I will not prejudge the guidance before we publish it, but I am sure that the hon. Gentleman, if he is not happy with what we do, will want to raise it with me at Question Time or through the Select Committee.
Following our debate on amendment 13 in Committee, I wrote to the hon. Member for Corby providing further details. I can assure the House that this amendment is not necessary, as sufficient safeguards are already, and will continue to be, in place to ensure the independence of the auditor. First, the Financial Reporting Council’s ethical standards require audit firms to establish policies and procedures to ensure that auditors act with integrity, objectivity and independence. There are specific limitations on audit firms providing non-audit services.
The ethical standards require the lead auditor to assess any threats to the auditor’s objectivity. Before accepting an engagement to provide non-audit services, it must consider whether doing so could threaten the firm’s actual or perceived objectivity or independence. The ethical standards do not prohibit audit firms from undertaking non-audit work, but they do require them to introduce safeguards that would eliminate these threats or reduce them to an acceptable level. This is where a reasonable and informed third party would probably not conclude that an auditor’s objectivity was or could be impaired. If the firm cannot introduce sufficient safeguards to reduce the threats to an acceptable level, it must not accept the non-audit engagement or it must withdraw from the audit.
Secondly, auditors must comply with international standards setting out the ethical requirements for financial statements audits and requiring lead auditors to report on compliance with independence requirements and audit firms to ensure that their quality control systems comply with professional standards and regulatory and ethical requirements. The international standards also require firms to put in place procedures for the acceptance and continuance of specific engagements, including whether compliance with ethical requirements can be achieved.
Thirdly, recognised supervisory bodies will have rules to ensure that local auditors conduct work properly and with integrity and that they do not accept appointments where a conflict of interest would prevent that. They must record threats to independence and the steps taken to safeguard independence and ensure that remuneration is not influenced by the local auditor providing other services. That is consistent with the established framework in the companies sector. In addition, we expect the independent auditor panels to advise the authority on the adoption and content of a policy on awarding non-audit work to the auditor. A note to the annual accounts is required if the audit firm undertakes non-audit work.
Those safeguards will protect the actual and perceived independence and integrity of the auditor. If objectivity is prejudiced, the firm must withdraw from either the audit or the non-audit work. We consider this approach preferable to the amendment tabled, which would not remove the potential conflict of interest. If the audit firm were required to subcontract to another firm, it would still be accountable for the audit opinion and any other work undertaken by the subcontractors.
3.15 pm
Amendment 12 would add local enterprise partnerships to schedule 2 and make them subject to the local audit provisions. I will begin by repeating the assurance, which I gave in Committee, that any public funds channelled through LEPs will be subject to appropriate scrutiny. LEPs are voluntary strategic partnerships, not statutory public bodies. Each has a lead local authority that acts as the accountable body for public funding, and it is this local authority that provides the appropriate financial accountability, including through an annual external audit.
Making LEPs subject to public audit themselves would simply duplicate existing audit arrangements through which lead local authorities act as accountable bodies. The recent report from the all-party group on local growth, local enterprise partnerships and enterprise zones, of which, as the hon. Member for Corby said, I was the first chair, stated that
“many participants recognised the role of the accountable body arrangement in providing the necessary financial accountability for public money outside the LEP organisation, freeing the LEP up to focus on strategy and delivery”.
The amendment would simply add unnecessary burdens to LEPs, while doing little to improve accountability. With these explanations and assurances, I hope that the hon. Gentleman will feel able not to press new clauses 1 and 2 and amendments 12 and 13 to a vote.
On the amendments tabled by the hon. Member for Hayes and Harlington, new clause 4 would require the Secretary of State to provide each House of Parliament with a report on the effectiveness, efficiency and economy of structures and procedures that local authorities put in place for reviewing decisions or actions taken by their executive cabinets under section 21 of the Local Government Act 2000. Section 21 requires local authorities operating executive arrangements to appoint at least one overview and scrutiny committee. The role of such a committee is to review and scrutinise decisions and actions of the executive or the council and make reports or recommendations to the council or executive.
Such committees may also undertake reviews and make recommendations to the council on any matter affecting the local authority area or its inhabitants. Overview and scrutiny is thus important in holding the executive to account for its decisions and actions and plays a vital role in the development of policy, but councils are accountable to their local electorates. It is their responsibility to ensure that their scrutiny arrangements are effective, and they must account for this to their local people, ultimately—like us all—through the ballot box. The provisions in the Bill that enable regulations to make it clear that people can film meetings and blog or tweet about what their elected representatives are saying in meetings are all part of reinforcing local accountability and making it more effective.
The Government believe in localism—that power should be passed down to local people to hold their councils to account. Local authorities should not have to spend their time reporting to central Government, only for the latter to lay some report before Parliament. That is turning accountability completely on its head. The Bill’s provisions are all about strengthening local accountability, making it more effective and bringing it into the 21st century. These amendments would take us
in a different direction and are wrong in principle as they would create a wholly unnecessary and inappropriate arrangement.
For example, new clause 5 would require the Secretary of State to prepare and lay before Parliament a report on the adequacy of the resources, staffing, structures and procedures put in place by authorities to detect and investigate fraud within the authority, before the Audit Commission is abolished. We agree that tackling fraud should be a priority, not only for central Government, but for local authorities and all public bodies. We are clear that local government needs to deal with the £2.1 billion a year of fraud that occurs largely through housing tenancy, payroll, procurement and council tax discounts fraud. “Fighting Fraud Locally: the Local Government Fraud Strategy” was published in 2011. Developed by local government for local government, it provides a blueprint to reduce the risk of fraud, realise cash savings and work together to prevent future fraud losses. To support local authorities in taking this work to the next level, we have just announced £16.6 million of new investment over the next two years. We have also committed to working urgently with local government to ensure that it has the right powers, incentives, data and capacity to tackle fraud effectively.
The Audit Commission’s work has clearly been an instrumental part of the counter-fraud landscape. Of primary importance is the national fraud initiative which, since it began in 1996, has helped to identify over £1 billion potentially lost to fraud, error and overpayment in the UK. During the earlier stages of the Bill, we announced that the initiative and associated data-matching powers would transfer to the Cabinet Office, and my officials are working with the Cabinet Office to ensure a smooth transition of that important function.
In addition, the Audit Commission has developed a set of counter-fraud tools, including “Protecting the Public Purse”, the annual fraud survey and the changing organisational cultures toolkit. We are working with the commission and others to determine the future of the tools that matter to local government, so please let me reassure hon. Members that we are progressing this issue with rigour and pace. I would be happy to keep hon. Members informed of progress in this area.