Local Government (Audit Practice)

HC Deb 28 July 1983 vol 46 cc1363-87 5.30 pm

The Under-Secretary of State for the Environment (Mr. William Waldegrave)

I beg to move, That the Code of Local Government Audit Practice for England and Wales, a copy of which was laid before this House on 11th July, be approved. On 8 July, the Secretary of State laid before Parliament the code of local government audit practice for England and Wales required under the Local Government Finance Act 1982. Section 14 of that Act requires the Audit Commission to prepare a code—after consultation with the local authority associations and the accountancy profession — prescribing the way in which auditors employed or appointed by the commission should carry out their functions. The Act provides that the code shall not come into force until approved by a resolution of each House of Parliament.

Under the 1982 Act the Audit Commission — an independent body — has assumed responsibility for overseeing audit and monitoring audit standards in local government. This is a role which was formerly played by the audit inspectorate, which answered directly to my right hon. Friend the Secretary of State.

Under the previous arrangements, a local government audit code of practice was prepared and issued in 1973, in the form of an annexe to a departmental circular. This 1973 code was not, however, subject to parliamentary approval, although it was, I understand, lodged—before publication—in the Library of the House.

When we debated these new arrangements for local government audit, and before we voted to establish the Audit Commission, the point was made that the independence of the new commission was crucial to its success. It was to diminish these anxieties—expressed, for example, by a figure whom I shall miss from our debates, Mr. Ted Graham, the former hon. Member for Edmonton, and by the right hon. Member for Manchester, Gorton (Mr. Kaufman) whom we shall not miss since he is ever-present—that the Government readily agreed that the code of audit practice should be subject to parliamentary approval. The debate today honours that commitment.

The code itself is the commission's code. It has been prepared by the commission, the members of which represent a wide range of interests in the public and private sector, and reflect wide experience of financial management relevant to the audit of local government accounts. It has been the subject of consultation, as required by the 1982 Act, with the bodies most directly concerned — local authority interests and the accountancy profession.

I believe that the House would be right to commend the urgency and thoroughness with which the commission has applied itself to the task of producing its code, which had to take account not only of the new arrangements for local government audit, but of the additional duties placed on auditors by the 1982 Act and, above all, the duty to consider value for money. Of course, since the 1973 code, there have been professional developments in audit practice and approach, in both the public and the private sectors.

As I have said, the code is the commission's code. My role is limited to honouring our commitment to bring it to the House for consideration and, I hope, approval. None the less, it might be helpful if I were to outline briefly its main features. In doing so I shall draw attention to points which the commission itself regards as particularly important.

The introduction provides a general explanation of the reasons why the commission has framed the code as it has done. The main body of the code which follows is divided into two parts. The first sets out the general duties of the auditor, and, in conjunction with the appendix, prescribes how the auditor should communicate his findings to those legitimately concerned. The second prescribes the procedures which the auditor should observe in conducting his audit, and identifies matters to which he should pay particularly close attention in discharging his responsibilities in respect of fraud, corruption, and value for money.

In part 1 of the code, which is headed "General Duties of an Auditor", the commission identifies three factors which it believes should characterise the work of an auditor in local government. These are independence, due professional care and recognition of the public interest. It also sets out, in paragraph 6, what it describes as its "basic philosophy."

This philosophy stresses that special care and consideration apply to the audit of public funds financed by the compulsion inherent in the tax system. The auditor, says the code, must not stop at considering whether such funds have been legally spent and accounted for, but should also consider whether the taxpayers' and ratepayers' money have been spent in a way which provides value for money. The code makes it clear later, in paragraphs 26 and 43, that the auditor's role does not extend to questioning policies, but simply to examining whether policies have been effectively carried out.

In the last subsection of paragraph 6, the commission makes the important and useful point that auditors and the commission itself have a duty to see that knowledge of efficient ways of doing things is effectively transferred from one authority to another. This is in addition to trying to ensure a consistent approach to the process of audits itself.

The commission says that the auditor's job is to help the bodies which he is auditing to improve their performance. To do this, he must understand what they are trying to do, and he must co-operate with internal audit staff. None the less, the code is right to emphasise that the auditor must always remember his responsibilities to the public at large. If necessary, says the code, he must make public his criticisms, if that is the only alternative left to him.

In paragraph 7 the code turns to the first of the three factors which it identifies as the necessary characteristics of those who must audit public bodies—independence. The House was rightly concerned about this during its consideration of the Bill which became the 1982 Act. I have read the debates on the Bill. Anxieties were expressed about the potential conflict of interest which could arise if an authority's auditor were also to undertake consultancy work on behalf of the same authority at one and the same time. That matter was brought up by Mr. Christopher Price.

The code takes a clear and unequivocal stance on this. Paragraph 8 makes clear the commission's determination that the auditor's independence must prevail over any other considerations and must be demonstrable. The code therefore rules that no appointed auditor—or his firm, or any organisation in which he has an interest—may undertake additional work for the authority of which he is auditor unless the work is so small in value as to be de minimis. In every other case, the auditor and authority must convince the commission both that there is no threat to the auditor's independence, and that the additional costs of using another firm would be excessive. Each individual such case will have to be argued before the commission separately. The commission will enforce this aspect of the code in its contracts with the firms which it appoints as auditors.

The second factor identified in part 1 of the code as a necessary requirement for auditors is that they must exercise due professional care. In paragraph 9 the code cites examples of the action that the auditor must take to fulfill this requirement, and emphasises the personal responsibility that an auditor retains even in circumstances where the work of audit has been shared with others.

The third factor which this part of the code highlights is the recognition of the public interest, and the special duty which the auditor owes to the public. Paragraphs 10 to 30 spell out clearly the duties which the auditor must discharge both in relation to the authority whose accounts he is auditing and to those to whom the authority is accountable.

As regards the auditor's responsibilities to the authority, the code makes a distinction between those routine matters which the auditor should try to resolve with officers during the course of the audit and at its conclusion, and those matters which are significant enough to be brought to the attention of the elected members. The code places particular emphasis on the need for the auditor to prepare a management letter for members of an authority and to seek a meeting with them to discuss and amplify the points raised. The importance which the commission attaches to the involvement of elected members is a new feature of this code when compared with the 1973 code.

The procedure whereby electors can inspect local authority accounts, and can question the auditor about items of those accounts and can make objections, is well established. It is reaffirmed in this code, which spells out in paragraphs 14 to 20 how the auditor should respond to such approaches by the public and how he should handle objections. It also spells out, in paragraphs 21 and 22, together with the appendix, how he should express his opinion on the accounts when he has concluded his audit.

Paragraphs 23 to 29 deal with the situation where, in the auditor's audit of the accounts—whether as a result of consideration of an objection or otherwise—he has found something sufficiently wrong to warrant his making a report in the public interest. A matter justifying such a report would by definition be one for which routine memoranda for officers or even a management letter for members were judged to be insufficient.

Paragraph 24 gives examples of the types of matters which might call for a report—for example: Unnecessary expenditure or loss of income due to waste, extravagance, inefficient financial administration, poor value for money". The code reminds us in paragraph 26 that, although an auditor should not be deflected from making a report because its subject matter is critical or unwelcome, it is not his function to express his opinion as to the wisdom of particular decisions taken by councils in the lawful exercise of their discretion. The auditor is not there to question policy. That is, the auditor cannot criticise a council for doing something foolish if it does it with its eyes open, in full possession of the facts. The auditor can show only how objectives set by councils could be more sensibly achieved.

Part 2 of the code, as I have already explained, deals with the procedures which the auditor should observe and identifies matters to which he should pay particularly close attention in guarding against fraud or corruption, and seeking to obtain value for money on behalf of the public. In framing this part of the code the commission has drawn heavily and sensibly on work already done by the professional accountancy bodies.

The code stresses that, in addition to their time-honoured and well-understood responsibility for vetting the legality and propriety of local authority expenditure, auditors have particular responsibilities in relation to fraud and corruption.

Finally, the code deals with the new value for money responsibilities specifically conferred on auditors by section 15(1)(c) of the 1982 Act. I think it would be helpful to the House if I were to remind it precisely what those responsibilities are. This section of the Act requires the auditor to satisfy himself that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources". The Government attach great importance to this new value for money responsibility of the auditor, and I am therefore pleased to see the prominence that the code of practice has given it.

Paragraph 3 of the introduction to the code states, for example: In addition to the auditor's continuing responsibility to assess the legality and regularity of expenditure, the Commission emphasises the auditor's value for money responsibilities and requires auditors to demonstrate a value for money thrust to their audits. The auditor's concern that the authority has made proper arrangements to secure economy, efficiency and effectiveness should influence him throughout his audit. During the passage of the 1982 Act, the right hon. Members for Gorton and for Halton (Mr. Oakes) and the hon. Member for Blaydon (Mr. McWilliam) expressed anxiety that the auditor's new value for money responsibilities should not be construed as giving him licence to question policy decisions legitimately taken by elected councils in the exercise of their discretion. As Government spokesmen have repeatedly made clear—my right hon. Friend the present Secretary of State for Transport issued a public statement on this point during the passage of the Bill—that was never our intention; and explicit assurances to that effect were given in the House and outside.

The House will, I hope, be further reassured by what is said in paragraphs 40 to 44 of the commission's code. Paragraph 40 clearly defines the specific meaning to be given to the terms "economy", "efficiency", and "effectiveness" — terms which I have summarised as "value for money". The point was raised during the passage of the Bill that wider definitions might land the commission in trouble, but as the code states explicitly in paragraph 43—I repeat it so that there should be no chance of misunderstanding— It is not the auditor's function to question policy". It goes on to state: It is, however, his responsibility both to consider the effects of policy and to examine the arrangements by which policy decisions are reached. That is the right distinction to make, and one which quite properly separates the role of auditor from that of policy maker.

I hope the House can agree that the Audit Commission has produced a sensible and practical code, which avoids the pitfalls to which right hon. and hon. Members drew attention in the last Parliament. I therefore commend it to the House.

5.44 pm

Mr. John McWilliam (Blaydon)

I welcome the Minister's statement — indeed, I welcome it so much that it would have been pleasant to have had him with us on Standing Committee D when, during the last Parliament, we went through the tortuous exercise of dealing with part III of the then Local Government Finance (No. 2) Bill, or the "Local Government Finance (No. 9) Bill" as my right hon. Friend the Member for Manchester, Gorton (Mr. Kaufman) called it as it began to be amended fairly substantially.

The Minister was right to point out that the 1973 code was not subject to parliamentary approval. This code is subject to that approval. I applaud the fact that that was one of the amendments that Opposition Members managed to make. The code should be subject to parliamentary approval and I am not sure that, at the time the suggestions were being made for audit of local government, it was clear in the minds of Ministers what the role of an auditor should be. There appeared to be a suggestion in their minds that the role of auditors should be slightly different from the normal role and that perhaps they should interfere with policy.

Only because of the strenuous arguments put forward by my right hon. Friend the Member for Gorton, by Mr. Ted Graham, by Mr. Christopher Price and others were the Government forced to see sense on this matter and to take account of the fact that local authorities are democratically elected in their own right. If democracy in local authorities is to continue, they must have the right to make their decisions on the basis of the policies of the majority of the elected councillors. I welcome the point that the Minister made on that matter during his statement. I do, however, wish to raise one or two points on the report.

The first arises from paragraphs 7 and 8 of the code which deals with the independence of auditors. What does the Audit Commission mean by substantial financial interest direct or indirect"? How substantial is "substantial"? This matter could be a little subjective. What might be "substantial" to some hon. Members might be mere pocket money to others. It would be helpful if the intention of the Audit Commission—I accept that it is not the Minister but the Audit Commission —was made clear.

On paragraph 8(a) and (b) the Minister made the point that the value of additional work should be "de minimis" —in other words, not more than £5,000 per year. There is a practice of firms of accountants being appointed as consultants to local authorities for various things. The value of such work is far from "de minimis", and I hope that the Minister will make it clear beyond peradventure than anyone appointed as a consultant to an audit body on that basis will be disbarred from auditing that local authority. I am sure that the Minister will be happy to make that commitment.

I welcome paragraph 15, which states: The auditor should not admit questions on general matters such as the authority's policies, finances or procedures which are not about the actual accounts for the year to which the date referred to in paragraph 12 relates. That paragraph is particularly important with regard to "policies". I was a commissioner for local authority accounts in Scotland. I have served on an Audit Commission. It is sobering to discover as an audit commissioner that one has limited privilege and that one could quite easily libel someone and be answerable for that libel. The auditors, except in the general sense of the limited privilege they have in exercising their profession, will be in exactly the same position. I welcome the Minister's words on this subject, but I should like to reinforce them on the point of privilege. I am not arguing that the auditors should have the same privilege as the Public Accounts Committee of this House —I do not think that they should. That aspect is a discipline to them when they are considering the issue of policy. It is also a useful discipline where auditors are tempted to object to accounts not because of the way they are formulated but on a non-democratic, unelected basis to affect the policies of a local authority which otherwise they could not affect. I welcome the clear and unequivocal assurance of the Minister about that.

On the point of public interest in paragraph 26, I welcome the unequivocal statement: It is not, however, the function of the auditor to express his opinion as to the wisdom of particular decisions taken by councils in the lawful exercise of their discretion". Indeed it is not. The auditors are appointed, not elected. They are answerable to the commission and, ultimately, to the Minister. They are not answerable to any groups of electors and the day we reach the point where local government is answerable to anybody but the electors will be the day when democracy dies, and I welcome the Minister's comments on that.

On value for money, paragraph 43 starts off in a fine way: It is not the auditor's function to question policy but there are some qualifications in sub-paragraphs (a) to (f) and I hope that the Minister will comment on the effect of those.

The present Secretary of State for Transport said in a statement which was wrung out of him with great difficulty by Labour Members: It can therefore be seen that the auditor's value-for-money functions are quite separate from any functions concerning illegality, and there is no question of it being part of the auditor's value-for-money function to form or express an opinion on what may be purely political aspects of a council's activities". — [Official Report, Standing Committee D, 25 March 1982; c. 931.] I welcomed that statement at the time. As I say, it was not an easy statement to get out of him, and my right hon. Friend the Member for Gorton will testify to that. But it was vital in the sense of defending local government democracy, and I hope that the Minister will now say how much that statement is qualified by the qualifications in sub-paragraphs (a) to (f) of paragraph 43.

Why was the code of practice document not published by the Stationery Office? As it does not bear a price, how much does it cost and how available will it be to the ratepayers?

5.53 pm

Mr. Derek Spencer (Leicester, South)

I am glad of this opportunity to address the House for the first time. I arrive here with a majority of seven votes. It is an exhilarating experience. I feel as though I have pitched my camp on the side of an abyss. I look out and the prospect is exciting, but at the same time it inculcates a proper sense of the laws of political gravity.

On 9 June the electors of Leicester, South put out one Yorkshireman and put in another. My predecessor, Jim Marshall, represented the constituency from October 1974, and he did so with the characteristics to be expected of someone who had the good fortune to be born under the white rose. He represented it with plain speaking and energy, and, as he dons his pads for his new venture, no doubt he will ruminate somewhat ruefully on the difference between a ball that shaves the off stump and the one that just clips it. I wish him well in his new endeavour and thank him on behalf of the people of Leicester, South.

Elections in Leicester, South can sometimes turn on very fine events, and I am not referring to a matter which will have interested hon. Members, that of absent voters on holiday. I am referring to two other matters, the first being voters who happen to be in hospital in the time leading up to the election.

In Leicester there were 400 patients in the Leicester general hospital during the time leading up to the date when applications for postal votes had to be made. An administrator in due course applied on their behalf for postal votes, the papers arrived and they were duly filled in. But they did not return to the returning officer until 20 minutes after the closing date, so they were disallowed. Another hospital in Leicester asked for papers for people to vote by post, and although it was sent a number, they were never returned. A third hospital did not even bother to ask.

But it was not there that the chance events ended. They went even further and related to the mechanics of voting, which in a number of respects are still lodged in the horse and buggy days, for in respect of the perforations which must be on the ballot paper a strange situation occurred in Leicester, South. In one of the recounts—at about 4 o'clock in the morning—the agent for the Labour party quite properly asked that the ballot papers should be scrutinised for perforation marks. So they were held up —all 55,000 of them—and it took a considerable time, rather like checking bank notes, although by that time enough was known about the likely outcome of the election for us to attach to them a value much greater than any bank note.

When that exercise had been performed to everybody's satisfaction it was found that 46 of the papers did not have a perforation mark and therefore were declared invalid. Of those, 27 had been cast in my favour and 19 for Jim Marshall. In other words, there was a difference between us of eight in respect of disqualified papers. If those papers had been valid and the figures had been the other way round, hon. Members would be listening to a familiar voice now. If they had not been cast away, I would have more than doubled my majority at a blow.

The Leicester, South which I inherited from Jim Marshall is rather different from the Leicester, South which he inherited from Lord Boardman in the autumn of 1974. The noble Lord is still remembered with affection in this House and I pay tribute to him on behalf not only of the electors of Leicester, South but of the whole of greater Leicester for the public service he has rendered for many years and for the help he gave me in the months leading up to the general election.

It is right that I should speak of Leicester as a city of enterprise and religious toleration. It has historically been a city of both, and in recent times there has been added to it a new dimension, in terms both of enterprise and of religious toleration.

Those who have been in this place before will be no strangers to the composition of the electorate in Leicester, South. About 27 per cent. of the electorate is Asian in origin. The members of the Asian community came to south Leicester, for the most part, during the past 10 years. Some of them came as refugees from Uganda. Some came in spite of the efforts that were made by the Labour group on the city council to direct them elsewhere by placing an advertisement in the Kampala Times that stated that Leicester was full, its resources would not allow it to take any more immigrants, and that those who planned to go to Leicester should go elsewhere. There was no greater signpost to Leicester as a haven of rest and refuge for those seeking it, and consequently they came in large numbers.

These people added to the small businesses that were already there by the businesses that they brought with them. They have had the same difficulty in setting up and maintaining their small businesses as the host community has had in the face of the high and sometimes unconscionable rate levels that have been levied by a Labour city council. The reaction to rate levels of that type knows no bounds in culture nor in background. There has been a welcome for such measures as have been introduced by the Government in the Local Government Finance (No. 2) Act 1982 and consequently in the code of practice that is before us.

The enterprise that the Asian community has shown in setting up its businesses alongside existing businesses and contributing significantly to employment opportunities in the city is to be found in another area. Its enterprise is not limited to business; it extends also to education. In 1981, Councillor Michael Cufflin and a number of friends set up a new grammar school in the tradition of the great Elizabethan grammar schools, one of which I had the honour to attend, and so many of which, if they have not escaped into the private sector, have been destroyed, lamentably, by the Labour party. Michael Cufflin, together with a number of colleagues, established a new grammar school in Leicester. It is prospering and it will prosper. It is heavily over-subscribed.

The efforts of Michael Cufflin and his friends have been matched by the Asian community. It too, despairing of the effects of compulsory comprehensive education upon its culture, has turned away from it, and a number of Moslems attached to the Asfordby street mosque have set up a secondary school for girls to ensure that their culture prospers.

Leicester has also shown a good example in religious toleration. Sikh gurdwaras, Hindu temples and Moslem mosques now dot the landscape, together with the synagogue which has been there for most of the century. The Ukrainian church is in another part of Leicester. In travelling across south Leicester one moves, in effect, across half the face of the world. Those who talk about a somewhat narrow approach to Britain's culture and religion would find it a salutary journey.

Having taken that journey, I turn to the motion via the place where I spent about five years before my arrival in this place—the town hall in the London borough of Camden where I spent the early hours of many mornings. I was often there at 3 o'clock and 4 o'clock in the morning—shades of things to come. At full council meetings in Camden there has been, until very recently, no guillotine and no time limit upon debate. As I spent my time there, far from agreeing with the words of the hon. Member for Blaydon (Mr. McWilliam) about councillors apparently being answerable to the local electors, I concluded that they were answerable to no one. Far from implementing the policies on which they had been elected by the local electorate, they were using all their energies in repealing the policy of central Government and sending the ratepayer the bill. Consequently, I decided to have recourse to the district auditor. I complained to him no fewer than 17 times when I became the deputy leader of the Tory group.

The complaints went to the district auditor regularly and he acknowledged them. The months ticked by and from this watchdog of the public purse there was not even a snarl, not even a baring of teeth. I despaired of any action being taken and then one day, quite suddenly, he took me and the Labour group entirely by surprise. Without any warning he leapt forward, figuratively, and grasped them by the collar, sank his teeth in and carried them off kicking and squealing into the High Court. He alleged by way of repetition of an argument that I had put before him that a settlement which the council had entered into of the dirty jobs strike in the winter of discontent, which no doubt has not entirely disappeared from the recollection of Labour Members, was unlawful on the ground that the council had broken national ranks, caved in and paid up to their friends in the trade union movement without bona fide negotiations. That argument was placed by the district auditor in front of the High Court.

The contrary argument was: "We were negotiating bona fide in the teeth of a legitimate industrial dispute. We may have paid more than other boroughs did, but we were acting honestly." They might have said under their breath, "We acted honestly even if we acted a little foolishly and with not too much steel." That was the argument of the Labour councillors. After many months the High Court declared in April 1982 that the councillors had not acted unlawfully.

That experience showed, for anybody who cared to consider it, how unsatisfactory was the system as it then stood. It gave no effective redress to the ratepayer and it involved the councillors in a long-drawn-out wrangle, during which time they wept crocodile tears and alleged that they might lose their homes. They complained that they were being treated harshly and that they had merely carried out the policy that they had been elected to implement.

The House may think that it was an unsatisfactory state of affairs from both points of view. So I welcomed the contents of the Local Government Finance (No. 2) Act and looked forward to something which would have teeth. If my optimism increased momentarily, it was quelled by what I heard from the hon. Member for Blaydon, especially when he said that the code of practice received almost the unequivocal blessing of the right hon. Member for Manchester, Gorton (Mr. Kaufman). That statement cannot be construed as a compliment in places where ratepayers are anxious to see that their interests are protected fully.

That situation applies as much in Leicester as in Camden or elsewhere. The code of practice and the enabling Act give the Minister powers to keep those matters under review. If the teeth that have been planted by the code of practice prove to be long enough, so much the better. It may be that the new Audit Commission and the new auditors will have learned their lessons in the light of what has happened. Perhaps an early snarl and an early growl will do the job. That will be a better approach than docilely doing nothing for a long period and then suddenly taking what may be criticised as draconian action.

I hope that the new commission will exercise its powers early and gently rather than late and fiercely. If that happens, some of the fears that I harbour about the code of practice will turn out to be misplaced. The hon. Member for Blaydon referred to paragraph 26 of the code of practice which might confirm one's misgivings. It states: The auditor should not be deflected from making a report because its subject matter is critical or unwelcome The new auditors who are the inheritors of the district audit function, whether they have moved from the public sector or are coming from the private sector, will walk in a field which will cause them to be subjected to unwelcome and party political criticism. That should be made known. The attempt to put steel into the spine, where it is feared that there is and will be none, is a defensive posture, which I do not entirely applaud. Perhaps my fears will not be borne out by events.

I welcome the code of practice, as far as it goes, and on behalf of the citizens of Leicester, South I shall keep it closly under review.

It has been said that all political careers end in tears—perhaps that is an exaggeration which is typical of the warp and weft of modern political life. Within a short time of my arrival in Parliament I heard a not-so-private sob of anguish. Perhaps there are still tears of disappointment drying in the eyes of some people who thought that they were in safe Labour seats. I hope that, when it is my time to leave Parliament, I leave as I came—with a smile.

6.14 pm

Mr. Michael Meadowcroft (Leeds, West)

It is a pleasure to follow a new Member as fluent as the hon. Member for Leicester, South (Mr. Spencer). Although I have no doubt that he would not expect all Opposition Members to agree entirely with his rather one-sided views on democracy, it is a pleasure to say that I, for one, envy him the sense of humour which he introduced during his maiden speech.

The hon. Gentleman seems to equate efficiency entirely with financial economy rather than with other considerations. However, that is something to which we shall perhaps come later. I appreciated the fact that he chose to make a maiden speech during a debate about the Audit Commission, when plainly his votes in Leicester, South were audited carefully. We look forward to hearing him in the future.

It is accepted by both sides of the House and in local government that the code is entirely professional. I wish to follow the hon. Member for Blaydon (Mr. Mc William) and ask the Minister about some technical problems. I hope that he will be able to set at rest some of our anxieties about them.

The first is the anxiety felt in local government about the flexibility of the appointment of auditors. There has been little interference in the appointment of auditors. There have been some threats about it, but so far they have not been carried out. Local government is worried that ideological considerations may rule in future. Whichever party is in power, we shall have the district or professional auditor and the same balance will not be maintained. The mix so far has been healthy and it will be a shame to upset that by imposing upon local government an arbitrary way of determining which kind of auditor it has.

My second point relates to fees. If one of the Audit Commission's aims is to make local government more efficient and enable it to function more economically, it is strange that local government will not know in advance what fee it will have to pay for its audit. It has previously been able to determine what the final price will be because a fee has been laid down for each task. Thirdly, I commend the fact that the report recommends the separation between the consultancy side of the audit and the carrying out of the audit.

I wish also to deal with the principles of approach. First, there is the treacherous subject of unit costs. If one believes that unit costs can magically determine whether a service is efficient, one enters the argument about the rate support grant and the way different factors are determined for different kinds of authority. Given the different types of local authorities, their different geography, sociological backgrounds and kinds of services they wish to offer, it is extremely difficult to measure one cost against another within the authority or with other authorities.

I accept that the Chartered Institute of Public Finance and Accountancy has done a great deal of work to provide guidelines to enable local authorities to compare costs themselves. It is fallacious to suggest that the Audit Commission will enable local authorities to compare unit costs on a fair basis. It would give rise to considerable bitterness if it were to lead to other kinds of imposition.

That leads logically to the problem of external and internal audit. One of local government's fears is that the Audit Commission's powers, and the way in which they will be carried out will create the risk of duplicating local government's internal audit functions. Even with the pressures that the Government impose on local government, I do not believe that there is one local authority, including Camden, which would not wish to make its services and administration as efficient as possible. It is clearly in their interests to do so.

The best authorities have the best internal audit and try always to see that they are not just avoiding corruption and maladministration, but are trying to find the best way to secure value for money. If the way in which the system is devised tends to duplicate that, that almost downgrades the professional skills and the precise task of the internal auditors. That would be a great shame. One would then be trespassing on the question of how to secure the best performance of an authority in its services as opposed to its best audited function. Those are two different things.

Efficiency is not necessarily measured by whether the local authority's performance is right. It is measured in terms of how one wants to achieve a service and what result one wants to achieve through the service as opposed to its fiscal nature and whether the best system is being used for carrying it out. It is not possible to make a distinction between the audit function as traditionally understood and the policy that the Minister suggested. For example, many authorities have a review committee. It looks across departmental boundaries and committee boundaries to see whether, for example, transportation in the authority is carried out effectively. Vast amounts of money are spent on it, and the committee tries to see whether things could be done differently. It might consider whether the provision of other communications is done effectively.

If the Audit Commission's proposal impinges too much on such an internal audit, I suspect that it will have the opposite effect from what the Government wish. In other words, it will make less efficient the local authority's efforts to secure the best delivery of services in its neighbourhood. Cost benefit analysis and examination of the systems are important. At the end of the day performance review is in the province of the local authority.

Finally, there is the question of how one judges the effectiveness under the code. The worry is that only what the Government think is effective will be regarded as the final arbiter. The Audit Commission is comprised of Government appointees. The alternative is to try to maintain a better balance between the Audit Commission, with its Government appointees, and the electors in the local authority's area.

It is significant that the consultation paper which the Department of the Environment and the Welsh Office issued in July 1981 states precisely the view that the Liberal party would hold. It rehearsed the arguments for taking into account the Public Accounts Committee suggestion that District Audit should form part of a new national audit office under the Comptroller and Auditor General, who would report to Parliament". The paper then states: In the Government's view this would bring local authorities into a relationship with Parliament which was fundamentally inconsistent with their constitutional position, confusing their line of accountability at a time when the Government's aim is to strengthen their accountability in the direction in which it constitutionally lies, to their electors. If that is so, it runs counter to much of what we have heard in the Chamber about the Government's imposition on Scottish local authorities, which I know is outwith the provisions, but the theme is the same. Those local authorities are having to determine accountability by criteria laid down by the Government. There is a fear about the way in which Government appointees are put on to the Audit Commission.

The hon. Member for Leicester, South referred to Camden's accountability. One of the difficulties is that most of the authorities that make hackles rise on Conservative Benches, because of their style of government, the spending in which they indulge or other bizarre things about which Conservative Members complain, do not have annual elections. In the Greater London council, the leader during the election was replaced immediately afterwards. There is no way of changing that administration for four years. It is the same with Camden.

If one wishes to have the accountability that the consultation paper suggests, one way to do it is to get away from a local authority being elected for four years. It would be a darned sight more accountable if there were an annual election with an annual verdict on the authority's performance. That happens in the district authorities. I suspect that that makes them more accountable.

Dr. John Marek (Wrexham)

If the hon. Gentleman is arguing along those lines, would he advocate annual elections for the House of Commons?

Mr. Meadowcroft

That is the only demand of the famous charter that has not been implemented. I would not argue that simply because the House can project its income and expenditure for longer than one year, but local government is not permitted by law to do so. Local government has to raise expenditure on a year-to-year basis, which does not apply to the House. Hence, there is a considerable constitutional difference.

Compared with the Government's attitude on rating, the success of the Audit Commission will depend to a large extent on the Government's relationship with local government. If the Government undermine the relationship with the local authorities in the way in which they seem to be determined on, no provisions of the Audit Commission, however professional, will be accepted as totally fair. Therefore, I hope that the Minister will bear that in mind, as that delicate relationship can easily be undermined to the detriment of both the Government and local authorities.

6.26 pm

Mr. Tim Smith (Beaconsfield)

The hon. Member for Leeds, West (Mr. Meadowcroft) was concerned that the Audit Commission would not be independent of the Government and that it would be the creature of the Government when it came to the determination of effectiveness. The underlying principle of part III of the Local Government Act 1972 was that it should be independent. It is considerably more independent than the district audit service ever was because it was a part of the Department of the Environment. That is the whole point of part III of the Act.

The hon. Gentleman was also concerned about the distinction between policy and questioning the merits of policy decisions which is also a concern of the official Opposition. I should have thought that the assurance given by my hon. Friend the Minister and the clear statements in the code of practice would have laid that doubt to rest. There is nothing new about value for money audits in Government. The Comptroller and Auditor General, on behalf of the Public Accounts Committee, has undertaken value for money work for many years. The distinction is clear. It is made by the Public Accounts Committee, which understands the difference between the merits of policy and the arrangements that are made for securing value for money.

I congratulate my hon. Friend the Member for Leicester, South (Mr. Spencer) on his maiden speech. He said that he had a majority of just seven votes. When I first came to the House I had a majority of about 40 times that. I shall not tell my hon. Friend what happened to me subsequently. Now that the electors of Leicester, South have had the good sense to elect a Conservative Member, and in the light of his speech, there is no doubt that next time his majority will be not seven, but 7,000. We shall value very much the benefit of his experience of local government in Camden. I am glad that I have never been a member of the opposition on Camden council, having to sit up until 4 am listening to its wild ideas. I congratulate my hon. Friend on his efforts to try to prevent some of those ideas from reaching fruition. He made an excellent maiden speech.

I welcome the code as a further step towards the improvement of the quality of local government audit. I have an indirect interest, because I am the parliamentary consultant to the Consultative Committee of the Accountancy Bodies, which is referred to in the introduction to the code and elsewhere. Considerable emphasis is laid on work that has already been done by the Auditing Practices Committee.

I have discussed the work that has been done by the Audit Commission with many private firms that are interested in that work. I can report that all of them believe that the Audit Commission has been commendably fair in the way in which it has dealt with them over the past few weeks and months. I understand that considerable progress has been made with appointments, although no public announcement has been made. A third of the financial year 1983–84 has already elapsed. When will appointments of auditors to local authorities be announced for the current financial year? The Local Government Finance Act requires some consultation with the relevant authorities on this. What consultation will have taken place?

Can the Minister say what proportion of audits the Audit Commission hopes to allocate to private firms this financial year? I am advised that it will be about 30 per cent. Can he also say what proportion the Audit Commission will allocate to private firms in future years? Is there a target of 50 per cent. or something similar?

What criteria are being used to select the private firms of auditors and how much reliance is placed on their past track records? Some firms have limited experience of local government audits but some experience in other parts of the public sector. How much reliance is placed on the formal presentation of their proposals?

The object of part III of the Act is to improve the quality of audit and the code of practice is fundamental in achieving that goal. I understand that the code will apply equally to all auditors, be they drawn from what was the district audit service or from private firms. The commission's basic philosophy is clearly set out in paragraph 6 of the code, which will be particularly helpful in giving auditors a clear understanding of what they are seeking to achieve. I did not, however, fully understand the second sentence of subparagraph (a). It states that the auditor must satisfy himself as to the legality of items of account"— that is quite clear— and that in compiling the accounts different sections of the public whose interests may be affected by them have been fairly treated. I am not sure what that means in practice.

The Act places great emphasis on what have become known as the three Es — economy, efficiency and effectiveness—and emphasis is rightly placed on them in the introduction to the code. I am surprised, however, that only four paragraphs of the code are devoted to the subject as it is a new field. I believe that that constitutes a slight imbalance.

Paragraphs 40 to 44 of the code give clear guidance to auditors. The distinction between the merits of policy, which are dealt with in paragraph 43, and the detailed matters listed in that paragraph seems quite clear. The hon. Member for Blaydon (Mr. McWilliam) said that they were qualifications, but I do not think that they are. Paragraph 43 clearly states: It is not the auditor's function to question policy". The auditor must consider how policy is arrived at and examine whether the authority has taken into account all facts available to it in reaching decisions. The auditor should also consider other aspects, but not the merits of the policy decision. I believe that that is a clear distinction.

Value for money audits can be approached in a variety of ways. Traditionally, the Comptroller and Auditor General has adopted a policy of examining specific transactions. Normally he examines large Government transactions—such as the construction of a hospital—which involve substantial sums of public money, and examines them in detail for cost overruns and so on. I believe that that has been at the behest of the Public Accounts Committee rather than the policy of the Comptroller and Auditor General himself. The PAC has always tended to look at transactions with a certain political sex appeal.

A more rational way of approaching a value for money audit is to adopt a systems approach, as this code of practice advocates. Instead of looking at particular transactions undertaken by central or local government, the auditors should examine the arrangements which underlie policy decisions. That is what value for money audits should be about, and the points raised in paragraph 42 refer to that approach.

The second sentence in paragraph 42 causes me some concern. It states: The auditor will take those examples of good practice and examine how far they can be applied to the authority under review. What does that mean? It could mean that the Audit Commission will use auditors to try to impose a model or an ideal solution on certain authorities. Having examined various authorities, it may decide on a model solution and try to impose it on local authorities. That would be a mistake, as circumstances differ very much between one authority and another. The auditor should be allowed to use his own judgment in individual cases but should consider what happens in similar circumstances in different authorities.

I hope and believe that this experiment will be a great success. As long as expectations of what auditors can achieve in financial irregularity audits or value for money audits are not too high, the code will be a success. I commend the Audit Commission for its enthusiasm and determination to make it so.

If the code is successful, the Government should consider adding the audit of health authorities to the responsibilities of the Audit Commission, as I think that they would benefit from a similar approach. A limited experiment of auditing health authorities was introduced by my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) when he was Secretary of State for Social Services. That experiment involved a dozen or so district health authorities and private auditors. That scheme could be extended and brought within the ambit of the Audit Commission. I believe that the health authorities would benefit from the advice, guidance and assistance that the commission could give.

I welcome the code of practice for local government audits and I wish it well.

6.37 pm

Mr. Dennis Skinner (Bolsover)

Many years ago when I was a member of the Clay Cross local authority, one of the problems that I and many of my Labour colleagues came up against when trying to get our policies through the council was being told that our policy objectives would not get through because the auditor would intervene and a surcharge might follow. I welcome the new code in that it prevents the district auditor from intervening in policy objectives.

In 1970, the Clay Cross local authority decided to rebuild a large number of slums which had relatively low rents. We wanted to ensure that when the people were rehoused they did not have to pay double, treble or in some cases many more times their original rent.

When I arrived in Parliament in 1971, I well recall having to face the district auditor as I was a member of Clay Cross council the previous year and the council had had the audacity to carry out the mandate of the electorate. In all the local council elections in which I was involved the Labour party had gone forward on a low rent policy. The money allocated from the general rate to the housing revenue account was about 18 per cent. We believed that it was right and proper for us to go forward with a low rent policy. That policy was then challenged by two people who had failed to get elected to the council and who decided to have a second bite at the cherry by invoking the district auditor.

One Monday, I had to make the trip from here to Clay Cross to meet the district auditor with my fellow councillors simply because we had been carrying out our low rent policy. Only as a result of showing comparisons between Clay Cross, some London boroughs and some Labour-controlled authorities in Wales which also made large contributions to the housing revenue account from the general rate fund were we saved from surcharge. If I had been surcharged I would have been declared bankrupt, and I suppose the House would have missed me for the past 13 years. Then again, it might not.

Having escaped from that political interference by the auditor, I quickly took the view that things had to be changed so that it would be made clear to auditors that their job is to ensure that the accounts are right. Auditors are employed to make sure that the books balance. Of course, they must also ensure that the accounts are right and proper and that money has not been spent as it should not have been. We made a policy decision to subsidise rent and it was wrong for the auditor to encroach on that territory and almost be able to declare the 11 Labour councillors bankrupt.

The problem did not end there because not long afterwards the Clay Cross council decided to do several other things. As I was in Parliament I had by then relinquished my seat on the council. The council took on the Tory Government's Housing Finance Act 1972. That is all history now, but does the Minister agree that if the code of practice had been in force then all the turmoil in Clay Cross would not have occurred?

The councillors were simply going to the people of Clay Cross and saying, "This is our policy. We do not believe that the Tory Government should interfere in the democratic functions of local authorities. We have a mandate to carry out our policies." We now have another Tory Government who are interfering in the democratic functions of local authorities. However, the district auditor was involved again. He surcharged the 11 Clay Cross councillors for carrying out their policy of keeping down the rents of several hundred people who lived in council houses. The councillors also decided to employ more people—not an enormous number, but a mere handful. It is only a small urban district council.

There had been a horrific disaster at Markham colliery just up the road near Chesterfield. It was the first time in the living memory of many people that a pit cage had fallen several hundred feet down a shaft, killing many miners. As it was not a run-of-the-mill accident, many miners felt that if the cage was not safe they did not want to go down the pit again. As a matter of compassion, Clay Cross council decided to allow a few of those Markham miners to become part of the council staff, to fill badly-needed posts.

The Clay Cross councillors were surcharged for employing too many people. For implementing the low-rent policy and for employing more people, the councillors were surcharged about £60,000. They have been kept out of local government ever since. Now, 11 years later, we have a code of practice that allows local authorities to decide what their policy objectives will be. The auditor is confined to ensuring that the books are correct and that money is not spent improperly. He must keep clear of the policy objectives that are proposed by the council.

Local authorities might decide to provide money to subsidise bus fares. South Yorkshire has a wonderful transport policy and bus fares there are the lowest in the country. There can be no doubt that that council has always faced the possibility of the district auditor deciding, on purely political grounds—not because the books do not balance—that he must surcharge it. The code of conduct sets out the auditor's job.

I welcome local authorities, especially Labour-controlled authorities, being able to carry out the policies for which they have a mandate. One of the major grouses has been that district auditors have been able to tell authorities that they are spending too much and that they must stop doing so or they will be surcharged. District auditors have never interfered with Tory-controlled authorities that are more interested in cutting services.

Socialists feel that it is important to increase the number of home helps and to spend more money on the mentally handicapped, the social services department and the old people—Clay Cross provides them with free television licences—whereas Tories cut and carve and take money away from pensioners, the disabled and the handicapped. The district auditor has always been a tool of the establishment in that he clamps down only on authorities that spend money on deserving cases even though they have a mandate to do so. I welcome the code of practice to the extent that it will help authorities that are prepared to look after the old and the disabled.

The code of practice will leave a sour taste in the mouths of the 11 Clay Cross ex-councillors who were made bankrupt because they kept down rents and employed more people. Despite having been discharged from bankruptcy 12 months ago, they still have another four years before they will be allowed to serve in local government. They were never found to be doing anything wrong. Moreover, 72 per cent. of the electorate supported their low rent policy. That is a bigger majority than many Tory Members have.

Progress has come much later than it should have done. The tragedy is that when we were in office between 1974 and 1979 or, to put it more appropriately, when the Labour Government were in office, Labour did not have the guts to introduce such a code of conduct and allow those councillors to serve in local government once again.

I am not asking for retrospective legislation but, before the House returns on 24 October, the Minister should have a word with his colleagues and suggest that the 11 ex-councillors at Clay Cross who are still not allowed to serve in local government should have that ban lifted. Under the proposed system they would never have been surcharged. As the code will be accepted without a Division, those ex-councillors should be allowed back into local government without having to wait another four years.

6.50 pm

Mr. Robert B. Jones (Hertfordshire, West)

As the Minister rightly said, the heart of this matter is value for money, which is nothing new. The hon. Member for Leeds, West (Mr. Meadowcroft) referred to the good work that is done by many performance review committees. I commend too the voluntary publication of such works as the good practice notes by the Association of District Councils and other local authority associations. However, it is new to put value for money in such specific terms as a remit for the district auditor or the approved auditor. To central Government, value for money is a valid consideration, because the Government wish to ensure that they get value for money for the large amounts of rate support grant that they give to local authorities. Given the constraints on public expenditure, they must ensure that they get value for money within the total.

I am worried that we shall not obtain demonstrable value for money from some local authority services. It is all very well for the district auditor to be given a remit to consider the best ways of achieving economy and efficiency, but the only real way of doing that is to subject services to competition. The hon. Member for Leeds, West was right to draw our attention to the deficiencies of comparisons of unit costs, because one is trying to compare the services in one authority with those in another, and the hon. Member rightly said that geographical and other variables made such a comparison difficult.

The best way to compare the possible costs to local authorities is to draw up a proper detailed specification and to invite tenders against it. I hope that that is what is meant in paragraph 43(c) where the district auditor is instructed to consider whether there are satisfactory arrangements for considering alternative options, including the identification, selection and evaluation of such options. It is not just a matter of seeking value for money through direct competition. One problem that has cropped up for many years is that where unfair contractual practices are applied by local authorities, such as saying that private contractors cannot get on to tender lists unless they fulfil some political requirements, it is difficult to prove to the district auditor that a financial loss may have been incurred by the local authority. If there is no competition one cannot prove that it would not have been good value for money.

I am also anxious about corrupt practices. The report deals in considerable detail with the practices that we normally regard as corrupt, but I mention local authorities such as Darlington, Harlow and Stirling, which advertise all their job vacancies in Labour Weekly. That must have one of two objectives—either to recruit Socialists for employment or covertly to supply funds to the Labour party. Could the district auditor investigate such practices? If not, there is a clear case for some amendments to the code.

We are all concerned with value for money, but I am convinced that the only way in which we can achieve it is with above-board competitive practices. I hope that that will be the primary remit drawn by the district auditor from the code of practice.

6.54 pm

Mr. Michael Knowles (Nottingham, East)

I was interested to hear what the hon. Member for Bolsover (Mr. Skinner) said, especially about the independence of local government. I should have been glad of his support when I was leader of Kingston council when we were fighting off endless attempts by the Labour Government to force us to make our schools comprehensives. They were totally unsuccessful, and Kingston remains the only local authority with grammar schools and secondary schools, but no comprehensive schools. Local councils can win such battles if they box clever, but if they take on Governments direct they are likely to lose.

The hon. Member for Leeds, West (Mr. Meadowcroft) mentioned internal audits, but the difficulty with them is that many councils are fairly small and the staff are necessarily drawn from the finance departments. They are not independent. When they pursue their careers, they may wish to return to the mainstream of the financial side of councils, so the fear must be that occasionally they will pull their punches. I examined a system for setting up a police force composed of internal auditors, corporate planners and school inspectors, but that was not workable. We need a powerful outside audit, and the concept of the commission is right.

Mr. Meadowcroft

Does the hon. Gentleman accept that his remarks downgrade the honourable part that is played in local government by internal auditors, who will be upset to hear that they are the lackeys of the finance departments, not least because on many occasions they investigate finance departments?

Mr. Knowles

We must recognise that there will be a conflict. If one speaks frankly to officers of finance departments and audit departments, they readily admit the fact. The problem is appreciated and it is no criticism of them to say that it exists. The problem is built into the system; it is not the fault of the individual.

One weakness of local government has been that in many authorities, no matter how well run, people do not compare notes and pass on their experience. There is much re-inventing of the wheel, so if the commission passes on the best practices in local government from one authority to another it will have served a useful purpose. I support the use of outside auditors. Kingston was the first authority to use them, and the commercial experience that we gained was useful in helping us to tighten up systems in the council. It was a two-way process, because the auditors had not worked in local government previously and had some ideas that simply would not work. There was a two-way flow between the private and the public sectors, which must be healthy for Britain in the long run.

We need an independent outside commission, simply because public money must be closely accounted for. This proposal will serve that purpose, and I shall support it.

6.58 pm

Mr. McWilliam

I congratulate the hon. Member for Leicester, South (Mr. Spencer) on his maiden speech. I enjoyed his dry wit. I cannot say that I was delighted that he beat an old personal as well as political friend of mine, but I am sure that he will be an asset to the House, not least because he brings to it extensive local government experience, albeit unsuccessful experience of auditors and the High Court. I also congratulate him on making his maiden speech on a technical, dry and demanding subject, and I commend his bravery in doing it and in sticking to the point of the debate.

The hon. Member for Leeds, West (Mr. Meadowcroft) was anxious about the appointment of members of the Audit Commission. I was appointed to the Audit Commission for Scotland—the Commission for Local Authority Accounts — by a Conservative Secretary of State on the basis that I had been the city treasurer of Edinburgh. I made it clear to him that I would not continue in local government, and therefore took on the role of poacher turned gamekeeper. There is nothing wrong with that, and I expect such things to continue regardless of what Government are in power. We want the most knowledgeable and experienced people on these commissions, as I am sure the whole House will agree.

Coming from a Scottish background and a Scottish local authority, I know that the annual basis for local authority elections does not work in quite the way suggested by the hon. Member for Leeds, West. His point about the House being able to finance itself for more than a year at a time is quite wrong. Finance Bills lapse annually; that is one of the important controls that back Benchers have over the Executive, regardless of the Executive's political complexion.

I remind the hon. Member for Beaconsfield (Mr. Smith) of what I said about privilege. The difference between the Audit Commission and the Public Accounts Committee is that the PAC enjoys the privilege of this House. It can say what it likes about anybody and anything and not suffer the consequences. The Audit Commission will only have privilege limited to the normal professional privilege of auditors. By that very definition, it will have to be more circumspect than the PAC.

It is therefore necessary that the value for money function of the commission should be restricted by paragraphs 26 and 43, which make it clear that it should not go down the path of sin by getting involved in political controversy. That point was picked up effectively by my hon. Friend the Member for Bolsover (Mr. Skinner).

I cannot go all the way with the suggestion of the hon. Member for Hertfordshire, West (Mr. Jones) that competition solves everything. When talking about areas that are effectively local monopolies, competition, while an interesting concept, cannot be held in all circumstances to solve all problems. However, I agree with the hon. Gentleman's general point.

I hope that all local authorities will advertise in all newspapers, be it Labour Weekly, the Conservative whatsit— [HON. MEMBERS: "Newsline".]—and so on. Advertising should be spread as widely as possible and should not be withheld from newspapers simply because they take a political view that is anathema to the political party that has local authority control. As Labour Weekly is a registered newspaper, it is as good an organ for advertising as any other.

I remind the hon. Member for Nottingham, East (Mr. Knowles) that the then Secretary of State for Education and Science did not take him to court, which is not as severe as what happened to the colleagues of my hon. Friend the Member for Bolsover. I accept that Governments twist arms, but it is better that such actions by central Government should be done by persuasion rather than coercion. That is our philosophy, and we shall continue to argue it.

On local government finance, the hon. Gentleman said that we must be like Caesar's wife. As a former treasurer of the city of Edinburgh, I could not agree more. As a commissioner for local authority accounts in Scotland, I assure the hon. Gentleman that, as well as ensuring that the external audit was properly conducted, we criticised any local authority that did not have a good internal and independent audit system. As city treasurer, I would have been annoyed had my internal audit department not felt free to be as embarrassing to anybody as it wanted, so long as it was trying to obtain the truth. I am sure that that will also find support throughout the House.

This has been an interesting debate on a narrow and technical subject that is sometimes considered boring. I find it fascinating. It concerns one of the most important things that we do in the House, and I have enjoyed the debate.

7.5 pm

Mr. Waldegrave

This is the third debate that I have introduced, and I have yet to have the Opposition vote against me. This is a dangerous precedent that could get me into trouble with the Conservative Back Benches. I agree that some of the issues involved in this subject are important and interesting, and this has been a good and useful debate.

The hon. Member for Blaydon (Mr. McWilliam) spoke of the quality and kind of person to be appointed to the Audit Commission. I hope that I can lay at rest any worries that this will be done, either by this Government or any other, on a political basis. The hon. Gentleman will know that among the present membership are Mr. Geoffrey Drain and Mr. John Gunnell, who on the whole support the Labour party. I have no doubt that, were the Labour party ever to come back to power at some far distant date, it would honour the commitment to appoint people on their merits.

My hon. Friend the Member for Beaconsfield (Mr. Smith) and others spoke of obtaining value for money as one of the duties of the Audit Commission. We are merely developing past policy. This is not a revolutionary new concept in public auditing. My hon. Friend referred to the Comptroller and Auditor General, but the 1973 code of audit practice stated that the auditor must be concerned with the possibility of loss due to waste, extravagance, inefficient financial management, poor value for money, mistake or other cause". The old district audit service took that increasing duty on itself and did useful work.

The hon. Member for Blaydon asked what constituted a substantial increase under paragrpah 7(c). It is more than simply that the individual lives in the authority's area. It would be absurd to exclude someone on those grounds, but any further involvement on any scale whatever would be such a bar.

The hon. Gentleman also asked about a conflict between consultancy and audit. As I said in my opening speech, the intention of the code is to separate major consultancy work and major audit work. The hon. Member for Leeds, West (Mr. Meadowcroft) also made that point. It is right that that work should be separated, and the commission is unequivocal about that in its code.

The hon. Member for Blaydon, a professional in these matters, also spoke of the protection given by qualified privilege. I shall probably not use the right legal language, but, as I understand it, an auditor cannot be sued for libel unless it can be proved that he acted with malice. Given that there is no question of malice, he will have privilege to say what he needs to say to carry out his duties.

My hon. Friend the Member for Beaconsfield argued that the sub-paragraphs to paragraph 43 did not amount to a qualification of my right hon. Friend's statement of 25 March. Those sub-paragraphs expand and define the contents of that statement, but do not amount to a qualification.

It was pointed out that the code was published not by Her Majesty's Stationery Office, but by an organisation called Needham Printers Ltd. This was simply the commission setting about its duty of finding the best value for money and Needham Printers Ltd. put in the lowest tender and has done a good job. That shows that the Audit Commission is setting about its task in small and practical things in the right spirit. As to the cost of the document, the commission has so far made no charge for the publication but regards the code as a service to the ratepayer. After it has been approved by Parliament it will be made generally available to the public from the commission, and it is right that that should be so.

I have great pleasure in congratulating my hon. Friend the Member for Leicester, South (Mr. Spencer) on his able maiden speech. I had the pleasure of living in that city for a time when I was working in an engineering factory to the south of the city and I know many of the aspects of the city to which he referred. I visited the new grammar school last year and can confirm that it is an impressive institution. However, if I have disappointed his expectations of the Audit Commission involving itself head on in what are effectively political battles, I am right to do so.

The only power that can limit the things about which he was complaining in Camden is another democratic power, whether it is the defeat of that council or the democratic power exercised by the House of Commons. It would be wrong for the auditors to become involved in a straight political battle. The case that my hon. Friend cited is an interesting example of some of the difficult decisions which, in the end, courts have to make whether a particular action is merely incompetence, or incompetence to the point of negligence, or not incompetence because it was foreseen by the council. Sometimes there will be difficult judgments to be made on the borderlines and the courts have to help to make them.

Mr. Sydney Bidwell (Ealing, Southall)

I apologise to the House for not having been here through all the debate, but I have been here for a substantial part of it. Does the Minister know that in the London borough of Barnet, which is Tory controlled, the district auditor pointed out that the expenditure on privatisation and getting rid of the direct labour force of the housing department had been much more costly than non-privatisation, and that Barnet has turned down the idea of privatisation of refuse collection? The Prime Minister's constituency is in that borough and it seems to have an intelligent district auditor. May we be assured that nothing will impair such activity under the new code or under any other measure?

Mr. Waldegrave

There is nothing in the code that will prevent the district auditors from conducting proper audits as they have done in the past. There is a widening of the importance attached to value for money, and, although it would be wrong for me to comment on an individual case, I understand that that was the point being made in this case.

The hon. Member for Leeds, West need not be too worried about the relationship with internal auditors. Right at the beginning of the code, in paragraph 6(e), there is a statement of the basic philosophy of the commission and an emphasis is put on the importance of co-operation between external and internal auditors.

As to fees, on which the hon. Member also commented, there is no intention to land local authorities with bills they do not expect. The commission may want to negotiate a package of fees relating to particular circumstances or to a particular authority. One of the things that will be taken into account is how much work it had to do, and that would depend on the strength of the internal audit. There will be flexibility, and there will be negotiation on bills at the time of the appointment of the auditors.

The hon. Member for Leeds, West made a number of other points. There is no intention of being simplistic about a comparison of unit costs. It is true that no set of numbers can describe in sufficiently objective detail the differences in circumstances, but, on the other hand the sensible use of figures can show up things that are worth investigating further. The Audit Commission has given itself the job of transferring best practice from one authority to another. That is an important job, the results of which must be widely used. From it, benefit can be offered to local authorities and to their ratepayers, and we should not seek to limit that. In every debate in which I have spoken the hon. Member for Leeds, West has brought up the matter of annual elections, but they are not within the subject of this debate, any more than they were within the subject of the last debate. However, the hon. Gentleman is determined and persistent.

My hon. Friend the Member for Beaconsfield asked about the proportion of the auditing work that will go to private companies. At the moment it is about 15 per cent. and the intention is to move it to about 30 per cent. This is 30 per cent. of a bigger overall total audit. More auditing will be done, so this is not a challenge to the staff who are transferring from the district audit service to the commission. This will be additional work, but he is right to warn us—and I am sure that the commission is aware of this—that different skills and experiences are needed in auditing public bodies. Part of the purpose in bringing in outside bodies is to build up a wider expertise in the outside companies, which will be of benefit to the public interest. My hon. Friend the Member for Nottingham, East (Mr. Knowles) made this point and said that there were things which the private sector can offer to the public sector, and that is true.

I have to say, and I should be in a certain amount of difficulty with my hon. Friends on the Back Benches if I did not do so, that I must disappoint the hon. Member for Bolsover (Mr. Skinner). I do not want to spend too much of the time of the House going over history, but there is nothing in the code to prevent an auditor—indeed, it remains the duty of an auditor to do so—from pointing out whether a council had exceeded its vires and gone outside its powers.

Councils are statutory bodies which derive their powers ultimately from this House, and, as the hon. Member for Bolsover knows having lived through that experience, the issue in his area was whether the council was acting within its vires. Under present legislation, if a council is not, it remains the duty of the auditor to bring that to the attention of the courts. I do not know what the courts would decide if the case were brought to them under the new code, but the issue whether the council was acting within its powers would remain the same.

Mr. Skinner

There is a problem. The surcharge was not just about rents, but whether the council was right to employ a number of workers on its staff, principally some of the miners who did not want to work at Markham colliery because of the disaster. That was not acting outside the powers laid down for local government. There was no Act of Parliament which said that the council could not employ a few more workers, yet it was surcharged.

It is true that the council was taking on the Government head on over the rents under the Housing Finance Act, but the Minister has to bear in mind that the Government also had the power under that Act to send in a commissioner straight away. Quite properly, the council said to the Government, "In accordance with the Act, send in your commissioner and see whether he can collect rents." The commissioner finally got there, very late, but he did not collect any rents because the council had the whole town behind it. However, the commissioner was not sent in to begin with and therefore it was the council's argument that it was the Government who were falling down on their job, not the council.

Mr. Waldegrave

It would not be fair on the House to conduct a sub-debate, on an issue which has no doubt been debated before my arrival in the House on many occasions. However, let us imagine a nightmarish council which voted to reintroduce hanging. Surely the hon. Gentleman would not say that that council, although it had a mandate to do so, could stand against the will of this House and do that. Clearly, that would be an absurd extension outside its vires. We must remember that the powers of local authorities are defined by this House, and it remains the duty of district auditors to see that local councils do not step outside their proper powers.

There has been a general welcome, I think, from both sides of the House for this code. Although I may have disappointed the hon. Member for Bolsover, after the enthusiasm of his initial welcome, I hope that he will recognise that a very professional accountancy job has been done here. It is one that will serve the public well. It will be revised from time to time and brought back once every five years or so to the House if it needs major revision. Meantime, we welcome the introduction of the code. The Audit Commission is a new and important addition to the safeguards for the ratepayer and individual citizen to see that his money is well spelt. We wish it well in its work, and its first step in producing this code has been a successful and professional one.

Question put and agreed to.

Resolved, That the Code of Local Government Audit Practice for England and Wales, a copy of which was laid before this House on 11th July, be approved.