Local Audit and Accountability Bill [Lords]

Public Bill Committee, 12 November 2013.

Clause 12 - Failure to appoint local auditor

Andy Sawford (Labour, Corby)

I beg to move amendment 116, in clause 12, page 9, line 18, at end insert—

‘(c) ensure that costs to a relevant authority of auditors appointed by the Secretary of State are no more than 10 per cent. above average costs for all relevant authorities.’.

Michael Weir (Scottish National Party, Angus)

With this it will be convenient to discuss amendment 115, in clause 12, page 9, line 24, at end add—

‘(6) Additional cost is calculated by comparisons to other similar sized authorities.’.

Andy Sawford (Labour, Corby)

It is a pleasure to serve under your chairmanship again, Mr Weir. I understand that you will chair our proceedings all day today, so I am sure that we will make good progress. I am also sure that hon. Members who were here past midnight last night will be forgiven for looking a little weary, but they will no doubt engage in a lively manner as we proceed.

Amendment 116 reflects our view that the audit market might not operate in the way that the Government envisage in all areas of the country. There might be some geographic variation in how effectively the audit market operates. Evidence from organisations such as Grant Thornton and Mazars, particularly their written evidence to the ad hoc Committee on the draft Local Audit Bill, suggests that the Bill may have a variable impact on authorities, according to geography and size. Under the amendment, in exercising the reserve power to appoint an auditor where a relevant authority has been unable to do so, the Secretary of State must ensure that the

“costs to a relevant authority of auditors appointed by the Secretary of State are no more than 10% above average costs for all relevant authorities.”

That reflects our concern that authorities further away from major cities and centres of population, or smaller authorities, may face a price premium. We cannot know how the market will operate. I am sure that the Minister will reassure us and express his hope that the market will operate effectively for all local authorities, but we hope that the amendment would provide a reasonable safeguard.

When considering the amendment, we discussed what threshold to set for the variance that can be tolerated. Our view was that too small a variance could lead to an adverse effect, where an authority might think, “We will leave it to the Secretary of State, because he will secure for us a better price than we might otherwise be able to achieve.” In setting the threshold at 10%, our hope is that there will still be an incentive for all local authorities, particularly those that choose not to take part in the national procurement scheme, to seek the best price, because they would not want to pay a 10% premium. Nevertheless, they would know that they would not have to pay a 20% or 30% premium.

Evidence from Mazars to the ad hoc Committee on the draft Bill said:

“In our opinion, competition is unlikely to result in an overall reduction in fees. Firms would ‘cherry pick’ and ‘low ball’ to win large audits to obtain critical mass in the market place, e.g. London boroughs, counties and unitary authorities. Some authorities, particularly small district councils and those in geographically remote places, may have difficulty in appointing an auditor.”

Commenting on costs, Grant Thornton said:

“One of the benefits of a national or regional procurement process is that it allows for standardisation of audit fees across audits of different types of local authorities. Whilst our expectation is that audit fees may fall in areas such as London as a result of local choice, they may well rise in less densely populated areas, or for specific types of local government body. The Audit Commission’s tender for audits in Cornwall and Cumbria suggests that this is a real risk.”

There is evidence from the tendering exercise in 2011-12 that the risk is real, hence our concern for more geographically remote areas. Another benefit of national or regional procurement is that an organisation

“is likely to become a more sophisticated procurer”.

There is some evidence in the ad hoc Committee report about how our current arrangements with the Audit Commission, particularly in the 2011-12 tendering process, allowed it effectively to balance out costs to different types of local authorities across the country. That is reinforced by Michael Higgins’ remarks to that Committee.

We are concerned about the Communities and Local Government Committee’s remarks on the operation of the market. It stated:

“Unless the Government can crack the problem of the very limited competition in the audit market in the UK, it will be open to the accusation that the abolition of the Audit Commission is not a measure to save public money but merely a mechanism to transfer public money into private hands.”

The ad hoc Committee stated:

“We heard evidence to suggest that it is not realistic for smaller firms and organisations such as mutuals and co-operatives to bid successfully for one-off audits without an inevitable impact on quality, consistency or cost.”

We will return to those issues in relation to public audit and liability, but they all relate to our much wider concern about the operation of the audit market.

I hope that the Minister can assure us that he has made some assessment of how the audit market might operate for a small district authority in, for example, Somerset or the north of England, where for the limited number of providers such as Grant Thornton and Mazars, which have expressed views about the operation of the market and concerns about cherry-picking and low-balling, the prospect may just not look very attractive and they may therefore pitch in with a high price.

I know that such things happen. To put the matter in everyday terms, a very good friend of mine is a painter and decorator who will give anybody a quote for any job, but the quote depends on how busy he is and how attractive the job looks. He will sometimes whack in a large quote, because he is frankly not that interested— he has a large order book—but is taking a punt. The nature of the market is such that an overpriced quote might be competitive for someone who, in the absence of any better quotes, cannot find a painter and decorator.

Our concern about how the market will operate for smaller or more distant local authorities is that a major provider of audit, which might have spent much time and resource bidding for a contract in Birmingham, may just whack in an overpriced quote for a small council whose audit it does not find particularly attractive. That is why we seek protection through the Secretary of State, when using his reserve powers to appoint the auditor, ensuring that the auditor’s price is within a range of the average.

There is a risk of a cost to the public purse, but we argue that the Secretary of State’s good offices would enable him—or perhaps her in future—to procure an auditor of last resort, providing audits where relevant authorities have failed to appoint one, within 10% of the average cost.

James Morris (Conservative, Halesowen and Rowley Regis)

In what circumstances would the provision apply? We had a long debate about the concept of the shared procurement structure, and that would surely cover the situation of a district authority not wanting to appoint an auditor itself. I am a little unsure about the circumstances in which the provision would apply.

Andy Sawford (Labour, Corby)

The Government of course hope that the provision does not apply. They imagine that the audit market will operate in a healthy and competitive way. I hope that the hon. Gentleman, as a member of the Communities and Local Government Committee that has done much work on how the audit market will operate in future, will want the joint national procurement offer to become available—I think that I have heard him say so. The Minister is not an enthusiast for that, having made it very clear throughout the first two days in Committee that he will encourage local authorities to procure their auditors independently. That is the Government view. We are pleased that they have come to see the great sense in having a joint national procurement offer, but that is certainly not how the Minister envisages the system working.

The whole framework of the Bill we are debating is predicated on the assumption that costs will be lower for a local authority, wherever it is in the country and whatever type it is, if it procures auditors independently, because the market will provide. That is a view of the world to which I am sure the hon. Member for Halesowen and Rowley Regis subscribes, but all our evidence, including the evidence that I have cited from organisations who made written submissions and gave oral evidence to the ad hoc Committee, is that there are concerns that audit firms will cherry-pick, and that there will be low-balling of offers to more attractive firms and overpricing in relation to larger firms.

The smoothing that was provided for by the way that the Audit Commission procured auditors in the 2011-12 round, by which significant savings were achieved, meant that they could effectively ensure that the savings were balanced out across all local authorities across the UK, including those that may be less attractive. If local authorities are to be dependent on the market to achieve savings, we all understand that markets do not always work effectively or as we envisage. I hope the Committee will agree that the amendment is therefore sensible.

I should speak briefly to the next amendment in the group, amendment 117, and also say that amendment 115 is linked to amendment 116, which helps to give it effect. It is a tidying amendment.

Michael Weir (Scottish National Party, Angus)

Order. Amendment 117 is actually grouped separately from these amendments. It is in the next set.

Andy Sawford (Labour, Corby)

Indeed it is. It is on the next line. Sorry Mr Weir. I will stop with amendments 116 and 115.

Chris Williamson (Labour, Derby North)

I support this extremely sensible amendment. As my hon. Friend has eloquently outlined, it is very clear that the market does not always provide the best, cheapest and most cost-effective solution.

My hon. Friend gave the example of a painter and decorator, and I can share my own anecdote about a building company. We wanted to get some work done at an office and one of the quotes for plastering external walls came in at £26,000. When I asked for a detailed breakdown of those costs, £3,000 was for the removal of the radiators—£1,000 to take three radiators off the wall, £1,000 to put them back again and £1,000 to get them working somehow. Clearly that particular contractor was not that keen on doing this work, but had we been foolhardy enough to take him on, we would have been out of pocket by a very substantial amount. The quote that was accepted was just over £12,000—half the price.

A small district council in a Tory heartland area, where there is very little in the way of expert auditors available through the market, could be faced with Hobson’s choice and have to pay through the nose for an auditor. That would be an extremely bad use of public money. I hope that Government Members agree and will therefore accept this very sensible amendment. A failure on their part to support it would reinforce my repeated assertion that many Government Members are predominantly interested in creating a self-serving money-making cartel for vested interests in the private sector.

Andrew Stunell (Liberal Democrat, Hazel Grove)

The hon. Gentleman appears to be saying that the Opposition believe that this principle should apply in particular to plastering and auditing, and his hon. Friend the Member for Corby mentioned decorating. Does he believe this is a general principle that should be adopted by public sector procurers—that there should always be a state-provided provider of last resort in the event that tender prices are seen as being a little bit too high?

Chris Williamson (Labour, Derby North)

We certainly want to protect the public purse. I do not know whether the right hon. Gentleman is saying that we should be cavalier about the public purse and it does not matter by how much the public purse is dipped into if it is a private sector provider. Surely we would all support the suggestion that there should always be, if we can find it, a lower-priced alternative, be it in the public sector or not. I know he was a posing a hypothetical scenario, but surely all of us want to get the best value for money for the public pound. Well, I would hope we do, but the silence from Government Members on this issue is deafening.

As I have already pointed out, in many sparsely populated areas of the country the expertise will not necessarily be available within the community. As a consequence of the decision to abolish the Audit Commission, local authorities could be placed in an invidious position. Hon. Members may have heard the piece on the “Today” programme this morning about the National Audit Office report published today, which highlights a real concern about the lack of transparency in the private sector when undertaking Government contracts. We are talking here about injecting a degree of transparency into the audit market, protecting the public purse and ensuring that the local taxpayers get value for money, because the Secretary of State will intervene if they cannot find the expertise locally.

Without the safeguard proposed by my hon. Friend the Member for Corby, quite a few local authority areas around the country could get extremely bad value for money. To use my analogy of the plastering contract, they would pay £26,000 as opposed to £12,000. Setting a limit at 10% above the average—the going rate—would be sensible, and I hope that we can get some consensus on this. I have sought consensus on a number of the excellent amendments that my hon. Friend has proposed. We have failed to achieve that consensus on most of them but I hope that on this one at least we might be able to do so.

Duncan Hames (Liberal Democrat, Chippenham)

Given the hon. Gentleman’s apparent willingness to spend as much as £12,000 on plastering, does he not agree that this demonstrates that even good socialist MPs cannot be relied upon to protect the public purse? The best way in this instance to protect the public purse is to increase the supply of competing firms seeking this work.

Chris Williamson (Labour, Derby North)

It is a very good point. If we could increase the supply of firms it would protect those sparsely populated local authority areas and the amendment would not need to be invoked. We would be getting value for money. There would be plenty of opportunity for local authorities to find a suitably qualified auditor to do the job. I hope that the hon. Member for Chippenham is not suggesting that we have cowboy auditors like we have cowboy builders, who do not provide the necessary expertise and do a slapdash job. I used to work as a bricklayer myself and I have seen the effects of cowboys in the building industry. One can only imagine the effects of a cowboy auditor. This wild-west approach that some Government Members might be advocating would get us extremely poor value for money.

On the point about spending £12,000 on plastering, that was less than half the price of the first quotation. We got good rather than poor value for money, unless we did not get the plastering work done at all. We could say, “We won’t bother with auditing. Why spend public money on making sure that we are getting value for money, that proper safeguards are in place and that there is not corruption in local authorities?” We have quoted on numerous occasions the concerns expressed by Transparency International. Obviously auditing is essential. We need to ensure that local authorities are audited properly.

We want to make sure that they are audited by highly skilled, professional people at a price that is commensurate with the average price, ensuring that we receive value for money. We are standing up for taxpayers who by and large are represented by local authorities of our political colour. I do not understand why hon. Members on the Government Benches seem willing to allow their potential electorate to be forced to pay inflated prices for audit arrangements when the amendment would protect the public purse, and the resources that would be wasted on cowboy auditors could be put to better use in providing quality front-line public services.

Brandon Lewis (Conservative, Great Yarmouth)

Good morning, Mr Weir. Before endeavouring to give the hon. Member for Corby the reassurance he is looking for, I will touch on some of the specific comments that have been raised. The hon. Member for Derby North referred again—he did so last week—to Transparency International UK. I gently remind him that this Government introduced transparency to local government in a way that never existed before to ensure that people have a clear understanding of local authority expenditure. That has resulted in armchair auditors, which is healthy, to ensure that there is good practice and good expenditure in local government. Local residents can fully understand exactly what the local authority they elected, which is locally democratically accountable, is doing with their money instead of having to rely on a Government quango such as the Audit Commission.

The hon. Gentleman also touched on the decorative and building industries, as did Government Members. I am sure we all have friends who work in those industries. A good friend of mine is an arboriculturist who I am sure does a similar thing to the hon. Member for Corby. I have seen some of my friend’s quotes and he makes a judgment call on whether he wants a particular job, needs the business at the time or wants the extra money, and prices accordingly instead of having a set band of prices for his tree work. I have often criticised him for that because it does not seem to be a good way to run a business. However, people can get other quotes, and the hon. Member for Derby North backed up the points that Government Members made in their interventions when he said that he had been able to obtain other quotes and found one at around half the original price. The beauty of such industries is that customers can get other quotes, as local authorities will be able to do.

When I worked in procurement in the commercial sector, I obtained a range of quotes, and the hon. Member for Derby North said last week that he had a similar experience with auditors. I ran a business that was smaller than a small authority, and it was not difficult to find auditor companies to quote. Part of the argument is that as the market grows, there will be more auditors. The hon. Member for Corby was correct when he said that if a procurement body comes together from the local government sector, that changes things somewhat, because small district councils particularly will be able to come together cohesively to take on a bigger contract, have more buying power and, in theory, obtain a better price. That does not always follow through, and the beauty of what the Government are doing is that local authorities will have the ability to make a choice between procuring locally and coming together.

The hon. Member for Corby said that the Government want local authorities to procure locally and individually. I say with the best will in the world that is a misrepresentation of our position. We want the sector to have control, but we are happy to facilitate it to design its own sector-led body, rather than do it from the centre, not because we think all authorities should go out and procure for themselves—they may wish to do that—but to give them a choice. If the sector wants to come together, it can do so and we have put that in place in new clause 1. I am sure that the hon. Gentleman is right in that I suspect that many if not all small district authorities will ultimately do that.

Chris Williamson (Labour, Derby North)

Is the Minister familiar with the concept of supply and demand, and does he acknowledge that in some areas of the country the audit market will be very limited? That might diminish the choice available to local authorities. Does he agree that if the Secretary of State intervenes without our proposed safeguard, local authorities might be forced to pay—on the basis of supply and demand—a price considerably higher than the going rate in normal circumstances?

Brandon Lewis (Conservative, Great Yarmouth)

No is the short answer, but let me explain that in a bit more detail. In the audit industry, auditors do not necessarily work only within two miles of their office. London auditors work in the very north of England and I know of auditors based in Scotland who work in the south of England. I therefore do not agree at all with the hon. Gentleman and I would gently caution him on the argument he made earlier on cowboy auditors. I remind him of the discussion we had last week. Auditors have a fiduciary duty and, under the audit code, they have duties that they must follow. To cast such an aspersion on that industry is, at best, a misunderstanding of how it works. I will say no more than that.

Chris Williamson (Labour, Derby North)

I did not seek to cast aspersions in any way, shape or form; I was pointing out, however, that unless we have the safeguards set out by my hon. Friend the Member for Corby, we could create a situation in which cowboy auditors come into the market. In no way did I suggest that cowboy auditors operate in the market currently—far from it.

Brandon Lewis (Conservative, Great Yarmouth)

I fully accept that, but the hon. Gentleman has again highlighted how little he understands of how the industry works. Any new auditors that come in will have to follow the fiduciary duty required of all auditors. I think he misunderstands how the industry works, but he can mug up on that over the next few days.

Amendments 116 and 115 relate to when an authority fails to appoint an auditor and the Secretary of State exercises a power to make an appointment on their behalf. I reassure the hon. Member for Corby that the Government see that purely as a back-stop power, use of which will be extremely rare. Authorities will have ample opportunity to make an appointment and we expect them to do so to comply with the law. He may have particular concerns about smaller or remote authorities—Members have used that phrase—that he might think would be less attractive to firms and could therefore struggle to make an appointment or secure a reasonable price.

As I outlined in the last few minutes, I do not agree with the hon. Gentleman that those situations will arise, because of the way the audit market works. The Bill gives authorities flexibility in appointment to enable them to secure the best price. First, it already allows two or more authorities to appoint a joint auditor, so smaller authorities could join together with bigger neighbours to help secure bulk discounts. During pre-legislative scrutiny, chief executives of Birmingham and Oxfordshire signalled their willingness to offer small councils the chance to join in with their procurement, which shows that the sector wants to work together.

Secondly, as I touched on, the Government’s new clause, which we debated last week, will allow for national, sector-led, collective procurement. If the sector sets up a collective procurement body, an authority that expects to struggle to appoint could opt in to those arrangements. To turn to the specific amendments, I do not agree that an appointment made by the Secretary of State through this power will inevitably mean a much greater cost than the average. The Government would seek to procure the audit at the best possible price for an authority.

Mary Glindon (Labour, North Tyneside)

If an auditor has to be appointed for a more remote authority, how would the extra cost of bringing up a team of auditors from, say, the south to the north, putting them up in hotels, travel and so on be borne? For a team of four or five auditors, that could be thousands of pounds. Has the Minister considered that on top of the cost of auditing?

Brandon Lewis (Conservative, Great Yarmouth)

The costs of the audit will be in the audit company’s quote; that does not necessarily mean that an authority that is remote or in the north would have to choose an auditor from the south.

Chris Williamson (Labour, Derby North)

Will the Minister give way?

Brandon Lewis (Conservative, Great Yarmouth)

I will finish answering one intervention before I take another. The point I made earlier to the hon. Member for Derby North was not that audit companies in London would necessarily have to service the north, but that there is that flexibility in the audit market. Auditors do not just work within a small remit. Having said that, there are auditors all over the country. It is quite likely that if independent, small authorities decide to procure for themselves, and lots of procurement is going on, that in itself will create a wider market, which will attract more auditors into the market. I do not see that as a particular issue, but I will come back to that in a moment.

Chris Williamson (Labour, Derby North)

I wanted to build on the point my hon. Friend the Member for North Tyneside has just made. If, as the Minister suggested, the Secretary of State could appoint auditors to fulfil a contract from, say, the south to the north-west of England, the additional costs—travel, hotel accommodation and so on—would inevitably have be borne by the local authority. It would therefore seem sensible to ensure the public purse was protected by having a threshold of 10% above the average, as in the amendment tabled by my hon. Friend the Member for Corby. I honestly do not understand why the Minister is resisting it.

Brandon Lewis (Conservative, Great Yarmouth)

I assume the hon. Gentleman appreciates that if the local authority follows through on its duty under the law to appoint its own auditors, it will have to deal with those issues itself. There is no reason things should be any different where the Secretary of State appoints them purely because the authority has not followed through on its legal duty to do so, as the Bill requires.

The Bill requires the Secretary of State to give notice to an authority of any intent to make or to direct an appointment—

Andrew Griffiths (Conservative, Burton)

I am intrigued by the argument about auditors travelling from the south to audit in the north. We should bear in mind that the Audit Commission is based in London. Where does the Minister think most of the staff used by the Audit Commission lived?

Brandon Lewis (Conservative, Great Yarmouth)

My hon. Friend makes a good point, and I suspect some of them may also have lived near some of the organisations the Audit Commission subcontracted to as part of some of the savings we have seen over the past few years around the country. Many of us spent some days in Manchester recently, and we have seen some of the big auditing companies with big bases there, in the North. The market therefore has the ability to work quite openly and quite nationally.

There is the ability to consider any representations from the authority on the proposed appointment. That is subject to the provisions in subsection (5) to deal with the need for a more urgent appointment, and we will discuss that in more detail on amendment 117, which the hon. Member for Corby will come to next. Even so, if there is a difference of 10% or more, it is not right that the Government should foot the bill for that difference, given that the authority failed to make the appointment in the first place.

With those reassurances, and in light of the new clause allowing for sector-led procurement arrangements, I hope the hon. Member for Corby will withdraw the amendment.

Andy Sawford (Labour, Corby)

I thank the Minister for his response. We have had a lively debate, and some of his assurances are welcome. It is good to hear, for example, that he envisages few, if any, circumstances in which the Secretary of State will use this default power. I suggest, therefore, that it is well worth the Government taking on any risk that may be associated with the amendment, relative to the risk my hon. Friends have rightly said may be posed to authorities that find they are not well served by the market.

My hon. Friends have made some very insightful remarks, but we have also cited evidence, from the very companies that will provide these services, that the market may not operate effectively. The Minister was not persuaded by my earlier submissions of evidence from various organisations, but perhaps he will think again when he hears the view of Sarah Howard, of Grant Thornton, who told the ad hoc Draft Local Audit Bill Committee:

“there will be pressure on fees in the absence of the large volume contracts and the huge discounts”

they are currently able to offer. She argued that was due to the loss of efficiencies in procurement costs, increases in tendering costs and the loss of the Audit Commission’s indemnity function. Indeed, the Government’s own impact assessment highlights 14 potential drivers of local bodies’ audit fees, some of which could clearly act as upward pressures. I hope, therefore, that the Minister will acknowledge that there are very real concerns about the issue.

I think the right hon. Member for Hazel Grove made his ideological point about how the market may operate for debating purposes, rather than out of a sincere view that I was saying the proposed power should be a general power for all markets. I hope he will accept that we are talking about a new market and a new set of arrangements.

Brandon Lewis (Conservative, Great Yarmouth)

I assume the hon. Gentleman will acknowledge that—as we discussed last week—this market has, to an extent, been operating for some time, because the Audit Commission has been subcontracting out to the private sector for a considerable period.

Andy Sawford (Labour, Corby)

The Minister reinforces the point about how the Audit Commission previously operated. As was said in the evidence, it can mitigate the risk to authorities—some authorities might find the price offered to them is way wide of the average—because it balances out the cost to authorities across the country, and recognises that there are some authorities where it is far more profitable for audit firms to undertake the audit, and others where it is less so. Through the joint procurement that the Audit Commission carried out in its past life, and in the 2011-12 tendering exercise, it was able to smooth that out across the country.

The hon. Member for Burton referred to the Audit Commission operating in London. I hope he accepts that the point my hon. Friends are making is that we are entering a new world in these arrangements. The Audit Commission previously carried out a central procurement. A joint procurement option might indeed contain an element of smoothing and, of course, some cost reduction in, for example, procurement costs. One of the drivers of having a national procurement offer is the issue that many authorities may be caught by EU tendering rules, which will increase the costs, and of course the costs of appointing the independent audit panels envisaged in the Bill.

Andrew Griffiths (Conservative, Burton)

In my intervention, I was referring to the specific point made by the hon. Member for North Tyneside about local authorities in the north having to pay hotel bills and expenses for auditors to travel from the south. The hon. Gentleman will be aware that there are auditors all over the country and many fine firms doing a great job in the north.

Andy Sawford (Labour, Corby)

I thank the hon. Gentleman for his intervention. Clearly, there is a concentration of auditors in London, as he rightly pointed out in his earlier intervention. He rightly made that point in relation to how the Audit Commission currently operates. I have evidence from organisations. For instance, Mazars stated:

“In our opinion, competition is unlikely to result in an overall reduction in fees. Firms would ‘cherry pick’ and ‘low ball’ to win large audits to obtain critical mass in the market place eg London Boroughs, Counties and Unitary authorities. Some authorities, particularly small districts...and those in geographically remote places, may have difficulty in appointing an auditor.”

That evidence is from an organisation that well understands the marketplace, and, indeed, would see the proposals as being attractive to the world of audit in terms of opening up the competition, but it reflects a real concern that was also expressed by other firms.

Andrew Stunell (Liberal Democrat, Hazel Grove)

The hon. Gentleman is making an interesting point. If large audit firms say that they would prefer to see the current system maintained and large audit contracts on offer, one might have reason to suppose that that was a teeny bit self-serving. Does he have evidence from smaller accountancy firms, perhaps from the provinces, that says they do not see that as a major barrier to their entering the market and winning contracts?

Andy Sawford (Labour, Corby)

I respectfully say that if the right hon. Gentleman looks at the evidence to the ad hoc Committee, and indeed the information contained in the Communities and Local Government Committee report into the Government’s planned new audit arrangements, he will see considerable concern about the high barriers to entry in this marketplace, particularly for smaller firms. Indeed, we will turn to those in subsequent groups on, for example, suitably qualified auditors and the wider scope of public audit, and see that there are significant concerns about the opportunity for smaller firms to come into this marketplace, because the costs of developing and submitting a bid, particularly if they go through EU procurement rules, might be prohibitive. We spoke about that in our first sitting, and I am sure the right hon. Gentleman was listening intently, as he is now.

On the remarks that the Minister made about the likelihood of using the power, he suggested that it is a misrepresentation to say the Government’s view is that they would prefer authorities to appoint independently. I suggest he look at the record where he makes it very clear that that is the Government’s preferred option. That is not a point of debate here. We are not arguing about whether authorities should be part of a national procurement body or whether one should be available; we welcome the way in which the Government have introduced it. However, if local authorities appoint independently, they may find themselves paying a premium because of the type of authority they are or because the market does not function effectively, and for that reason they may fail to appoint a local auditor. If the Secretary of State then imposes an auditor on them at an even greater premium, they will lose again. This issue relates to the Public Accounts Committee’s concern about the financial sustainability of local authorities. It identified that smaller local authorities in particular are at risk of simply not being able to make their finances add up.

Brandon Lewis (Conservative, Great Yarmouth)

I rise only to clarify that we are not saying that every local authority must procure an auditor. The Government want to give them the choice. The Government see the logic of having a sector-led procurement body, which is why we are facilitating one. I suspect that most district councils will want to do it that way, and I can see the logic of that. The difference between us and the Opposition is that we want to give local authorities the power to make the choice; we do not want it to be set upon them from the centre.

Andy Sawford (Labour, Corby)

It is clear that the wilful misrepresentation is on the part of the Minister. He knows that Opposition Members did not vote against the Bill on Second Reading and have not tabled amendments that would prevent local authorities from establishing an independent auditor panel and making use of the opportunity for independent audit that is in the Bill. At no time during this debate will we seek to prevent local authorities from making the choice to procure independently. Indeed, we recognise that larger authorities in particular, which are at the very heart of this debate, may find that to be the most attractive way of finding the best provider at the best price. I hope the Minister will correct his mischaracterisation of our position on the record.

Brandon Lewis (Conservative, Great Yarmouth)

I just clarify again that I do not doubt the hon. Gentleman’s position. We all heard what he said last week. The point I am making is not about the Opposition’s position. However, last week they made the case that there should be a Government-set sector-led body, which we are against because we think it should be a choice for the sector. I want to clarify our position. We do not want to force local authorities to do it themselves, and we are not begrudgingly allowing them to have a sector-led body. We want to let the sector have the choice. It wants to design a sector-led body, and we have facilitated that. My point is about the representation that the Opposition made of the Government’s position, not their own.

Andy Sawford (Labour, Corby)

The Minister has helpfully built on the remarks he made in previous sittings. It is encouraging to local authorities that want the opportunity to opt in to joint arrangements that he is supportive of them. Our earlier amendments on this point, which we are not debating now, were designed to ensure that there is enthusiasm for the scheme and that it is sector-led.

These amendments concern authorities that do not opt in to the national procurement arrangement, but procure independently. The Minister, in our view, has not given adequate assurance that he understands the range of views of those who think the market may not operate for many authorities. I hope that he and the right hon. Member for Hazel Grove, who sought further evidence, will look at the evidence published in the ad hoc Committee’s report. I draw to their attention the additional papers, which are available from the Vote Office, of written evidence submitted to the ad hoc Committee. I do not have them in front of me, but there are two additional papers of written evidence that contain ample evidence to justify our concern that some authorities will find that they pay a significant financial penalty from these arrangements because the market will not operate effectively.

I regret that the Minister will not accept our two simple amendments on that point, but I hope he will give further consideration to this issue before Report. Will he provide further reassurance, give a greater assessment of his view that the market will operate effectively for even smaller authorities, or tell the Committee of any other ways the Government seek to mitigate the risk? I look forward to seeing that further consideration. I beg to ask leave to withdraw the amendment.

Andy Sawford (Labour, Corby)

I beg to move amendment 117, in clause 12, page 9, line 20, leave out

‘the Secretary of State thinks it is likely that’.

The amendment is about the failure to appoint a local auditor. Subsection (5) says that

“the Secretary of State may give a direction or make an appointment under subsection (2) without having complied with subsection (4) if the Secretary of State thinks it is likely that a local auditor would have to exercise a function under this Act in relation to a relevant authority within the period of 60 days beginning with the day on which the direction is given or the appointment is made.”

We understand the reason for the measure, which is that the Government might need a power to trigger the provision to appoint a local auditor if a local authority is going to fail to do so. Our argument, which we will make again about other aspects of the Bill, is that the wording is imprecise and leaves the door wide open for any future Secretary of State to make a subjective judgment on what the Bill is intended to do. It also gives the Secretary of State a wider power to make a judgment that may not be justified on the balance of evidence—they will be able to appoint an auditor of a local authority just because they choose to. We may find ourselves passing legislation that will leave it entirely to the whim of a future Secretary of State—perhaps depending on what they had for breakfast that morning—as to whether they choose to exercise the power.

The amendment would tidy the provision up and ensure that a more objective test was applied. It would change subsection (5) to say that the Secretary of State might give a direction subject to the point about subsections (2) and (4) “if a local auditor would have to exercise a function under this Act in relation to a relevant authority within the period of 60 days beginning with the day on which the direction is given or the appointment is made.” Clearly, that decision will have to be made by the Secretary of State based on evidence, but I would argue that in removing the rather subjective language the test will be greater, stronger and based on the recognised principle of objectivity, rather than the current wording which leaves it to whether

“the Secretary of State thinks it is likely that”.

What is the test of how likely it may be? Surely, before using the powers, the Secretary of State should be certain that a relevant authority will fail to meet its duties to appoint an auditor and that it is therefore necessary to use the back-stop powers. They should not just think “it is likely”. That does not seem appropriate language to use.

I hope the Minister will recognise that the amendment is sensible and would tidy up the provision, and that it will make it clear that we intend the provision to be based on proper evidence and certainty that the powers are necessary.

Chris Williamson (Labour, Derby North)

I again support my hon. Friend’s amendment. It clearly cannot be right to give the Secretary of State—whoever they might be—this kind of carte blanche can it? It is astonishing and I am not sure that there is any precedent. As my hon. Friend has pointed out, there must be some sort of objective test. One wonders where such a provision will lead—is it a portent of things to come? In future, will we just give the Secretary of State carte blanche to do whatever they like in whatever area they happen to be dealing? I hope that the Minister will think carefully, listen to the wise counsel of my hon. Friend and ensure that an objective test is applied rather than the subjective one that is currently in the Bill. It would seem that, as it stands, the Bill would lead to all sorts of accusations of unfairness being levelled at the Secretary of State.

It was thought to be in everybody’s interest, certainly in the interests of good governance, to have some proper guidelines in place, so that the Secretary of State acts within certain parameters. Otherwise, it would be a free-for-all, to do what they liked, as my hon. Friend said, depending on what they had had for breakfast, whether they had had an argument the night before, whether they had had a bad day in the Chamber, or had been stopped for speeding and thought they would take it out on that local authority. It cannot be right that the Secretary of State can decide on a whim, because of a bad day, to apply these powers as he pleases.

Andrew Stunell (Liberal Democrat, Hazel Grove)

I wonder whether, from his experience on the Front Bench, that is how he found a Labour Administration proceeded.

Chris Williamson (Labour, Derby North)

As the right hon. Gentleman will know, I did not have the privilege of being on the Front Bench when Labour was in government. I hope that I will have that privilege in a little under 18 months when Labour storms back to power at the general election, following the disastrous five years of the Tory-Lib Dem coalition.

Andy Sawford (Labour, Corby)

On the interesting point made by the right hon. Member for Hazel Grove, does my hon. Friend agree that it is right that, whichever party is in power and whichever person sits in the office of the Secretary of State, the country is not subject to their whims from one day to the next? That Secretary of State and Government should govern according to reasonably constructed Acts of Parliament.

Chris Williamson (Labour, Derby North)

That is absolutely right and is the point I was about to make. If the legislation proposed in this clause is anything to go by, the present Administration of the Tory-Liberal Democrat coalition would not deserve to continue in government, as they would introduce wide-ranging sweeping powers for the Secretary of State. Those powers would be available to any Secretary of State: Labour, Conservative or, God forbid, Liberal Democrat.

As my hon. Friend cogently set out, we are arguing for an objective criterion. I do not understand why Members on the Government Benches are resisting that. If they are resisting the reasonable suggestion that a Secretary of State should not be given sweeping powers and should apply the powers within an objective criterion, I despair of them.

James Morris (Conservative, Halesowen and Rowley Regis)

Is the hon. Gentleman not over-egging his argument? The wording

“thinks it is likely that a local auditor”

does not give the Secretary of State carte blanche to make a decision based on what he had for breakfast. That wording highlights the fact that the Secretary of State would need to anticipate the potential failure of a local authority to appoint its auditor. It is not purely subjective language; it is actually quite useful language for the sort of decision that the Secretary of State will have to make.

I am interested to hear what the hon. Gentleman thinks the objective criterion or test that he talks about would be. He has failed to describe it yet, but I am sure he will.

Chris Williamson (Labour, Derby North)

I disagree with the hon. Gentleman that the drafting is helpful in the words used. It does give the Secretary of State sweeping powers. It simply says,

“if the Secretary of State thinks it is likely that a local auditor”.

The hon. Gentleman is suggesting that honourable and reasonable motives would be applied by any Secretary of State. One would hope that would be the case, and there is no reason to doubt that the present incumbent would act reasonably. The problem is, of course, that because it is so badly worded it gives carte blanche. It would be sensible to have an objective criterion set out. I do not necessarily want to rehearse what that objective criterion would be. I can hear the hon. Gentleman scoffing. I do not think it is reasonable or sensible to set out that detail, but it is reasonable to argue for a reasonable, objective criterion to be applied, to ensure that in future the Secretary of State does not misuse the power that will be given to him if the wording of the provision is not amended.

Brandon Lewis (Conservative, Great Yarmouth)

I appreciate the passion and strength of feeling that the hon. Member for Derby North has shown in supporting Opposition amendments over the past week. I am delighted that on a regular basis I have been able to convince him and the Opposition Front-Bench team to withdraw amendments. I hope that I will be able to do that now and pacify him yet again; if not, I have no doubt that the strong feelings that he expresses at every single opportunity about each amendment will make the Opposition Front-Bench team more likely to press amendments to a vote to back up his passion.

Amendment 117 would modify the Secretary of State’s power to appoint or direct an appointment of an auditor to an authority that has failed to make an appointment. The Bill currently enables the Secretary of State to do so without complying with the requirement to give 28 days’ notice to the authority or to consider any representations, where he thinks it is likely that the auditor would have to exercise a function more urgently. The amendment would remove the words

“the Secretary of State thinks it is likely that”

from the clause, with regard to situations in which the auditor would have to exercise functions urgently. However, that reference is necessary. There is no single objective test of whether an auditor would have to exercise a function. Without a reference in the Bill to the Secretary of State’s view, it would not be clear when he can and cannot exercise such a power.

Ultimately, it will be for the auditor appointed for the relevant period to decide whether to exercise any of his functions under the Act, but without that auditor in place it would clearly not be possible to rely on his or her view for that purpose. In coming to a view on the matter, the Secretary of State might consider, for example, any matters brought to his attention by a member of the public or the auditor appointed for the previous year.

I should also reassure the hon. Member for Corby that the Secretary of State must act reasonably in coming to a view. In a situation where an authority thought he had clearly not done so, the decision would, in line with normal practice, be subject to judicial review request. Finally, I should also remind the hon. Gentleman that this power will be used extremely rarely, in cases where an authority has failed to make an appointment itself.

With those reassurances and clarifications, I hope that the hon. Gentleman is willing to withdraw the amendment.

Andy Sawford (Labour, Corby)

I thank the Minister for his response. He has reassured me in some ways. The important point he makes is that the Secretary of State should act reasonably and that a failure to do so would mean his decision was subject to judicial review. It was worth the Minister reminding the Committee of that.

I would say, however, that it is possible to define a more objective trigger for the Secretary of State to use these powers. My hon. Friend the Member for Derby North was right to speak strongly about our concerns about the level of subjectivity that is implied in the clause and indeed in many other provisions in the Bill. To give an example of an objective criterion, a trigger could be that a local authority had failed to notify the Secretary of State that it had become a member of a joint procurement body and had failed to appoint an independent auditor panel to carry out the procurement exercise on its behalf. It would be clear to see by any objective measure that, as it had failed to follow either path open to it, it was also likely to have failed to appoint the relevant auditor.

There could be other relevant circumstances, but they would be demonstrable. For example, the Secretary of State might receive evidence from a local authority that its independent procurement panel had been unable to attract any bidders, or certainly any that met the necessary criteria to carry out the audit work; it might therefore notify the Secretary of State that it needed to call on him to use his reserve power. However, I remind the Minister of the point made by my hon. Friend the Member for Derby North; again, there are other references in the Bill to

“the Secretary of State thinks it is likely that”.

Clear evidence will, in all likelihood, be available to demonstrate why the action is necessary. A simpler and more definitive form of words would be more appropriate than leaving it to the Secretary of State to think “it is likely that”.

The Minister encourages me to test the Committee’s opinion and urges me to listen to my hon. Friend’s comments. I assure him that my hon. Friend and I are one on the matter and have spoken about our concerns regarding the Secretary of State’s powers under the Bill. We will have another go at persuading the Minister when there is a second reference in the Bill to

“the Secretary of State thinks it is likely that”.

I hope that we will be able to convince the Minister of the merits of our argument at that point and persuade the Government to recognise that the phrase is not good language to use in the Bill. I urge my hon. Friend the Member for Derby North to support me in making the case again, because we think that the point is important. For now, I beg to ask leave to withdraw the amendment.

Clause 14 - Limitation of local auditor’s liability

Andy Sawford (Labour, Corby)

I beg to move amendment 118, in clause 14, page 10, line 46, at end add—

‘(8) The provisions of this section shall remain in force until five years after commencement and shall then expire unless continued in force by an order under subsection (9).

(9) The Secretary of State may by order made by statutory instrument provide—

(a) that all or any of those provisions which are in force shall continue in force for a period not exceeding 12 months from the coming into operation of the order; or

(b) that all or any of those provisions which are for the time being in force shall cease to be in force.

(10) No order shall be made under subsection (9) unless a draft of the order has been laid before and approved by a resolution of both Houses of Parliament.’.

I hope for some illumination from the Minister on the reasons behind the clause and a greater understanding of why it is needed. I also hope to find out how the audit market will operate for relevant authorities in the context of this Bill and in relation to the Companies Act 2006. I should warn my hon. Friends who might not have had their strong coffee this morning that the point is rather technical, but it is important, because we are uncertain about the effect of the clause.

I have read the Lords stages of the Bill. The Government’s argument, as I understand it, is that it is reasonable to allow auditors and the body they are auditing to make agreements limiting the auditors’ liability, and that that is in line with the Companies Act 2006 and arrangements in the private sector. Under the Companies Act, such limitations must be fair and reasonable.

Under clause 14(6), the Secretary of State may make regulations to

“make provision requiring a relevant authority that has entered into a liability limitation agreement to disclose such information about the agreement”.

He may also, under earlier subsections, make regulations about what the limited liability agreement may cover.

We have two concerns. The first is whether such agreements are necessary, which leads us to our sunset clause, which would require a review of the provision in five years. The second is about the effect of the clause in practice. How will such agreements emerge between auditors and relevant authorities?

The Government’s impact assessment and other documents show that the Audit Commission currently provides an indemnity to audit firms for certain aspects of their audit work, which covers irrecoverable legal costs. However, we know that the indemnity has been used only twice in the past five years. Why does the Secretary of State envisage that such a substantial clause is necessary in the Bill, given recent experience?

The Minister may be able to enlighten us. It would be interesting and helpful to know the amounts involved on the two occasions when the Audit Commission used the indemnity. Such questions were aired in the House of Lords, but answers were not forthcoming at the time. It would be helpful to understand what amounts we are talking about.

Critically, what we want to understand in the interests of the general public is how this will work for the relevant authorities. What benefits will come from these limited liability arrangements, which relieve auditors of their liability in respect of negligence, default or breach of trust? I refer back to the point made by my hon. Friend the Member for Derby North about cowboy auditors. As he said, of course we hope that the market will work effectively and that independent audit panels will be able to recommend to local authorities the appointment of audit firms that will be able to conduct effective independent audits, following the principles of sound public audit, and carry out that role in the way we would all hope.

Our concern, though, is if the market does not develop effectively and authorities around the country are not attractive to audit firms that make bids to provide audit services. There could then be a loophole whereby substandard auditing begins to take place around the country. None of us would want that to happen and I do not believe that that is in any way the Government’s intention. However, I hope that the Minister understands that we see that as a potential risk in terms of safeguarding the public’s interest. Agreements could be made that allow audit firms to provide an audit that is not effective and does not, for example, identify issues of maladministration or fraud, which we all hope would be properly identified in an audit report, but those firms would be indemnified against that. There are provisions on the matter later in the Bill, but does the Minister understand our concern? Perhaps he might reassure us that the provisions in the clause allowing the Secretary of State to introduce regulations about what can be within a limited liability agreement will safeguard against the prospect of substandard auditing.

Andrew Griffiths (Conservative, Burton)

Would the hon. Gentleman clarify the wording that he used? He talked about a situation where an audit took place that did not pick up fraud being undertaken in a local authority. Surely by its very nature, that would be fraudulent on behalf of the auditors. Can he be clear exactly what he is alleging could take place?

Andy Sawford (Labour, Corby)

I thank the hon. Gentleman for his intervention. I hope that he understands that we are not seeking to make a controversial point. Indeed, we hope for reassurances. The reality could be that the limited liability agreement may allow an audit firm to conduct half a job. If I could test your patience, Mr Weir, with my friend the painter and decorator, which I hope will illustrate the point effectively, he always said to me: “I could charge you twice the amount and give you two good coats of paint, or I could come in cheap and give you one coat of cheap paint”.

Andrew Griffiths (Conservative, Burton)

Will the hon. Gentleman give way?

Andy Sawford (Labour, Corby)

Let me finish the point. If the way that the market operates is such that companies are low-balling—the language that Mazars used—their bids to some authorities and using the limited liability agreements, they will provide some protection for the auditor if they miss something. We are not talking about motives. I want to be absolutely clear on that to the hon. Member for Burton. We are confident that the audit firms, which are part of national codes of practice, the auditors who are professionally qualified and the independent audit panels will seek to do the best job. However, we ask why anyone would think that the limited liability agreements are necessary if they are not to protect the audit firm in a situation where it has missed something, the audit has gone wrong and it finds that it is subject to legal challenge.

We argue that legal challenge is right, which is the point that the hon. Gentleman makes, that a relevant authority should be able to do that if the audit has not been carried out effectively and that the audit company should be subject to that process, rather than deals being signed around the country that limit its liability. Public audit is so important that we all have to be confident that it will be carried out in the fullest, most proper way and to the highest professional standards. That is why we do not necessarily consider—although we want to hear from the Minister— that limited liability agreements should be allowed.

Andrew Griffiths (Conservative, Burton)

The hon. Gentleman is being generous in giving way. The argument that he makes about his decorator is entertaining, but surely he would accept that the difference between his decorator and an auditor is that an auditor has a fiduciary duty—a legal obligation —to seek such things out and not turn a blind eye or ignore them. When the hon. Gentleman makes an argument about fraud occurring in local authorities and being missed, that fiduciary duty would surely lead any auditor to do their job to the fullest extent.

Andy Sawford (Labour, Corby)

The hon. Gentleman makes an important point. I would argue that the fiduciary duty is such that we would not want that to be subject to some kind of exemption through a limited liability agreement, and that we would want it to apply properly. Why is the limited liability agreement necessary? Given that it is so rarely used in the private sector under the Companies Act, given that most of the providers are limited liability partnerships in themselves anyway—thereby preventing personal liability for the auditors—and given that we all want to see high standards in operation, why do the Government think that it is necessary to introduce a substantial clause that would allow local authorities to limit liabilities by agreements with auditors? That is precisely the point.

Duncan Hames (Liberal Democrat, Chippenham)

If the hon. Gentleman is keen to be clear that he is not questioning the motives of auditors, perhaps he would like to withdraw the term “cowboy”, which was introduced by the hon. Member for Derby North, and which he has furthered in the debate. These are professional people upholding professional standards, and it does his amendment no service for him to wallow in the name calling that his colleague introduced.

Andy Sawford (Labour, Corby)

I am sure that the hon. Gentleman’s intervention was intended to be helpful in furthering the debate, rather than it being some cheap political point—I am sure he is better than that. On cowboy builders, my hon. Friend the Member for Derby North and I join the hon. Gentleman in hoping that the market will operate effectively and that audit providers will operate to the highest standards. We would question, therefore, why a limited liability agreement is needed. If, as we all hope, there will be no cowboy operators and the Minister’s intention is not to allow for auditors to sign up to deals with local authorities that limit their legal obligations in future and limit the requirement on them to carry out the role according to the highest standards, we would question why the clause is necessary. Given the confidence of the hon. Member for Chippenham in the market, perhaps he will join us in questioning the Government on why clause 14 is needed, and if there is a Division on the proposal, I hope that we can count on his support.

The hon. Gentleman may feel unable to support us—I have noted his considerable finesse, as his colleagues do on the Government Benches, in not voting for policies that he supports—but perhaps he will go so far as to vote for the sunset clause that would require a review of the provision in five years. That seems a perfectly reasonable back-stop to ensure that, if the provision is not needed, it falls out of use, and that if it is needed, there is a review of how the clause is being used. We all want to ensure that it is being used to benefit the process of public audit and the general public.

I can see that there could be some beneficial use, which perhaps the Minister will set out for us. For example, we talked about barriers to entry in the market. Given the assurance of the framework in which auditors previously provided services to relevant authorities of the Audit Commission, and given that there have been two cases in which that assurance has been used in a helpful way, I assume, by auditors—I hope the Minister will tell us more about those two cases—this could be about removing barriers to entry, in which case, we would support it. It could even be about vexatious litigation, although I cannot see what party would bring forward such litigation because, under the clause as drafted, the limited liability agreement must be made properly between the relevant authority and the auditors. Therefore, I am unsure as to what party would challenge the way that the auditor carries out his role.

If reasonable explanations and clear evidence are provided and if we can get assurances about the way the Government will seek to limit the use of liability limitation agreements, that will be incredibly helpful. I hope that, on this occasion, however, the Minister will—I know that Governments tend not to like sunset clauses, but there appears to be, unless he can tell us differently, little evidence that the measure is necessary—feel confident enough to allow a sunset clause to be included in the Bill, so that the specific provisions in the clause can be renewed by statutory instrument in five years’ time if he is right that the measure is needed. If it is not needed, as we suspect may be the case, it will fall out of use.

Chris Williamson (Labour, Derby North)

When the Minister responds, will he acknowledge that the clause, in my understanding, shows that the Government recognise that the market does not exist in some parts of the country? The clause is a means of stimulating the market. If that is the rationale behind it, it is important that he makes that clear as it suggests that a sunset clause would be appropriate in order to review the situation at some point and to take stock of how the provision is working.

Various aspersions have been cast on Opposition Members by some Government Members about our view of the present audit market. My hon. Friend the Member for Corby and I have corrected the record by saying that we are not casting any doubt on the existing professional auditing companies. Our concern is that the clause could result in ill-equipped companies taking on such business. It is not a question of turning a blind eye, as suggested by one Government Member earlier, but rather that, with the best will in the world, if an auditing company is inexperienced in auditing local authorities, that lack of expertise could result not in corners being cut or blind eyes being turned, but things simply being missed through lack of experience. We would not want to see an easyJet-style auditing system being introduced into the market. It would serve no purpose and would certainly not serve the council tax payers affected by such a company coming in to audit a local authority.

I hope that the Minister will clarify those points and will acknowledge that the recognition that the market does not exist in some parts of the country is the rationale behind the clause and that the clause seeks to stimulate the market. If that is not the reason, will he explain the clause’s purpose?

Brandon Lewis (Conservative, Great Yarmouth)

We debated under the previous clause—I am sure that the hon. Member for Derby North was listening, but he can always check Hansard—how the audit market is not restricted to the specific villages and towns where such companies work and how it is slightly more national than that and has been for some considerable time.

Amendment 118 would introduce a sunset clause to the provisions on liability limitation agreements. From what Members have said, I expect that the amendment builds on discussions in the other place, where if memory serves Lord Beecham spoke at length about such agreements. He raised questions about whether such agreements in the companies sector were in fact having the desired policy effect, which is to reduce fees and help open up the market. He also pointed out the very limited take-up of such agreements by companies.

I understand that this amendment might be motivated by a desire to assess the impact and desirability of such agreements, and to take a view on clause 14 in that light, so it might help if I begin by clarifying the purpose and effect of clause 14, as Members have asked me to. I should explain to the Committee that it is not the effect or policy purpose of clause 14 to introduce or allow liability limitation agreements. It is already possible, quite aside from the Bill, for two parties to agree to limit their respective liability. The purpose of the clause, as with similar provisions in the Companies Act 2006, is to prevent any such agreements from unreasonably limiting auditors’ liability. It requires any liability limitation agreements to comply with regulations made by the Secretary of State. For example, as in the companies sector, we intend to provide that any agreement will be effective only as far as it is fair and reasonable.

Removing the clause, either now or through a proposed sunset provision, would do nothing to prevent an authority from entering into such an agreement with an auditor and would in fact mean that there were no safeguards or limits on such an agreement. Removing the clause would leave no protection on the extent to which auditors could limit their liability. I do not think for one moment that that is the intention of the hon. Member for Corby. Although it is reasonable for auditors to try to ensure that they are not held liable for losses beyond those for which they are directly responsible, I think we all agree that they should certainly be held responsible for any damages or liabilities for which they are properly responsible.

Andy Sawford (Labour, Corby)

My question is genuine, having listened to what the Minister has said. He suggested that if we removed clause 14, there would be no limit on the ability of an auditor to agree the limitation of liability. Could he tell the Committee how that would be lawful? The alternative interpretation is that it is clearly not lawful for an auditor to limit liability, but perhaps the Minister is saying that under the Companies Act, or some other provision, there would be under no restrictions on that. I think that is what the Minister is saying.

Brandon Lewis (Conservative, Great Yarmouth)

In effect, yes. The power is there for the two clients to make that kind of agreement, but this provision ensures that it stays within reasonable bounds—I hope to cover that in more detail in a second. The clause seeks to uphold the principle rather than undermine it, and therefore aims to achieve exactly what the hon. Gentleman is looking to achieve, from what he has said, and also what he wants to see in the market.

I also remind the Committee that it would be up to individual authorities to decide whether to enter into a limited liability agreement. They cannot be forced to do so, either by the Government or an audit firm. The Bill already requires authorities to seek advice from an independent auditor panel before entering into a liability limitation agreement. I hope the hon. Gentleman will be happy with those clarifications and feel able to withdraw the amendment.

Andy Sawford (Labour, Corby)

I thank the Minister for his response. We will withdraw the amendment at this point, although we consider a sunset clause to be a reasonable proposal and we might seek to raise the matter again on Report. I often ask the Minister to agree to undertake homework for the Committee. What I will do on this occasion is go away and seek to understand the point he makes, because if the sunset clause were adopted and the removal of limitations in five years’ time meant that we suddenly found there were no limitations on liability agreements in year 6—that is, because they were lawful—we would achieve precisely the reverse of what I wanted.

Brandon Lewis (Conservative, Great Yarmouth)

I understand the hon. Gentleman’s point. One thing I did not touch on was the two cases that he raised. If he will bear with me, I, too, will do some homework, in the spirit of joint ventures. We will try to get some information about the two cases he raised and pass it on to him.

Andy Sawford (Labour, Corby)

I thank the Minister for that; it would be very helpful in understanding how and why this provision might be necessary in future. The point about the proposed five-year sunset provision is that if the clause were not used within five years, we might reasonably presume that it might not be used in future, but if in year 6 we found that we actually wanted these provisions in place, that would concern us all. However, on the basis of what has been a most helpful reply from the Minister, I beg to ask leave to withdraw the amendment.

Clause 15 - Further provisions about liability limitation agreements

Andy Sawford (Labour, Corby)

I beg to move amendment 119, in clause 15, page 11, line 20, leave out ‘the Mayor of London and’.

Amendment 18 helps to illustrate why we have tabled amendment 119 and why we are questioning whether the provision in question is necessary. To remind hon. Members, these amendments concern further provisions about liability limitation agreements in clause 15. Subsection (6) says:

“A decision to enter into a liability limitation agreement between a local auditor and the Greater London Authority must be taken by the Mayor of London and the London Assembly acting jointly on behalf of the Authority.”

We want to understand from the Minister why a different principle will operate in the executive role of the Mayor of London, in relation to the London assembly, from that which will apply in executive arrangements in local authorities or, perhaps, other relevant authorities. Let us take, for example, the executive and directly elected mayor of Leicester. We believe that the power around many of the Bill’s provisions—liability limitation agreements, as in this case, or independent appointments—rightly rests with the full council of the local authority, rather than the leader or the executive. We would argue that that is the most appropriate principle and question why an exception is being made in the case of the Greater London authority. The power in question could rightly be exercised by the London Assembly, given the importance of independent probity, and so on, in the appointment of auditors and the limitation of liability.

Let us reflect on the arrangements in London. The strong mayoral model envisaged has the support of all parties in the House, although at times it has been much debated. A general view of strong city leadership, as demonstrated in our capital city by the incumbents of that office, would be that the model works best when the leader can exercise their powers in a way that we all recognise as appropriate for a big city. In the case of the two holders of the office to date, the very nature of that strong leadership model is a form of idiosyncratic leadership. In some ways, the London assembly is a relatively light check on the powers of the elected Mayor of London. It would be inappropriate for that idiosyncratic strong leader to be able to strongly influence what could be contained in a liability limitation agreement about the operation of the Greater London authority. That is an example of where the London assembly can play an important role, so we question the need for this clause.

Andrew Griffiths (Conservative, Burton)

The phrase that the hon. Gentleman just used in referring to the Mayor of London was “idiosyncratic strong leader”. Is there not a danger that he is seeking to legislate around an individual rather than an issue?

Andy Sawford (Labour, Corby)

I am sure the hon. Gentleman is trying to be helpful. The point I am trying to make, which I am sure all Members will understand, is that in exercising the power to champion economic development in London, for example, the mayoral model and this city are best served by a very strong leader. That comes in all forms, which is why I used the term “idiosyncratic”. That is not to say that there is one type of person. Indeed, the two holders of the office to date are very different characters.

In the case of a limited liability agreement, my argument is that we would not necessarily see the strength of leadership that rests in an individual for many of the Mayor of London’s functions as something desirable when it comes to the power being exercised by the London Assembly, which has a fairly limited role. We think the proposal should be in line with all the other provisions in the Bill, including those for the elected mayor of North Tyneside. That could be consistent with Government amendment 18, which says:

“A decision to enter into a liability limitation agreement between a local auditor and a parish meeting must be taken by the parish meeting itself (and not by its chairman on behalf of the parish meeting).”

Brandon Lewis (Conservative, Great Yarmouth)

I am sure the hon. Gentleman would agree that there is a difference between a chairman of a parish meeting and a directly elected mayor such as the Mayor of London.

Andy Sawford (Labour, Corby)

We can debate the point. Clearly the scale of operation of the Greater London authority and that of a small parish council are incomparable. However, the Minister considers it is appropriate to move an amendment in this area—where we might be talking about a few thousand pounds, rather than many hundreds of millions of pounds of public money—to safeguard the power to enter into a liability limitation agreement. We should focus on what is at stake in the amendment. The specific power about a limited liability agreement should not be made by an individual, but by the wider body of which that individual is part. In this case, we argue that the London Assembly should play that role properly and effectively. That is not to say that there are many areas where we oppose the operation of the powers of the Greater London authority or the different balance of power that might exist between the Mayor and the London Assembly. We do not seek to open up those debates, but we hope the Minister will see the wisdom of our argument about London on this point and also the point about consistency with the rest of the Bill.

Brandon Lewis (Conservative, Great Yarmouth)

My point about parish meetings was about the direct democratic accountability of an elected mayor who is an executive of a local authority with executive arrangements. That is specifically covered in subsection (4). Amendment 119 would require that, in the case of the Greater London authority, any decision to enter into a limited liability agreement with the auditors should be made by the London assembly. As he says, the Bill currently requires such a decision to be made by the Mayor of London and the London Assembly acting jointly. Any decision to enter into a liability limitation agreement will be a part of the wider appointment of the auditor. The current requirement for a joint decision on a liability agreement mirrors the wider requirement, for consistency purposes—which I know the hon. Gentleman is keen on—that the appointment of the auditor should be made by the Mayor and London assembly acting jointly.

It is right that that is a joint decision, given the important role of the assembly in scrutinising the Mayor’s activities. It is also right, however, that the Mayor, as the elected and democratically accountable head of the Greater London authority, is part of that decision. As with all other authorities, the GLA will be required to have an independent auditor panel to oversee the appointment of the auditor. The panel will also advise the GLA on any proposal to enter into a liability limitation agreement. With these reassurances and clarifications, I hope that the hon. Member for Corby is willing to withdraw the amendment.

Andy Sawford (Labour, Corby)

The Minister has made two significant points. The first is about an emphasis on executive power and direct elections, which of course speaks to my argument that the mayor of North Tyneside in the constituency of my hon. Friend the Member for North Tyneside will not be able to exercise this particular executive power, whereas, by exception, the Mayor of London will.

I understand, of course, that there is a whole body of law on the operation of the Greater London authority, and the relative powers of the London assembly and the London Mayor. Can the Minister help us to understand the mechanics of how the power might operate in the GLA? For example, the word “joint” does not give us many clues. Unless we understand it in relation to other legislation or examples of case studies, it does not help us to understand quite how the provision will work if there is a difference of view.

For example, the London assembly could have a difference of view about the content of the limited liability agreement from the Mayor of London. Given that we are talking about a very large public body, it could ultimately be of some significance to the public in London. How would any dispute between the Mayor of London and the London assembly be negotiated within the arrangements that are in place in the London assembly? I hope there are ways—by custom and practice or by standing orders—in which the London assembly and the Mayor of London could come to some agreement.

Where there is a premium on the public understanding what the relative powers are in relation to public money, such as the setting of the London assembly’s budget, I hope that there is a clearly defined and easily understandable provision on the relative powers of the London assembly and the Mayor. For example, there is a requirement for a two-thirds majority in the London assembly to overturn the Mayor’s budget. Would a two-thirds majority be required in all cases? The hon. Member for Burton might have a view on the mechanics.

Andrew Griffiths (Conservative, Burton)

I am intrigued by the hon. Gentleman’s analogy between the London assembly and North Tyneside. The real difference is that in North Tyneside many of the councillors are part time and do other jobs. They are not full-time councillors in many cases, yet in the London assembly the vast majority are full-time assembly members, earning £54,000 a year. If the assembly cannot hold the Mayor to account on important issues such as this, its members should hand their salaries back.

Andy Sawford (Labour, Corby)

The point the hon. Gentleman is making is unclear to me, but what he seems to be saying is helpful. The Bill clearly places a substantial onus on the often part-time members of North Tyneside council—as well as on the well-meaning and broadly effective, albeit part-time members of local authorities all around the country—to carry out their role in relation to their paid, full-time, executive mayor, whereas the onus placed on the well-paid members of the London assembly is not as great. The hon. Gentleman makes an important point, which supports our case for questioning why the balance of those roles and responsibilities should be different in the Greater London authority, where the members might indeed have more time, more expertise and, given their payment, certainly more expectation to carry out that role.

Returning to the point that I was making, will the Minister explain the mechanics of how the Greater London authority might resolve any conflict between the Mayor and the London assembly? That would be extremely helpful. It might simply be a case of pointing out what is already in legislation or in standing orders.

Brandon Lewis (Conservative, Great Yarmouth)

I will be happy to write to the hon. Gentleman in the next few days with further details.

Andy Sawford (Labour, Corby)

That would be helpful. If, for example, we were looking at a two-thirds majority arrangement, or a situation in which a simple majority of the assembly could overrule the view of the Mayor—or, indeed, if the Mayor’s wishes could overrule the assembly—it would be helpful to understand that, in the interests of the 7 million people who are served by the Greater London authority.

I am grateful to the Minister for his general assurances and also his specific assurance that he will let us have more information, and I beg to ask leave to withdraw the amendment.

Clause 16 - Resignation and removal of local auditor

Andy Sawford (Labour, Corby)

I beg to move amendment 120, in clause 16, page 11, line 24, after ‘may’, insert

‘after consultation with relevant authorities’.

Michael Weir (Scottish National Party, Angus)

With this it will be convenient to discuss the following:

Amendment 121, in clause 16, page 12, line 5, at end insert—

‘(f) the right of the local auditor to make representations to the authority’s audit panel, prior to being removed.’.

Amendment 122, in clause 16, page 12, leave out lines 10 to 15 and insert—

‘(5) The relevant authority shall be responsible for the replacement of a local auditor in accordance with the process set out in sections 7 and 8.’.

Clause stand part.

Andy Sawford (Labour, Corby)

I think this debate could be brief. There is a pattern forming, as we have tabled amendments to earlier provisions that were similar to amendment 120. Whenever we have seen the Secretary of State taking the power to make regulations in relation to the Bill’s operation, we have sought reassurances from the Minister that before those regulations are made there will be “consultation with relevant authorities”; the amendment would add that requirement to the clause. The Minister may suggest that that will happen, and that we do not need a reference to consultation in the Bill, but I hope he will understand why we feel the need to emphasise that there should be reasonable consultation about the regulations.

Our other amendments are designed to question the Secretary of State’s role as the default person to step in when there is a failure by a local authority to appoint an auditor or when an auditor resigns or is removed, which the clause specifically provides for. An auditor could resign for many reasons. For example, the auditor may be a small firm—we all hope small firms will be able to bid for this work—that finds it is unable to continue trading and operating as a provider of audit and so needs to resign its role as auditor to a local authority. We suggest to the Minister that in that sort of situation the responsibility for appointment should revert to the processes set out in the Bill—the appointment of an auditor through recommendations by the authority’s independent local audit panel, for example. If an auditor that is part of a national scheme resigns we might revert back to the national providers; the authority affected could say to them, “For whatever reason”—it may be that a company has ceased trading—“our auditor has resigned; we therefore look to you to work with us to make arrangements for a replacement.”

The argument could be made that, were an auditor to resign mid-audit or at a critical point just before the start of an audit, or if it had not been carrying out its role effectively—we all hope that that will not happen and have discussed the standards we hope auditors will work to—and resigned under a cloud, the Secretary of State might want some powers. We can see the validity of that argument, but would ask the Minister to consider whether amendments could be tabled, perhaps on Report, that allowed that to happen by exception rather than by default.

To allow us to probe that possibility, we tabled amendment 122, which would specifically remove the ability of the Secretary of State to appoint or direct the relevant authority to appoint, and would leave that power with the local authority. However, it may be that the Minister can suggest another, perhaps clearer way of achieving our objective of ensuring that powers are taken by the Secretary of State in extremis rather than as the general rule when there is a resignation or removal.

Brandon Lewis (Conservative, Great Yarmouth)

The amendments seek to make various changes to the provisions in the Bill regarding the resignation or removal of auditors. Amendment 120 would add a requirement for the Secretary of State to consult the relevant authority before making regulations about the resignation or removal of an auditor. Amendment 121 would enable those regulations to make provision about the right of an auditor to make representations to the authority’s audit panel before being removed.

On amendment 120, I am pleased to confirm to the Committee that we will shortly be consulting publicly on the relevant regulations, and I have already shared copies of the draft regulations with the Committee. We expect to publish the formal consultation document before Christmas.

On amendment 121, I reassure the Committee that the draft regulations deal with exactly the amendment’s subject matter; indeed it goes further than the amendment in providing for scrutiny of any proposed removal of the auditor. The draft regulations provide the auditor with the right to respond in writing to any proposal by an authority to remove them and require the authority to forward the auditor’s response to the independent audit panel.

Under the proposed regulations, the audit panel must take that response into account and advise the relevant authority on the proposal to remove the auditor. The authority must take into account that advice before making a removal decision. If the authority decides to proceed with the removal, it is required, under the draft regulations, to issue a public statement confirming that decision.

To ensure full transparency over the decision, that public statement will include a copy of the auditor’s response; a copy of the audit panel’s advice to the authority; and, if the authority has not followed that advice, the reasons why. In addition, the draft regulations provide the auditor with the right to attend and speak at any meeting of the authority that considers the proposal to remove the auditor.

Amendment 122 would remove the power enabling the Secretary of State to appoint, or direct the appointment of, an auditor by regulations. The amendment would replace the Secretary of State’s power with a provision that the authority shall be responsible for the replacement of their auditor. I agree with the hon. Member for Corby that, where an auditor resigns or is removed, it should be for the authority itself to appoint a replacement. The draft regulations therefore require that where an auditor resigns or is removed the authority must appoint a new auditor within three months of the previous auditor’s departure.

Subject to the outcome of the consultation on the draft regulations, the Government have no intention to make further regulations to enable the Secretary of State to override the authority’s decision and make an appointment for it. However, the provision has been included as a backstop measure, should further experience under local appointment suggest that it may be necessary in some cases for an auditor to be replaced sooner than the proposed three months.

In such cases, we may wish to consider a potential role for the Secretary of State, for example in putting an interim auditor in place more quickly. Currently, we do not think such measures are necessary, but it is right that we retain the ability to make appropriate provision in the future should it be needed.

Given that the regulations are only in draft, we will consider any relevant responses when they are published for formal consultation. The draft regulations on resignation and removal will achieve the desired effect of all the amendments, so I hope that the hon. Member for Corby will be willing to withdraw them.

Andy Sawford (Labour, Corby)

I thank the Minister for that extremely helpful response. It is good to hear that draft regulations are being developed. We have been encouraging him to introduce regulations in areas where they are required as early as possible, given that the Bill has been three and a half years in the making. It is therefore good to hear that there has been substantial progress.

We welcome the reassurance on consultation, which meets the point raised by our first amendment, so I will withdraw that. We also welcome the Minister’s reassurance that the regulations will mean that the auditor has a right to speak at any meeting of the council where the decision is made. Although that is not the specific provision that our amendment would provide for, the Minister has provided a sufficient reassurance for us not to press amendment 121.

The Minister’s response to amendment 122 is reassuring and allows us not to press it. He has indicated that the power will be used by the Secretary of State only in extremis rather than as a matter of course, and that local authorities will have three months to upgrade. However, it is slightly worrying to hear the Minister’s uncertainty about how the market will operate. He identified a need for reserve powers in case the Secretary of State needs to step in. That speaks to some of the points we have made in this debate about how the market will operate.

Brandon Lewis (Conservative, Great Yarmouth)

It is probably useful to clarify that that was not a statement about how the market will operate. The backstop is to ensure that a local authority has appointed in good time and gone through the process in an appropriate way; it is not about the market.

Andy Sawford (Labour, Corby)

I thank the Minister for his clarification, but we are still concerned about how the market will operate. However, we welcome the assurance that the power will be used only in extremis. We recognise the clear statement of intent that the Minister has put on the record. He indicated that the regulations would give the power to make the appointment to local authorities in the first instance, rather than to the Secretary of State. On the basis of the Minister’s helpful assurances, I beg to ask leave to withdraw the amendment.

Schedule 5 - Eligibility and regulation of local auditors

Brandon Lewis (Conservative, Great Yarmouth)

I beg to move amendment 19, in schedule 5, page 43, line 3, at end insert—

‘(3) The reference in sub-paragraph (1) to Part 42 of the Companies Act 2006 includes sections 1288, 1289, 1290 and 1292 of that Act (regulations and orders) as they apply in relation to that Part.’.

Michael Weir (Scottish National Party, Angus)

With this it will be convenient to discuss Government amendments 21, 26, 28 and 29.

Brandon Lewis (Conservative, Great Yarmouth)

The amendments make a number of minor and technical amendments to schedule 5, which sets out the eligibility and regulation of local auditors. Amendment 21 will correct a drafting error in the Bill in order to mirror accurately the obligations under schedule 10 to the Companies Act 2006 that make provision for a recognised supervisory body’s rules about confidentiality of information. It will change an ‘or’ to an ‘and’, which will make it clear that a recognised supervisory body’s rules around confidentiality apply equally to those seeking appointment as a local auditor, or who have acted as a local auditor, and to persons who have been members of the supervisory body at any time after the provisions in schedule 5 commence.

Amendment 19 will insert a new subsection 3 into paragraph 1 of schedule 5, which will explicitly apply sections 1288, 1289, 1290 and 1292 of part 42 of the Companies Act 2006 in relation to local audit. Those sections set out how regulations and orders under the Companies Act are to be made. For example, section 1288 provides that regulations and orders are to be made by statutory instrument. Although schedule 5 to the Bill already applies part 42 of the Companies Act, the amendment will allow us to cite those sections, as applied by schedule 5, when making regulations under schedule 5 to the Bill.

Amendment 26 will make a minor change to ensure references to a local auditor in the Bill correctly reflect changes made by amendments 2, 3 and 4 about the definition of local auditor. Amendment 26 ensures that the definition of “local auditor” used in the 2006 Act, as modified and applied to local audit, refers to the correct clause in the Bill.

Amendments 28 and 29 will ensure that a body to which the Secretary of State’s functions are delegated under schedule 5 to the Bill, which we expect to be the Financial Reporting Council, can be audited by either a statutory auditor or a local auditor. Schedule 5 to the Bill currently makes a general modification that all references to a statutory auditor in part 42 of the Companies Act should be to a local auditor. However, the amendment provides that that general modification should not apply to paragraph 9 of schedule 13 to the Companies Act to allow that body to be audited by an auditor eligible for either local or statutory audit.

Andy Sawford (Labour, Corby)

We agree that these are reasonable amendments that tidy up aspects of the schedule. We have concerns, however, about the schedule, which my hon. Friend the Member for City of Durham will raise in the next debate.

Roberta Blackman-Woods (Labour, City of Durham)

I beg to move amendment 123, in schedule 5, page 43, line 21, leave out—

‘1221 (approval of third country qualifications)’.

Michael Weir (Scottish National Party, Angus)

With this it will be convenient to discuss the following:

Government amendment 22.

Amendment 125, in schedule 5, page 45, line 7, leave out paragraph (c)

Amendment 124, in schedule 5, page 46, line 3, at end insert—

‘(5A) The requirements under section (5) must in particular take full account of the need to understand the wider scope of public audit covering the audit of financial statements, regulatory, propriety and value for money.’.

Government amendments 23 and 24.

Roberta Blackman-Woods (Labour, City of Durham)

I will speak to amendments 123, 125 and 124. Amendment 123 seeks clarity from the Minister on the Government’s position with regard to qualifications obtained in another country. My noble Friends raised a number of points on this part of the schedule in the other place and a few of those would benefit from further clarification.

As the Minister will know, the Companies Act 2006 sets out who may be treated as holding an appropriate qualification for the purpose of acting as a statutory auditor. A Secretary of State can include persons who are qualified to audit accounts under the law in a foreign country and those who hold professional qualifications in a specified foreign country. Though it may worry—or annoy—some Government Members, for these purposes an EU state is not treated as a foreign country. It may cheer them up to know, however, that under the Bill those provisions are specifically excluded from operating. It is important that we hear from the Minister exactly what is intended by proposed section 1219(2)(c), where the Secretary of State can say, as he sees fit, whether a particular qualification is appropriate. Government Members’ positive feelings about EU qualifications being banished from the UK may therefore be short lived, as it would appear that the Secretary of State may approve a qualification that he thinks meets certain requirements.

It may be possible that some EU qualifications, or—dare I say it—qualifications from other foreign countries, such as Australia or Canada, may be deemed to be acceptable and creep back in. Will the Minister reassure us that third-country qualifications will be considered as a relevant qualification where appropriate? The critical point for us and our noble Friends in the Lords, who also raised this matter, is that it is not entirely clear how the Secretary of State will decide whether a particular qualification is suitable. We are not clear where he or she will set out the rationale for their decision making. How will the Secretary of State satisfy themselves that those persons hold relevant qualifications?

As the Bill does not set this out, we want to ask more about the holders of these qualifications. How will people who hold qualifications that are not obtained in this country be required to demonstrate not only that their qualification is suitable but that they have some knowledge of local audit? I would be grateful if the Minister would address those two points specifically in his response.

Amendment 125 again picks up on the vagueness of language in the Bill, which has previously exercised the Opposition. Do we want a system of audit in which the auditors hold a qualification that the Secretary of State

“thinks meets specified requirements”?

It is the inclusion of the word “thinks” that worries us. Should the Secretary of State not know that a qualification is appropriate before the person is deemed suitable for audit? Should there not be absolute clarity about whether the qualification is appropriate? Should that not be in the Bill, or at least set out clearly in regulations?

This point has exercised us much in the past. The inclusion of a phrase about the Secretary of State’s thoughts was high up the agenda when discussing the Localism Bill and the Growth and Infrastructure Bill. The Secretary of State clearly likes to do a lot of thinking, although I am not entirely sure what he likes thinking about. I am not sure that any Opposition Members want to spend a lot of time thinking about what the Secretary of State might be thinking about.

I raise the point again because it is not a basis for sensible legislation. We should not have to spend valuable time thinking about what the Secretary of State might or might not be thinking about. I want to know, as I expect does everybody in the country involved with the issue of local audit, that proper arrangements are in place for appointing auditors with relevant qualifications that have been deemed appropriate according to a set of criteria. We would also expect that the people appointed to do local audit have some knowledge of the practice, and that that is set out clearly so that we know how it is to be judged.

Will the Minister reassure us that he will not detain us unnecessarily in speculating about the thoughts of the Secretary of State? Will he instead give us some clear criteria against which qualifications will be judged suitable? Can we also be clear that the Secretary of State’s thoughts will be put into a framework where they can be analysed and judged to be reasonable or not?

Finally, amendment 124 deals with whether the audit system being put in place is fit for purpose—a long-standing question about the measures in the Bill. The Minister will know that those who conducted the pre-legislative scrutiny of the Bill were concerned that, although auditors must be suitably qualified—although we are not absolutely sure of that; it is to be subject to the Secretary of State’s thoughts, so we do not know whether the auditors will be suitably qualified or simply thought to be, but let us say that they are deemed to be suitably qualified—the Bill does not specify that they must understand the wider scope of public audit. The amendment would make it a requirement that, when appointing auditors, full account must be taken of the wider scope of public audit, covering financial statements, regulatory propriety and value for money, in addition to basic auditing processes.

It is not at all clear—still—that Ministers have taken on board the concerns about the wider role of public audit and addressed them. They have had a number of opportunities to do so, because after pre-legislative scrutiny the draft Local Audit Bill Committee made it clear that it was not convinced that the Financial Reporting Council understands the wider scope of public sector audit. The Committee said that the Government should take appropriate steps to assure Parliament that the FRC, in taking on its new role, will reflect the importance and character of public sector audit.

If the Minister thinks that the Government have taken on board the concerns and have responded, perhaps he can point out to us exactly where that has happened. If there are regulations, or if advice and guidance have been given to the FRC, it would be useful if he could let us have that. As he will know, the director of policy at the Chartered Institute of Public Finance and Accountancy has said that one worrying feature of the Bill

“is that the wider scope of public audit is not strongly embedded, an omission which might actually serve to weaken rather than strengthen public accountability.”

I am sure that, like us, the Minister would not seek to do anything that would serve to weaken public audit, so we look forward to hearing about how the Government have responded to those concerns.

The amendment would specifically require that, when evaluating whether someone has an appropriate qualification, regard must be had to the need to understand the wider scope of public audit, and that the FRC must be up to the job of determining that—it is not clear to us how the Minister would reassure himself that it is up to the job. CIPFA has repeatedly pointed out that although the employees of many private firms hold appropriate basic qualifications, they simply do not understand the workings of the public sector well enough to do the thorough job required of public, as opposed to private, audit.

In the other place, my noble Friend Lord McKenzie quoted the CIPFA chief executive, who said that

“the transition from private sector auditing, which firms are clearly extremely good at, to public audit is not straightforward; it is very challenging and difficult”.

We have not heard in the debates on the Bill any evidence that the Government truly recognise the difference between private sector and public sector audit. How are they seeking to reassure themselves that the firms awarded contracts have some knowledge of the wider scope of public sector audit? A private sector firm will often rely on a very specialist group of people to be able to bid for public sector audit. That raises another question: will there be enough people out there with the correct qualifications, experience and wider knowledge of the public sector to be able to undertake the role? The Minister has been asked this question a number of times, but has he sought to determine how many firms might be willing to bid to be public auditors?

Baroness Hanham said in the other place that the Government were

“absolutely clear that the auditors must be competent, appropriate and steeped in local government finance”.—[Official Report, House of Lords, 24 June 2013; Vol. 746, c. GC191.]

That is a very strong statement to make in answer to these questions, but we still have no information from the Government about exactly how the laudable objective set out by Baroness Hanham is to be achieved. I would really appreciate the Minister giving us more information about that today.

All of us on this Committee will understand that public sector organisations are changing almost daily, new structures are formed locally and new legislation comes in fairly regularly, so it is challenging for auditors to be able to keep up with changes in the public sector, be aware of what is happening locally and adjust their methods to take account of wider changes in public sector bodies and the requirements placed on them. This is a very challenging job indeed, and without the right expertise and knowledge there is a risk of complete failure.

I hope that the Minister will appreciate that this is a serious set of amendments, designed to test whether the necessary provisions really are in the Bill, or whether the Government intend to produce them in regulations or guidance. We want to ensure that the people with the right experience and knowledge are appointed to this difficult but important task, so all of us can assure ourselves that public sector money is spent in the most effective way possible.

Chris Williamson (Labour, Derby North)

I support amendments tabled by my hon. Friend the Member for City of Durham. Both this morning and previously, the Government have been at pains to reassure the Opposition that the measures they are putting in place will not diminish the quality of audit provision as it applies to local authorities. This morning, my hon. Friend has again argued that if the Bill is not amended, our original fears could be borne out in practice.

A range of bodies outside this place have articulated their anxiety about the implications of the Government’s proposals. For example, in his evidence to the draft Local Audit Bill ad hoc Committee, Steve Freer, the chief executive of CIPFA, said:

“One of the worrying features of the legislation is that the wider scope of public audit … is not strongly reflected in the legislation, or certainly does not seem to be reflected as strongly as it should be”.

I have quoted in previous sittings from the work undertaken by Transparency International, and it is worth quoting it again on the wider implications of the Government’s proposals. Under the heading “The erosion of the audit safeguard”—it could not be clearer—Transparency International states:

“The new arrangements for audit in England, together with the impact of spending cutbacks, raise the potential for the erosion of audit safeguards against corruption”.

Transparency International is articulating a serious concern. It continues:

“We identify eight risk areas where accountability may be weakened”.

I would be interested in the Minister’s comments or those of other hon. Members about those eight areas, which are:

“1. Local authorities have reduced internal capacity to investigate fraud and corruption.

2. The responsibility for investigating and detecting fraud and corruption is being delegated to lower-level officers with lesser expertise.

3. Audit committees have been weakened and may disappear because there is no longer a statutory requirement for an audit committee to be a full committee in its own right.

4. External auditors appointed under the new arrangements may be less able to withstand pressure when undertaking investigations or raising concerns about suspicions of fraud or corruption.

5. The independence of internal and external audit, and of monitoring officers, financial officers and chief executives, is weakened because the Audit Commission no longer acts as a backstop or provides support.

6. Powers of public audit have been eroded.

7. The capacity to collect nationwide data on fraud and corruption, or analyse trends has been greatly weakened.

8. External audit is not adequately covered by Freedom of Information Act.”

Transparency International is expressing clear reservations. As my hon. Friend said, we have grave reservations about the measure’s impact on public audit.

It is worth also reading into the record some of the evidence on public audit provided by Grant Thornton to the Select Committee on Communities and Local Government. Under the heading “Wider scope of public audit”, Grant Thornton stated:

“Local taxpayers cannot choose to opt out of paying for local council services. In addition, the absence of a profit motive within local authorities means that the first principle of public audit, that the scope of the audit should go beyond that necessary to form an opinion on the financial statements, is important. The audit of local authority expenditure currently includes the review and reporting on arrangements for ensuring activities are lawful, well governed, and likely to promote value for money for local taxpayers…The wider scope of public audit is entirely consistent with those areas where transparency to the public should be promoted. Encouragement of the public to hold councils to account locally is best supported if the public (through access to the independent external auditor) is able to raise matters that go beyond the financial statements. Matters of interest to the local media and topics of Public Interest Reports invariably relate to these wider aspects of the audit, not the financial statements.

In our experience, local authorities are supportive of the wider scope of public audit. Audit committee meetings are more meaningful and useful to members if they include reporting and discussion on assurance relating to the local authority’s governance and value for money arrangements, particularly when audit work is based on specific local risks and is proportionate to those risks. Better performing and aspirational councils routinely rely on local VFM audit work to help target improvement, whilst less well performing councils are held to account and challenged through the audit process to improve.

However, local government should have a greater say in shaping these wider aspects of the audit and, in our view, local VFM work should be less prescriptive than in the past, with the onus for delivering, demonstrating, and reporting on, value for money resting with local government itself, not the auditor.”

Andrew Griffiths (Conservative, Burton)

Would the hon. Gentleman like to pass the piece of paper around, so we can read it for ourselves and save time?

Chris Williamson (Labour, Derby North)

I am coming to a conclusion; I have nearly finished the quote. Grant Thornton stated:

“In summary, we believe the unique nature of local government requires a wider scope audit to cover legality, probity and value for money. Local authorities should have a greater say in determining the scope of local VFM audit, and in demonstrating and reporting achievement of value for money. The wider scope audit is best integrated with the audit of the financial statements to avoid duplication, minimise cost and maximise the value of audit reporting.”

Clearly there are very real concerns, which have been articulated by a range of agencies from Transparency International to Grant Thornton to CIPFA. On that basis, I hope that when the Minister responds he will take account of those reservations, which are not articulated only by Opposition Members. Very real, serious concerns were also expressed by well respected, learned institutions which know a thing or two about the audit process, which act in the public interest, and which want the public purse to be protected. They want measures put in place to ensure that we get the highest quality of audit scrutiny at the best possible value for money. I hope that when the Minister responds he will take those comments into account, and give us the reassurances sought by my hon. Friend the Member for City of Durham.

Brandon Lewis (Conservative, Great Yarmouth)

I will deal with the Opposition amendments in the group first, before moving onto the Government amendments. Amendments 123, 124 and 125 seek to amend the provisions relating to the qualifications of auditors in the new regulatory regime. Amendment 123 would require section 1221 of the Companies Act 2006 to be applied for the purposes of local audit. This amendment was previously proposed in the other place, but we believe that it is not necessary.

Section 1221 of the Companies Act provides for the approval of third-country audit qualifications from non-EU countries for the purposes of carrying out statutory or company audit in the UK. It sets out the conditions that need to be satisfied regarding the assurance of professional competence of those holding an overseas audit qualification from outside the EU. It also allows the Secretary of State to recognise an overseas qualification only if there is comparability of treatment of UK qualifications in the country in question.

For the purposes of local audit, an auditor will hold a suitable qualification if it is one recognised under part 42 of the Companies Act 2006, or if it is another qualification recognised under the Bill. If the third-country audit qualification has already been recognised for company audit through the application of section 1221 of part 42 of the Companies Act 2006, it will automatically be deemed to be an appropriate qualification for local audit. This is set out in paragraph 8 of schedule 5 to the Bill. It is therefore not necessary to make additional provision for this. In addition, the obligation to recognise the third-country audit qualifications is determined by the statutory audit directive. The profession of local audit will not be covered by this directive, which extends only to statutory audit.

Roberta Blackman-Woods (Labour, City of Durham)

I am listening very carefully to the Minister’s response, because this is quite technical. If the Companies Act sets out very clearly what sorts of qualifications are deemed to be appropriate, I am having some difficulty understanding why it is necessary to include sub-paragraph 2(c), which allows the Secretary of State to use his judgment about what he is specifically requiring. If the Companies Act is clear about it and a list exists of appropriate qualifications, why is there a need for additional leeway for the Secretary of State to add—or, presumably, take away—some qualifications from that list?

Brandon Lewis (Conservative, Great Yarmouth)

I hope that, as I continue outlining the position, I will be able to satisfy the hon. Lady’s point, but it is partly because this provision is needed in order to recognise other qualifications. That is one of the reasons why it is there. CIPFA itself, which I think the hon. Lady mentioned, is a good example of that.

Amendment 124 seeks to ensure that the requirements which may be specified for a qualification to be recognised as being appropriate for local audit must take full account of the wider scope of public audit. It may help if I explain how the new local audit framework will require all auditors to be suitably qualified and competent to carry out audit work. As I noted in response to amendment 123, an auditor will be required to hold an appropriate qualification to undertake local audit, which could be a statutory audit qualification under the Companies Act 2006 or another qualification recognised under the Bill. Amendment 124 would place that requirement only on individuals holding a qualification for local audit. It is important that all auditors recognise the wider scope of public audit, regardless of which appropriate qualification they hold, and the framework that we are putting in place will achieve that. I must stress, however, that while holding an appropriate audit qualification is necessary, it is not sufficient in itself for those individuals within firms assigned with the responsibility for signing audit reports of local bodies. It is important that auditors have sufficient skills and experience of local audit, including understanding the wider scope of public audit.

We are mirroring the Companies Act framework for local audit. The recognised supervisory body for local audit will have responsibility for approving the individuals nominated by its member firms to sign the audit reports of local bodies. That will be overseen by the Financial Reporting Council. Under rules that it will agree with the Financial Reporting Council, a recognised supervisory body will approve an individual to take a key responsibility in the audit of a local body only if that individual has an appropriate level of competence to carry out local audits. A firm that cannot demonstrate that a nominated person has recent experience of auditing a local body and understands the wider scope of local audit will not be considered competent and therefore cannot be approved by the recognised supervisory body.

To provide further assurance, firms must comply with established standards and professional obligations regardless of whether they are appointed to a company or a local public body. In particular, the international standard on quality control requires all firms to have policies and procedures that ensure that all individuals have the right knowledge and experience to undertake a specific engagement. For local audit, that would mean that a firm could not put forward an individual to be responsible for a local audit if that individual did not understand the wider scope of public audit. If it did so, it would be in breach of its obligations and would risk breaching the terms of its registration with the recognised supervisory body.

Roberta Blackman-Woods (Labour, City of Durham)

The Minister is generous in giving way. If a company that gets a contract to carry out an audit has only one or two people with knowledge of the public sector and of auditing public sector organisations and those people leave and someone else, who may not have such knowledge, has to pick up the contract, how would that be addressed by the measures in the Bill?

Brandon Lewis (Conservative, Great Yarmouth)

As I said a few moments ago, it would be the auditing company’s responsibility to ensure that an individual has an appropriate level of competence to carry out local audits.

Given that we are providing for a qualification to be recognised specifically for the purpose of local audit, we agree that its focus needs to be different from a statutory audit qualification. We have already provided the Committee with draft regulations that specify the minimum requirements that a local audit qualification must meet and have made suggestions about the subjects that need to be passed through examination. Where appropriate, they are focused on the different areas of knowledge and auditing and professional skills that are relevant to auditing local bodies.

Finally, amendment 125 seeks to omit the requirement for the Secretary of State to assess whether a qualification meets the requirements that will be set out in regulations. It may be helpful for me to explain to the hon. Lady how a qualification, other than a statutory audit qualification, will be recognised under the Bill. The Secretary of State will make regulations setting out the minimum requirements that other qualifications will need to meet in order to be recognised as an appropriate qualification for local audit. The power to make such regulations will not be delegated to the Financial Reporting Council, but we do intend to delegate to the council the responsibility for assessing whether a qualification meets the specified requirements in the regulations. That will be set out in the delegation order and will mirror the arrangements for approving statutory audit qualifications under the Companies Act 2006.