Clause 5 is an enabling power that allows the Secretary of State to make regulations that provide for the audit of smaller authorities, defined as those with an annual turnover not exceeding £6.5 million.
There are two kinds of provision. First, there are those that will enable the creation of a proportionate, less onerous framework, mirroring the current limited assurance arrangements and in line with the smaller scale of the authorities. Secondly, there are those that will enable a person specified by the Secretary of State to appoint auditors to smaller authorities. The second kind of provision will facilitate the development of a sector-led body, as proposed by the National Association of Local Councils and the Society of Local Council Clerks.
Subsection (2) enables the regulations to disapply or apply with modifications any of the Bill’s provisions in relation to smaller authorities. Subsections (3) to (6) set out the matters that may, in particular, be included in the regulations.
To ensure a proportionate audit regime for smaller authorities, we propose to use regulations to make provision for the eligibility of an auditor of a smaller authority and for the nature of the audit itself. Our intention is that the limited assurance form of audit will be retained and specified in the code of audit practice, which will be produced, following abolition of the Audit Commission, by the National Audit Office. A limited assurance audit is a lighter-touch audit conducted off site and is proportionate to the small amounts of public money that smaller authorities control.
As explained in subsection (6)(a), the regulations may exempt specified types of smaller authorities from external audit. We propose to exempt authorities by reference to their annual turnover and to set that threshold at an annual turnover below £25,000. Subsection (6)(b) explains that regulations may make provision for the circumstances in which such an exemption would not apply. We propose to do that on the basis of risk, such as where a small authority is newly created or where an authority’s auditor has issued a public interest report in the previous financial year. Authorities exempted from external audit will still be required to appoint an auditor to undertake public interest duties.
All smaller authorities will be required to appoint an auditor, or have an auditor appointed on their behalf by the sector-led body, to undertake any challenge work, such as responding to elector questions and objections to items of account.
Provisions relating to a sector-led body are set out in subsections (3) and (4), which explain that regulations may provide for the Secretary of State to specify a person or body to appoint an auditor on behalf of a smaller authority, and to confer a power to set audit fees for authorities that opt in to its arrangements. Regulations may also set out arrangements, in the event of de-specification, for the transfer of the person’s rights and liabilities. This would ensure that any outstanding contracts continued to operate effectively on behalf of small authorities.
I now turn now to the Government’s amendments on this clause. Hon. Members will be aware that a commitment was made in the other place to bring forward an amendment to make similar provision to enable regulations to allow a sector-led body to appoint auditors to principal authorities. We intend to introduce a new clause to that effect, which we will be debating shortly. As a consequence of the new clause for principal authorities, amendments 5 to 13 make a number of minor changes to provisions for a sector-led body for small authorities. These ensure consistency with the new clause and clarify government powers to make regulations in relation to such a body.
Amendment 5 clarifies that the provision to make modifications to the Bill in regulations under clause 5 in relation to small authorities applies where specific provision about a small authority is already made in the Bill. Amendment 7 mirrors the new clause for principal authorities in allowing regulations to make provision about who may be specified by the Secretary of State as a sector-led body. Amendment 8 updates subsection (3) of clause 5, and provides further detail on the scope of any functions to be given to a sector-led body through regulations. As with the new clause, this includes functions on the appointment of auditors, on the activities of appointed auditors and on the resignation or removal of such auditors. Amendment 9 updates the existing power that enables regulations to give a sector-led body a duty to consult smaller authorities before setting fees. The amended power instead enables regulations to require the body to consult specified persons before exercising specified functions. This will allow, for example, regulations to require the body to consult on proposed auditor appointments as well as on fees. It would also allow regulations to require that audit firms, as well as audited bodies, are appropriately consulted.
Amendment 10 copies across a provision in the new clause for principal authorities, to confirm that regulations may make provision on how an auditor is to be appointed to an authority where a sector-led body is due to, but fails to, make such an appointment. Amendment 11 makes a minor change to the regulation-making power in relation to the procedure through which an authority can opt in or opt out of sector-led arrangements. This ensures that such regulations can make provision as to the role of both individual authorities and the sector-led body itself in relation to this process. Amendment 11 also makes it clear that regulations may impose duties on a smaller authority that has its auditor appointed by a sector-led body. As with principal authorities, this might include a duty to pay the appropriate fee to the sector-led body and to provide information that the body would need to make an appointment.
Amendment 13 replaces the existing power to make provision in regulations on the audit of the accounts of a smaller authority with a power to make provision on the functions of a local auditor in relation to the accounts of a smaller authority. This is intended to clarify that the regulations can make provision in relation to smaller authorities which will be exempt from the requirement for routine audit. These authorities will still be required to have an auditor appointed to undertake any challenge work that may arise, for example, from a question or objection to an item in the accounts from an elector.
Finally, amendments 6 and 12 amend references in clause 5 to “an auditor”, so that they refer instead to “a local auditor”.
We broadly support the clause and do not envisage a stand-part debate, unless the Chair thinks it necessary. We also broadly support the amendments, although I do want to test the effect of those amendments, specifically in relation to our amendment 87 but also, more broadly, the cumulative effect of the other arrangements. As the Minister says, we will be having a debate about sector-led procurement, but certainly in relation to new clause 1, I envisage that our focus at that time will be more on principal authorities and therefore this is an opportunity to seek some assurances and clarifications from the Minister about how the Bill will apply to smaller authorities.
The Bill will affect about 9,000 parish and town councils around the country in different ways. There is a three-tier regime. There is an exemption for those with a turnover of under £25,000 a year. There is an intermediate level, which I think the Minister envisages all town and parish councils coming under, but will he confirm that? Does he have any current figures on which town and parish councils will not be considered to be the smaller authorities under £6.5 million? Then there are the larger authorities, with a turnover of more than £6.5 million. It is clearly sensible to make the arrangements for smaller authorities proportionate. We welcome the way in which the Government have sought to do that, which is set out in clauses 5 and 6. When we come to the debate on clause 6 I will have some questions on the qualifying areas.
The Government were encouraged by the Earl of Lytton, the president of the National Association of Local Councils, to set out why the £25,000 threshold was chosen. He made the interesting point in the other place that that is half the salary of a clerk. It is easy to see how a small authority that takes the simple measure of seeking to professionalise their clerk will find itself subject to having to prepare a proper audit, rather than being exempted and being subject to the much lighter touch arrangements that apply to the smaller authorities. Will the Minister explain why the threshold was set at £25,000, rather than £50,000, which might allow a local authority to carry out its core functions? Many parish councils do not provide direct services but do employ a clerk, rent an office and manage small services within villages and small communities. Some councils will be caught by the threshold and will have to take part in the sector-led body, or procure an independent audit. Will the Minister explain how the £25,000 threshold was arrived at? I do not necessarily oppose it. We all want to ensure that public money—even £25,000—is spent well, but I want to know what consideration the Minister has given to why that level is right and who it will capture.
The Minister presumably envisages these to be opt-in arrangements for smaller authorities, and in the spirit of localism, we support them. The amendments will allow those opt-in arrangements to be developed. But what does he envisage will happen if an authority that has a turnover of £30,000 or £40,000, chooses—the Bill gives it the right to do so—not to participate in joint procurement because, in its view, it is not be priced attractively? As I understand it—the Minister can correct me if I am wrong—it would have to have an independent audit panel. Later, we will explore some of the challenges we foresee in setting up the independent audit panel, such as the cost. A small town or parish council may have to opt in to the joint procurement simply because the costs are prohibitive. I can foresee the practicalities being such a challenge that all smaller authorities will simply become part of a joint procurement arrangement. Has the Minister given assurance to the National Association of Local Councils, the Society of Local Council Clerks or any individual local authorities? I know he visited Sevenoaks parish council recently because he gave me an interesting written reply about his visit, and I know he is committed to this sector. What assurance has he given to smaller authorities that it will be in practice realistic for them to make a localist choice and not to opt in to the joint procure arrangements, given that they are subject to the other provisions in the Bill?
We had an interesting discussion earlier about joint procurement for principal authorities. Is it the Minister’s intention that NALC will be the co-ordinating body? It seems that it is the principal consultee at the moment, certainly from the Minister’s remarks and the submissions I have received from NALC. Does he envisage that NALC would lead the sector-led body or that some other form of arrangement might emerge?
I know NALC well, and declared an interest this morning as I have worked with it previously on extending the general power of competence and the power of well-being to town and parish councils. It is a light-touch, nimble and effective organisation, but is very small when compared with the Local Government Association in its annual turnover. If NALC is to lead the body, does the Minister consider that it would have the capacity and expertise to take on that leadership role? If not, who else is he looking at to develop that sector leadership?
Specifically in relation to smaller authorities, will the Minister comment on the transfer of the Audit Commission’s functions in relation to any outstanding contracts between 2015 and 2017 that relate to town and parish councils? That brings us back to my earlier question about which authorities would be captured, as the significance of those contracts relates to the size of town and parish councils. There will be some that are currently provided for by the contracts that have been let in the transitional arrangements. If contracts are transferred from the Audit Commission to the sector-led body for principal authorities, which was certainly the tenor of our conversation earlier and is the basis upon which the Minister is consulting the Local Government Association, for example—indeed, he has said that he does not want to set the details out in the Bill because the matter needs further work and there may need to be regulations—will there be separate arrangements for contracts to be transferred to the sector-led body for smaller authorities?
In either event, we need to consider the implications. For example, if the contracts are to be transferred to the joint procurement body for principal authorities, it could be done as part of arrangements in which the body is building capacity to become the sector-led body and so there might not be the opportunity for smaller authorities to develop their own sector-led body. On the other hand, if those responsibilities are transferred to the National Association of Local Councils or some new sector-led body for joint procurement for smaller authorities, my concern would be whether, frankly, that body would have the capacity to manage those contracts, given the important statutory functions in the management of those contracts. I hope the Minister can offer some reassurance on that point.
Amendment 87 is designed to test the intention behind the clause, and we have an open mind. As I understand it, the issue here is a letter of objection from a local elector needing a response—if I have grasped the wrong end of the stick, the Minister will tell me. We are concerned about the cost implications of meeting that new obligation for very small councils. In some cases they have very limited resources—where their resources are not above £25,000 threshold for auditing, for example. It may be that some kind of insurance could be provided at a reasonable cost for all those smaller authorities whose resources are not above the audit threshold but which are, rightly, required to respond to electors about their accounts. Alternatively, perhaps some kind of scale of charges could apply according to the turnover of those authorities. I will be grateful for an assurance from the Minister that that has either been considered or will be in future dialogue with NALC and other representatives of the sector.
I will try to make sure that I deal with all those points.
As Baroness Hanham said in the other place, in the command paper of 2012 that accompanied the draft Bill we committed to review the £25,000 threshold with a view to whether we potentially need to raise it in future. That was partly for the reasons the hon. Member for Corby laid out, and I understand the points he has raised. It is right that the threshold can be reviewed, and we are happy to make that commitment. There are a number of parish councils in my constituency, all of which work—as I am sure the hon. Gentleman knows that many do—on that much smaller scale where a parish clerk may get only a few thousand pounds. Where to draw the line is an issue, and that is why we think it is right that it is reviewed.
To deal with the hon. Gentleman’s query about the numbers, setting a threshold at £25,000 would remove about 6,400 or 64% of smaller authorities from the requirement to have an external audit. For hon. Members who have rightly raised issues about ensuring that public money is well covered and audited, it is worth noting that such authorities are responsible for just 7% of the total money within the smaller authority sector. On his query about smaller authorities, all parish and town councils are defined as smaller authorities—in other words, all those under £6.5 million.
I will turn to limits and insurance in a moment. In relation to financial safeguards for parish and town councils, we will give auditors the discretion not to consider an objection if they think it is frivolous and vexatious, if it repeats an objection that has already been considered or if the cost of the auditor’s investigation would be disproportionate to the financial amount that the objection involves.
We are working with the National Association of Local Councils, but it is still possible for the Secretary of State to appoint one sector-led body, whether it is the Local Government Association or any other single sector-led body to administer both parts, but the contracts are different, because smaller authorities obviously have less onerous systems, as has been outlined.
Amendment 87 would remove subsection (4)(c), which explains that regulations for smaller authorities may include provision for them to pay into a fund to cover auditors’ costs in specified circumstances. The provision has been included at the request of the smaller authorities sector. The proposed fund would be administered by the sector-led body, and would be available to authorities that opted into its appointment regime. The provision is necessary as many parishes and other smaller authorities cannot currently make such payments, because they are not covered by the general power of competence. We understand that the purpose of such a fund could be to indemnify auditors against costs incurred in legal proceedings relating to the exercise of their statutory powers. It would be for the sector-led body to choose whether to create such a fund. We will consult in 2014 on any draft regulations about the fund, and those regulations will be subject to the affirmative procedure. With those reassurances, I hope that hon. Gentleman will not press amendment 87.
I thank the Minister for his assurances. It seems that further work is still needed, but the spirit clearly exists to do it in partnership with the sector, which he knows well and to which he is absolutely committed. Given our earlier debate, Opposition Members particularly welcome the fact that the regulations will be subject to the affirmative procedure. In considering the Bill’s consistency, we urge him to consider whether other regulations might also be made subject to the affirmative procedure.
Amendments made: 6, in clause 5, page 4, line 9, leave out ‘an’ and insert ‘a local’.
Amendment 7, in clause 5, page 4, line 10, at end insert—
‘(aa) make provision about the persons that may be specified by the Secretary of State;’.
Amendment 8, in clause 5, page 4, line 18, leave out paragraph (d) and insert—
‘(d) confer functions on a specified person, including in relation to—
(i) the appointment of local auditors under the regulations,
(ii) the activities of such auditors, and
(iii) the resignation or removal from office of such auditors;’.
Amendment 9, in clause 5, page 4, line 21, leave out from ‘consult’ to end of line 23 and insert
‘such persons as are specified in the regulations before exercising specified functions.’.
Amendment 10, in clause 5, page 4, line 23, at end insert—
‘(f) make provision for the appointment of a local auditor in relation to the accounts of a smaller authority to which arrangements within paragraph (a) apply where the specified person does not make an appointment under the regulations (and in particular for such an appointment to be made by the authority or the Secretary of State).’.
Amendment 11, in clause 5, page 4, line 28, leave out paragraphs (b) and (c) and insert—
‘(b) make provision about the procedures to be followed in relation to opting into or out of those arrangements;
(c) impose duties on smaller authorities to which those arrangements apply, including duties as to—
(i) the payment of fees to a specified person, and
(ii) the provision of information to a specified person;
(d) make provision for the making of payments, in specified circumstances and by the smaller authorities to which those arrangements apply, to a fund of specified kind for the purposes of meeting local auditors’ costs of a specified kind.
(4A) Provision made by regulations under subsection (1) by virtue of subsection (4)(c)(i) may, in particular—
(a) provide for fees to be paid in accordance with a scale or scales of fees determined by a specified person, and
(b) provide for the payment in specified circumstances of a larger or smaller fee than is set out in the appropriate scale.’.
Amendment 12, in clause 5, page 4, line 35, leave out ‘an’ and insert ‘a local’.
Amendment 13, in clause 5, page 4, line 37, leave out ‘audit of such accounts’ and insert
‘functions of a local auditor in relation to the accounts of a smaller authority’.—(Brandon Lewis.)