My Lords, the local Audit and Accountability Bill is another important step in our plans to strengthen local democracy and transparency. It is the final step in a programme of reforms to local audit that will secure millions in savings, protect important local freedoms and further increase the localism agenda in three specific ways.
First, it will allow local bodies to take control of their own audit arrangements, and replace the Audit Commission with a new framework for local audit that is robust and retains a focus on value for money. Secondly, it safeguards the contribution that our independent local press makes to local democracy. Thirdly, it protects the taxpayer against excessive increases set by the levying bodies.
I should like to focus on each of these in turn but, before doing so, let me rehearse the context of the Bill. The Government are doing everything we can to bring down our inherited deficit, achieve sensible savings for the taxpayer and give local people greater say in decision-making. As part of this, the coalition agreement pledged to reduce the cost and number of quangos. It also pledged to end the era of top-down government by giving new powers to local councils, communities, neighbourhoods and individuals. We have already ended assessment and inspection of local authorities—that is, comprehensive area assessments and local area agreements—freeing local authorities from centrally imposed targets and £25 million in annual compliance costs. Currently, the Audit Commission appoints auditors for nearly 11,000 local public bodies, which are responsible for some £200 billion of public expenditure. It is however no longer fit for purpose, its remit and functions having expanded significantly beyond their original intention. It has become unnecessarily centralist and bureaucratic.
Local independent audit is essential to ensure that those who handle public money spend it in the public interest, but there is no reason why local authorities should not be able to appoint their own auditors—something the private sector, charities, foundation trusts and academies do as a matter of course. We have been open about our plans to abolish the Audit Commission and replace it with a local regime. The Government
consulted extensively on the proposals, including publishing a draft Bill for pre-legislative scrutiny. Over the past two years, we have stopped the Audit Commission exercising many of its functions, privatised its in-house audit practice—resulting in a 40% reduction in audit fees for local bodies—scaled back its other activities and cut overhead costs. The Bill is the final piece in the jigsaw and it will now abolish the Audit Commission completely. It will bring down the curtain on the centralised arrangements for the audit of local bodies and replace them with a new framework.
Local bodies will be firmly in the driving seat. Under the Bill’s provisions, they will appoint auditors of their own from an open and competitive market. They will have to publish information about the appointment of an auditor within 28 days of that appointment being made. To safeguard the integrity of this process, they will need to consult and take into account the advice of an independent auditor panel. We know, because we have been told so, that local government has concerns about these auditor panels but the Bill provides a flexible approach. These local bodies will be able to use an existing committee, if it meets the independence requirements, establish a small new panel or combine with other public bodies to appoint auditors collectively.
After listening to views, we will be retaining a limited audit regime for smaller authorities: that is, those with a turnover below £6.5 million. Local bodies with an annual turnover below £25,000 will be exempted from automatic external audit altogether, although a mechanism will be retained for auditor-led scrutiny if problems are perceived to have arisen. New transparency requirements for smaller authorities will enable electors to access the information about accounts and governance that they need to hold the authority to account.
I have heard the arguments that this Bill will affect the independence and quality of the audit process, so it is important to underline that we are strenuously safeguarding the integrity of the local audit system. The scope of that system will broadly remain the same: auditors will look not just at the accuracy of the financial statements but at value for money. Auditors will continue to be required to comply with a code of audit practice and have regard to accompanying guidance, which will be set by the independent and impartial National Audit Office. Parliament will retain its oversight role by approving this code.
The National Audit Office will also slightly increase the number of value-for-money studies it carries out to enable it to undertake examinations that take account of local delivery. This will enable a wider view to be taken on the use of public money. There will continue to be a statutory duty on auditors to make public interest reports, and they will be able to recover their costs from the audited body for undertaking an investigation. There will also be a new requirement on local bodies to publish any public interest reports and their response.
The Financial Reporting Council will oversee the monitoring of the quality of audits, as it already does for the private sector. This will align the regulatory system for local public audit more closely with the private sector and remove unnecessary duplication.
Recognised supervisory bodies—professional accountancy bodies—will register audit firms and assess those individuals responsible for signing audit reports. We are working very closely with these professional organisations to develop the detailed arrangements and ensure a smooth transition to the new regulatory framework.
Meanwhile, the Bill also protects the rights of local taxpayers to inspect a local authority’s accounts and to raise concerns with the auditor, who may report on these matters if necessary. Whistleblowers will also be protected by amending the relevant whistleblowing legislation so that they can raise matters of concern confidentially with the auditor or the Comptroller and Auditor-General, without prejudicing their employment. The Government also recognise the value of the national fraud initiative. The Bill transfers the Audit Commission’s data-matching powers to the Secretary of State, the Minister for the Cabinet Office or another authorised Minister, so that the work to prevent and detect fraud at local level can continue.
The local audit system we are proposing to put in place will maintain, we believe, a high quality of audit. It will also be markedly improved in terms of efficiency and cost effectiveness. Overall, these reforms will deliver estimated savings of £1.2 billion over 10 years, which is rather more than originally anticipated. Authorities will not just have greater control over how much they pay for the services; they will have greater incentives to keep their costs down, since they will no longer have to fund the Audit Commission’s overheads and other activities.
I know that consultation respondents and Select Committees have raised a question about the current lack of competition in the audit market. However, the outsourcing of the Audit Commission’s in-house audit practice has already increased the number of suppliers in the market from five to seven, with at least a dozen firms passing the pre-qualification questionnaire. We expect a greater number of smaller contracts to be available once local bodies start to appoint their own auditors. This will open up much more opportunity for smaller firms.
The other provisions covered in the Bill include those relating to local authority publicity. We have made it clear all the way through that we expect local authorities to conform to the publicity code. Many are not doing that at the moment; councils such as Tower Hamlets and Greenwich are not. We are therefore taking powers in this Bill to make that code something that local authorities will have to apply.
The final matter here is the question of levying bodies. We have been conscious that levying bodies are not part of the council tax system or the referendums, while they can have an enormous effect on council tax bills. In some areas, levies account for over half of the local council tax requirements. In Liverpool they account for 56%—a very high percentage, which is not given any democratic oversight. Percentage increases in levies year-on-year have consistently outstripped the increase in council tax as a whole. In 2011-12, levies in England increased by 4.1% at a time when Band D bills were frozen, and this year authorities in Greater Manchester
have increased their bills by more than the 2% referendum threshold set. Without the Bill, any tax increases by levying bodies effectively mean that large elements of council tax demands remain beyond direct democratic control. Local taxpayers must have the right to approve or veto all council tax increases above the approved amount, without having to worry that some elements of that increase are beyond their control.
The provisions contained in this Bill will strengthen localism and democracy. They will put local bodies in charge of their own audit arrangements, help save council tax payers money and ensure that elected representatives can continue to be held to account. I commend this Bill to the House.
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