to facilitate the establishment of a cartel by those with vested interests.

Neil Carmichael (Conservative, Stroud)

Does the hon. Gentleman agree that localised, more efficient auditing might drive higher standards and better value, which is one way that local government can save more money?

Chris Williamson (Labour, Derby North)

To be honest, with the greatest respect, the hon. Gentleman is starting from a false premise. The problem, as my hon. Friend the Member for Corby said, is that the audit market is very limited. It would be different if companies were falling over themselves for the work, as the hon. Member for Stroud suggests would be the ideal. We might be in unison, but the problem is that the market is very limited. Consequently, there is a danger that we might drive out competition and create a money-making cartel for vested interests in the private sector, which I am sure the hon. Gentleman does not want.

Andrew Griffiths (Conservative, Burton)

The hon. Gentleman is of course right to question how the Government intend to make efficiency savings and save money—my mother always said that the proof of the pudding was in the eating—but in doing so, should he not congratulate the Minister for the Cabinet Office and Paymaster General, who today announced £5.4 billion of savings, up 73% on last year, which indicates that the Government’s approach to delivering value for money for taxpayers is right?

Chris Williamson (Labour, Derby North)

If I may say so, we must be careful not to throw the baby out with the bathwater.

Edward Leigh (Conservative, Gainsborough)

Order. We have had enough bad puns about mothers and bathwater. Let us get on with it.

Chris Williamson (Labour, Derby North)

I am drawing to a conclusion, but I want to repeat to the Minister some of the comments made by my hon. Friend the Member for Corby. There has been a good deal of resistance to the notion of facilitating a national scheme, but it seems that the Government have listened, which is very welcome. We hope that they will listen more, so that we have a degree of consensus in our developing discussions today, and in subsequent sittings.

Will the Minister provide illumination on how many councils want to participate in a national scheme? I made this point on Second Reading: the anecdotal evidence and representations I have received suggest that smaller local authorities are desperate for the opportunity to participate in the national scheme that my hon. Friend the Member for Corby referred to. I am curious as to why the Minister was initially resistant to a national scheme but now appears to have listed to sense.

It would be instructive for hon. Members if we could be told how many local authorities are interested in participating. Many Government Members represent the rural communities where most of the smaller local authorities are located—the very ones that are under a good deal of pressure to maintain their front-line public services and would benefit from a national scheme. It is key that they have adequate audit arrangements in place, but it is also important that they do not have to pay unnecessarily for audit arrangements, which could take money away from their front-line services and undermine the marketplace in the audit world. I hope that the Minister will clarify that point.

Brandon Lewis (Conservative, Great Yarmouth)

The Government’s amendments are closely related to the amendment of the hon. Member for Corby, as he outlined. They will achieve our shared objectives, as he said, with respect to sector-led collective procurement of audit.

In response to comments from across the Committee, but particularly those from the hon. Members for Corby and for Derby North, there is an issue about understanding where the Government have come from. As I said on Tuesday, our view is that local authorities should be allowed to procure directly. We do not feel it is for us to create another body, because that risks becoming Audit Commission light or Audit Commission version two and we are determined that that will not happen. We listened to the local government sector, which made a case, particularly through the Local Government Association, as the hon. Member for Corby outlined, for the ability to set up a sector-led body through the sector and we think that new clause 1 deals with that.

The purpose of the amendments and new clause is to allow the local public body sector to establish large-scale, collective procurement arrangements. They will give the Government the power to set out a framework for such arrangements and regulations, which will fulfil a commitment made in the other place in response to calls from the local government sector to allow for sector-led collective procurement.

Since making that commitment, the Government have had further discussions with the Local Government Association on potential arrangements and the amendments are built on those. The new clause inserts provisions to allow the sector to establish collective procurement arrangements. Under the new clause, the Government may, by regulation, make provision for certain authorities to have their auditor appointed by an appointing person specified by the Secretary of State. That will allow the Secretary of State to designate a sector-led body as an appointing person and give them the necessary powers and duties to act as a collective procurement body. Going forward, it may be easiest if I refer to the appointing person simply as the sector-led body.

Regulations will set out the process by which authorities can choose to participate in the sector-led arrangements, the process for specifying the sector-led body and the key powers, functions and duties of such a body. That will include, for example, a power to levy fees on opted-in authorities and a corresponding duty on the body to consult before setting those fees.

Amendment 62 provides that the regulations made under the new clause will be subject to the affirmative procedure. The Government also intend to consult publicly on draft regulations before they are made. As we have previously said, any collective procurement arrangements established under those regulations will be voluntary. Local authorities will be able to choose to participate or to make their own appointment locally. It is right that bodies choose what arrangements suit them locally, but I must be clear that the Government will not impose centralised appointment and effectively recreate the Audit Commission.

Mark Pawsey (Conservative, Rugby)

Does the Minister agree that this is localism in practice? We are giving local authorities the right to choose what is best for their community: either to go it alone with its own contract or to join other authorities to get the best of whatever is more suitable in their area.

Brandon Lewis (Conservative, Great Yarmouth)

My hon. Friend is spot on. That is why, to touch on the point made by the hon. Member for Derby North, it is not for the Government to collect data on which authorities want to join others; it is for the sector to do so, if it thinks necessary. Both authorities that gave evidence during the pre-legislative scrutiny—Oxfordshire and Birmingham, as the hon. Member for Corby mentioned—stated that they were happy to make their own appointments, but we are aware that others may want to go that way. The whole point is that that is a matter for them.

Chris Williamson (Labour, Derby North)

I am curious about that. In making fundamental changes, it is incumbent on the Minister and the Government to understand the impact and implication of what they are doing. The Minister says that they do not collect those data, but surely he must have some idea, because his initial proposal might have cost considerably more for many local authorities, which are often those represented by Government Members.

Brandon Lewis (Conservative, Great Yarmouth)

The hon. Gentleman made that point in his speech, but it comes from a false premise or misunderstanding about where the Government stand. To repeat what I said on Tuesday and what I have just said, our position is that it is for local authorities to procure. If they decide to come together, that is a matter for them. We are not setting up and will not set up a central body to do it. Indeed, recent evidence from contracting out shows that the local government sector is already saving about 40%, which completely contradicts his point about costs.

Neil Carmichael (Conservative, Stroud)

Far from replicating the National Audit Office or any similar body, the measures whose implementation we are discussing will create a competitive market, because smaller contracts will attract more and more small firms to engage with local authorities.

Brandon Lewis (Conservative, Great Yarmouth)

My hon. Friend makes a reasonable point. The market for auditing companies to enter and to offer their services to local authorities does not yet exist as we envisage it, but I hope that it will develop in a way that brings in more competition, which is absolutely our aspiration. However, if the local government sector so wishes, the new clause will give authorities the ability to come together in a manner of their choosing, which we will be happy to facilitate.

Andrew Stunell (Liberal Democrat, Hazel Grove)

Does my hon. Friend agree that this is absolutely the right way to go, in stark contrast to the very centralist approach of the hon. Member for Derby North, who appears to be just as unreconstructed this morning as he was on Tuesday morning?

Brandon Lewis (Conservative, Great Yarmouth)

I thank my right hon. Friend for that helpful intervention, although it is not for me to comment on the construction or otherwise of the hon. Member for Derby North. My right hon. Friend makes the good point that the crux of the Government’s position is not to have a centrally-led, top-down approach. It is for the local government sector to design what it wants.

Andrew Griffiths (Conservative, Burton)

We charge local authorities with spending billions of pounds of taxpayers’ money to deliver complex care needs, complicated infrastructure structure projects, help for vulnerable families, and growth and employment opportunities. We trust them with all that, yet the Opposition will not trust them with choosing their own auditors. Why do the Opposition just not trust local government?

Brandon Lewis (Conservative, Great Yarmouth)

My hon. Friend makes a point that has occurred to us on several occasions during this Parliament. I sat on the Localism Public Bill Committee, during which the consistent approach of the Labour party was not to trust local government with devolved powers. We trust local government with them, and we intend to continue to do so.

Chris Williamson (Labour, Derby North)

Will the Minister give way?

Brandon Lewis (Conservative, Great Yarmouth)

I will make more progress before I take other interventions, because I do not want to test your patience too far, Sir Edward.

I should make it clear that a framework will be set out in regulations to allow authorities to opt into collective procurement arrangements established by the sector. The regulations will set out a process for the Government to approve an organisation to act as a sector-led body, but they will not establish the body or arrangements for national collective procurement. It will be for the sector to decide whether it wishes to establish an appointment body and to take forward any proposals. If those in the sector come together to develop such proposals, the Government will work constructively to support them. We intend to work closely with the sector and any prospective sector-led body in developing the detail of the regulations, the process for which I have already outlined.

Regulations under the new clause will also be able to modify other parts of the Bill as they apply to authorities that have opted in to the collective procurement arrangements. We intend to use that power to ensure that, where necessary, other provisions reflect the different appointment process for those authorities: for example, authorities that opt in and do not make their own appointment will not need to establish an independent auditor panel.

Amendment 63 makes a minor related change to update the definition of a local auditor in clause 41. It ensures that the definition covers either an auditor appointed by the local authority or one appointed to it by a sector-led body.

Amendment 93 would, it appears, achieve a similar objective to the Government amendments. It would also establish the powers necessary for the Government to enable the sector to put in place collective procurement arrangements for local audit. I have already outlined the Government amendments that will achieve that, and I hope in the light of those amendments that the hon. Member for Corby will not press amendment 93.

Amendment 92, however, addresses a slightly different issue, as the hon. Gentleman outlined. The amendment would prevent an authority from reappointing the same auditor where that auditor has already served two five-year terms; in effect, it would require authorities to change their auditor every 10 years. I understand and am sympathetic to the concern behind the amendment, which is clearly designed to prevent an auditor and an audited body from developing too cosy a relationship. However, I do not think mandatory rotation of auditors is a necessary or proportionate step; in addition, the amendment would in effect reduce competition by taking at least one bidder out of the market. I should make it clear that auditors will still be required to consider whether they need to make a public interest report; nothing will change in that respect. The code of audit practice and guidance provided by the National Audit Office will support auditors in making those decisions. In addition, there are robust protections about appointment and removal of auditors in the Bill, and auditors are subject to ethical standards.

Andy Sawford (Labour, Corby)

My hon. Friends and I are considering whether we wish to press amendment 92 to a vote. One of our concerns is that there is not a requirement in the Bill—this was debated in the Lords, and I cannot see it in the Bill—for local authorities to have a full tendering exercise after five years, organised through the independent audit panel. That is why we are concerned that reappointment by default could lead to too cosy a relationship. Will the Minister comment on that?

Brandon Lewis (Conservative, Great Yarmouth)

The hon. Gentleman must be psychic; I was just about to come to that very point. The Bill requires local bodies to make a new appointment at least every five years. In the vast majority of cases, that will require them to go through a full EU-compliant appointment process, taking advice from their independent auditor panel. That will ensure that authorities regularly review the quality of the audit service and that auditors are appointed through a fair and compliant process. If the incumbent firm is found to be the best candidate through such an open and competitive process, we do not think it right that Government should prevent its reappointment.

In addition, the Financial Reporting Council’s ethical standards already require that key audit staff such as the lead partner are rotated on a regular basis. The Government believe that, along with the other provisions about auditor appointment and removal, the requirements for a new appointment every five years and for the rotation of key audit staff provide sufficient safeguards to ensure the independence of the auditor.

Andy Sawford (Labour, Corby)

I understand the Minister’s point but I fear it is a repetition of the inadequate assurances that were given in the other place. Will he point me to where there is a requirement for a tendering exercise in the Bill? It may be that he plans it to be in regulations but we would prefer it in the Bill. We want to know whether local bodies will go out to the market. He has said that it is likely that a tendering exercise according to European procurement rules will take place, but I cannot see a trigger or indeed a requirement for that in the Bill.

Brandon Lewis (Conservative, Great Yarmouth)

I say to the hon. Gentleman that, based on what we know about current audit fees and assuming that most bodies will enter into five-year contracts—that of course is a separate issue—the vast majority of contracts will be subject to EU procurement rules. In making an appointment, bodies will also have to take advice from their auditor panel, and we can reasonably expect that that would include scrutiny of any decision to reappoint auditors without putting the contract out to tender.

I should also point out that, as the hon. Gentleman outlined earlier and as Baroness Hanham mentioned in the other place, a recent report by the Competition Commission rejected proposals for mandatory auditor rotation for companies’ auditors in favour of what it called “less onerous” measures, such as requiring the audit to be put to tender every 10 years. The report noted that mandatory rotation would actually impose costs on companies, for example, by limiting their choice of auditor. I also understand that the evidence that mandatory rotation improves auditor independence and audit quality is inconclusive at best. With those assurances, I hope the hon. Member for Corby will withdraw the amendment.

Several hon. Members rose—

Edward Leigh (Conservative, Gainsborough)

The Minister is not giving way.

Andy Sawford (Labour, Corby)

I think that my hon. Friends wanted to probe further into where the requirement for the independent audit panel to go out to a tendering exercise is in the Bill.

The Minister is trying to assure us that in all likelihood local authorities will tender, but there is no clear evidence that the Bill will make that happen. On the contrary, it will be costly, and we all know how hard pressed local authorities are. We will discuss later how the auditor panel will work, its remuneration, the process it will have to follow and its cost. In all likelihood, many authorities that choose independent appointment rather than a national procurement panel will not tender unless they are made to by European procurement rules. We therefore remain concerned about that issue.

I understand the Minister’s point about the Financial Reporting Council and the rotation of the lead auditor. Rotation is important because it brings in a fresh pair of eyes. However, we remain concerned that, after 10 years, the relationship could become too cosy. We are not concerned about the 10-year period itself, but it could become too cosy after 11, 12 or 13 years. Local authorities receive a huge amount of public money to run public services and play an important leadership role in our communities. Therefore, the quality and independence of the audit is important.

Chris Williamson (Labour, Derby North)

Would my hon. Friend care to comment on another quotation from Transparency International on the new arrangement? The Minister expressed his reluctance to impose a two-term restriction. Transparency International says:

“When local authorities are able to appoint their own external auditors…the independence of auditors may be compromised by concerns about contract renewal and other non-audit services the firm supplies the local authority with.”

Will my hon. Friend comment on that quote? It concerns me; I am surprised that it does not ring alarm bells for Government Members. Does it ring alarm bells in my hon. Friend’s mind?

Andy Sawford (Labour, Corby)

I thank my hon. Friend for that point. Politicians are sometimes accused of not having experience of the real world that is affected by our legislation, but I ran a small business that was audited and a charity that was subject to stringent rules around the audit process. During the time that I was chief executive, we had a full tendering exercise and replaced our auditor, partly because the new auditor was more price-competitive—that is the crucial point—but also because it was a healthy thing to do. The charity sector advised us that mandatory rotation is healthy, and the Competition Commission, their Lordships, my hon. Friend the Member for Derby North and organisations such as Transparency International share that view. That is a powerful and important point.

Brandon Lewis (Conservative, Great Yarmouth)

Actually, the Competition Commission rejected proposals for mandatory auditor rotation. I agree with the hon. Gentleman because I ran a small business myself that was audited. The hon. Gentleman is making the same point as the Government: he had the choice to make the decision to go out to competitive tender. That is what local authorities may wish to do every five years.

Andy Sawford (Labour, Corby)

I thank the Minister for that point. The change in the relationship with the auditors in my case was necessary because I inherited a set of auditors, I did not have that cosy relationship and I wanted to ensure that there was an independent audit process. There may be all sorts of other reasons why authorities wish to change their auditors. It may be triggered by a change of personnel in the independent audit panel or in the authority itself, and members may suggest that a full tendering exercise needs to take place to refresh the auditors.

Chris Williamson (Labour, Derby North)

I am now even more alarmed by the Minister’s intervention. Earlier in the debate, we heard reassurances that Government Members are as concerned as we are about the appalling scandal that occurred in Westminster, but it seems to me that his intervention means that that is much more likely to happen again, because the cosy relationship mentioned by my hon. Friend is likely to come to the fore. Powerful council leaders would not be subject to the necessary level of scrutiny by the auditors because of the cosy relationship that would develop under such an arrangement, and because of the auditors’ fear of losing the contract—they would want to please their masters, because he who pays the piper calls the tune—so I am even more concerned following the Minister’s intervention.

Andy Sawford (Labour, Corby)

I agree with my hon. Friend.

Brandon Lewis (Conservative, Great Yarmouth)

I politely say that I am sure the hon. Gentleman appreciates, having been through the process of working with auditors—he made the point that he has, although the hon. Member for Derby North may not have done so—that they are under a fiduciary duty and have to follow a duty of care. I know that the hon. Member for Derby North is going back 25 years, and he is a little in the past with many of his comments, but as my hon. Friend the Member for Burton has rightly pointed out, independent private sector auditors highlighted the problem in the first place, so to query independent auditors’ fiduciary duties and how they work is to push a little into other realms.

Andy Sawford (Labour, Corby)

If I have given the Minister or any hon. Member the impression that I in any way doubt auditors’ good intentions and the honourable way in which the overwhelming majority of them carry out their work day to day, or the intentions of local authority officers and members around the country or, indeed, those of the Minister in giving us reassurances, I hope he will understand that we are talking about what might happen by default in local authorities in which such a relationship emerges.

Those relationships will not always be because of any bad intent on the part of auditors. For example, having worked with a set of auditors over a period, I have known them go away on maternity leave, come back, share photographs of bringing up their families and tell stories of the trials and tribulations of life, as people do when they seek to build a working relationship. Those things are a healthy part of trying to work closely together, ensuring access to documents and having an open dialogue, and they are a very good thing for a period, but that relationship perhaps becomes too close over time.

There is also the pressure of needing to ensure that the contract is renewed. In many cases, a local authority audit will be so significant that it is the whole of an auditor’s work load. Their whole job might therefore rest on the renewal of their contract by the person whom they now know and with whom they have worked for a decade.

Mark Pawsey (Conservative, Rugby)

Is not the hon. Gentleman disregarding the effect of local democracy and the fact that many council tax payers take an awful lot of interest in what goes on in a local authority? There are sufficient checks and balances to make the Government’s position secure.

Andy Sawford (Labour, Corby)

The hon. Gentleman is right that local democracy plays an important part. The amendments that we have tabled in relation to transparency will, I hope, enable members of the public to play a vital role. We are giving members of the public, local authorities and auditors a framework in which we can safeguard an independent relationship. I think that we would all agree that that is important, and that those working in this area want such an independent relationship. However, from the examples cited by my hon. Friends and evidence presented to the ad hoc Committee and others about securing independence in the Government’s proposed new framework, hon. Members can see the concern that, in a tiny minority cases—such cases might involve billions of pounds of public money—the audit may not be carried out as independently and effectively as it otherwise might be if there was a refresh of an auditor after a decade.

Chris Williamson (Labour, Derby North)

Checks and balances are vital, of course, and the ballot box is one such check or balance. Do there not, however, need to be other checks and balances—the ones to which we are referring—to ensure that the highest levels of probity are observed by elected members when they get into elected office? It is not good enough simply to say, as the hon. Member for Rugby has said, that the electorate can always resort to the ballot box. They can do, but it is important that high standards of probity are upheld and maintained by having other checks and balances in place through an independent audit system.

Andy Sawford (Labour, Corby)

My hon. Friend makes a strong point and has highlighted our concerns.

Andrew Griffiths (Conservative, Burton)

Will the hon. Gentleman give way?

Andy Sawford (Labour, Corby)

I will, but I am sure that the hon. Gentleman, like me, the Minister and you, Sir Edward, wants to make progress.

Andrew Griffiths (Conservative, Burton)

I have a simple and straightforward question. Will the hon. Gentleman tell the Committee when the Labour party last changed it auditors?

Andy Sawford (Labour, Corby)

I have no idea, but it would be in the interests of any organisation to look at its relationship with its auditors. I am quite sure that the hon. Gentleman could find that out and bring the information back to me and the Committee. We are discussing publicly funded public bodies, so the hon. Gentleman will agree that the circumstances are different. We are dealing with public money.

I sense some enthusiasm from my colleagues to test the will of the Committee on this point. On reflection, if the Minister could commit to providing information before Report on how many authorities will be subject to EU rules, which may change over time as the proposals relate to turnover, that would be helpful in enabling us to see whether his assurances, which are honest and genuine, are correct. He differs from us in that he believes that the situation will be okay. In the meantime, my hon. Friends and I will give the matter further consideration and will seek to raise the issue on Report subject to that commitment. Will the Minister commit to provide that information?

Brandon Lewis (Conservative, Great Yarmouth)

I am very happy to have a look at the matter and to come back to him. We may even be able to do that in writing before the next sitting. Whatever the outcome, however, the Government’s position will not change.

Andy Sawford (Labour, Corby)

The Minister will want to achieve some measure of consensus as we go forward and will not want any more than I to divide the Committee unnecessarily.

Brandon Lewis (Conservative, Great Yarmouth)

Inspiration has just come my way, so I will point out to the hon. Gentleman that he said on 5 November that

“an estimated 93% of such contracts would exceed the threshold and have to follow the EU procurement rules, which will clearly add substantial cost.”––[Official Report, Local Audit and Accountability Public Bill Committee, 5 November 2013; c. 9.]

We can obviously check that at our end as well.

Andy Sawford (Labour, Corby)

I thank the Minister for that clarification. I recall making the point in relation to the costs of EU procurement exercises and the need for the national procurement arrangements, which are the subjects of the remainder of this debate and the other amendments. In deciding whether to bring the matter back on Report, we will consider what that 7% looks like, who it includes and what the risks are.

With that, and noting my hon. Friends’ strong concerns, I will not press amendments 92 and 93 to a Division, because I can see that new clause 1 seeks to achieve what we sought in amendment 93. Although I do not feel able to encourage my hon. Friends to support new clause 1—I want to hear a little more from the Local Government Association before Report—we shall certainly not oppose it, because we understand the Government’s intention. I beg to ask leave to withdraw the amendment.

Schedule 3

Clause 8 - Procedure for appointment

Andy Sawford (Labour, Corby)

I beg to move amendment 96, in clause 8, page 6, line 20, at end insert—

‘(1A) A relevant authority must have an audit committee, which may be instructed by the relevant authority to appoint the auditor panel to advise on the selection of the local auditor in accordance with section (7).’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 97, in clause 8, page 6, line 26, at end insert

‘and the term of appointment’.

Amendment 98, in clause 8, page 6, line 33, leave out paragraph (b).

Amendment 99, in clause 8, page 6, line 34, leave out subsection (4).

Andy Sawford (Labour, Corby)

I hope that we can bring some unanimity to the Committee on amendment 96, which would require authorities to have an audit committee. In the past the Government have not wanted to impose on local authorities a duty to have such a committee. However, they have recognised—I know that the Minister would agree, and so would the hon. Member for Burton—that many local authorities have such committees, which play an important role.

Many local authorities have a process of independent audit, which is the Minister’s preferred option, and we are now entering a new, post-Audit Commission world. We have tabled a sensible small amendment, which would affect only a small number of authorities. It would require them to have an audit committee, which would fulfil a vital function.

I understand that 90% of local authorities have audit committees. Crucially, the overwhelming majority of those are set up in accordance with, and follow, guidance from the CIPFA framework.

Audit committees play a vital role in good corporate governance, because they bring an objective, independent appraisal of how effectively an organisation achieves regularity, probity and value for money. Local government councillors and officers have onerous and important financial and legal responsibilities—the hon. Member for Burton commented on that a moment ago, before he left the Room. The audit committee provides a key source of assurance that those responsibilities have been met.

The increasing prominence of audit committees in both public and private sectors reflects the pivotal role of audit for corporate governance. The CIPFA framework that I have mentioned, “Corporate Governance: A Framework for Public Service Bodies” recommends that all public service bodies should establish an audit committee comprising non-executive members with responsibility for the independent review of the systems of internal control and the external audit process.

The CIPFA guidelines state that the purpose of an audit committee is to provide independent assurance on the adequacy of the risk management framework and the associated control environment, and independent scrutiny of the organisation’s financial and non-financial performance to the extent that it affects exposure to risk and weakens the control environment, and to oversee the financial reporting process.

In some ways our amendment follows on from the debate we just had about the assurance that we can have about how systems operate in local authorities. I imagine that my hon. Friends who spoke so strongly would agree that audit committees are just one part—aside from our amendment on limiting terms of appointment—of the assurance that there could be about independence in a local authority, and suitable checks, balances and controls.

I will list the core functions of audit committees because I hope that the Minister will support the amendment, and that we may be able to agree or work together on a new clause to define, in brief, their core role. I hope that if I set out the core functions he will understand what we intend in relation to what the committees already do in most local authorities, and what new ones will do in the few that do not currently have them.

Audit committees would consider the effectiveness of the authority’s risk management arrangements, the control environment and associated anti-fraud and anti-corruption arrangements. My hon. Friend the Member for Derby North mentioned those things in relation to the excellent report by Transparency International.

An audit committee would seek assurances that action is being taken on risk-related issues identified by auditors and inspectors; it would be satisfied that the authority’s assurance statements, including the annual governance statement and audit opinion, properly reflect the risk environment and any actions required to improve it; it would approve but not direct—that is a crucial point—the internal audit strategy; and it would plan and monitor performance. We know from the evidence given to the inquiries by the Communities and Local Government Committee and the ad hoc Committee that internal audit is growing in importance in local authorities around the country, and I think we can all see that that is a positive development. Approval and monitoring of performance would be important functions of an audit committee.

The audit committee would review summary internal audit reports and the main issues that arise from them, and seek assurance that action has been taken where necessary. Because they are concerned about the operation of their local authorities, the Minister and all Committee members, along with the independent audit panel, the auditors themselves, the finance officers or others working in audit and corporate governance, should all take great comfort from and support the fact that audit committees would—if I can use a colloquialism—have some clout in authorities to ensure that their reports and recommendations were acted upon.

The committee would receive the annual report of the head of internal audit. It would consider the reports of external audit and inspection agencies. Although in the arrangements under the Bill, the independent audit panel will have a role in appointing the auditor, its role is largely limited to that, and rightly so when we consider the level of bureaucracy involved. We must recognise that the panel has a very limited role. In a local authority, it is necessary to have day-to-day assurance that money is being spent well, that there is value for money, and that there is probity and independence in the use of money. In the increasingly complex world about which my hon. Friends have spoken—including my hon. Friend the Member for City of Durham, who spoke about local enterprise partnerships on Tuesday—the assurance that audit committees could give the public is important.

Audit committees would ensure that there are effective relationships between external and internal audit. They would also ensure that the working relationship between private sector auditors and, we hope, new firms at least every five years—ideally every 10 years—is working well and that the value of the audit process is actively promoted. Crucially, audit committees would review the financial statements, the external auditor’s opinion and reports to members, and monitor management action in response to the issues raised by external audit.

A small number of authorities do not currently have a committee. Of course, some have something that looks like an audit committee, but is called something else and sits as a sub-committee or panel of the authority, and they may simply be able to think about how it applies the CIPFA rules and re-recognise it as their audit committee. However, without the Audit Commission, in authorities without the effective functioning of an audit committee, all the important roles I have just outlined are essentially left to the full council. They are left to the general assembly of the council, the agendas of which are often packed—I know that from real world experience as, like many Members, I have been a councillor.

James Morris (Conservative, Halesowen and Rowley Regis)

A quick point of clarification on the wording of the amendment, which says:

“A relevant authority must have an audit committee, which may be instructed…to appoint the auditor panel”.

Why did the hon. Gentleman choose the word “may,” and what are its implications?

Andy Sawford (Labour, Corby)

There are two reasons for the use of the word “may.” The first is that I am a localist, as the hon. Gentleman knows, and I do not wish to impose on an audit committee a new role or burden that it does not wish to take on or see as its core function. Secondly, audit committees will of course take various forms. I do not intend to be too prescriptive, which is why I recommend that if we allow for a new measure that sets out some of the core roles of an audit committee, it is not overly prescriptive—for example, it must not require the committee to appoint the independent members of the audit panel.

However, I also anticipate that the Minister might argue, in the spirit of how he and his officials have constructed the new arrangements, that independent appointments must be made by the full council. I can understand that argument, but we would seek to give the flexibility for the full council to delegate responsibility for the detailed work of independent appointment if it considered it appropriate.

Neil Carmichael (Conservative, Stroud)

Is the hon. Gentleman’s proposal not just a bit too prescriptive, especially bearing in mind the fact that some authorities may simply be too small to justify a full audit committee?

Andy Sawford (Labour, Corby)

The role of the audit committee should be proportionate, as is the whole process of audit. Proportionality is a core principle. The audit committee may meet more frequently and include more members—the CIPFA guidelines are very broad and membership can range from three to 17. In a small authority, we might envisage a committee of three that meets quarterly and concerns itself with expenditure of £10 million of public money, and therefore that is not too onerous. As opposed to that, the audit committee in a large authority, spending hundreds of millions of pounds of public money, may meet more regularly and have more members to undertake a wider role in the local authority.

We deliberately intend not to be too prescriptive—I understand where the hon. Member for Stroud is coming from. Instead we are saying that this is good practice, recognised by CIPFA and doubtless by most of the local authorities represented by Government Members as well as those represented by my hon. Friends. Therefore, at a time when we are reviewing audit arrangements in local government and across relevant authorities, it is a sensible amendment to make. It reflects customer practice across the country, but addresses a tiny number of councils—about 10% —that do not currently have audit committees.

When I say tiny, we have to reflect on the fact that we are still talking about hundreds of millions of pounds of public money that is not in any way accounted for through an audit committee. Therefore we should be concerned about what internal controls there are. The amendment seeks to ensure that, in those cases, they catch up with good practice and do something that links well with establishing, for example, an independent audit panel and having a new process of independent audit.

Audit committees are good practice in the private sector and most charitable organisations have them. I looked at some research on this by the Charity Commission and it includes very small organisations. Bearing in mind that local authorities with responsibility for more than £6.5 million are required under the Bill have to have the full audit, we would not call any of them small in terms of the amount of public money for which they are responsible.

If the hon. Member for Stroud and other hon. Members are minded to support the amendment, we could debate how prescriptive to be and what level of prescription is desirable. The characteristics would be: a strong chair displaying a depth of skills and interests and, I am sure, an intolerance of phrases like “chucking the baby out with the bathwater”.

Edward Leigh (Conservative, Gainsborough)

Absolutely.

Andy Sawford (Labour, Corby)

They do not always add to debate. The characteristics would also include: unbiased attitudes, again displayed by Sir Edward today; treating auditors, the executive and the management equally; the ability to challenge the executive when required; and membership of the audit committee that is balanced, objective, independent of mind and knowledgeable.

One thing about audit committees that we should recognise and cherish in local government is that they always work most effectively on an apolitical basis. They are a little oasis of joint working in local authorities, where members come together, leave their party cards at the door and concern themselves with ensuring that public money is spent well.

James Morris (Conservative, Halesowen and Rowley Regis)

The hon. Gentleman is generous in giving way. Linking back to the debate on new clause 1, does he envisage that, in the instance where the authority was considering opting into the collective procurement arrangement, the audit committee would have power to make that decision? Would it be the decision-making body for opting into this collective procurement arrangement, or does he have other arrangements in mind?

Andy Sawford (Labour, Corby)

The hon. Gentleman makes an important and interesting point about the remit of the audit committee within the authority in relation to the new arrangements. However, this relates to my answer to his point that a local authority may delegate to its audit committee the role of appointing the independent panel. It may also delegate to its audit committee the role, for example, of considering in the first instance whether to use a national procurement option or an independent panel, and of considering the relative merits of those two different arrangements. It could also do so in greater detail and doubtless with more expertise than if this matter were considered at a local authority’s general assembly or full council meeting.

So while we would not wish to be prescriptive and would rather leave the delegation of this role to local authorities, I can well imagine them thinking that it makes sense to delegate some of these matters to their audit committee. However, part of the audit committee’s corporate governance function is to see that important delegations, including those that relate to the audit process, are carried out effectively with effective reporting back to the full council or general assembly. In the spirit of localism that the hon. Member for Halesowen and Rowley Regis and I always embrace, I suggest that we be not too prescriptive but allow local authorities the opportunity—through the audit committee that they would all have if the Minister supported our amendment—to make decisions on the best arrangements.

I had more to say on the role of audit committees, but I sense that we have explored that point well. We are absolutely clear that local circumstances must determine the most appropriate structure and membership of any committee. Research shows that the most effective audit committees have chairs with strong leadership qualities. Often, local authorities choose to have an opposition member chair the audit committee, which is usually good practice in the scrutiny process. However, circumstances vary across the country and local authorities cannot always neatly determine which opposition member might take that role, save to say the chair of the audit committee and its members will play a vital role in bringing some independence and assurance to both the local authority and the auditors.

The group contains several other amendments—97, 98 and 99—that I wish to deal with briefly. The hon. Member for Halesowen and Rowley Regis made the point about not wishing to be too prescriptive only a moment ago, as did the hon. Member for Stroud. I therefore hope that I will have their full support for this. The amendments deal with the unnecessary prescription in the Bill on public appointment; in particular, for setting out notices about public appointment.

We do not think that the Secretary of State should take on the role he seems to want of being the public relations officer-in-chief for all local government and determine the best way to notify the public how a council operates. The way a local authority determines is best to inform the public of its appointment of an auditor is clearly a matter of common sense and local circumstance. That is subject to some minimum requirements, which are recorded in the clause, and that is why we seek not to delete the clause entirely, but to make sensible amendments to it.

We hope to add to transparency through amendment 97, which would provide that the notice must state the term of appointment. That relates very much to our earlier amendment on the competitive nature of the market and the need for appointments to be renewed periodically. We want to ensure, subject to a European procurement rules exercise, that if an authority chose to appoint independent auditors directly rather than through the national procurement option, auditors who may wish to seek that contract know the year in which the appointment needs to be renewed well in advance. We suggest that the Government should see a requirement to state the term of appointment as a sensible, small amendment.

Amendment 98 would omit those overly prescriptive aspects of the clause.

James Morris (Conservative, Halesowen and Rowley Regis)

I am surprised by the hon. Gentleman’s position on the 28-day notice period. He has expressed concerns about probity and ensuring accountability, but is it not right to have some stipulation of the length of time an authority should take to publish information that is vital to local accountability and probity, as he said earlier?

Andy Sawford (Labour, Corby)

Again, the hon. Gentleman is absolutely right. That is why we have not sought to remove the 28-day requirement and rather seek to strengthen it through notifying the public of the term of appointment, but then removing some of the prescription around how the council will communicate with the public. Local authorities do not need the Secretary of State to be their PR officer. They know the nature of their communities and how best to communicate with them and can make such judgments perfectly well for themselves

Mary Glindon (Labour, North Tyneside)

It is a pleasure to serve under your chairmanship, Sir Edward.

I want briefly to emphasise the value of audit committees. Several years ago, North Tyneside had an audit committee, but the elected mayor—North Tyneside has had an elected mayor for many years—and people from the same party served on it. That probably is not the best way to set up such a committee, but, following the council’s own decision, it evolved to include members of all parties on the council. It has now progressed further and has an independent chair and an independent deputy. It does all the things that my hon. Friend the Member for Corby says. The committee’s minutes are published on the council’s website, ensuring transparency. Importantly, North Tyneside and Northumberland now share an internal audit and risk management service, which is a cost-saver, but both councils still have independent committees.

Mark Pawsey (Conservative, Rugby)

The hon. Lady and I both sit on the Select Committee on Communities and Local Government, but audit committees were investigated by the Committee before the hon. Lady joined. One of the Select Committee’s recommendations was that an audit committee should have a majority of independent members. Does the council to which she refers have such a majority? Should there be such a majority?

Mary Glindon (Labour, North Tyneside)

North Tyneside is evolving and has reached the stage where there is an independent chair and deputy chair. While transparency has seemed sufficient to date, the council wants to increase it and that is a good step. The committee is evolving and it is important to show that it is relevant and that it has responded to changes over the years. It may end up being totally independent, but, for now, the transparency that they are working towards is always assured. As my hon. Friend the Member for Corby said, we are not prescribing how the committee should be formed, but I wanted to demonstrate how an audit committee can move with the times and become a really important part of the transparency and accountability of every council.

Chris Williamson (Labour, Derby North)

I concur absolutely with my hon. Friend on the role and importance of audit committees. When my hon. Friend the shadow Minister was speaking, I randomly decided to look at the agenda for Derby city council’s audit committee and noted the range of topics that it considers. On 26 June 2013, it was looking at the council’s covert surveillance policy and procedures, the annual governance statement, the anti-fraud and anti-corruption policy and strategy, “Fighting Fraud Locally: The Local Government Fraud Strategy” and a range of other important topics. I mentioned checks and balances earlier and, as my hon. Friend the Member for Corby suggested, the audit committee provides an additional source of checks and balances in each local authority. It would be remiss of us to allow residents who live under a local authority that does not have an audit committee to be denied that additional comfort blanket without challenge and without ensuring that an audit committee is put in place. I have quoted at length from Transparency International, but it makes an interesting observation about such committees:

“Audit committees should be committees of the main council, reporting directly into full council to ensure maximum scrutiny and accountability of audit findings and recommendations.”

That is clearly sensible advice.

The fact that some local authorities have no audit committee at all—let alone as a committee of the main council—is less than satisfactory, so it is therefore appropriate to support the amendment and I hope that the Government will take it on board. It in no way impinges upon localism. In fact, it is about enabling localism and ensuring that local people have that additional assurance available to them through the added scrutiny that can be brought to bear by an audit committee. On that basis, I hope that we can, as my hon. Friend the Member for Corby suggested, find some unanimity at least on this issue and move forward in a spirit of consensus.

Edward Leigh (Conservative, Gainsborough)

I remind the Committee that with this we are discussing the following:

Amendment 97, in clause 8, page 6, line 26, at end insert

‘and the term of appointment’.

Amendment 98, in clause 8, page 6, line 33, leave out paragraph (b).

Amendment 99, in clause 8, page 6, line 34, leave out subsection (4).

Brandon Lewis (Conservative, Great Yarmouth)

Thank you, Sir Edward. Amendment 96 would require relevant authorities to have an audit committee and allow the authority to instruct its audit committee to appoint an auditor panel. The amendment builds on discussions on the matter in the other place. I understand that the hon. Member for Corby may be of the view that audit committees should be made a statutory requirement for local authorities. The Government believe that such a requirement would be unnecessary and overly prescriptive. We do not think there is a clear case for imposing statutory audit committees on local government. Under the accounts and audit regulations, local authorities are already required to ensure that a committee or meeting of the whole body reviews arrangements for internal control and the effectiveness of internal audit. They must also approve the annual governance statement, consider and approve the statement of accounts, and consider the annual audit letter from their auditor.

Paul Blomfield (Labour, Sheffield Central)

Will the Minister develop his point a little further? Several Opposition Members are confused by the failure to recognise our case for statutory audit committees. There has been some discussion about the burden that that would place on councils, but it is important to recognise that we are not proposing a one-size-fits-all model; there would be scalability appropriate to the size of an organisation. Does the Minister agree that having an audit committee at the appropriate level is sensible, prudent and key to accountability for all local authorities?

Brandon Lewis (Conservative, Great Yarmouth)

I intend to expand on my argument in the next few minutes, so the hon. Gentleman has been somewhat psychic in his request. I understand that more than 80% of local authorities—the hon. Member for Corby suggested that it was more than 90%—already have audit committees that fulfil those functions, usually led by back-bench councillors. However, the Government are not, and do not intend to be, prescriptive about the precise structure that local bodies use to meet the requirements. I am not clear what the hon. Gentleman thinks a statutory duty would achieve in practice, apart from requiring a number of authorities to restructure and perhaps rename their existing committees. I know that he is a committed localist, as am I, and I would expect him to support the idea of giving local bodies flexibility to determine their own arrangements and governance structures.

The amendment may also reflect concerns that local authorities should not be required to have a separate auditor panel if they already have an audit committee. I can reassure the hon. Gentleman that under schedule 4, an authority may nominate an existing committee to act as its auditor panel, provided that the committee already meets, or can meet, the requirement for a majority of independent members and an independent chair. If the authority does not wish to use an existing committee to act as the auditor panel, it may set up a small, separate auditor panel. Again, we are providing the flexibility for authorities to put in place whatever arrangements suit them best locally.

During the debate in the other place, some concerns were raised about how audit committees and auditor panels would work alongside each other when they are in place, and about the potential for confusion or duplication over their roles. I recognise that there are important links between the role of an auditor panel and an audit committee. However, the functions of the panel are clearly focused on the independence and appointment of the auditor, so I do not think that duplication or confusion are inevitable. In practice, authorities may wish to ensure some cross-membership, with a member of the audit committee also sitting on the panel. That would help to ensure they work effectively together. We would be happy, in due course, to consider whether any guidance would be helpful in clarifying how the two should work together, and I would be happy for the hon. Member for Corby to contribute ideas.

Amendments 97, 98 and 99 would make changes to the notice that an authority must publish in relation to the appointment of its auditor. They would require the notice to include the term of the auditor’s appointment, and they would remove the requirement for an authority, if it does not have a website, to publish the notice in a way that the authority thinks is likely to bring it to the attention of relevant local persons.

I will first deal with the proposed requirement for the notice to include details of the auditor’s term of appointment. It may help if I re-clarify the two main purposes of the notice. First, it simply confirms that an appointment has been made and the name of the auditor. Secondly, and more importantly, it ensures transparency over the authority’s decision on whom to appoint. In particular, the notice includes any advice from the auditor panel, and if the auditor authority has not followed that advice, the reasons why. I do not think that adding a further requirement to include the term of appointment is necessary. It will not make the notice serve those purposes any better. However, I appreciate the hon. Gentleman’s point that there may be a way of doing this without further regulating authorities. If he will withdraw his amendment, I am happy to look at this matter and get back to him before Report, so we can find something we agree on that will satisfy his concerns.

The hon. Gentleman might be concerned that authorities can enter into extended terms of appointment, which could compromise independence. However, the Bill already requires local authorities to make a new appointment every five years. I will happily work with him on this issue over the next few weeks.

Andy Sawford (Labour, Corby)

I thank the Minister sincerely for his offer to look at this issue. However, we are motivated less by our concern about the length of appointment than by our belief that it would be helpful to the public to know the term of the appointment. It would also ensure that there is lively competition with other potential bidders, who would know when a contract is to come up for renewal.

Brandon Lewis (Conservative, Great Yarmouth)

I appreciate the hon. Gentleman’s comment. Obviously the public can ask about the term of appointment, but I appreciate his point about making the length of term readily available. I am happy to look at this matter, and hopefully we can come to an agreeable conclusion by Report if he withdraws his amendment.

I turn to the amendment about the publication of the notice. I can reassure the hon. Gentleman that the purpose of subsection (4) is simply to provide for authorities that do not have a website. I understand that a number of small authorities do not have one. In the context of our wider discussions about statutory notices, I can reassure the hon. Gentleman that subsection (4) will apply only if an authority does not have a website. The authority will be left to decide the best way to publicise the notice. With those assurances, I hope the hon. Gentleman will withdraw the amendment.

Andy Sawford (Labour, Corby)

I thank the Minister for his response. First, I will address his remarks on the argument that all authorities should have an audit committee. The contribution of my hon. Friend the Member for Derby North on the items that the audit committee considers in his local authority showed the importance of the committee’s role, and went beyond my more limited examples about their core role. Although we do not seek to be prescriptive about the role that audit committees will play, I hope all hon. Members will accept, from the examples we have heard and from their knowledge of how their local authorities work, that they play a vital role around the country.

As the Minister has said, very few local authorities do not have audit committees. Our view is that authorities should be required to have a proper audit committee that the public can identify with and see in operation. The committees will, for example, play a clear role in the implementation of the Bill, and will carry out important core functions—ensuring sound internal audit and that any recommendations from external auditors are taken up in the authority, and looking at wider issues raised—from one week to the next in larger authorities and from one quarter to the next in smaller authorities.

My hon. Friend the Member for North Tyneside gave an interesting example of how her audit committee evolved. She highlighted the role of its independent chair and vice-chair. She said it has played a growing role in the authority, and has safeguarded the independence of the audit in the council. That chimes with some of the principles of the Bill that the Minister has set out, which we will debate later, such as independence. We are not persuaded by the Minister’s relaxed attitude to whether councils have audit committees, because we consider them to be vital. In the spirit of localism and not wanting to encumber local authorities with unnecessary statutory provisions, we are quite happy not simply to offer a one-for-one-deal; in fact, we think that many areas of the Bill impose unnecessary burdens on local authorities.

We think that it is far more important for Parliament to make clear its belief that local authorities should have an audit committee than to prescribe how a local authority should run its publicity and communicate with its electorate. Extensive provisions in the Bill impose wholly unnecessary burdens on local government, and we are simply asking for one small amendment to signal to councils that they must have an audit committee. Most will welcome that, because they will see that local authorities operating without a proper audit committee are missing out. We will press the amendment to a vote, because we feel very strongly about the matter.

I welcome the Minister’s willingness to look at the term of appointment. We think that that is a helpful addition. This is not a party political debating point, but it might help the public and other auditors to know the term of their appointment. I welcome the Minister’s offer to look at the matter and I look forward to seeing what further consideration he can give it.

The Minister has assured us that subsection (4) will apply only to local authorities that do not have a website. In the interests of keeping the Bill neat, tidy and not over-prescriptive, I have to ask how many local authorities large enough to require independent audit—provisions are made for very small authorities not to have independent audit—will not have their own website. I find that an extraordinary suggestion. What concern has motivated his Department to spend time drafting such extensive provisions in primary legislation for authorities that may not have a website? It seems wholly disproportionate. Given its relative significance to the audit committee, we urge the Minister and his officials to think again about whether that prescription is necessary.

Schedule 4 - Further provisions about auditor panels

Andy Sawford (Labour, Corby)

I beg to move amendment 81, in schedule 4, page 41, line 3, at end insert—

‘(10) Such regulations shall in particular provide that an individual shall be ineligible to act as a member of an audit panel if that individual has any disqualifying interest.’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 82, in schedule 4, page 41, line 11, leave out paragraph (c).

Amendment 83, in schedule 4, page 41, line 13, after ‘may’, insert

‘after consultation with relevant authorities’.

Amendment 84, in schedule 4, page 41, leave out lines 23 and 24.

Amendment 85, in schedule 4, page 42, line 10, leave out sub-paragraph (7).

Andy Sawford (Labour, Corby)

Schedule 4 sets out further provisions about auditor panels and how they will be comprised. If you will grant leeway, Sir Edward, I want to make a point that may otherwise have been raised in a stand part debate. I hope that you will allow us to include it at this point as it relates to our other amendments.

I want to draw attention to the use of the term “close friend” in schedule 4. We considered whether to table an amendment to omit the term, but we instead ask the Minister to reflect on the lack of definition in the Bill and commit to defining the term. Hon. Members will understand our concern that the phrase is highly subjective and difficult to define, so it must be clearly defined in the Bill if it is to have any meaning in practice when the Bill becomes law.

I asked the Library to provide me with information to illuminate the assurances that were given by Baroness Hanham in the other place. Her principal assurance and the basis on which my colleagues in the Lords withdrew their amendment was that “close friend” was already defined in the Localism Act 2011 and that great comfort should be taken from that. I asked the Library to tell me where the term appeared in the 2011 Act, how it was defined and, for completeness, how council officers, independent audit panels, the Government, courts and others may interpret the parliamentary record in future when checking the Government’s intention and how the term was defined in debate. I must tell the Committee that I was incredibly disappointed to find that there was no such debate on the matter during the Committee stage of the 2011 Act. The term was slipped into the Act through regulations that were never debated and that contain no definition of “close friend”. That is the advice that I received from the Library, which is a source of great expertise, but perhaps it just did not spot the guidance somewhere in the legislation. I hope that the Minister will be able to tell us that the definition does exist or, if not, that he will commit to defining the term.

The problem is not in the principle but in the practice. We can all understand the principle that a close friendship might be a disqualifying interest for someone to serve on an independent audit panel. We would all agree that, for example, a long-term, close friend of a senior officer of a local authority may not be an appropriate person to serve on the independent panel. They may not be able to bring that measure of independence that we would all want to see in this process if it is to work effectively and to safeguard the independence in the new arrangements relative to the independence afforded by the Audit Commission, which was its driving purpose when established by Lord Heseltine. How would a Minister define a close friend in that context? I hope that he will make that clear both in this debate and by tabling an amendment or new clause. My local authority, Corby borough council, has approximately 500 employees. I imagine that the local population includes many thousands of people who, by virtue of their day-to-day connections—perhaps they are neighbours or they attend the same social clubs—know, are on good terms with or have a personal relationship with officers and members of the council. Members of local authorities have to be active in their communities and develop good working relationships, which could be defined as friendships, with people in their community, in their ward or across the town or city that they serve.

To take my point further, would a Facebook friend be considered a close friend? After all, an officer or elected member of the council might communicate with that person daily. They might share details about their children’s life events, such as their exam results, their starting at university, their working lives, their achievements and other significant happenings in their lives. They might even share details of the sports teams that they support. A friend of someone who works at the local authority, whom they may not consider to be a close friend, might like, comment on or share one of their posts on Facebook and thus make a connection with them. Someone who lives in the same local area or city as an officer of the council and shares their interest in many aspects of life in the city might well retweet a tweet from that officer. Would that make them a close friend?

The Labour club in Corby has many hundreds of members—sadly, so does the Conservative club—and they could be said, by association, to be close friends. The question of political connection and association was mentioned in the other place. There are more than 350 members of the Labour party in Corby and east Northamptonshire, and that number grows all the time in response to the political comings and goings in this place. I know that there are far fewer members of the Conservative party in my constituency, but I imagine that there are some tens. Those people will be friends with or connected to officers of the council. They might be providers of audit services or bidders who might bid to provide audit services. Then there are connected parties of the council, for example, through substantial shared services arrangements or through procurement arrangements that are made by the local authority. As a connected party, would the person who works in the bakery that provides the council with sandwiches for its meetings have to tell her friends that they were excluded from taking part in the process because they could be defined as close friends? I have set out a few examples, and I am sure that colleagues can think of many other areas where the term might apply.

Roberta Blackman-Woods (Labour, City of Durham)

My hon. Friend is making a strong case. Does he accept that we have no idea how a close friendship might be severed, or what would count as a severance of a close friendship to allow a person to be an auditor?

Andy Sawford (Labour, Corby)

Indeed, that is a further complicating factor. If I were to “unfollow” my hon. Friend on Twitter—I cannot imagine any circumstances in which I would want to do so—or “unfriend” her on Facebook, would that be considered sufficient evidence that we were no longer strongly enough connected to be considered, for the purposes of the Bill, as close friends?

I hope that I have demonstrated to the Minister that further work and definition are needed. The letter of the law might mean that almost nobody within a reasonable distance of the civic centre or the county hall in my constituency could bid to provide audit services, because one way or another they will almost certainly be connected to the local authority, somebody who works in the provision of services to the local authority, an auditor of the local authority or a member of the local authority. We completely understand the motivation—the need to ensure independence—but we cannot support the way that is expressed, because we think it is so empty and ill-defined a phrase as to be meaningless. Therefore, we ask the Government to think again.

I turn to amendment 82, which would delete paragraph (c). We believe that the word “independence” is already well defined and does not need definition at some future time by regulations from the Secretary of State. The words of Humpty Dumpty come to mind when I think about how, in future, this power could be used in regulations. As I was told earlier, in Lewis Carroll’s novel, “Through the Looking Glass”, Humpty Dumpty said:

“When I use a word…it means just what I choose it to mean—neither more nor less.”

In the future, whether we find—as I hope we will—my right hon. Friend the Member for Leeds Central (Hilary Benn), or indeed the current Secretary of State, in the position to define the term, they will be able to decide what they think the term means without any recourse to the Oxford English Dictionary or the Collins English Dictionary definition. In the Collins English Dictionary, “independence” means

“free from control in action, judgment, etc; autonomous… not reliant on the support, especially financial support, of others… capable of acting for oneself or on one’s own”.

To me, those seem to be sufficient ways of defining independence in so far as we would all share a view of what the term means.

The Oxford English Dictionary describes independence as:

“The condition or quality of being independent; the fact of not depending on another; exemption from external control or support; freedom from subjection, or from the influence of others; individual liberty of thought or action.”

Those seem to be good, accepted definitions. If, though, we wanted to go further than that, we should do in the Bill what the Government, and other Governments, have done elsewhere in legislation. Section 28 of the Localism Act 2011 gives a definition of, for example, an independent person and it outlines what makes someone independent. I refer the Minister to that definition and ask him to consider whether such a definition could be included either by reference to section 28 of that Act or specifically in the Bill, rather than giving such extraordinary power to make changes by regulations to the Secretary of State.

The Localism Act has a far briefer definition of independence as regards independent planning examiners, for example: a point that my hon. Friend the Member for City of Durham will be aware of. It says:

“The person appointed must be someone who, in the opinion of the person making the appointment: is independent of the qualifying body and the authority; does not have an interest in any land that may be affected by the draft order; and has appropriate qualifications and experience.”

That seems to be an appropriate definition of independence that we could easily and readily adapt here; we could substitute “land” with “financial transactions”.

James Morris (Conservative, Halesowen and Rowley Regis)

I do not want to get into an argument on semantics, but would the hon. Gentleman not agree that there might be something more specific to the independence required to sit on an audit body than some generic definition of independence extracted from the dictionary?

Andy Sawford (Labour, Corby)

The hon. Gentleman, as ever, makes my point for me eloquently. Of course, we can begin with a general understanding of the definition from the Oxford English Dictionary and the Collins English Dictionary, but then, in carrying out our role of scrutinising legislation, we should go further than that when necessary to ensure independence in the appointment of an individual to carry out an important public role. We made that clear in relation to the draft Bill and the Localism Act, with its specific clauses. The Independent Police Complaints Commission has a useful definition of independent that could be drawn on here. The Police Reform Act 2002 provides a clear and straightforward definition of independent custody visitors that I think everyone would be able to understand. Indeed, the independence of members of the Independent Parliamentary Standards Authority—if hon. Members do not mind my mentioning its name this afternoon—was defined and set out when that body was created.

It therefore seems to me that there is a clear precedent, in terms of what is good law-making and good practice in this place, for us to request that the Government think again on having this sweeping power for the Secretary of State to act rather as Lewis Carroll’s Humpty Dumpty may do and just decide that independence means whatever he wants it to mean at any future point, according to his world view. That is not the right way to make legislation.

Our other amendments make similar points about definitions in the schedule and are, I hope, fairly self-explanatory and straightforward. Amendment 83 is consistent with our previous proposals, asking for a commitment that the Secretary of State will consult relevant bodies before changing regulations. I think that that is a reasonable request to make of the Government, given how many powers are being taken, disappointingly, in regulations.

The purpose of amendment 84, on which I hope the Minister will comment, is to ask him what he considers to be an appropriate level of remuneration or allowances. Perhaps he is looking this up on his phone to see what comparable bodies there may be in local authorities. I know that he will recognise the importance of this point, given the concerns that he will have about the costly burden that could be placed on local authorities as a result of this process. Therefore, might he set out for us how many times he imagines an independent audit panel might meet and how extensive its role might be? It would be helpful to have that on the record. Frankly, we do not necessarily seek that detail in the Bill. In the interest of not being over-prescriptive, we would not necessarily consider all that detail to be necessary or, indeed, helpful. However, to understand the Minister’s thinking about this provision and his intentions would be very helpful not only for the drafting of future guidance and regulations, but for independent audit panels in ensuring that they are carrying out their role effectively.

Let us consider, for example, the conducting of a procurement exercise that in all likelihood, the Minister assures us, will be an EU procurement exercise. How many meetings might there be and how long might it take in those meetings to frame that procurement exercise, to draft the tender? Would he envisage there being substantial meetings in the process of longlisting, which could be important in terms of all the competition that he tells us there will be? We think that it may be a brief process to longlist from the two or three bidders, if you are lucky, that there will be, but in the Minister’s world, there is huge competition.

Then we get to the process of shortlisting from the highly competitive bids that the Minister imagines will come forward. Again, we think that unlikely, but in that process of shortlisting, surely it would be appropriate, in terms of the independence of the auditors and the quality of the provision that they are offering, to have meetings between the independent panel and the shortlisted bidders. How long might those interviews or meetings take? Subsequent to those interviews and meetings—I have conducted audit tendering exercises and have met the companies bidding and asked others, including those involved in the governance, to meet them—we would have a reasonable expectation that the independent audit panel would meet to discuss the bids that it had received and the shortlisting interviews that had taken place and to judge them against appropriate scoring metrics. No doubt it had had a meeting to discuss and decide the appropriate scoring metrics to achieve its objectives. It will have the shortlisting meeting. It will then have, I assume, the meeting with the local authority to share its findings. Then it may have scoping meetings with the appointed independent auditor to ensure that the independent auditor will carry out their role effectively. It then, of course, may have review meetings with the independent auditor. Those meetings may take many hours; they may take all day. It may be necessary to have an away day to consider how to structure all this important work that the independent audit panel is doing. The away day may be, as some of the free schools and academies have decided, abroad. It could be in Bermuda for all we know.

Brandon Lewis (Conservative, Great Yarmouth)

When the hon. Gentleman suggests that the panel might go to Bermuda, is he thinking back to the old days in the DCLG, under the previous Labour Government, when there were away days in very expensive restaurants around the world?

Andy Sawford (Labour, Corby)

No, I certainly was not invoking the DCLG’s financial management, because of course that would not be a good model for us to follow, given, for example, the recent National Audit Office condemnation of its unauthorised £217 million overdraft, for which it was fined.

Brandon Lewis (Conservative, Great Yarmouth)

Does the hon. Gentleman want to point out our 60% saving in the DCLG, compared with what it was under the previous Labour Government, when—

Edward Leigh (Conservative, Gainsborough)

Order. That is enough. Let us calm down and get back to the point.

Andy Sawford (Labour, Corby)

Of course, I will follow your guidance on how helpful or otherwise this part of the debate may be, Sir Edward. The point I am making to the Minister, which I am sure I have made well enough now, is that there could be a substantial commitment from the independent audit panel, and we would like to know how he envisages the audit panel carrying out its role, in terms of the level of commitment, and what remuneration might be appropriate. We would not want him to prescribe remuneration, because it may need to fit appropriately with whatever scheme applies within a local authority, and that would need to be considered, but clearly substantial costs could be involved. Will he tell us his intentions in that regard?

If the Minister could assure us that he will go away and think about that point, and perhaps come back to us with a guidance note on how an auditor might carry out its role, in terms of the time commitment that may be involved, that would be very helpful. The amendments are, I believe, otherwise self-explanatory and I do not intend to go into them further. I am sure that my hon. Friends may have comments to add.

Alan Whitehead (Labour, Southampton, Test)

I want to address amendment 82, which would leave out schedule 4(3)(c). At an earlier Committee sitting, I mentioned my concern about Henry VIII clauses and the extent to which they were creeping into the Bill. I am not sure that this is a Henry VIII clause exactly, but as my hon. Friend the Member for Corby just mentioned, it certainly is a Humpty Dumpty clause, which may lead to further discussion in the constitutional press about such clauses.

It is clear, for two reasons, that it is a very strange schedule indeed. First, as my hon. Friend mentioned, the schedule appears to be saying on the surface that the Secretary of State can define independence in any way he thinks fit. If he decides that “independent” means the newspaper, he can do that according to the legislation, and he can do so because nothing else in the Bill seeks, in the context of that schedule, to define “independent” further.

What one normally goes to, when looking at a piece of legislation, is the clause at the back of the main body of the Bill, which is usually the one that no one raises any objections to and which the Committee steams through at the end of proceedings, before everyone thanks everyone for being in attendance. It is on the interpretation of the Bill, and in this instance, it is clause 41. In that clause, we see 26 different definitions, from “combined authority” to “expenses”, to “functional body”, to “item of account”, to “police area”, to “recognised supervisory body”. Everything is defined, and so it should be, so that we are clear when referring to legislation what particular things in it mean.

Conspicuous by its absence is the word “independent”. It is not defined in that clause. However, earlier in schedule 4, in sub-paragraph (2) of paragraph 2 on “Constitution of auditor panels”, there is a definition of “independent”:

“A member of a relevant authority’s auditor panel, other than a health service body’s auditor panel, is “independent” at any given time if”—

and various things then follow.

“Independent”, interestingly, is defined as what is not independent, but nevertheless, “independent” is defined. If someone wishes to be on the relevant authority’s auditor panel, as defined previously, they must not have been certain things. Some of those things are defined further down in the schedule. For example, sub-paragraph (8) defines what it is to be a “relative”. We have already discussed the question of close friends and friends, but clearly, “relative” is closely defined. Up until this point in the Bill, some attempt seems to have been made to define “independent”. At that point, either the drafters of the Bill went to lunch and forgot that they had to add to the Bill, or there are reasons why the auditor panels of health service bodies do not need to be independent. If they need to be independent, it seems that they need to be so in a new and mysterious way that can only be defined by the Secretary of State, about which we know nothing at the moment but perhaps we will in the fullness of time, if and when the Secretary of State decides to pass secondary legislation telling us what independence is for the purpose of those auditor panels.

That is another dreadful bit of drafting, which deserves to be removed, as the amendment suggests; taken away and tucked into the interpretation clause; or aligned with the attempt earlier in the Bill to define independence. Alternatively, will the Minister explain why, uniquely, the members of health service auditor panels do not need to be independent in the same way as those of non-health service panels? If they need to be independent, can he tell us what definition of independence for those panels might be in the Secretary of State’s mind?

Chris Williamson (Labour, Derby North)

I congratulate my hon. Friends the Members for Corby and for Southampton, Test on their razor-sharp and scathing critique of the weaknesses and inconsistencies in schedule 4. Without a definition of “close friend”, we are open to all sorts of flights of fancy, depending on what happens to float the boat of the Secretary of State at the time. While my hon. Friend for Southampton, Test was speaking, I looked on the internet for the definition of a close friend—who knows, the Secretary of State may consult the internet when he comes up with his own definition—and this is what I found:

“A close friend is a friend that you can talk about anything with, and never worry that they will judge you. They will always be there for you, and you feel so comfortable at each other’s houses that it is like they are a second home to you.

A normal friend would just be someone that you go to the mall with, talk on the phone with, and hang out with at school or something.”

My hon. Friend the Member for Corby has given some examples involving Facebook and Twitter. Another person said:

“A close friend is one that you see on a regular basis”—

Edward Leigh (Conservative, Gainsborough)

Order. It is not the normal practice to read straight out from mobile phones, even between friends. Be my friend, and just make it up as you go along. That usually works quite well with you anyway.

Chris Williamson (Labour, Derby North)

Thank you for that guidance, Sir Edward. I do not have a tablet or an iPad, so I have to rely on my small mobile phone to assist me as an aide-mémoire.

Duncan Hames (Liberal Democrat, Chippenham)

The hon. Gentleman demonstrates some of the perils of over-reliance on definitions. Given that we are debating the Local Audit and Accountability Bill, is he familiar with the accounting principle of substance over form and does he think that that principle might prove beneficial in trying to understand those issues in practice?

Chris Williamson (Labour, Derby North)

Well, if I could understand what the hon. Gentleman was talking about, I might be able to give him a considered response. I am reminded of when a colleague in a previous Parliament talked about neo-classical endogenous growth theory and was dismissed as talking gobbledegook. I get a sense that the hon. Gentleman was, to some extent, talking gobbledegook. All we are trying to say in our criticism of this part of the Bill is that unless there is a definition of what a close friend is, it is left open to all sorts of different interpretations along the lines that I have outlined.

In all seriousness, it is incumbent on the Minister to take on board what my hon. Friends the Members for Corby and for Southampton, Test have said today and come back with a proper definition. There are plenty of definitions available. My hon. Friend the Member for Corby spoke about the definition of independence that applies to people serving on the IPSA board. It cannot be beyond the wit of the Secretary of State or the Minister to come back with an appropriate definition; it is unacceptable to leave it hanging and vague. I hope it is simply an oversight and that the Minister will reassure us that he has taken on board our criticism that there is a glaring omission and a weakness in the drafting of the Bill and will do something to correct it. That would give the Committee confidence that he has taken this issue seriously and, more importantly, give the public confidence that it will be appropriately addressed. We do not want abuses to occur in the future.

Edward Leigh (Conservative, Gainsborough)

I call Humpty Dumpty—sorry, the Minister.

Brandon Lewis (Conservative, Great Yarmouth)

Thank you, Sir Edward. I will do my very best not to fall off the wall this afternoon.

I am rather disappointed that the hon. Member for Corby, in his comments about close friends, did not mention the fact that on Tuesday he said he hoped we would become close friends during this Committee. The concept of close friend is already included in section 28 of the Localism Act 2011. There is a view that we should consider providing guidance to local authorities on this if we are considering issues such as whether people socialise on a regular basis. The term “close friends” is already used in Government regulations on benefits. Clearly, the context here is different, but it is sensible and reasonable to take the view that it is possible to recognise whether somebody is a close friend for the purpose of independence, and what probity is in a professional relationship, in the context of councils’ standards of conduct. I will return to that issue in a few moments.

The amendments relate to provisions about independent auditor panels. Amendments 81 and 82 deal specifically with the definition of the independence of auditor panel members. Amendment 81 would require that regulations making further provision on members of an auditor panel who are and are not independent shall, in particular, provide that a person

“shall be ineligible to act as a member of an audit panel if that individual has any disqualifying interest.”

Amendment 82 would remove the Secretary of State’s power to define the meaning of independence for auditor panels of health bodies in regulations. The definition of independence for local government bodies is in schedule 4, paragraph 2(2), and it is based on section 28 of the Localism Act. The amendment addresses the Secretary of State’s power to make a different definition for health bodies. We are currently consulting on the definition publicly. I will turn to that in a few moments.

I will begin by addressing the reference to persons with a disqualifying interest. I reassure the hon. Member for Corby that the Government intend to make further regulations in this area. In fact, we have now shared draft regulations with the Committee which set out a range of disqualifying interests. Any person holding one of those interests will not be able to count as an independent member of an auditor panel.

In particular, the draft regulations address two important issues raised previously during earlier consideration of the Bill. First, they provide that persons with significant commercial links with an authority may not be considered independent members of an auditor panel. Secondly, they ensure that any employees of any firm that is, or is bidding to become, the auditor of an authority may also not be considered independent. The Government will consult on those draft regulations in the coming months.

Although the Government’s draft regulations will define persons with a disqualifying interest as non-independent, they will not prevent such persons from being members of the panel. The amendment would require that persons with a disqualifying interest are ineligible to act as a panel member. The Bill already provides that the panel will need to have a majority of independent members and be independently chaired. Local authorities may choose to have non-independent members, for example elected councillors, but given that they will always be, by definition, in the minority, we see no reason why we should prevent such persons from being members of the panel, should an authority find it helpful.

Andy Sawford (Labour, Corby)

I thank the Minister for his assurances. There is absolutely no difference of view between us on the importance of the panel being independent and of there being independence in the audit process. He is preaching to the converted when he talks about the motivation. We are not questioning that; we are saying that if that is so important, it should be defined. There is some attempt to define independence in later clauses, but we are concerned, for example, about the Secretary of State’s taking this sweeping power and redefining independence again. It is not the principle that the Minister is talking about that is at stake; there are specific clauses that we are concerned about.

Brandon Lewis (Conservative, Great Yarmouth)

I appreciate the hon. Gentleman’s point. In just a moment, I will speak about the Secretary of State’s power. My point, as I have already outlined, is that independence is defined in the Localism Act 2011. I reassure him that we intend the regulations to provide that a meeting of the panel will be quorate only if a majority of independent members are present.

Amendment 82 would remove the Secretary of State’s power to define “independent” when making regulations on whether any of the members of the auditor panel of a health service body must be independent. It would effectively create a legal limbo. Without paragraph 3(c), the Secretary of State could make regulations about whether any of the members of the auditor panel of a health service body—including the chair—have to be independent, but would be unable to define “independent” for those purposes. That touches on points my hon. Friends made earlier.

The Department of Health is consulting on proposed requirements that could be created under paragraph 3 of schedule 4, subject to the passage of the Bill through Parliament. The consultation proposes:

“The governing board will determine if a prospective audit committee member is independent. They will do this by taking into account if s/he: has been an employee of the Health Service Body within the last five years; has, or has had within the last three years, a material business relationship with the Health Service Body either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the Health Service Body; has received or receives additional remuneration from the Health Service Body apart from a ‘Governing Board member’s fee’, participates in the Health Service Body’s performance related pay scheme, or is a member of the Health Service Body’s pension scheme, other than the NHS Pension Scheme; has close family ties with any of the Health Service Body’s advisers, directors or senior employees; holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; has served on the board of the Health Service Body for more than nine years from the date of their first appointment; or is an appointed representative of the Health Service Body’s university medical or dental school.”

The Bill provides that the Secretary of State can regulate to define independence for health service bodies, so that the sorts of requirements that I have set out can be created. Without paragraph 3(c), the meaning of any regulations that the Secretary of State made under paragraph 3 would be unclear and the regulations would be unclear in practice.

Alan Whitehead (Labour, Southampton, Test)

I take from that that somewhere there is an exhaustive definition along the lines of the definition in an earlier clause on non-health service audit bodies. That exhaustive definition would establish what it means not to be independent and therefore to be excluded from membership of that health service body, but it is not in the Bill. Is the Minister saying that, unlike the definition on non-health service audit bodies, which is in the Bill, it is good enough that the Bill proceeds without the exhaustive definition, because a consultation has not been concluded, and the Secretary of State can be left to have discretion over what goes on or otherwise? I am not particularly comforted that a consultation is under way if it is not eventually related to what is in the Bill.

Brandon Lewis (Conservative, Great Yarmouth)

I have to say to the hon. Gentleman that the provision, as I am sure he will appreciate, given all his experience in the House, will be detailed and technical. We also expect there to be minor differences for each sort of health service body, reflecting their different constitutions. That is why the matter is for secondary, not primary legislation.

Amendment 83 would require the Secretary of State to consult the relevant authorities before making regulations to make further provision on the constitution of auditor panels. I reassure the hon. Member for Corby—I should say “my hon. Friend” in the light of our earlier discussion —that the Government fully intend to consult before making the regulations. I have shared the draft regulations with the Committee and the Government intend to run a formal consultation on them later this year. The regulations make minor practical provisions about the constitution and operation of panels, with the aim of ensuring that they are properly run and fully transparent. For example, the draft regulations require panels to have a minimum of three members and that local authorities must have a properly open approach to the recruitment of independent panel members.

Amendments 84 and 85 deal specifically with any costs associated with auditor panels. Amendment 84 would remove the provision that allows the Secretary of State to make regulations on the payment of remuneration or allowances to members of an auditor panel. Amendment 85 would remove the duty of relevant authorities to meet the reasonable expenses incurred by its auditor panel.

On amendment 84, I can assure the hon. Member for Corby that the Government’s intent is simply to put beyond doubt that authorities will be able to pay members of their independent auditor panel if they want to. I have shared draft regulations on the matter with the Committee that confirm that the authority may pay allowances to panel members, but that they are not required to do so. It is right that it is for the authority to decide what provisions should be in place. Auditor panels and councils that are looking at this may want to ensure that they learn from the Audit Commission to ensure that its mistakes are not repeated. The hon. Gentleman touched earlier on the potential for profligate expenditure on away days in the various wonderful places that he named. He may well have taken that example from the awful things that we have learned about the Audit Commission, which used to enjoy fine dining at some of the most expensive restaurants in London, such as L’Escargot, Coq d’Argent, Cinnamon Club, Smollensky’s and Brasserie Blanc. Other wasteful spending included shopping at HMV, buying doughnuts and spending nearly £5,000 on a drinks reception at the Royal Horseguards hotel for past and present quangocrats that was attended by just 34 people, which probably shows how many friends the Audit Commission had.

Andy Sawford (Labour, Corby)

The Minister is unnecessarily trying to score a point. We all agree that the Audit Commission lost its way. What is necessary, however, is that we tell an independent auditor panel in Cornwall, for example, which has absolutely no intention of dining at Smollensky’s or the other restaurants that he mentioned—I am not familiar with them, but he may be—what we broadly expect of it. When it looks to today’s record, it will get no help from the completely unnecessary points that the Minister makes about the Audit Commission’s past practice, because it will be looking for guidance on how to carry out its role effectively and what is appropriate. It would be much better for such panels and for the British public were the Minister to address the point.

Brandon Lewis (Conservative, Great Yarmouth)

That was exactly the point that I was addressing. It is important that people learn from the mistakes of the past, such as the Audit Commission’s profligate expenditure, which was rather like the previous Government’s profligate expenditure at the Department for Communities and Local Government that we stopped. Rather than having a top-down approach from central Government that dictates what panels should pay for things, it is right that we can trust local authorities to look at what is right for them. That trust exists among Government Members.

On amendment 85, it is right that an authority should, as it would do with normal committees of the authority, meet any reasonable expenses. The clause does not necessarily require the authority to pay any remuneration to panel members. It specifically deals with expenses incurred by the panel in carrying out its duties.

The hon. Member for Corby may have more general concerns about the anticipated costs to local authorities of maintaining an auditor panel, so it may help if I highlight a number of key points. First, I have mentioned that authorities will not be obliged to pay auditor panels any remuneration and that rates will not be set centrally. It will be for authorities themselves to decide. Secondly, I expect auditor panels to be small, so that many authorities will need no more than two independent members. The cost of remunerating such members, should an authority choose to do so, would not be sizeable.

Mark Pawsey (Conservative, Rugby)

The Minister suggests that the minimum number of independent members should be two, but does he have a view about the recommendation of the Select Committee on Communities and Local Government that independent members should have a majority on auditor panels?

Brandon Lewis (Conservative, Great Yarmouth)

The Government have taken that on board. As I made clear a little while ago, there should be a majority of independent members. That is why the panel members who are not independent are not an issue, because they will be outnumbered by independent ones. If a sector-led body goes ahead, for many local authorities the issue will in effect become redundant, because the matter would be dealt with by the sector-led body’s independent panel.

Finally, a separate Government amendment will provide for sector-led procurement. If such arrangements are put in place, an authority opting in will not be required to have an independent panel at all. With those assurances, I hope that the hon. Member for Corby will withdraw the amendment.

Andy Sawford (Labour, Corby)

I thank the Minister and emphasise how helpful it was that, towards the end of his remarks, we got to some of the clarity that will be helpful to organisations out there looking at implementation, not least the independent panels. Taking the five amendments in turn, he may not have anticipated the guidance that I received from the Library on “close friend”, because he gave us the same response that Baroness Hanham gave in the other place. That response, on the face of it, was that this debate had already taken place during the passage of the Bill that became the Localism Act 2011, in which there is a definition to allay our concerns, and so on. That, however, simply does not satisfy us, because the advice from the Library is that there was no such debate—we cannot find it and they cannot find it.

Brandon Lewis (Conservative, Great Yarmouth)

If the hon. Gentleman looks in Hansard later, he will see that I went further on the point made by Baroness Hanham in the other place. In addition, the term is already used by local authorities when looking at close friends and independent panels during recruitment of the independent standards person. There have been no problems, as far as we are aware.

Andy Sawford (Labour, Corby)

I thank the Minister for his reply.

Neil Carmichael (Conservative, Stroud)

The term “close friend” is mentioned in the Localism Act.

Andy Sawford (Labour, Corby)

I thank the hon. Gentleman, but suggest to him that he might have been looking at his iPad—contrary to Sir Edward’s advice—while we had the substantive debate about that very issue of whether the term being in the Localism Act 2011 is sufficient. That assurance—that the term is in the Act—was given in the other place, and it was satisfactory to my noble Friends at that stage, so, on the basis that there had been substantial debate and a definition, they withdrew their objections. On looking into things, however, we found that the provision was slipped in right at the end of the Bill’s passage through the Lords, so there is no definition and there was no debate to provide guidance as to the meaning.

In respect of local authorities looking at “close friend”, we are encouraged that the Minister has done some research into how the term might be defined, so we suggest—in response to clear evidence of how meaningless it is until it is defined—that he might draw on that research, although he has not shared it with us, to come up with a definition and include it in the Bill, because of course one is needed. This is not only about the Bill, but about the future and what will be in law—this place having debated and sought to define “close friend”. In fact, having now debated the term and shown that it can have such a broad definition, surely the courts will be able to take only that interpretation, so it risks being so broad a term that people are ruled out of participation in the independent audit panels. It is incumbent on the Government to come back with a definition, and I hope that they will. On that basis, we will not press the amendment.

On independence, the Minister tells us that it is needed because of the position with health service bodies. Later in the Bill’s passage, we will return to the matter, which my hon. Friend the Member for City of Durham is looking at. She will ask some questions of the Minister about how health services are treated in the Bill, because frankly it is a real mess—it is a dog’s breakfast of a Bill in the sense that we have clauses that are thought through and worded for relevant authorities, and concepts that are framed for them, but then exemptions are made for health service bodies on such vital issues as independence, although we all agree that that point is so fundamental that it should apply to health service bodies and to all relevant authorities.

I would have hoped that the Minister might have spoken to the Department of Health about the consultation. Having seen such strong condemnation earlier this year from the ad hoc Committee, which said how disappointing and unsatisfactory it was that the Department of Health had not brought forward the consultation—it did not even respond to that Committee so that it could look at the impact on health care bodies—I would have thought that the Department of Health could have done the consultation earlier to provide clarity in relation to the Bill. That is so disappointing, but as I have said, we will have to return to and explore that issue.

On amendment 83, I welcome the Minister’s assurances about consultation, and I am happy not to press that amendment. The point has been made that although we are disappointed about the breadth of future regulations, if they are to be covered by the Bill and to be used, people affected by them should clearly be consulted.

On amendments 84 and 85, with regard to the functioning of audit panels, I have to say that the Minister’s response has made me more, not less, concerned about the lack of thought and consideration given to how those bodies may operate. For example, he said that they may be voluntary, but I do not envisage their being voluntary. An independent audit panel will invariably be set up by a much larger local authority because, in our assessment and that of all the organisations that have looked at the Bill, only larger local authorities will be able to follow the independent route in a reasonably cost-effective way, compared with using the national procurement opt-in. If an authority spends £1 billion of public money, it is not acceptable for its audit committee to rely on voluntary effort. If it can find people who are willing to be unpaid in carrying out so vital a role, the local authority may not want to look a gift horse in the mouth, but that should not be the approach towards the vital role that panels will play.

James Morris (Conservative, Halesowen and Rowley Regis)

Is not the key point that it is for local authorities to determine how the panel is comprised, as is underpinned in the Bill? Is it not up to them whether the panel should be voluntary and whether there should be the relevant remuneration, without that being prescribed in the Bill?

Andy Sawford (Labour, Corby)

I thank the hon. Gentleman for his characteristically helpful intervention. He points out that local authorities will obviously want to interpret the Bill and make sure that they put it into effect in the most appropriate and proportionate way for themselves, but in keeping with its spirit, certainly in relation to the crucial role of the independent audit panel as the guarantor of independence.

In his work on the Select Committee on Communities and Local Government, the hon. Gentleman will no doubt have been involved in the production of its report, and he will have looked at the report on the draft Local Audit Bill, neither of which was convinced that the new arrangements provide the required independence. The overarching concern is about whether there will be independence in the system, and we will return to that point in subsequent debates.

The Government assure us that the independent audit panel is the guarantor of independence, and that its role is perhaps the most crucial part of the whole Bill in guaranteeing the independence of the system. Yet the Minister has nothing to say on how the panel might conduct its business and carry out its role. It seems that he is entirely happy to be overly prescriptive towards local authorities about the duties placed on them to publish information and notices from the panel. Such is the importance of the guidance that the Government have set out, in extraordinary detail, exactly how relevant authorities should publish what guidance they receive. However, no guidance in Committee—or in the transcript of our discussion—has been given by the Government about how the independent panel is to arrive at its crucial role.

That is incredibly disappointing, and I hope that the Minister will go away and reflect on the need for further thought about how the panel will conduct its role. The crucial point to highlight about remuneration is that substantial costs will inevitably be involved in its work.

Brandon Lewis (Conservative, Great Yarmouth)

Surely the hon. Gentleman can distinguish between the need to make sure that there is transparent information for members of the public about the probity of the audit panel—hence the issues he is outlining—and the Government dictating from the top whether a local authority offers remuneration and pay, and what level they are set at. As my hon. Friend the Member for Halesowen and Rowley Regis said, the point is to allow local authorities the flexibility to look at what is right for them locally—to get the right people in, and to have the power to recompense them and cover expenses—should those local authorities think that they need to offer remuneration. That is surely a matter for local councils, rather than central Government putting extra cost on them that will put up council taxes, which this Government have gone so far to keep frozen to help hard-working people.

Andy Sawford (Labour, Corby)

The Minister hits the nail on the head with that final sentence. Extra costs clearly will be imposed on local authorities and taxpayers will rightly be interested to know what those costs might be. While we do not want the measure to be overly prescriptive and have not sought to include in the Bill a level of prescription for how authorities conduct their affairs, because we recognise that the proposal must be proportionate and that the size of the authority and its turnover matter, the costs involved are a matter of public interest. That is why are seeking to draw out from the Minister—it should not be this hard—some indication as to how the committees will work.

On the substance of the Minister’s intervention—I will answer it before he makes another—his second point does not follow the other. The Minister says that the guidance is so important that we must set out in primary legislation how and where it will be published and that that is relevant and proportionate prescription. That guidance, however, may be entirely without use or value to the local public if three people and a dog have met once in the course of this process for half an hour on a voluntary basis and done little to provide the measure of independence to local public audit that is required to safeguard the public purse. The Minister’s points do not follow each other. In fact, he points out a massive contradiction in the Government’s approach to the amendment and I regret that he has not provided more information. If he wants to do that in a further intervention, I will of course give way.

Brandon Lewis (Conservative, Great Yarmouth)

The hon. Gentleman is keen to ensure that the public purse is looked after, but can he explain why it would be appropriate for central Government to enforce an extra cost on local authorities, who are locally democratically accountable, by telling them how much they must pay in remuneration as opposed to trusting them to decide what is right for them and to deal with remuneration themselves? We have to trust local councils to make those decisions. The difference here is that the Opposition are again looking for a top-down, prescribed approach while the Government trust local government and local people to make such decisions.

Andy Sawford (Labour, Corby)

It is worrying that the Minister, leading for the Government on such an important matter, is wilfully misinterpreting our points. He can read the amendments and will have advice from his officials or the Public Bill Office that says that the effect of our amendments is not to prescribe in the Bill how audit committees will work. We are simply trying to draw from him—we could have had it in the past half an hour—how the committees will work, but he seems so interested in making political points that he has done nothing to help the public understand. It is disappointing. I hope that he goes away and thinks further and comes back with a little more clarity, perhaps on Report or by letter, on how such a committee might go about its operations, so that the public might understand. That would be a reasonable thing to do. It is certainly a reasonable request. I am disappointed that the Minister has not responded, but I beg to ask leave to withdraw the amendment.

Clause 10 - Functions of auditor panel

Roberta Blackman-Woods (Labour, City of Durham)

I beg to move amendment 100, in clause 10, page 7, line 19, after ‘auditor’, insert ‘, Police Commissioner’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 103, in clause 10, page 8, line 13, leave out subsection (11).

Amendment 101, in clause 10, page 8, line 17, leave out ‘any’.

Amendment 102, in clause 10, page 8, line 19, leave out ‘any’.

Roberta Blackman-Woods (Labour, City of Durham)

As this is my first opportunity to do so, may I say what a pleasure it is to serve under your chairmanship, Sir Edward?

I would like the Minister to answer some questions about why police and crime commissioners are being dealt with differently from, for example, chief constables when it comes to the independence of relationships with auditors. That is very curious. Clause 10 states:

“A relevant authority’s auditor panel must advise the authority on the maintenance of an independent relationship with the local auditor appointed to audit its accounts.”

Under subsection (2), the advice that the police and crime commissioner gives to the chief constable must be to have an independent relationship with the auditor. Nothing is said about whether the police and crime commissioner should have an independent relationship with the auditor, which seems to be an omission.

Are the Government saying that anyone can carry out the audit of a police and crime commissioner’s office? Could the PCC’s husband, wife, sister, brother, granny, life-long friend, crony or indeed close friend—I will not go down that line again—carry out such an audit? Whom do the Government envisage carrying out the audit of police and crime commissioners? No information is provided in the Bill about how that will happen.

That is an important matter, because hundreds of thousands of pounds are going into the offices of police and crime commissioners. They are receiving money for their offices and for their staff, and they also receive moneys to provide grants to a range of local organisations. That prompts the question of why the Government do not want an independent audit of the police and crime commissioner’s office to be carried out. We particularly want to bring the matter into sharp focus in the light of the recent scandals surrounding the operation and lack of scrutiny of police and crime commissioners’ offices.

I would like to read into the record some examples, by way of evidence, of the scandals that have arisen recently, because they back up the Opposition’s assertion that independent audit is indeed necessary. The first case comes from the website “Liberal Democrat Voice”, and I am sure the Committee will agree that if we find something on “Liberal Democrat Voice”, it must be true. The headline reads: “The ludicrous story of Northamptonshire’s new Police and Crime Commissioner”, and the article states:

“Across the country the controversial newly elected Police and Crime Commissioners are supposed to be getting down to business. The reality in several areas is that many are hitting the headlines for the wrong reasons, and nowhere is this truer than in the case of Adam Simmonds, the Northamptonshire PCC, who has stacked his new “sprawling” 17-person commission with his campaign staff…During the campaign Mr Simmonds refused to outline his plans for how he would run the police, saying that people would find out once he was elected. He did join the criticism of a new job advertised at the police authority at £70k as “management madness”. Upon taking office”—

four days later—

“he appointed 4 assistant commissioners at £65,000 each”.

That is a huge amount of money. How are we to know if it has been spent effectively?

A second case related to the Secretary of State for the Home Department. Under the headline “Theresa May reads the riot act to police commissioners after expenses scandals”, The Independent reported:

“After a slew of allegations and mishaps involving chauffeur-driven trips funded by taxpayers and embarrassing rows over staffing, the country’s newly elected but already beleaguered police leaders have been called into Whitehall to be warned of their responsibilities.

Ministers have told their police and crime commissioners that they must detail their spending and hospitality arrangements online after a new round of damaging headlines about the Conservative law and order policy.”

I am sure we all agree that the Home Secretary took responsible action. I point out to her and the Minister, however, that when she called the police and crime commissioners in and explained to them how they had to behave properly and account for the money that they were spending, she could have had a word with the Secretary of State for Communities and Local Government and asked him to include independent and thorough audit arrangements for police and crime commissioners in this Bill.

We have many more examples that I could read out, but I will refer to just one—

Edward Leigh (Conservative, Gainsborough)

Order. I am sure that the hon. Lady will not want to do so at any great length. She has made her point. It is slightly tendentious to the Bill to have a long discourse on the nature of police and crime commissioners. It is fair enough to make the point, but she can now move on, can she not?

Roberta Blackman-Woods (Labour, City of Durham)

Thank you, Sir Edward, I was just about to do so. I have the made the point that there are some real concerns in the public domain about how police and crime commissioners are operating—how their money is being spent—and we want to ensure proper audit arrangements. I hope that the Minister will tell me that I am worrying unnecessarily and that enough is being done to ensure independent audit.

There is already a great deal of confusion and lack of clarity about the role of police and crime commissioners. They would benefit from an audit process, which would make their value to the community clearly apparent and give the public some tools with which to judge the efficacy of their local police and crime commissioners. Such information and those tools for local communities do not appear to be in the public domain at the moment. We would like them to be made available. If the Minister does not agree that police and crime commissioners should be subject to independent audit, perhaps he will tell us why.

Brandon Lewis (Conservative, Great Yarmouth)

These amendments concern the functions of the independent auditor panels, which will advise authorities on the independence of their auditors.

Amendments 101 and 102 deal specifically with “any guidance” issued by the Government on auditor panels and may reflect concerns about the Government’s intentions on further guidance on auditor appointment. I reassure the hon. Lady that any guidance issued under clause 10 will be limited to matters relating to the functions of the auditor panel and to authorities’ functions in relation to the panel. The guidance will therefore deal with issues such as how the auditor panel should fulfil its duty to oversee auditor independence or, in the case of the authorities’ functions, what skills or experience they might look for when appointing the panel.

The duty under clause 10 for panels and authorities to have regard to guidance issued by the Secretary of State would not apply to anything outside those matters—for example, the conduct of the audit and the statutory duties of the auditor. Such matters will be covered in the audit code of practice that will be issued by the National Audit Office and subject to parliamentary scrutiny.

It may also be helpful if I clarify our intentions regarding “any guidance” and the specific obligations of local authorities to follow it. The Bill requires that authorities have regard to guidance, which will be designed to be helpful rather than to set rigid requirements. More generally, I can reassure the hon. Lady that the Government’s intentions are well meaning.

During consultation, local authorities indicated that further guidance on the role of panels would be helpful. The Chartered Institute of Public Finance and Accountancy has also said that such guidance may be needed. The Government fully intends to work with local authorities and other interested parties in developing any guidance. Given that current contracts do not expire until 2017, the detailed work on this has not yet begun. We expect that any guidance will need to be finalised closer to 2015 when authorities begin putting arrangements in place for local employment.

As the hon. Lady outlined at great length, amendment 100 deals specifically with police bodies. It would clarify that advice to a police and crime commissioner from its auditor panel includes advice on the maintenance of an independent relationship between the local auditor and the police commissioner. We do not believe that the amendment is necessary, as the Bill already requires that a police and crime commissioner’s auditor panel advises the PCC on its relationship with the auditor. It may be helpful if I clarify that, in the case of police bodies, the Bill requires that chief constables are audited by the same auditor appointed to audit the PCC. As they will share an auditor, the PCC and chief constables will therefore share an audit panel. That panel will advise on the independence of the auditor with respect to both the PCC and the chief constable.

Amendment 103 would remove the requirement on a local authority to exclude material where disclosure would prejudice commercial confidentiality from any publication of advice from the auditor panel, unless there is an overriding public interest in favour of its disclosure. There will be cases in which commercial confidentiality must be protected. Unlimited disclosure could hinder an authority’s ability to get good value for money in letting contracts. Bearing that in mind, the authority is best placed to make and be accountable for the decision whether to publish any item relating to commercial matters. Similar provisions in the Local Government Act 1972 and the Freedom of Information Act 2000 allow public access to local authority documents and information, except where that access may compromise the need for commercial information to be withheld in confidence. In both cases, that exemption is balanced by the need to take into account the public interest: whether the public interest in favour of releasing or publishing the information is outweighed by the public interest in withholding it. That is what we have also provided for in the Bill for consistency.

We consider, therefore, that the existing provision in the Bill provides transparency while protecting public money. With those reassurances, I hope that the hon. Lady will withdraw the amendment.

Roberta Blackman-Woods (Labour, City of Durham)

I will deal first with amendments 101 and 102 on the issue of guidance. Our concern with the way in which clause 10 is written at the moment is that it gives carte blanche to the Secretary of State to produce guidance on anything and then require local authorities to act on that guidance. We feel that the power is still too wide-ranging. I would like the Minister to give us more information about what guarantee there would be that the guidance would be drawn up with the co-operation of local authorities. [ Interruption. ] Perhaps the Minister can intervene and say exactly where the co-operation with local government will be in the Bill.

Brandon Lewis (Conservative, Great Yarmouth)

I did give that confirmation in the words I used just a few moments ago, very specifically.

Roberta Blackman-Woods (Labour, City of Durham)

What I think the Minister is suggesting is that his comments this afternoon are the guarantee that we have been looking for. We will go away and look at whether we think it is sufficient to ensure that something unreasonable will not be set out in the Secretary of State’s guidance that would not be able to be countered by the views of local authorities.

I will move on to amendment 100. I think the Minister was saying that both police and crime commissioners and the chief of police would share an auditor, but both those parties would need to ensure that they had an independent relationship with the auditor. We will go away, look at the Minister’s comments in more detail and ensure that we are certain that what was said will guarantee independence in that relationship.

On amendment 103, to a degree, we accept the Minister’s reassurances. We would ask him, however, what he thinks could be done to ensure that local authorities put as much information in the public domain as possible about auditors—how they are appointed, what they find out and how they come to their conclusions—so that public trust in the system is maintained. With those comments, I beg to ask leave to withdraw the amendment.

Clause 11 - Relationship with relevant authority

Roberta Blackman-Woods (Labour, City of Durham)

I beg to move amendment 114, in clause 11, page 8, line 23, leave out:

‘other than a health service body’.

I apologise to the Committee for taking us back to the thorny issue of why the Bill treats health service bodies differently from other authorities. It is extremely important that we pay attention to that in relation to clause 11. I am grateful to the Minister for sending round the consultation document on audit arrangements for NHS trusts and clinical commissioning groups. However, is it not a peculiar practice to have the Government rely in Committee on a set of arrangements that are open for consultation only now? Indeed, the Government propose that the consultation on audit committees for health service bodies will run until 31 December, so the consultation period probably will not finish before the Bill has passed through the House of Commons—it could be heading for Royal Assent. Surely that is worrying.

I want to be fair. I congratulate the Government on producing a consultation document; that would appear to be good practice. What is not good practice is publishing a consultation document about a year after it should have been published, because that will not help the Committee’s deliberations. The Government have form on that: we had four relevant consultations running through the passage of the Growth and Infrastructure Bill. I hoped that the Government would listen to the points made by the Opposition during the passage of that Bill as to how unhelpful it was to the Committee to have relevant consultations running at the same time as consideration in Committee. Clearly, they did not listen, because we are back in exactly the same situation again. That is not acceptable, because at this point we are unsure as to what the audit arrangements will be for NHS trusts and clinical commissioning groups or what might emerge from the consultation document. That presents us with a huge problem in the consideration of the clause.

Perhaps a greater problem is the lack of joined-up thinking demonstrated by the Government. They are often criticised for their lack of competence, and here is a good example of such incompetence. At a time when local authorities and health bodies are supposed to be working together to reach imaginative local solutions to the problems that they face, why are we not dealing with the audit arrangements for health bodies and local authorities in the same way? Lord True made that point eloquently during consideration of the Bill in the other place. He noted, as do we:

“On local audit and accountability, this Bill goes wider than just local authorities,”—[Official Report, House of Lords, 22 May 2013; Vol. 745, c. 911.]

We know that from the long list of bodies in schedule 2. Irksomely, the Bill includes some NHS bodies but not others in what appears to be an inconsistent and illogical manner. Sometimes NHS bodies are included and sometimes they are excluded. Sometimes some consideration is given to them, but at other times no mention is made of them at all. It is not good enough for the Minister to say, as he did on Tuesday, that the reason for excluding NHS bodies from time to time is that audit arrangements already exist for the NHS.

The point we are making is that the way in which the Bill has been constructed means that an opportunity is missed, as Lord True said, to give local authorities a more constructive role in securing effective audits and accountability of public bodies operating in their area. It also misses the opportunity to streamline audit arrangements for health and local authority bodies. The introduction of common arrangements for audit would surely help the integration of health and social care services, which the Government claim to promote, but the Bill does not mention that. We note that the Government have moved towards integration by placing public health responsibilities in local authorities, so it is even more peculiar that audit arrangements for health and local authority services remain separate.

The panoply of health arrangements as experienced locally is causing a great deal of confusion. Health services are commissioned by four different commissioning groups: local authorities, NHS England in whatever local structures it adopts, local clinical commissioning groups and the national commissioning group. So much for the Health and Social Care Act 2012 simplifying arrangements on the ground. The point that I am making is that all those different organisations, and the local authorities with which they engage, have different audit arrangements, which is surely a recipe for disaster. At best, it will cause massive confusion locally.

That is especially the case when we look at what is happening on the ground with some local NHS bodies. Their budgets are coming under severe strain. In the next year, my clinical commissioning group is due to lose £17 million, and the north-east as a whole will lose £230 million. Those are huge sums of money, and the question of how money is spent will become even more important. Lord True is also right to point out that if local audit and accountability of the NHS and other local bodies that affect local communities is to have any meaning, there must be a place for public scrutiny.

Local authorities have an obvious role, and it is not clear that the Government have set out anywhere else the role of the public in scrutinising health bodies locally. Indeed, Lord True described in the other place a situation that many of us are already seeing locally: the world of health and local government is rapidly changing. In some areas, clinical commissioning groups and foundation trusts are already establishing integrated community organisations to carry out their commissioning roles, either in an advisory capacity or through some other set of arrangements. He made the very point with which the Minister so incredibly failed to engage on Tuesday.

We have the very odd situation where one strand of law is semi-engaged in the Bill and derives from the National Health Service Act 2006 as amended in 2012 and a whole other strand of local authority-related legislation concerns audit and accountability. Crucially, the Bill misses the opportunity to bring those strands together in one coherent whole of local audit of health and local authority bodies. Indeed, I thought that Lord True put it well. He said that as the two empires come together, their audit worlds should come together. The Minister must answer why the Government have not listened to Lord True and done just that. The legislation does not address how public accountability can be built into the auditing of the new local health structures or into the extension of local authorities’ role in scrutinising local health bodies.

To conclude, I have a couple of questions for the Minister. Why has he not allowed for the fact that local health bodies and local authorities could share common audit arrangements? Will he speak specifically about the point that Baroness Hanham raised in the other place? In answer to the questioning of Lord True, she indicated that the Government would produce updated guidance on audit arrangements for local health bodies. Has that guidance been produced and, if so, where is it to be found?

Brandon Lewis (Conservative, Great Yarmouth)

The amendment would duplicate the existing requirement for health service bodies to supply information to the audit committee when acting as an independent auditor panel. Clause 11 gives auditor panels the power to acquire documents or information held by the authority. Audit committees are integral to the governance arrangements of health service bodies and perform a key role in supporting the board and accounting officer, by reviewing the comprehensiveness and reliability of assurances on governance, risk management, the controlled environment and the integrity of financial statements and annual report.

Any non-compliance with the requirement on the health service body to supply information to the audit committee when it is acting as an auditor panel will be highlighted in the annual audited governance statement of the body, which will be published as part of the annual report and accounts. The Government want to secure greater integration of health care services and greater integration between health and social care services, where that would improve quality or reduce inequalities.

I need to make clear the Government’s position. The focus is on services as they are provided to patients, not on the bodies that provide them. That is why we do not see the fact that bodies might have different auditors as hindering the drive for the better integration of services. That is perhaps the difference between the two sides of the Committee. We are interested in the service and what the patient sees, rather than being too caught up in the structure behind it when it is already covered by auditors. In many cases, clauses in the Bill specifically exclude health service bodies. To be clear, that is a consequence of the way in which the Bill is drafted and reflects the different accountability arrangements between health service bodies and local authorities.

Local auditors of health service bodies, for example, are already required to report unlawful expenditure to NHS England, the NHS Trust Development Authority, clinical commissioning groups or NHS trusts and to the Secretary of State. Conversely, local authorities are accountable to the local electorate; consequently, the auditor has more direct access to the records of local authorities and needs to have powers to refer matters to the courts, as the Secretary of State does not have powers to direct local authorities. Similar provision is made for health service bodies, but in different clauses or schedules.

Chris Williamson (Labour, Derby North)

For the record, I want to make it clear that both Government and Opposition Members are concerned—certainly we are—about the quality and delivery of service to the public on the ground. I am interested, however, in whether the Minister agrees with me that getting the audit arrangements right has a bearing on the front-line services to the general public. Surely the two cannot be divorced from one another.

Brandon Lewis (Conservative, Great Yarmouth)

I am not sure that many patients served by their doctors or nurses understand how that doctor service changes according to how the audit is set up—whether it is audited by a local authority auditor or the NHS auditor. The Bill recognises the difference in how the NHS and local government are dealt with.

On Lord True’s amendments in the Lords and the commitments made to him in the other place, the Department of Health expects to publish guidance shortly on the health scrutiny regulations. The Department has worked with Lord True to develop the guidance.

I have nothing against the principle of the amendment, but simply do not think that it is necessary. With that clarification, I hope the hon. Lady will feel able to withdraw the amendment.

Roberta Blackman-Woods (Labour, City of Durham)

I am grateful to the Minister for his response and for his direct answer to my question about the guidance. I suspect that, as with many other areas of the Bill, we will have to wait to see what the guidance is like when it is produced and whether it answers our specific questions. However, I am more worried now about the way in which NHS bodies are being treated than I was before the Minister’s comments. I simply do not feel that the Committee was given an explanation as to why local health bodies audit arrangements should be any different from those for local authorities, or indeed why local authorities in their audit arrangements are not given a much greater role in scrutinising what is happening in local health bodies.

Brandon Lewis (Conservative, Great Yarmouth)

Does the hon. Lady not appreciate the difference in the governance structures and the way in which those structures feed through the system between the NHS and local authorities?

Roberta Blackman-Woods (Labour, City of Durham)

I assure the Minister that I do understand the difference in the governance arrangements. Indeed, I thought that I had demonstrated that to the Committee by outlining some of the complexities in the particular structures that are now operating locally and how complicated the new world of health is. It is particularly difficult for local people to get their head around who is commissioning what, for whom and where they should check how money is being spent. It is the lack of clarity in the Bill about how local bodies should account to their local communities that so worries us.

I noted what the Minister said. He said that health bodies account to NHS England and the Secretary of State. We know that that is the current state of play, but, as the Department of Health has commenced a consultation exercise on its audit arrangements, it would surely not have been beyond the ability of the communities and health ministerial teams to have got together to create a set of scrutiny and audit arrangements for local health and local authorities that would have made sense to local communities as well as accounting for the money received from the Department of Health.

Neil Carmichael (Conservative, Stroud)

I have been listening carefully to the shadow Minister. Does she agree that the thrust of her comments, if realised, would somewhat collide with the role of Monitor and other structures in the NHS?

Roberta Blackman-Woods (Labour, City of Durham)

The hon. Gentleman will forgive me if I do not go down that route. Monitor has a particular role to play in examining whether foundation trusts and other health organisations are delivering a degree of value for money and doing what they should be doing. The hon. Gentleman has again identified a difference between the two sides of the Committee. The Opposition are not saying that audit arrangements are not in place for health bodies. Such arrangements clearly are in place and I have mentioned the legislation that covers it—the NHS Act 2006, as amended by the Health and Social Care Act 2012. Our point is that, given that we all want to see greater integration of local authority services and health services, it would be much better if some combined audit arrangements were in place, or, at least, that the two sets of bodies talk to each other and are both outward-facing to the local community—that is critical—so that local people can have a better understanding of what local health services and local authority services are being delivered, which is what the Bill seeks to achieve. It is that missed opportunity that we are raising.

I am not sure we have heard the detail that we would have liked from the Minister about why the Government have missed that opportunity and why, given the various comments from Government Members in the other place, no action has been taken to rectify such a huge omission. Although I will withdraw the amendment for the time being, we will return to the issue on Report. I beg to ask leave to withdraw the amendment.

Claire Perry (Conservative, Devizes)

May I beg to move that the Committee be now adjourned?

Edward Leigh (Conservative, Gainsborough)

You may. My co-Chair will be looking after you next week, so I will not have to look at Mr Carmichael’s colourful tie any more.