Local Government Audit (Hansard, 28 July 1981)

§ The Minister for Local Government and Environmental Services (Mr. Tom King)
With permission, Mr. Speaker, I wish to make a statement on local government audit in England and Wales.
In its report on the role of the Comptroller and Auditor General, the Public Accounts Committee made recommendations on this subject, among others. The Government's response to the Committee's report as a whole is being published today in a White Paper. Since early legislation on local government audit is proposed, it was thought right to make a separate statement to the House on this.
The Government entirely endorse the PAC's conclusion that the present arrangements for local authority audit need to be improved and that greater attention needs to be given to value-for-money work. In addition, we do not believe that it is right in principle that a local authority should appoint its own auditors. We also wish to see the experience of private sector accountants used in substantially greater measure in local government audit.
The PAC concluded that the Comptroller and Auditor General should assume responsibility for the district audit service. The Government have considered this very carefully but have decided that such an arrangement would be fundamentally inconsistent with the constitutional position of local authorities. Parliament's proper interest in moneys voted as Exchequer grants to local authorities is best pursued through the accountability to Parliament of the Ministers responsible for the payment of those grants.
The Government accordingly propose to introduce early legislation to establish a new Audit Commission, which would be responsible for the audit of local authorities in England and Wales. Its members would be appointed by my right hon. Friends the Secretaries State for the Environment and for Wales, partly from local government and partly from people with relevant expertise in industry, commerce and the professions, with an independent chairman.
The commission would appoint auditors to the local authorities, either from district audit or from the private sector. It would take over from my Department responsibility for the district audit service. Discussions with the staff about possible transfer arrangements will start now.
The Commission would also subsume the functions of the advisory committee on local government audit.
The commission would not be responsible for the audit of water authorities, whose auditors would in future be appointed by the relevant Secretary of State.
The commission would have powers to promote or undertake work on value for money and efficiency. It would thus cover some of the work of the local authorities management services and computer committee, and I intend to discuss this with the local authority associations.
The commission would be self-financing, primarily from audit fees, as the audit service is now. Some increase in the present scale of fees would be required to accommodate the increased audit effort.
A consultation paper setting out the details of this proposal is being issued today.
My right hon. Friend also intends to use his powers under the Local Government Act 1972 to appoint as 994 additional district auditors members of private accountancy firms. We believe that their diverse experience will be helpful to local authorities facing the challenges of a period of declining resources. They will undertake the audit of the accounts for 1981–82 of a small number of authorities in England, working under the general supervision of the chief inspector of audit. The authorities will be selected to give a variety of types of authority, geographical locations, and expenditure patterns. Their names will be announced in due course.
Local government expenditure in England and Wales will be about £22,000 million this year. The need to secure value for money for such a scale of public expenditure is crucial. The Government wish to establish an audit system for the future which is well equipped to meet this need. We believe that the measures that I have announced are the right way to achieve that system.

§ Mr. Denis Howell
Is the Minister aware that his statement, taken together with the consultation document, shows, first, that the newly proposed audit commission will be an expanded and more expensive quango to replace the present district auditors system? How can that possibly be justified at this time? Secondly, the proposals represent a further and serious erosion of local government independence and accountability. The consultation paper and the Minister's statement rejected the unanimous advice of the Public Accounts Committee that a new national audit office should be established under the Comptroller and Auditor General. The consultation document says that such an arrangement would be fundamentally inconsistent with the constitutional position of local authorities. That comes from a Government who time and again in recent months have undermined the constitutional independence and responsibility of local government. What greater contradiction could there be than that? Would it not be more satisfactory, as the Public Accounts Committee suggested, for the audit service to be controlled by a distinguished public servant, the Comptroller and Auditor General, rather than by a Secretary of State and particularly by a very political Secretary of State such as the country now has?
I turn to the detailed questions. Paragraph 18 of the consultation document makes it clear that the new auditor will have expanded powers to make an immediate report if he considered that a matter of public concern should be brought urgently to public attention. What does that mean? Does it mean that there are irregularities or illegalities and the unlawful use of public funds? If so, of course we would support what is proposed. Or does it mean, as we fear, that the new auditors will be empowered to make political judgments and report upon areas of public policy where the responsibility must be from the local authority to its electors? What is the criterion for judging what is a matter of public concern"? If it is political, the Opposition take the view that local government democracy would no longer have any meaning whatsoever.
In paragraph 20 of the consultation document, the Secretary of State proposes to take powers to direct an additional, extraordinary audit.

§ Sir John Biggs-Davison (Epping Forest)
On a point of order, Mr. Speaker.

§ Mr. Denis Howell
Is not this an abuse?

§ Sir John Biggs-Davison
To use the right hon. Gentleman's own words, is not it an abuse for the right hon. Gentleman to make the kind of speech that he would make on Second Reading of any legislation introduced as a result of the statement?

§ Mr. Speaker
Order. I believe that the right hon. Gentleman is just coming to the end of his questions on the statement and that it would therefore be better for him to continue.

§ Mr. Howell
Further to that point of order, Mr. Speaker. When the Minister says that he is making a statement in association with a White Paper issued today, a copy of which I have, it must be possible for the Opposition to draw attention to what the White Paper says, which is the guts of the Minister's statement. Otherwise, one must assume that the Government are trying to hide from the House the facts of what they seek to achieve. That is an extraordinary point of view.
According to paragraph 20 of the consultation document, the Secretary of State is taking powers to direct an extraordinary audit in addition to the powers that he already has. Again, for the benefit of hon. Members who have not obtained a copy, I quote. In any case where the Secretary of State considers that it is justified in the public interest", he can ask for an extraordinary audit. What does that mean? What criterion of public interest does the Secretary of State intend to apply? Is it in the area of public policy? If so, he is not only taking away the powers of local authorities to appoint their own auditors. He is taking powers to direct the new audit commission into areas of public political controversy where it ought not to be. That is a matter of fundamental policy. No Government of this country have ever before sought such totalitarian powers.
I turn to my remaining questions—and there could be many more—and ask the Minister about the appointment of auditors under paragraph 2 of his statement. He said: we do not believe that it is right in principle that a local authority should appoint its own auditors. Why not? Is not that a disgraceful attack upon the intergrity of professional auditors? Does not almost every business house in the country appoint its own professional auditors? Why should local government be put in a different position?
Finally, how much will all this cost? What estimate has the Minister made of the additional cost to the ratepayers and how does he intend to legislate to implement the proposals? At the moment, although I hope that he can remove some of the misgivings that I have mentioned, I must tell him that the Opposition treat the statement with the utmost seriousness in terms of the future of local government.

§ Mr. King
I am surprised that the right hon. Gentleman has responded as he has to a statement which I should have thought would command wide support in the House. He attacked it as being somehow an infringement of the independence of local government. I am sure that he has checked and has found that our proposal for the audit commission is very much in line with the recommendations of the Layfield committee of which the present Labour leader of the AMA was a distinguished member, and also with evidence given to the Public Accounts Committee by, for example, councillor Roy Shaw, Labour 996 leader of Camden council, in support of the proposal. To suggest that it is part of some party political plot is therefore an unfortunate representation.
I was surprised also when the right hon. Gentleman suggested that almost every board of directors in the country appointed its own auditors. That is not the situation. No board of directors can appoint its own auditors. That is reserved to shareholders. No management may appoint its own auditors. It is our view, again supported by the Layfield committee, that individual local authorities should not be able to appoint their own auditors. I therefore hope that, when the right hon. Gentleman has had the chance to consider the matter at greater leisure he will regard the proposals in the consultation paper, to meet what I believe that the Public Accounts Committee unanimously agreed was an area in which more work was needed, as a sensible way in which to approach these problems.

Several Hon. Members
rose—

§ Mr. Speaker
Order. I propose to allow 20 minutes for questions on this statement and then to move on.

§ Mr. Tony Durant (Reading, North)
I welcome the Minister's statement and am delighted that he has not gone down the route suggested by the Public Accounts Committee. I believe that this proposal represents a fair balance between the different points of view. Unlike the right hon. Member for Birmingham, Small Heath (Mr. Howell), I believe that the Government proposals maintains an element of independence of local government from central Government and from Parliament itself which is very important. I welcome the encouragement of the private sector coming into this. I also hope that the Minister will open up far wider the provision of information to electors on local government accounts.

§ Mr. King
I am grateful to my hon. Friend for his welcome to the proposals. I am also glad that he believes that this is a better constitutional balance. It is interesting that the right hon. Member for Birmingham, Small Heath (Mr. Howell) seemed unaware of the response of the Labour Government, in which he was a Minister, to a previous Public Accounts Committee. The Labour Government made precisely the same statement as I have made about the undesirability of the Comptroller and Auditor General affecting the present constitutional relationship of this House and local government. We therefore hope that these proposals, which are extremely similar to the present arrangements in Scotland, will be a reasonable way in which to proceed.

§ Mr. Arthur Lewis (Newham, North-West)
Under the new arrangements, would a Member of Parliament such as myself be able to ask the new audit commission to order an investigation into the alleged corruption in the London borough of Newham, where it is alleged that the ex-chairman of the housing committee, who was there for 20 years, has been putting his friends and relatives and the friends and relatives of West Ham footballers into housing and that council officials have been working hand in glove with the various Labour borough councillors to use ratepayers' money to feather their own nests? Our so-called Left-wing people are saying that this is the case. May I ask that the commission investigate these cases, to see whether there is any truth in them? If there is a misappropriation of the council rate, someone somewhere should do something about it.

§ Mr. King
If defamatory accusations are being made, which those so maligned feel to be without any substance, it is up to them to take civil action. I have answered a parliamentary question from the hon. Member on the issues that he has raised. It would be open, under our proposals, in exactly the same way as it is to any elector, to make representations to the district auditor on matters that he thinks deserve special investigation.

§ Mr. Peter Emery (Honiton)
How many civil servants or employees it estimated that the new audit commission will employ directly, and what is likely to be the total cost of running the new body?

§ Mr. King
The present cost of the district audit is about £8 million. It is a self-financing body, raising its income from audit fees from the authorities that it serves. It has 570 staff. We envisage a growth also in private sector auditing. At the moment, 27 out of 421 authorities have approved private auditors. The rest are audited by the district audit service. There are grounds for wanting a better balance in that respect. The balance in Scotland is of the order of 67 per cent. private and 33 per cent. public.

§ Mr. John Garrett (Norwich, South)
The Minister must be aware that the Public Accounts Committee considered it crucial that a local audit should be carried out by a body directly under the control of the House, and that all public expenditure should be audited by a body directly under the control of this House. Will he agree with me that the proposal represents a severe setback for the idea of parliamentary accountability?

§ Mr. King
I have tried to explain our views on that in my statement. The hon. Gentleman will be aware—I know of his interest in this matter—that that view was not accepted by the previous Labour Government, of whom he was a supporter. They rejected the concept of the Comptroller and Auditor General. We also feel that it would be an unacceptable infringement of the present constitutional relationship between local government and central Government.

§ Mr. William Shelton (Streatham)
Is my right hon. Friend aware that the proposals will receive a great welcome in boroughs such as Lambeth, which would very much welcome the auditor having more strength and more teeth, and the power to use them? Is my right hon. Friend aware that a year and a half may pass after a complaint has been made to the district auditor before an official judgment is given by him, and that meanwhile the abuse—if, indeed, it is an abuse—continues unchecked? Will the new proposals do something to remedy this?

§ Mr. King
I am grateful to my hon. Friend for raising that point. The answer to his question is "Yes". The proposal is included precisely for that reason. The criterion that will determine whether the district auditor makes an earlier report will be his decision whether it is a matter of public interest.

§ Mr. Stephen Ross (Isle of Wight)
Without having the benefit of the consultation document, which was not available 20 minutes ago in the Vote Office, I give a cautious welcome to the statement, and I think that local authorities should also do so, but some of the questions raised by the right hon. Member for Birmingham, Small Heath (Mr. Howell) frighten me. Most people in local authorities, including myself, think that the Government are being grossly unfair to local authorities, and that the 998 proposals for the future are extremely dangerous. Why should the proposals not be extended to cover the water authorities? May we take it that the advice now being given to authorities which are worried about hold-hack, to bring in outside accountants, has been superseded by his statement today?

§ Mr. King
The hon. Gentleman should not be too frightened by the comments of the right hon. Member for Birmingham, Small Heath (Mr. Howell), who on reflection may see that the proposals are to a considerable extent in line with those of the previous Labour Government. He does not seem to be tremendously aware of that fact. The water authorities have not been included because it is felt that they are more akin to the nationalised industry structure than the local government structure. This is a local government audit arrangement, and we think it sensible that water authorities should have auditors appointed by my right hon. Friend.

§ Mr. David Stoddart (Swindon)
Is it not a fact that, in spite of the Minister's honeyed words about local government, the Government really detest local government and fear local democracy? Is it not a fact that the whole idea behind the new arrangement is to enable political decisions to be taken by appointed auditors? Is not that the prime aim of the Government, who would perhaps prefer to appoint gauleiters rather than local councillors?

§ Mr. King
That is a singularly ill-informed question. At the moment, the district audit service is part of the Department of the Environment. It works within the Department and is controlled by Ministers. Our proposal is to distance it from the Department of the Environment and to give local government for the first time a real say in the management of its own audit service. Far from having a centralising effect, it is an improvement in the arrangements.

§ Sir Albert Costain (Folkestone and Hythe)
I congratulate the Minister on the way in which he presented the statement and for giving the House an opportunity to comment on the proposals. Does he agree that the nonsense from the Opposition Benches is a clear indication that a little knowledge is a dangerous thing? Does the Minister appreciate that this is one of the first occasions on which the recommendations of the Public Accounts Committee have been discussed in the House in this way? Are we to have a statement on how to deal with the nationalised industries, which the Public Accounts Committee—

§ Mr. Speaker
Order. That question does not arise out of the statement. The hon. Gentleman is referring to another statement.

§ Sir Albert Costain
It is in the document that we are considering, Mr. Speaker.

§ Mr. Speaker
Like everyone else, I do not know what is in the document, but I know what is in the statement.

§ Mr. King
It was because we proposed early legislation in this matter that we felt it right to make a statement. Obviously, it will be for the House to decide whether it wishes to have further debate on the wider issues raised in the White Paper.

§ Mr. Robert Maclennan (Caithness and Sutherland)
Why does the Minister not recognise the force of the 999 argument which the Public Accounts Committee accepted and put before the House, that the House should have control over the global totals of sums voted to local authorities by this House? There is nothing unconstitutional in giving the Comptroller and Auditor General the responsibility to account to this House for the vast sums of money that the House votes.

§ Mr. King
If the hon. Gentleman is suggesting that there should be accountability only in respect of the grant moneys and that rate-funded expenditure should not be covered in this way, I do not think that that is a practical way in which to organise a local government audit. I am sure that he is familiar with the arguments. It is a matter of judgment. We believe that the proposal represents the best way in which to proceed.

§ Mr. Neville Trotter (Tynemouth)
I declare an interest as an accountant, and also as a former city council finance chairman. I welcome the statement. Local government in general will benefit from the introduction of a wider financial acumen than that available to the district auditor, who has performed his job very well in a limited sphere. With the vast sums of money now being spent by local government, there is a need for more value for money judgment than can readily be made available by the district audit service. Will my right hon. Friend confirm that a scheme similar to his has worked successfully for many years in Scotland?

§ Mr. King
I confirm the latter point. I gave a figure of £8 million, which represents the total audit effort in relation to an expenditure of £22,000 million. We agree with the Public Accounts Committee that much more work needs to be done in the area of value for money, and we hope that our proposals will help to enhance that.

§ Mr. Dennis Skinner (Bolsover)
Will the Minister give us a clear outline of the cost of this quango? Will he also give an assurance that there will be no regional spawning of other quangos as a result of the introduction of the commission? Will he confirm that, under any new set-up, the system of local government audit will not be such that if a local authority decides to pay its workers decent wages the authority's members can be surcharged as a result of an extraordinary audit while a Tory local authority can refuse to implement the Chronically Sick and 1000 Disabled Persons Act and to employ its quota of disabled workers without coming under public scrutiny? Do not the Government have a cheek and is it not bordering on the bounds of hypocrisy for them to talk about local government getting its estimates right when, in the last financial year, they overestimated the public sector borrowing requirement by £5,000 million and got off scot-free?

§ Mr. King
I am not sure how many of those points arise directly from the statement. I am sure that the hon. Gentleman listened carefully. We are proposing that the quango set up by the previous Government—the advisory committee on local government audit—will be subsumed within the new proposal.

§ Mr. Denis Howell
Will the Minister answer the one crucial question? What does the phrase "the public interest" mean, according to which the new audit service, or the Secretary of State, will be able to make an extraordinary audit of a local authority? Does it mean areas of political policy? If so, will the right hon. Gentleman note that we shall fundamentally oppose such a proposition because a professional audit service should not become involved in areas of political controversy?

§ Mr. King
The right hon. Gentleman may not be clear about that part of the consultation paper. At present, the Secretary of State has the power to direct an extraordinary audit. The proposal in the paper is that the power to direct an extraordinary audit will fall on the local government audit commission. The Secretary of State will retain powers to require or request the local government audit commission to make an extraordinary audit. Therefore, the Secretary of State will not increase his powers but will retain the power that he has.