HOUSE OF COMMONS
Fifth Standing Committee on Statutory Instruments, &c.
UPDATED CODE OF AUDIT PRACTICE FOR LOCAL AUTHORITIES AND THE NATIONAL HEALTH SERVICE IN ENGLAND AND WALES
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not later than
Tuesday 18 July 1995
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The Committee consisted of the following Members:
Chairmen: Mr James Hill
Chairmen: Mrs Gwyneth Dunwoody
Abbott, Ms Diane (Hackney North and Stoke Newington)
Austin-Walker, Mr. John (Woolwich)
Barnes, Mr. Harry (Derbyshire, North-East)
Bennett, Mr. Andrew F. (Denton and Reddish)
Beresford, Sir Paul (Parliamentary Under-Secretary of State for the Environment)
Hayes, Mr. Jerry (Harlow)
Hughes, Mr. Kevin (Doncaster, North)
Illsley, Mr. Eric (Barnsley, Central)
Jackson, Mrs. Helen (Sheffield, Hillsborough)
King, Mr. Tom (Bridgwater)
Kirkthorpe, Mr. Timothy (Vice Chamberlain of Her Majestys Household)
Legg, Mr. Barry (Milton Keynes, South-West)
Maitland, Lady Olga (Sutton and Cheam)
Marland, Mr. Paul (Gloucestershire, West)
Rendel, Mr. David (Newbury)
Riddick, Mr. Graham (Coln Valley)
Roberts, Sir Wyn (Conwy)
Stanley, Sir John (Tonbridge and Mailing)
Mr. Hennessy, Committee Clerk2 3 Fifth Standing Committee on Statutory Instruments, &c. Thursday 13th July 1995
[MRS. GWYNETH DUNWOODY in the chair]
The Parliamentary Under-Secretary of State for the Environment (Sir Paul Beresford): I beg to move, That the Committee has considered the updated Code of Audit Practice for Local Authorities and the National Health Service in England and Wales The code is not a Government document. It is a statutory guidance document produced by an independent body for independent professionals. My role is limited to bringing the code to the Committee for consideration and, I hope, approval. The content of the update code is not radically different from the current version. Changes have been made in the ordering of material, and it may be helpful if I rehearse the way in which it is now set out.
The Chairman: Order. May I encourage the hon. Gentleman to read more slowly? It is unkind to the Official Reporters to do otherwise.
Sir Paul Beresford: Thank you, Mrs. Dunwoody. The purpose of the audit is explained first, and section 2 then sets out the powers and duties of the auditor; the statutory functions of auditors are also listed in appendix A. Section 3 explains the required approach to audit, beginning with the general principles before dealing with planning, controlling and recording the audit, through to methodology. Auditors are specifically instructed to base their overall view of an authority's financial position on an annually updated assessment of financial risk to, or incurred by, that authority. That section also guides auditors on their responsibility to assess arrangements made by audited bodies to ensure the legality of their financial transactions. Section 4 deals with the outputs from audit, including certification and provision of an opinion on the accounts, value for money reports and annual management letters to audited bodies. Auditors now have more forms of presentation open to them, especially for their management letters. The passages about qualified auditors' reports have been rewritten to bring them into line with current professional guidance. That section also deals with reports in the public interest. The old instructions to auditors to avoid wording that could generate defensiveness and opposition has been updated to an instruction to use careful and unambiguous language. 4 Section 5 offers guidance on the exercise of special powers by the auditor on handling questions and objections from local electors, and on the consideration of action under sections 15(3), 19 and 20 of the Local Government Finance act 1982. Section 5 also deals with the auditor's power to issue a prohibition order and to apply for judicial review, which is covered by sections 25A and 25D of the Act respectively. Certain changes have been made specifically to bring the code into line with current thinking or to take account of recent developments. The key changes are, first, that references have been added to the auditor's statutory duties under section 3 of the Local Government Act 1992, which was not enacted when the current code was approved. Those are to ensure that, where an audited body has a duty to publish performance information, it has made sufficient arrangements for collecting, recording and publishing the information. Performance indicator work for the national health service is not covered by the code, as it is done in response to a request from the Department of Health, on a non-statutory basis. The updated code generally expresses the auditors' duties, including their duty of care, more clearly. That will help auditors themselves, and those who have an interest in their work, to understand better the framework in which they operate. In particular, new paragraphs on the scope of the code—paragraph 1—and the scope of the audit—paragraph 5—seek to dispel any misconceptions about how the code is to be applied or about what can be expected from the auditors. The code gives greater attention to the need for auditors to follow up local value-for-money work, to encourage audited bodies to realise identified opportunities for efficiency savings. The Audit Commission has a continuing duty to keep the code of audit practice under review, and in carrying out that duty it takes full account of external events such as litigation, which might result in the need to amend the code. It does not have to wait five years before coming to Parliament again with a revised code. However, the commission does not and should not seek to anticipate eventualities in the current version of the code. I hope that the Committee will agree that the commission has fulfilled its task in a thorough and professional manner and produced a code that lays down a proper yet practical course for auditors to follow. It is easy to take for granted the professionalism and integrity of the auditors and the Audit Commission, on which we rely to ensure that public money is properly accounted for. But those standards are not achieved by accident. They are the result of personal commitment and of professional attention to detail. The code has a key role in ensuring that audit work is carried out thoroughly and effectively. I commend it to the Committee.
Mr. Eric Illsley (Barnsley, Central): The document that we are debating places the Opposition in a difficult position. It has been prepared and written by the Audit Commission, so we cannot amend it. Indeed, this is our 5 first opportunity to discuss some of the points in it. I want to raise one or two points about particular paragraphs, and if the Minister is unable to respond them, he could take them up in correspondence to save the time of the Committee. The revised code, which has been produced under the five-yearly review, has not come a moment too soon, in view of the comments of the right hon. Member for Richmond and Barnes (Mr. Hanley) in a debate on local government in the House on 30 June. He referred to the Government having exposed "a catalogue of endemic waste, bureaucracy, mismanagement and, yes, even corruption."—[Official Report, 30 June 1995; Vol. 262, c. 1147.] The Government's view, then, is that local government is riddled with mismanagement and corruption, and that the Audit Commission or district auditors are not fulfilling their functions. If the right hon. Gentleman is to be believed, we should perhaps be debating the functions of district auditors and the Audit Commission. I do not, however, accept that view. Local authorities are mostly responsible organisations and attempt to provide quality services for their populations. The right hon. Gentleman none the less mentioned more than 15 different local authorities and alleged that there was corruption, illegality or mismanagement in each of them. The Opposition welcome the code of practice as far as it goes. We are on record as calling for the district audit service and the Audit Commission to be strengthened. In particular, we want the Secretary of State to be given a power to set up an inquiry and to take action after an audit report. We want a tougher audit service and Audit Commission. We might return to debate the code of practice, depending on whether the Nolan committee recommends that district auditors should have the power to investigate the conduct of members and officers of local authorities. The Nolan committee will be debated in the House next week, and it remains to be seen whether consideration will be given to allocating to district auditors the duty to which I referred. It is of course essential that proper and adequate audits of local government and the NHS are carried out. The second paragraph on page 8, in the explanatory foreword, mentions the auditor's independence. I want to emphasise that paragraph because of the situation that recently arose in Lambeth. The district auditor there signed off the local authority's accounts last year, but failed to recognise that Lambeth had spent the balances that it had allocated to its schools. The independence of the district auditor was called into question. In paragraph 12, which deals with auditor's assistance, the word "competent" has replaced the word "qualified". Assistants no longer have to be "experienced and qualified", but to be "competent and experienced". That devalues the code, because auditors and their assistants should be properly qualified. It is difficult to understand 6 why the change has been made to the code. Given the amounts of money involved, and the difficulties faced by local authorities, it is essential that qualified personnel deal with auditing. Paragraphs 22 and 48 relate to fraud. Paragraph 22 states: "It is not the auditors' function to prevent fraud and irregularities", but paragraph 48 states that the audit must be planned so that the auditor can detect "material misstatements … including those that might result from fraud". The code is a little cloudy on that point. Either the district auditor has a duty to detect fraud or he does not, and the position ought to be made crystal clear in those two paragraphs. If the district auditor must detect fraud that should be stated, and the reference to the auditor's not having a function to detect fraud should be omitted. Why should the district auditor have to be satisfied that the audited body has the machinery in place for the collection of data for performance indicators, as is specified in paragraph 25? That is not an audit function. Performance indicators are welcome, although perhaps they should be improved, but should it be the district auditor who is required to ensure that a local authority is collecting information in relation to performance indicators, or should the Audit Commission or the Department of the Environment have that power? Is it really an audit function? Paragraph 49 lists areas in which corrupt practices may be found. We question whether the payment of benefits and education awards should have been included in the list of corrupt practices that the district auditor can investigate. Paragraph 52 takes account of legal advice. The Association of Metropolitan Authorities has expressed disquiet about legal advice provided by the Audit Commission. I understand that the association objects to the Audit Commission's giving legal opinions or opinions of law which district auditors then enforce. The association questions whether it is the Audit Commission's job to supply legal opinions and to ask the district auditor to enforce them. The problem has recently been confused by the outsourcing of the Audit Commission's solicitor. An article in the Local Government Chronicle said: "Former Audit Commission solicitor Tony Child has panicked councils by contradicting the DoE's guidance on pensions and the transfer of undertaking regulations." I shall not read further from that article, but it appears that Mr. Child has contradicted the Government's advice. Councils are worried because they now have contradictory advice from the Department of the Environment and from a former Audit Commission solicitor. They are confused 7 about which advice is correct. The provision of legal opinion is brought into question by the Association of Metropolitan Authorities. Paragraph 74(a) suggests that the district auditor has a duty to comment on local authorities' reserves and balance and to say whether they are too great or too small. I refer to that because the theme comes up every year in the capping debate in the House. Many local authorities mention their lack of balances in their submissions to the Secretary of State, and that lack is compounded year on year, as authorities in financial difficulties try to use their balances judiciously and at the same time try to maintain an adequate level, usually on the district auditor's recommendation. Usually the Government ignore that, and do not take the problem into account during the capping debate. Paragraph 94 deals with objectors. Again, a query has been raised by the Association of Metropolitan Authorities. It believes that it is wrong that objectors to a local authority's accounts have to find the resources to pursue their objections, and have to be legally qualified. I draw the Committee's attention to the case in Westminster in which objectors revealed £100 million of unauthorised expenditure. That is now under investigation by the district auditor. Should not objectors be given financial assistance rather than being required to meet the costs of objecting? Notwithstanding those inquiries, we welcome the code. We will not vote against it, as we want it to be implemented.
Mr. Tom King (Bridgwater): The hon. Member for Barnsley, Central (Mr. Illsley) referred to the Nolan committee—I declare an interest as a member of that committee—and to its comments about auditing. Will my hon. Friend the Under-Secretary tell us when the Government are likely to respond on that issue?
Mrs. Helen Jackson (Sheffield, Hillsborough): Will the Minister deal with a couple of points before we go ahead with the review of the code? I think that I am right in assuming that the code applies to local authorities and health authorities. There is little distinction between the two except that for health authorities any irregularity has to be referred to the Secretary of State, whereas local authorities have to refer to the electors, who can comment, as is set out in appendix A. The general point that concerns me arises out of paragraph 25, which refers to the responsibility to "collect, record and publish" the specified information. The practice of different health authority trust boards varies with respect to the publication of financial matters and financial discussions, and the practice within health authority trust boards differs from that of local authorities' committee proceedings, in which the practice is to publish 8 the information. According to the investigations that I have made, it has not been the practice to publish such information in health authorities. Will the Minister comment on that and ensure that the Audit Commission is made aware of the need for openness, as is practised in local authorities, in health trusts? Linked to that issue is the important matter of capital budgets and assets. In paragraph 5, which describes the scope of the audit, it is clear that the new code is supposed to "safeguard the assets of the audited body". In correspondence with Ministers and in parliamentary questions, I asked about the transfer of capital assets from the regional health authority to the various health trusts as they were being set up. I was surprised when I received a parliamentary answer informing me that there was no centrally held register of health authority land and assets before the break-up and disposal of those assets to the various trusts that now form hospitals and community health trusts. The scope of the code of practice should cover in some detail how capital assets are to be disposed of, especially in health authorities, in which there is not the same transparency and openness about capital receipts, capital sales and transfer of capital as there is in local authorities.
Sir Paul Beresford: I shall start with the comments of the hon. Member for Sheffield, Hillsborough (Mrs. Jackson), although I cannot give her a complete answer. I do not know of the particular case to which she referred, and the relationship between the auditor, the Audit Commission and the health authority is slightly different, as I understand it, from that with the local authority, as it is more on the basis of an application from the health authority than the other way round. I shall certainly consider the points that the hon. Lady raised and pass them on, as I shall pass on her comments on openness to the Audit Commission. At this stage, that is the best that I can do. I am afraid that, as I suspect that he is aware, I cannot give an answer to my right hon. Friend the Member for Bridgwater (Mr. King). If an answer is available I shall ensure that we write to him as quickly as possible.
The Chairman: Order. Will the Minister address the Chair, please?
Sir Paul Beresford: Thank you, Mrs. Dunwoody. The hon. Member for—
The Chairman: Order. It is very difficult to hear in this Room, and there is a lot of noise outside. It would help if Ministers and others addressed the Chair.
Sir Paul Beresford: Thank you Mrs. Dunwoody. The hon. Member for Barnsley, Central asked a number of questions, some of which were off the point that we are 9 debating. However, I shall certainly chase them up and write to the hon. Gentleman. He mentioned the desire for a tougher service, and although that is beyond the scope of today's debate, I am tempted to agree with him. The point of the measure is to ensure that those few authorities that have strayed—I agree that they are a small percentage of the total—are brought back into line. The other function of the Audit Commission and the district auditor is to assist local authorities, especially regarding value for money. That answers some of the hon. Gentleman's points. There was a comment about performance indicators, which the Local Government Act 1992 applied to auditors. That is not directly related to our debate; however performance indicators are best operated in local residents' interests if the district auditor undertakes them, especially as that role could be integrated with examining value for money. With regard to legal opinions, we desire two objects, and we are achieving them by outsourcing. We want to differentiate between the Audit Commission and the district auditor so that there is a definite, arm's-length 10 break between them. That is correct, and it is emphasised by the code. More importantly, we want there to be an opportunity for the auditor to obtain a variety of legal opinions. That is appropriate, because he will then be able to choose the legal opinion that he seeks for a particular case. The hon. Member for Barnsley, Central made a comment about a debate on capping and balances. That is probably a debate for another day, and I see from the smile on the hon. Gentleman's face that he recognises that. I shall consider that matter and one or two other questions. On the assumption, however, that the hon. Gentleman has put his wooden spoon away, I commend the order to the Committee.
Question put and agreed to
Resolved That the Committee has considered the Updated Code of Audit Practice for Local Authorities and the National Health Service in England and Wales.
Committee rose at seven minutes to Eleven o'clock.
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Mrs. Gwyneth Dunwoody (Chairman)
Beresford, Sir Paul
Jackson, Mrs. Helen
Maitland, Lady Olga
Roberts, Sir Wyn
Stanley, Sir John