My Lords, the debate initiated by the noble Lord, Lord Christopher, has, in many respects, touched on future amendments that are coming up for further discussion. I appreciate that what he is trying to do is to see whether he can reverse what is being done. However, the noble Lords, Lord Beecham and Lord McKenzie, have recognised that we are very far down the line now and that it is not possible, nor do the Government want, to reinvent the Audit Commission and the existing audit regime.
The Government’s believe that the Audit Commission presided over a regime that was unnecessarily centrist and bureaucratic. As the noble Lord, Lord Shipley, pointed out, it indulged in mission creep during its existence. It consequently had little incentive to reduce its costs. Its overall approach encouraged relevant authorities to focus more on the views of the Audit Commission and less on those of local people. The noble Lord, Lord Beecham, pointed out that substantial savings have already been achieved by lifting the burden of top-down regulation from local bodies. The savings were achieved, too, by putting the audit operation into the private sector. We want to make these savings secure and ensure that a central government body cannot again grow to dominate local government, and so the Audit Commission will cease to exist.
I shall briefly go through some of what the clause deals with. Clause 1 repeals the Audit Commission Act 1998, under which the commission currently operates, and it introduces Schedule 1, which makes provision for such matters as the transfer of property, the preparation of final accounts and various consequential repeals and revocations. There are amendments tabled on all those matters, which I think that we will come to quite soon. The clause lays the foundations for a new localist audit regime that hands powers and responsibilities to local bodies. Other parts of the Bill make arrangements for a robust framework that maintains a high quality of audit and transfers necessary functions to other suitably qualified and well respected institutions, such as the National Audit Office and the Financial Reporting Council.
Local bodies are capable of appointing their own auditors, as charities, companies and foundation trusts already do, and, by and large, they have welcomed the opportunity to do so. Putting local bodies in charge of procuring their own auditors will create greater transparency as they will have greater control over how much they pay for their audit services. They will
not have to fund the Audit Commission’s overheads and pay for its other activities and, as a result, there will be greater incentives to keep costs down.
We have made good use of the time since the Government first announced their intention to abolish the Audit Commission in August 2010. We began our reforms to the local audit and inspection framework by ending comprehensive area assessment, freeing local authorities from £25 million in compliance costs. I am not sure that anybody was very troubled by the loss of the comprehensive area assessment.In addition, the decision to outsource the Audit Commission’s in-house audit practice has saved local bodies 40% in their audit fees. We touched on this in my reply to the last amendment. We have developed the proposals in the Bill with key partners and have consulted extensively; there has been proper consultation on this matter.
Schedule 1 to the Bill makes further provisions in relation to the abolition of the Audit Commission. Part 1 sets out the arrangements and, in particular, provides for the Secretary of State to make one or more schemes to transfer the Audit Commission’s property rights and liabilities. We are working closely with partners to assess the options for where the existing audit contracts will transfer after the Audit Commission closes. We will set out details of the arrangements to transfer management of the audit contracts in the transfer scheme outlined in Schedule 1.
Paragraph 1(1) enables the Secretary of State to make one or more schemes to transfer the property rights and liabilities to a person or persons specified in the scheme. Sub-paragraph (2) sets out the items that may be transferred under such a scheme. Sub-paragraph (3) states that such a scheme or schemes may make consequential, supplementary, incidental or transitional provisions.
Paragraph 2 allows for the number of Audit Commission board members to be reduced. Upon closure of the Audit Commission, the Secretary of State must prepare a final statement of accounts for the last financial year of the commission. The Secretary of State must also prepare a final annual report for winding up. Finally, paragraph 5 provides for the Secretary of State to make payments in respect of the Audit Commission pension scheme.
The noble Lord, Lord Christopher, raised the question of the pension scheme. This has been underwritten by the Government and is in pretty good shape. It is 104% fully funded at the moment. There is a clear understanding that should some disaster overtake it in future, the Government will pick up the bill; one way or another, the pension scheme is well accounted for.
Closing down the commission is part of an overall programme of reform that will save the public over £1.2 billion over 10 years. We are able to do that because of the reduction of the commission. Retaining the commission would leave open the possibility that it could build itself back up again to the size that it reached in 2009-10. That is when the Audit Commission ceased to be operable in its current form, which was another point raised.
The noble Lords, Lord Christopher and Lord Beecham, asked what will happen with the demise of the commission leaving no single body to take
responsibility for supervising and co-ordinating local audit. The local auditors who will undertake the audits within a national framework will be overseen by the Financial Reporting Council and professional accountancy bodies and accorded the code of audit practice and guidance to be developed by the National Audit Office. So they will be regulated and controlled. Also government departments are, through the accounting officer, accountable to Parliament for the money voted to their departments. Where this money is distributed to others, as it will be under the grant system, it will need to be demonstrated that appropriate accountability is in place.
The noble Lord, Lord Christopher, asked what is going to happen about the value for money studies. The National Audit Office has the ability within the Bill to increase the work that it does. The expectation is that it might undertake about six more national studies to those that it is undertaking at the moment. It will be able to choose what it does and, provided that it is working within existing legislation, it will be able to look at what is going on, either across the piece of local authorities or in individual authorities.
On the fragmentation of the new regime and the quality of audit, government departments are accountable to Parliament through the accounting officer. That is the other helpful addition to ensuring that the new regime is well set up.
4.45 pm
The noble Lord, Lord Beecham, asked about the five years. His question was not why we are asking for 10 or five years but why five years was not the absolute limit for auditors to continue. The requirement is that they make a new appointment at least every five years, in which case they will have to go out to further tender. They cannot just reappoint the auditors that are there but will have to go out through a new process. If within that process it was adjudged that the audit firm that was being used was the best, they would be entitled to appoint it again. We think that five years is the right time initially but it must be protected. We must make sure that it is not continued if that is not what should be done.
A number of other questions were raised. The noble Lord, Lord Beecham, talked about the health service sector. May I duck that today? I know that we are going to come to it later on in the Bill. It is very relevant. The auditing of accounts such as community budgets across public bodies is definitely germane to what we are talking about today. The expectation is that auditors who are auditing public bodies will come together to co-operate to ensure that they understand what is being done.
The noble Lord, Lord Christopher, also raised the question of the amount of money that had been saved by the Audit Commission in terms of fraud and error. It is certainly true that there is fraud and error and it is vital that local government and local authorities ensure that there is no fraud in their own accounts and their own way of delivering those accounts. I know that there is more than the local government fraud initiative. There are strong local government fraud policies and
processes which are beginning to identify pretty sharply the amount of money that is being lost. With that and the national fraud initiative, for which we are currently about to find a home, the issue will be well addressed.
My noble friend Lord Shipley raised a number of questions, which again I think will come up in the course of the rest of our discussions. I agree totally with him that where there is a local audit panel, it has to be seen to be independent. Under the Bill it will be because, although it does not have to be big, it has to have a majority of independent members on it. As the noble Lord says, it is desirable for the audit committee not to be comprised of only one party, and that is what one would hope and expect in local government where there is more than one party. Again, if the local audit committee were to try to turn itself into an audit panel to recommend new auditors, it would have to create a situation where it had a majority of independent members. We will come back to that because it is an issue that will come up as we go ahead. If I have not replied to every question, I am sure that I will have an opportunity to do so as we proceed.