My Lords, I thank the noble Lord, Lord McKenzie, for introducing these two amendments which fire the
opening shots on this aspect of the Bill. As he said, Amendment 1 would require the Secretary of State to make arrangements to enable the national procurement of external audit before the closure of the Audit Commission. The Bill currently requires local bodies to appoint their own auditor. The intention behind the amendment is clearly to create the potential for bodies to have their auditor appointed on their behalf by a national body, which effectively would be mandatory.
Amendment 13 would support such arrangements by allowing a body to have its accounts audited by an auditor appointed on its behalf. At present the Bill requires a body to have its accounts audited by an auditor appointed by the body itself. I hope that I have interpreted correctly the points in the amendments.
It is argued that local authorities and local bodies are best placed to put in place whatever arrangements suit them locally for their auditing. Many local authorities have already welcomed the opportunity to appoint their own auditor. For example, during pre-legislative scrutiny, the two local authorities that gave evidence to the committee both signalled that they were happy to appoint their own auditor, and the chief executive of a foundation trust said that appointing its own auditors had resulted in a 50% reduction in fees.
I am not unsympathetic to the intention behind these amendments—which I understand to be to secure the lowest audit fees for local bodies by encouraging large-scale collective procurement of audit. The Government recognise the benefits of bulk buying and the Bill already allows local bodies, if they wish, to come together to procure jointly. It does not say how many local authorities or local bodies there should be or limit them, but it allows them. It says that local bodies must be able to choose what arrangements suit them. We do not think that it is up to central government to dictate to local authorities how they should go about appointing their auditor, regardless of whether they do it singly or come together jointly. We believe that we should be careful that provision for national procurement—if that is the way it is going, and the LGA seems to hope that it is—does not limit local choice and that we do not recreate the Audit Commission in another guise. We are saying that the options must remain. Local authorities should have the option to join the national scheme if they wish to do so. If they do not so wish, they have the option to appoint their own auditors or to join up with an external authority.
It has been made clear that there is some appetite for developing this national procurement arrangement. If such arrangements for this national procurement maintained choice for local bodies—which is effectively what I have said—and allowed them to take part or appoint locally then we would be willing consider the scope for allowing it under the Bill. It would therefore be not mandatory but permissive. If we are to consider such a change, it is important that we have further details on how the proposed scheme will work and an assurance on the commitment to ensuring that such arrangements are effective.
The noble Lord, Lord McKenzie, raised the matter of the savings that have come from the current national scheme, which was created by the Audit Commission some time ago. Even though the £400 million savings
may not be achievable under this, we still see very substantial savings coming from local procurement and, indeed, even from a limited central procurement.
As result of what I have said and what has been said I am happy to take this matter away for now, and not to come to any decisions or put my foot down very firmly, but we must talk more clearly to the Local Government Association and any other interested organisation to see what arrangements they may want to put in hand so that we can see if there is any room for the optional scheme in what they are proposing. I hope that we might be able to get that into place. I emphasise that we will not and cannot agree to a mandatory scheme.
The noble Lord, Lord Smith, agreed—I hope that I am right in saying this—that joint contracting works perfectly well in other fields of local government. There seems to be no reason why it should not work in this one. I understand that the way that it works may be affected by the size and number of people who join in, so we would also want to discuss how one estimates how many people would like to join such a scheme before it is implemented.
The noble Lord, Lord McKenzie, asked what safeguards there are around the provision of the non-audit work by the appointed auditor. The Financial Reporting Council’s ethical standards already require auditors to identify and address conflicts of interest associated with the acceptance of non-audit work. Auditor panels also have a role in adjusting non-auditor work under the accounting code of practice. Local authorities are required to disclose additional payments to the auditors.
The noble Lord, Lord Palmer, was interested in the independence of the auditor. We are clear that the auditors will be subject to the Financial Reporting Council’s standards. These require audit firms to have robust systems and processes in place for ensuring the objectivity and independence of audit and addressing any issues on the non-audit work. We are also putting in place robust protections around the appointment and removal of auditors, and local bodies will need to consider advice from an independent auditor panel or audit committee before making their appointment. We will not deal with that in today’s amendments but I am sure that we will discuss it later. Finally, the Bill specifies circumstances where a person may not act as a local auditor on grounds of lack of independence.
I hope that I have covered the points that have been raised. The noble Lord, Lord McKenzie, also mentioned the auditor fees. We realise that the savings may not be quite as great as they are currently but we expect them to be there. With those reassurances and the offer to have further discussions with the Local Government Association—discussions which I believe are ongoing—I hope that the noble Lord is willing to withdraw his amendment.