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”.