My Lords, this may take only a little time, partly because the noble Earl, Lord Lytton, and I have had an opportunity to discuss the issues that he has raised today. Actually, I may take a little
more time to respond because it is quite important that this is on the record and that people can see where this is going.
I thank the noble Earl not only for the thoughtful contribution that he has made today but for the pragmatic way in which we have discussed the whole issue of having a central or non-central body to do this. The regulations that the Government propose in relation to smaller authorities need to accomplish two things. They need, first, to enable the development of a viable sector-led body to appoint auditors to smaller authorities and, secondly, to set up a proportionate accounting and audit regime for small authorities that minimises the administrative burden while ensuring accountability for the public money that they control.
In relation to the first of those points, I am grateful to the noble Earl for being pragmatic about this, and for listening to what I said earlier about systems such as this being central but not mandatory and giving opportunities for smaller authorities that wish to appoint their own auditors to do so. In reality, though, one is bound to say that for the small authorities it would be a godsend to have a body helping them with it. While we certainly will not change our view about the question of whether this is mandatory, we would expect quite a large number of the small authorities to want to join in. I am pleased to be able to offer the noble Earl the assurances that he seeks that we will bring forward regulations in relation to the sector-led body. I will write to him setting these out and then perhaps we can discuss them further if necessary. The second purpose of the smaller authorities regulations will be to set out proportionate accounting and audit requirements.
I intend to lay a statement of policy intent, which I hope is now in the Library—it should have gone in today—which will share with noble Lords further detail about the proposed audit arrangements for smaller authorities. In this document, the Government confirm their intention to retain the limited assurance form of audit. It will be specified in the code of audit practice, which will be produced following abolition of the Audit Commission by the National Audit Office. As the noble Lord said, limited assurance audit is a lighter-touch form of audit, which is conducted offsite and is proportionate to the small amounts of public money that the smaller authorities control.
The Government also intend to maintain the current accounting requirements for smaller authorities. In addition, they propose to exempt the smallest authorities—those with an annual turnover below £25,000—from the requirement to have external audit. In the command paper published with the draft Bill last year, we said that we would review how this level works, if necessary raising the threshold once the system is up and running. Therefore, it is in mind but how it is working will have to be demonstrated. The exemption will not apply in certain circumstances. For example, where a small authority is newly created or where an authority’s auditor issued a public interest report in the previous financial year, authorities exempted from external audit will be required to appoint an auditor to undertake those public interest duties.
With regard to the specific amendments, I think I will turn to Amendment 12A at the end. That is what the noble Earl did and, if I may, I will follow his line. Starting with Amendment 13A, this appears to capture the noble Earl’s concerns most fully. The amendment enables the Government, when making the regulations under Clause 5, to have regard to the size of the electorate, the authority’s income, and whether the effect of those regulations would be “onerous or disproportionate”. The Government’s view is that the regulation-making powers in Clause 5 allow us to do that without additional provision.
The Government’s purpose in taking those powers is to enable them to make regulations that will set out a proportionate accounting and audit regime for smaller authorities. The proportionality that the Government envisage will be defined in relation to the higher of the authority’s gross income and gross expenditure rather than just its income, a point raised by the noble Earl. We do not propose to take into account the size of an authority’s electorate because income and expenditure are the most relevant criteria in relation to the primary purpose of audit, which is safeguarding public money. The size of an authority’s electorate is not material and members of a large electorate may individually pay a very small precept and vice versa.
I turn to Amendment 12A. One of the purposes of Clause 3 is to specify the financial year for relevant authorities that are not health service bodies. It does that in subsection (4) with reference to 31 March, but subsection (5)(a) gives a power by regulation to change that period either for all authorities or for particular authorities. Subsection (6) allows regulations changed in the financial year to make amendments or modifications to this legislation or provisions made under it in their application to the bodies whose financial years are changed. The main purpose of that power is to allow dates to be changed to such purpose as the preparation and publication of the statement of accounts so that they are consistent with the changed period of the financial year.
I hope that this explanation will provide a useful background to understanding Amendment 12A. The amendment adds the words “including exemption” after the word “application”. I find it difficult to see what this adds to the power. If the purpose is to confirm that the financial year can be altered even for a body that is exempt from audit, I am happy to confirm that, but I have to say that the Bill as it stands allows that and the amendment would not do anything more.
Perhaps I may deal with Amendment 14 in the name of the noble Lord, Lord McKenzie, once I have finished with the amendments in the group. Amendments 14A and 14B would enable regulations to exempt or partially exempt a smaller authority from the need to have an auditor panel. The sector-led body for smaller authorities that, as we have already said, we intend to provide for in regulations that are non-mandatory, will in effect assume the functions of the auditor panel. We propose to exempt smaller authorities which have opted into the sector-led body from the requirement to have an auditor panel. By definition, the auditor scrutiny
would be undertaken by the sector-led body. We will do that in regulations made under Clause 5 and we do not need to make additional provisions in the Bill.
The exemption will not, however, apply to smaller authorities which opt out of the sector-led body. I suggest that these will need to appoint an auditor panel to advise on the appointment of an auditor, which would ensure that proper scrutiny takes place. We do not expect those auditor panels to be large. The Bill does not set a minimum size, but Treasury and CIPFA guidance on audit committees recommends that they should comprise at least three members, in which case two independent members would be required. To make it easier for the authority to find panel members, we do not intend to preclude suitably experienced individuals from serving on more than one panel. In addition, the Bill allows authorities to share auditor panels if they wish to minimise additional costs of bureaucracy.
Amendment 14C has a similar effect to Amendments 14A and 14B. Clause 12 requires the authority to inform the Secretary of State if there is a failure to appoint an auditor and enables the Secretary of State to direct the authority to appoint the auditor named in the direction or to appoint an auditor on behalf of the authority. The precise effect of the amendment would of course depend on how such regulations were drafted and, in particular, which small authorities they captured.
The Government accept that the smaller authorities’ regulations will need to apply modifications to Clause 12 in the case of smaller authorities which opt into the sector-led body. We do not of course envisage that the sector-led body would default on its obligation to appoint auditors. We will not propose to disapply these provisions for smaller authorities which opt out of the sector-led body. As with the noble Earl’s other amendments, we do not need to take a separate power to make these modifications in regulations, as they are already allowed under Clause 5.
To conclude, the Government propose to publish draft smaller authorities’ regulations in the autumn for consultation. I am sure that the National Association of Local Councils and the Society of Local Council Clerks will continue to work closely with us to help shape those regulations and to ensure that they are fit for purpose for smaller authorities. I hope that with those assurances, the noble Earl is willing to withdraw his amendment.
Before he does so, perhaps I could refer to Amendment 14, tabled by the noble Lord, Lord McKenzie, which will scoop up this part. This amendment would place a duty on the Secretary of State to issue guidance on the definition of gross income and gross expenditure for the purpose of determining whether an authority qualifies as a smaller authority in a financial year.
Gross income and gross expenditure are terms used now in the accounts and audit regulations to define the smaller bodies threshold and no further guidance is given, but I see that with a duty in future being on the relevant bodies to assess their income and expenditure against the threshold, there may be times when guidance on interpreting the terms could be useful. This guidance need not be statutory or issued by the Secretary of
State. However, the Secretary of State may issue guidance on this matter if he wishes. In addition, there is provision in subsection (5) to enable the Secretary of State to make regulations to amend Clause 6. This may be used to amend the threshold or to add further conditions and could be used to require smaller authorities to have regard to any such guidance.
However, the noble Lord makes good points and I am happy to take the question of guidance back so that we can have another look at it. If I do not manage to do that by Report, I hope at least that we will have it in writing before Third Reading. I put that marker down now so that there is no argument at Third Reading about whether it is relevant. I hope that, under those circumstances, the noble Lord, Lord McKenzie, may be willing not to press his amendment.
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