My Lords, the definition of independence is set out in Schedule 4, which says that a person is independent if they are not a member or officer of the authority and have not been within the past five years, or a “relative or close friend” of such a person. Questions of objectivity and competence, particularly competence, are, apart from qualifications in accountancy, a little more subjective. Professional competence is defined by qualifications rather than by other things.
The intention here is to allow flexibility rather than to be too prescriptive. I am told that 80% of local authorities already have audit committees; 31% have at least one independent member and 15% have more than two independent members. If panels can be constituted from members of the audit committee, that is fine, provided that they are independently chaired and have an independent majority. There could be two independent members of the local audit committee, plus one other, to make the specific appointment for external audit. I assume we all accept that there is a difference between the continuing internal audit process and the appointment of external auditors. We are trying not to be too prescriptive on this, but that is the distinction that we are drawing.
There are concerns that audit committees will get in a muddle about having audit panels alongside them, but that is not at all necessary, particularly in larger authorities. We are not convinced that we need to make audit committees a statutory requirement in local government, although, of course, practice is such that the overwhelming majority of large and small local authorities have audit committees. Local authority audit committees may wish to set up a small auditor panel, which may be connected with the audit committee, provided that it has an independent chair and an independent majority. There can be important links between the role of a panel and the audit committee, but their specific roles are distinct.
We do not think that there is a wider case for imposing statutory majority independent audit committees on local government for internal audit, for some of the reasons mentioned, but for a panel that appoints the external auditors that case should stand. Under the accounts and audit regulations, local authorities are already required to ensure that a committee, or a meeting of the whole body, reviews arrangements for the internal control and effectiveness of internal audit, approves the annual governance statement and considers and approves the statement of accounts. That is what the audit committees in most local authorities already do, usually led by back-bench councillors and, as noble Lords have said, very often by opposition councillors. However, the Government are not prescriptive
about the precise structure that local bodies use to meet these requirements. Based on these existing functions, guidance from the Chartered Institute of Public Finance and Accountancy suggests that members of audit committees should be independent of the executive but need not be fully independent of the council.
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The Bill therefore includes the flexibility for bodies to retain their existing councillor-led audit committees by setting up a separate independent panel. Where an authority wishes its audit committee to advise on auditor appointment and independence, it is right that that committee has a majority of independent members. A general requirement for majority independent audit committees, without any flexibility, would be more prescriptive and possibly even bureaucratic. It would require local authorities to significantly restructure their existing audit committees, even though they might be functioning well with respect to their current, non-appointment-related roles. In the light of these reassurances and the flexibility that the Bill continues to provide to local bodies, I hope that the noble Lord will be willing to withdraw his amendment.
Perhaps at the same time it might be appropriate if I reply to the noble Earl, Lord Lytton, on his amendment, which would remove the requirement for a relevant authority’s auditor panel to consist of a majority of independent members. The amendment would mean that a panel would need to have only an independent chair. We understand that the amendment might be related to concerns that we avoid any undue burdens on local bodies. There might also be concerns that some authorities would struggle to find enough skilled and fully independent members to form a majority. Given the noble Earl’s interests in the smaller bodies sector, I understand that he might have particular concerns about ensuring that requirements are proportionate for smaller bodies that choose not to take part in central procurement arrangements.
As we discussed earlier this week, protecting the independence of the auditor is critical to ensuring the quality and integrity of audit. The pre-legislative scrutiny committee endorsed the need for a properly independent panel to oversee auditor appointment. In the companies sector, guidance from the Financial Reporting Council recommends that audit committees consist of independent non-executives. It is right that panels advising on auditor appointment should be majority independent.
The Bill meets these aims while minimising additional bureaucracy and burdens for local bodies. There is no requirement for panels to be large. If, for example, a panel consisted of three members, which is the recommended minimum size of audit committees in Treasury guidance, only two independents would be needed to form a majority. The Bill also allows bodies to share panels to further minimise any burden.
On the possible concerns about smaller authorities, I agree with the general principle that arrangements need to be proportionate. In most cases, I expect that such bodies will participate in central procurement arrangements, so they will not need to have a panel. Where a smaller authority decides not to participate in such arrangements and makes its own appointment, it
is right that a majority panel should oversee auditor independence. As I have said, the Bill therefore provides flexibility to allow authorities to minimise any burden. A smaller body might, for example, choose to share an auditor panel with a larger neighbouring authority where they would otherwise struggle to find independent members. With those reassurances, I hope that we have satisfied the noble Earl’s concerns and that he will not press his amendment.