My Lords, the regulations are among a number of statutory instruments which will put in place new arrangements for the audit of relevant authorities as set out in the Local Audit and Accountability Act 2014. Noble Lords may recall that my noble friend Lady Williams of Trafford kindly led the debate on the Wednesday before last on one of these instruments, an order delegating certain of the Secretary of State’s powers to the Financial Reporting Council. The others in the group are all negative instruments.
I do not wish to take up noble Lords’ valuable time by repeating in this debate the arguments supporting the abolition of the Audit Commission that were put forward during the passage of the Bill. However, it remains the view of the Government that the arrangements that we are putting in place, including these regulations, will create a more efficient audit system, giving greater responsibility to local bodies while providing greater opportunities for local people to hold those bodies to account. As has been said previously, this will save £730 million over the five years from 2012 to 2017—the duration of the outsourced audit contracts—and an estimated £1.2 billion over 10 years. As a direct result of this work being done by the private sector, the cost of external audit for local bodies will reduce by £30 million per annum.
Before explaining the content of the regulations, I should first explain their context. A local public body must appoint its own auditor unless it avails itself of such sector-led collective procurement opportunities
as may exist in future. It is important, however, that any authority appointing its own auditor does so taking into account independent, impartial advice from a source other than itself or the auditor. For this reason, we require such authorities to appoint an auditor panel to advise on matters of auditor appointment, resignation or removal, and to advise on the maintenance of an independent relationship between the audited body and its auditor. The panel must have a majority of independent members and be chaired by an independent member.
We already have in the Local Audit and Accountability Act 2014 descriptions of some basic associations which will render an individual not independent for the purposes of auditor panel membership. As I am sure noble Lords will appreciate, the local public sector presents us with a complex set of interrelations and personal interests, and a few definitions around independence had not been comprehensively developed in time to be included in the local audit Bill. The regulations being considered today reflect the further consideration and full public consultation on the detail in the form of draft regulations. We considered it important to consult fully the relevant sectors to ensure that the regulations are proportionate and workable. That consultation took place in autumn 2013.
Respondents to the consultation were broadly content with the measures. Of those expressing a contrary point of view, one respondent argued that back-bench councillors—those not in cabinet in those local authorities running under executive arrangements—should be considered independent for auditor panel membership. However, as all members of an authority have responsibility for appointing the auditor, the Government consider that they cannot be independent from that decision.
Another respondent recommended a shorter, two-year expiry for the period of non-independence due to association with bodies specified in the draft regulations. However, it is the Government’s view that five years is an appropriate period for the effect of those associations to have expired. Among the consultation responses, there was an appetite for guidance on the practical application of definitions of independence. We will consider this with the sector.
More generally, before the introduction of what became the 2014 Act into Parliament, we consulted widely both on the broad policy approach and, in more depth, on the proposed framework, through the publication of the draft Bill. Noble Lords may recall the parliamentary pre-legislative scrutiny committee that provided detailed scrutiny of the draft Bill. During its passage through Parliament, we also provided draft regulations on several key provisions in the Bill, including a draft of the regulations we are considering today.
These subsequent provisions on independence will provide some further definitions of links or associations that would render a person not independent for the purposes of the auditor panel. Persons who have commercial links with the relevant authority to be audited, and persons who have links with a prospective or appointed audit firm, will be added to the existing definitions in the 2014 Act. This is a straightforward measure, to avoid any predominating conflict of interest in the deliberations of auditor panellists.
Persons who are, or have been in the last five years, members of an entity connected with the authority to be audited, where the connected entity is also a relevant authority under Section 2 of the Act, will also be added. For example, an integrated transport authority is an entity connected with a passenger transport executive. This measure is necessary because the connected entity will also have relevance to the accounts of the authorities with which they are connected, as the connected entity’s accounts are consolidated into them. As a connected entity that is a relevant authority may have members, it is necessary to exclude them as well as officers and employees.
For the Greater London Authority, that means persons who are, or have been in the last five years, members or officers of a functional body of the GLA—for example, the LDA or the London Fire and Emergency Planning Authority. Similarly, for a functional body of the GLA, that means persons who are members or officers of the GLA or who have been in the last five years. Just as members or officers of the GLA cannot be considered independent for membership of the auditor panel, the close relationship these functional bodies have with the GLA must also necessarily render their members and officers non-independent as regards the auditor panel.
It is important to note that the links or associations I have just described, and those described in Local Audit and Accountability Act 2014, need not necessarily disbar a person from being on an auditor panel. In fact, persons with those associations might well have just the kind of expertise that would be useful to the panel in its deliberations. The effect of these regulations on such individuals is only that they must not chair the panel or be counted towards the independent majority required on the panel. The independent view must dominate on these panels, even though that view may have drawn on the input of those who are not independent but provide expertise in their opinions. I commend these regulations to the Committee.
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