I hope that we can bring some unanimity to the Committee on amendment 96, which would require authorities to have an audit committee. In the past the Government have not wanted to impose on local authorities a duty to have such a committee. However, they have recognised—I know that the Minister would agree, and so would the hon. Member for Burton—that many local authorities have such committees, which play an important role.
Many local authorities have a process of independent audit, which is the Minister’s preferred option, and we are now entering a new, post-Audit Commission world. We have tabled a sensible small amendment, which would affect only a small number of authorities. It would require them to have an audit committee, which would fulfil a vital function.
Audit committees play a vital role in good corporate governance, because they bring an objective, independent appraisal of how effectively an organisation achieves regularity, probity and value for money. Local government councillors and officers have onerous and important financial and legal responsibilities—the hon. Member for Burton commented on that a moment ago, before he left the Room. The audit committee provides a key source of assurance that those responsibilities have been met.
The increasing prominence of audit committees in both public and private sectors reflects the pivotal role of audit for corporate governance. The CIPFA framework that I have mentioned, “Corporate Governance: A Framework for Public Service Bodies” recommends that all public service bodies should establish an audit committee comprising non-executive members with responsibility for the independent review of the systems of internal control and the external audit process.
The CIPFA guidelines state that the purpose of an audit committee is to provide independent assurance on the adequacy of the risk management framework and the associated control environment, and independent scrutiny of the organisation’s financial and non-financial performance to the extent that it affects exposure to risk and weakens the control environment, and to oversee the financial reporting process.
In some ways our amendment follows on from the debate we just had about the assurance that we can have about how systems operate in local authorities. I imagine that my hon. Friends who spoke so strongly would agree that audit committees are just one part—aside from our amendment on limiting terms of appointment—of the assurance that there could be about independence in a local authority, and suitable checks, balances and controls.
I will list the core functions of audit committees because I hope that the Minister will support the amendment, and that we may be able to agree or work together on a new clause to define, in brief, their core role. I hope that if I set out the core functions he will understand what we intend in relation to what the committees already do in most local authorities, and what new ones will do in the few that do not currently have them.
Audit committees would consider the effectiveness of the authority’s risk management arrangements, the control environment and associated anti-fraud and anti-corruption arrangements. My hon. Friend the Member for Derby North mentioned those things in relation to the excellent report by Transparency International.
An audit committee would seek assurances that action is being taken on risk-related issues identified by auditors and inspectors; it would be satisfied that the authority’s assurance statements, including the annual governance statement and audit opinion, properly reflect the risk environment and any actions required to improve it; it would approve but not direct—that is a crucial point—the internal audit strategy; and it would plan and monitor performance. We know from the evidence given to the inquiries by the Communities and Local Government Committee and the ad hoc Committee that internal audit is growing in importance in local authorities around the country, and I think we can all see that that is a positive development. Approval and monitoring of performance would be important functions of an audit committee.
The audit committee would review summary internal audit reports and the main issues that arise from them, and seek assurance that action has been taken where necessary. Because they are concerned about the operation of their local authorities, the Minister and all Committee members, along with the independent audit panel, the auditors themselves, the finance officers or others working in audit and corporate governance, should all take great comfort from and support the fact that audit committees would—if I can use a colloquialism—have some clout in authorities to ensure that their reports and recommendations were acted upon.
The committee would receive the annual report of the head of internal audit. It would consider the reports of external audit and inspection agencies. Although in the arrangements under the Bill, the independent audit panel will have a role in appointing the auditor, its role is largely limited to that, and rightly so when we consider the level of bureaucracy involved. We must recognise that the panel has a very limited role. In a local authority, it is necessary to have day-to-day assurance that money is being spent well, that there is value for money, and that there is probity and independence in the use of money. In the increasingly complex world about which my hon. Friends have spoken—including my hon. Friend the Member for City of Durham, who spoke about local enterprise partnerships on Tuesday—the assurance that audit committees could give the public is important.
Audit committees would ensure that there are effective relationships between external and internal audit. They would also ensure that the working relationship between private sector auditors and, we hope, new firms at least every five years—ideally every 10 years—is working well and that the value of the audit process is actively promoted. Crucially, audit committees would review the financial statements, the external auditor’s opinion and reports to members, and monitor management action in response to the issues raised by external audit.
A small number of authorities do not currently have a committee. Of course, some have something that looks like an audit committee, but is called something else and sits as a sub-committee or panel of the authority, and they may simply be able to think about how it applies the CIPFA rules and re-recognise it as their audit committee. However, without the Audit Commission, in authorities without the effective functioning of an audit committee, all the important roles I have just outlined are essentially left to the full council. They are left to the general assembly of the council, the agendas of which are often packed—I know that from real world experience as, like many Members, I have been a councillor.
A quick point of clarification on the wording of the amendment, which says:
“A relevant authority must have an audit committee, which may be instructed…to appoint the auditor panel”.
Why did the hon. Gentleman choose the word “may,” and what are its implications?
There are two reasons for the use of the word “may.” The first is that I am a localist, as the hon. Gentleman knows, and I do not wish to impose on an audit committee a new role or burden that it does not wish to take on or see as its core function. Secondly, audit committees will of course take various forms. I do not intend to be too prescriptive, which is why I recommend that if we allow for a new measure that sets out some of the core roles of an audit committee, it is not overly prescriptive—for example, it must not require the committee to appoint the independent members of the audit panel.
However, I also anticipate that the Minister might argue, in the spirit of how he and his officials have constructed the new arrangements, that independent appointments must be made by the full council. I can understand that argument, but we would seek to give the flexibility for the full council to delegate responsibility for the detailed work of independent appointment if it considered it appropriate.
Is the hon. Gentleman’s proposal not just a bit too prescriptive, especially bearing in mind the fact that some authorities may simply be too small to justify a full audit committee?
The role of the audit committee should be proportionate, as is the whole process of audit. Proportionality is a core principle. The audit committee may meet more frequently and include more members—the CIPFA guidelines are very broad and membership can range from three to 17. In a small authority, we might envisage a committee of three that meets quarterly and concerns itself with expenditure of £10 million of public money, and therefore that is not too onerous. As opposed to that, the audit committee in a large authority, spending hundreds of millions of pounds of public money, may meet more regularly and have more members to undertake a wider role in the local authority.
We deliberately intend not to be too prescriptive—I understand where the hon. Member for Stroud is coming from. Instead we are saying that this is good practice, recognised by CIPFA and doubtless by most of the local authorities represented by Government Members as well as those represented by my hon. Friends. Therefore, at a time when we are reviewing audit arrangements in local government and across relevant authorities, it is a sensible amendment to make. It reflects customer practice across the country, but addresses a tiny number of councils—about 10% —that do not currently have audit committees.
When I say tiny, we have to reflect on the fact that we are still talking about hundreds of millions of pounds of public money that is not in any way accounted for through an audit committee. Therefore we should be concerned about what internal controls there are. The amendment seeks to ensure that, in those cases, they catch up with good practice and do something that links well with establishing, for example, an independent audit panel and having a new process of independent audit.
Audit committees are good practice in the private sector and most charitable organisations have them. I looked at some research on this by the Charity Commission and it includes very small organisations. Bearing in mind that local authorities with responsibility for more than £6.5 million are required under the Bill have to have the full audit, we would not call any of them small in terms of the amount of public money for which they are responsible.
If the hon. Member for Stroud and other hon. Members are minded to support the amendment, we could debate how prescriptive to be and what level of prescription is desirable. The characteristics would be: a strong chair displaying a depth of skills and interests and, I am sure, an intolerance of phrases like “chucking the baby out with the bathwater”.
They do not always add to debate. The characteristics would also include: unbiased attitudes, again displayed by Sir Edward today; treating auditors, the executive and the management equally; the ability to challenge the executive when required; and membership of the audit committee that is balanced, objective, independent of mind and knowledgeable.
One thing about audit committees that we should recognise and cherish in local government is that they always work most effectively on an apolitical basis. They are a little oasis of joint working in local authorities, where members come together, leave their party cards at the door and concern themselves with ensuring that public money is spent well.
The hon. Gentleman is generous in giving way. Linking back to the debate on new clause 1, does he envisage that, in the instance where the authority was considering opting into the collective procurement arrangement, the audit committee would have power to make that decision? Would it be the decision-making body for opting into this collective procurement arrangement, or does he have other arrangements in mind?
The hon. Gentleman makes an important and interesting point about the remit of the audit committee within the authority in relation to the new arrangements. However, this relates to my answer to his point that a local authority may delegate to its audit committee the role of appointing the independent panel. It may also delegate to its audit committee the role, for example, of considering in the first instance whether to use a national procurement option or an independent panel, and of considering the relative merits of those two different arrangements. It could also do so in greater detail and doubtless with more expertise than if this matter were considered at a local authority’s general assembly or full council meeting.
So while we would not wish to be prescriptive and would rather leave the delegation of this role to local authorities, I can well imagine them thinking that it makes sense to delegate some of these matters to their audit committee. However, part of the audit committee’s corporate governance function is to see that important delegations, including those that relate to the audit process, are carried out effectively with effective reporting back to the full council or general assembly. In the spirit of localism that the hon. Member for Halesowen and Rowley Regis and I always embrace, I suggest that we be not too prescriptive but allow local authorities the opportunity—through the audit committee that they would all have if the Minister supported our amendment—to make decisions on the best arrangements.
I had more to say on the role of audit committees, but I sense that we have explored that point well. We are absolutely clear that local circumstances must determine the most appropriate structure and membership of any committee. Research shows that the most effective audit committees have chairs with strong leadership qualities. Often, local authorities choose to have an opposition member chair the audit committee, which is usually good practice in the scrutiny process. However, circumstances vary across the country and local authorities cannot always neatly determine which opposition member might take that role, save to say the chair of the audit committee and its members will play a vital role in bringing some independence and assurance to both the local authority and the auditors.
The group contains several other amendments—97, 98 and 99—that I wish to deal with briefly. The hon. Member for Halesowen and Rowley Regis made the point about not wishing to be too prescriptive only a moment ago, as did the hon. Member for Stroud. I therefore hope that I will have their full support for this. The amendments deal with the unnecessary prescription in the Bill on public appointment; in particular, for setting out notices about public appointment.
We do not think that the Secretary of State should take on the role he seems to want of being the public relations officer-in-chief for all local government and determine the best way to notify the public how a council operates. The way a local authority determines is best to inform the public of its appointment of an auditor is clearly a matter of common sense and local circumstance. That is subject to some minimum requirements, which are recorded in the clause, and that is why we seek not to delete the clause entirely, but to make sensible amendments to it.
We hope to add to transparency through amendment 97, which would provide that the notice must state the term of appointment. That relates very much to our earlier amendment on the competitive nature of the market and the need for appointments to be renewed periodically. We want to ensure, subject to a European procurement rules exercise, that if an authority chose to appoint independent auditors directly rather than through the national procurement option, auditors who may wish to seek that contract know the year in which the appointment needs to be renewed well in advance. We suggest that the Government should see a requirement to state the term of appointment as a sensible, small amendment.
Amendment 98 would omit those overly prescriptive aspects of the clause.
I am surprised by the hon. Gentleman’s position on the 28-day notice period. He has expressed concerns about probity and ensuring accountability, but is it not right to have some stipulation of the length of time an authority should take to publish information that is vital to local accountability and probity, as he said earlier?
Again, the hon. Gentleman is absolutely right. That is why we have not sought to remove the 28-day requirement and rather seek to strengthen it through notifying the public of the term of appointment, but then removing some of the prescription around how the council will communicate with the public. Local authorities do not need the Secretary of State to be their PR officer. They know the nature of their communities and how best to communicate with them and can make such judgments perfectly well for themselves
It is a pleasure to serve under your chairmanship, Sir Edward.
I want briefly to emphasise the value of audit committees. Several years ago, North Tyneside had an audit committee, but the elected mayor—North Tyneside has had an elected mayor for many years—and people from the same party served on it. That probably is not the best way to set up such a committee, but, following the council’s own decision, it evolved to include members of all parties on the council. It has now progressed further and has an independent chair and an independent deputy. It does all the things that my hon. Friend the Member for Corby says. The committee’s minutes are published on the council’s website, ensuring transparency. Importantly, North Tyneside and Northumberland now share an internal audit and risk management service, which is a cost-saver, but both councils still have independent committees.
The hon. Lady and I both sit on the Select Committee on Communities and Local Government, but audit committees were investigated by the Committee before the hon. Lady joined. One of the Select Committee’s recommendations was that an audit committee should have a majority of independent members. Does the council to which she refers have such a majority? Should there be such a majority?
North Tyneside is evolving and has reached the stage where there is an independent chair and deputy chair. While transparency has seemed sufficient to date, the council wants to increase it and that is a good step. The committee is evolving and it is important to show that it is relevant and that it has responded to changes over the years. It may end up being totally independent, but, for now, the transparency that they are working towards is always assured. As my hon. Friend the Member for Corby said, we are not prescribing how the committee should be formed, but I wanted to demonstrate how an audit committee can move with the times and become a really important part of the transparency and accountability of every council.
I concur absolutely with my hon. Friend on the role and importance of audit committees. When my hon. Friend the shadow Minister was speaking, I randomly decided to look at the agenda for Derby city council’s audit committee and noted the range of topics that it considers. On 26 June 2013, it was looking at the council’s covert surveillance policy and procedures, the annual governance statement, the anti-fraud and anti-corruption policy and strategy, “Fighting Fraud Locally: The Local Government Fraud Strategy” and a range of other important topics. I mentioned checks and balances earlier and, as my hon. Friend the Member for Corby suggested, the audit committee provides an additional source of checks and balances in each local authority. It would be remiss of us to allow residents who live under a local authority that does not have an audit committee to be denied that additional comfort blanket without challenge and without ensuring that an audit committee is put in place. I have quoted at length from Transparency International, but it makes an interesting observation about such committees:
“Audit committees should be committees of the main council, reporting directly into full council to ensure maximum scrutiny and accountability of audit findings and recommendations.”
That is clearly sensible advice.
The fact that some local authorities have no audit committee at all—let alone as a committee of the main council—is less than satisfactory, so it is therefore appropriate to support the amendment and I hope that the Government will take it on board. It in no way impinges upon localism. In fact, it is about enabling localism and ensuring that local people have that additional assurance available to them through the added scrutiny that can be brought to bear by an audit committee. On that basis, I hope that we can, as my hon. Friend the Member for Corby suggested, find some unanimity at least on this issue and move forward in a spirit of consensus.