§ Lords amendment No. 27
8.15 pm§ Mr. RaynsfordI beg to move, that the House agrees with the Lords in the said amendment.
The new clause tabled by the Government on Report gives the Secretary of State in England and the National Assembly for Wales power to amend or repeal by order any enactment relating to a local authority in the light of generally accepted accounting practice as it applies to local government. The new clause was tabled partly in response to the Liberal Democrat amendment to clause 18 tabled in the House of Lords Grand Committee.
Clause 18 concerns the definition of a local authority company and the Opposition amendment reflected the pressure from local government for a modern, all-purpose definition of such a company. In resisting the amendment, we acknowledged that it raised an important issue and we promised to bring forward our own measure. The new clause enables the definition of a local authority company to be brought into line with accounting practice at the earliest opportunity. The timetable for that will depend on the work being done by the Chartered Institute of Public Finance and Accountancy. CIPFA is currently working on a revision to its standard local government accounting code to incorporate a group accountancy requirement for companies. As soon as the CIPFA code is ready, the new power will be used to substitute the accounting definition for the one now in clause 18.
The immediate need to update the definition arises from work being taken forward on the Treasury-led whole of Government accounts exercise, in which the Audit Commission and CIPFA are closely involved, along with officials from our Department and the Welsh Assembly. The aim of the initiative is to produce a consolidated set of accounts for the whole public sector. It must encompass all central and local government bodies, including not only local authorities but those companies in which authorities have a major interest.
The definition of a local authority company used in the Bill for the prudential borrowing system is not based directly on accounting principles. That means that it would not meet the needs of the whole of Government accounts exercise. Authorities would have to follow two different accounting procedures in relation to their companies. This would be onerous, unwelcome and confusing, so the new power will solve that problem. However, the new clause will also allow any other aspect of the local government finance system to be harmonised with accounting practices and to be adapted to reflect future developments without the need for primary legislation. Such a move would implement the Government's policy objective of bringing public sector accounting more into line with standard accounting practices. 666 In leaving the term "generally accepted accounting practice" undefined, we were aware of a precedent. The Government Resources and Accounts Act 2000 requires the Treasury to use its powers to ensure that departmental resource accounts comply with "generally accepted accounting practice" subject to adaptations that are necessary in the context but no definition is given. In fact, the expression has a well-established meaning. In the UK, it covers the aggregate of the accounting practices that companies are required to follow in preparing their accounts. It has as its principal source the practices recommended by the Accounting Standards Board, a body independent of Government. For local government, accounting practice is established by a code issued by CIPFA, which is recognised as a statement of recommended practice within the Accounting Standards Board framework.
It might be helpful if I explained the difference between the new power and the one already provided for under clause 21. The latter enables the Secretary of State to specify codes that are to count as proper practices. The two powers work in different ways. Clause 21 ensures that local government accounting practice is compliant with appropriate professional codes, namely those issued by CIPFA. However, the clause 21 power could not be used to amend existing legislation that might be acting as an obstacle to the adoption of proper practices.
In the next few years, there are likely to be major developments in national and international accounting practice to improve transparency and reduce the scope for the kind of "creative" accounting highlighted in the Enron affair. For example, there could be fundamental changes in the treatment of borrowing and investments, the full implications of which may not become clear for some time. The changes would need to be applied in local government. Clause 21 is unlikely to be adequate on its own for that purpose, but we are confident that the new clause would make it possible.
I should also like to comment on the breadth of the power, which can be used only to change legislation to which accounting practice is relevant. When the power is used, the Secretary of State gives up his own freedom to devise accounting practices and relies instead on standards imposed by the independent accounting bodies. In all cases, the relevant provisions of a published accounting code or standard that lie behind the order should be readily identifiable. However, since this is a power to amend primary legislation, we have recognised that orders exercising it should be subject to the approval of both Houses of Parliament. The approach was endorsed by the House of Lords Committee on Delegated Powers and Regulatory Reform.
§ Mr. HammondI am grateful to the Minister for his full and explanatory speech, and I congratulate his Department on its economy in the use of civil servants' time. Anyone who also sat through the debate in the Lords the other night will have noticed a marked similarity between his speech and that delivered by his colleague in the other place. One Government, one set of briefings, one speech template—that is commendable economy.
We Conservatives are generally wary of extending the powers of the Secretary of State to amend primary legislation by order, but in this case we can see the merit 667 of the Government's proposal. I understand—the Minister has confirmed this—that the original issue was specifically concerned with local authority companies: the possible need to produce consolidated accounts for local authorities and their companies, to avoid off balance sheet scams of the type that we have become rather familiar with in the past few years; and the need to support the whole of Government accounts exercise. CIPFA, as the Minister said, identified the need possibly to amend definitions in clause 18(2) to deal specifically with local authority companies and preparing consolidated accounts for local authorities.
The Government went on to identify a possible broader need, and the Minister's speech dwelt greatly on local authority companies and the whole of Government accounts exercise. To my mind, the perhaps more important issue is the ongoing question of the rapid evolution of UK generally accepted accounting practice, partly in response to the demands of legislators and investors for greater transparency in the wake of Enron, WorldCom and other well-documented accounting scandals. We support moves to bring public sector accounting as far as possible into line with GAAP. For the record, the Committee that deals with matters relating to local government and the regions has also clearly endorsed that position. We therefore have to trade off the benefits of the rapid implementation of further moves in that direction. That necessarily means amending obstructing legislation, whereby procedures to be followed in local authority accounting have historically been prescribed in statute—against the objection in principle, which a diligent Parliament ought to start from, to granting the Government powers to amend primary legislation through secondary legislation.
The Government's amendment, which was accepted in the Lords, has been reviewed by the Lords Delegated Powers and Regulatory Reform Committee, which found it acceptable. Any orders made under it will be subject to affirmative resolution, as the Minister said, which always helps to reassure any sceptics in this place. However, as I have said the weakness in resorting to that procedure to tighten scrutiny is the feebleness of the scrutiny process itself. We are certain to reach a 90-minute Committee debate when we have an affirmative procedure, rather than a negative one. But as anyone who has taken part in such debates—as we all have—will agree, once we reach that stage we are a very long way away from really effective scrutiny of the Executive, because of the time limitations that such debates entail. But on balance, we believe that this is a justified measure and we will support it, particularly given that the power to amend is strictly limited to cases in which it is appropriate to do so in the light of the GAAP of the time.
It is important, however, that we recognise that we are agreeing to quite a wide power. It is not, as Lord Rooker appeared to suggest in Grand Committee, merely a power to alter definitions across a wider range than just clause 18(2). It is a power to amend any Act that requires amending in order to bring local authority accounting procedures into line with GAAP. So any statute that prescribes a different procedure, or which inhibits the adoption of GAAP, could be amended by this measure. This is an appropriate provision to include in the Bill, but the House should be in no doubt that it does give the 668 Government significant powers—rather more significant ones that the Minister's colleague suggested during the Grand Committee debate. However, we will support this measure tonight.
§ Mr. Edward DaveyAs the hon. Gentleman has just suggested, this is a significant power. It is interesting to see how the parliamentary process sometimes works. In Committee, we were unable properly to analyse the charging and trading provisions in chapter 1 of part 8 of the Bill because of lack of time. We wanted to make some of the points that were made in the other place in order to try to examine the framework around trading companies that the Government were introducing. I am delighted that Baroness Hamwee was able to make those very sensible points in Committee, and the Government have reacted to them by going much further.
The amendment certainly deals with some of our concerns about local authority trading by making sure that local authority companies will have to abide by proper accounting practices; indeed, the Government now have the power to ensure that they do so. That is important, because it will put to rest the concern of small businesses that such companies will be trading unfairly against the private sector. Some small businesses are still sceptical about what the practice will involve, but the provision does help them, because they can be reassured that the Government have the power to intervene if any local authority is trading unfairly through its trading arms. That point of detail has now been met, but it is interesting to note that the provision is wider and therefore affects the entire system.
§ Mr. HammondI am not sure that I understand that point. We are not talking about a provision that will give the Government the power to intervene if they thought that a local authority company was trading unfairly; rather, it will pave the way for consolidated accounts to be produced, which will prevent local authorities from using companies for inappropriate purposes. I doubt whether it will give the Government the power to intervene to prevent unfair trading.
§ Mr. DaveyThe hon. Gentleman rightly picks me up—I think my use of language was slightly loose. There could be examples of unfair trading that are not covered by the new power. Some representations from small business organisations that I received related to how the accounts of these small companies will be drawn up, and how they will relate to local authority accounts; however, that concern appears to be covered. I can imagine contracts being given in an unfair way that is, however, completely unrelated to accountancy practices, so the hon. Gentleman makes a fair point.
On how this wide power will apply more generally, as a veteran of the Committee that considered the Government Resources and Accounts Bill—GRAB, as it was unfairly known—I can tell Members that this power was included then. The power was welcomed on both sides at the time as it applied to central Government Departments, so there is a corollary to read across—that it should now be applied to local government. I am sure that the Chartered Institute of Public Finance and Accountancy and other bodies will welcome it.
669 8.30 pm
Will the Government comment on a point of detail? When we debated the Government Resources and Accounts Bill in Committee in 1999, we obviously devoted time to the views of the Accounting Standards Board and its role in the UK's generally accepted accounting practice. We also talked about the Financial Reporting Council, an independent body set up to advise the Government on the adoption of resource accounting for all Departments. That relates to Government accounts, and the body has to take account of the special circumstances that apply in the public sector. Although GAAP is sensible for many aspects of public sector activities, some fall outside normal commercial pressures and considerations. That is why the body was set up—to ensure that public sector accounting standards and practices take into account the special aspects of the public sector.
We raised in Committee the classic example of how to value an account for nuclear weapons. Some assets belonging to local authorities would not be marketised, so GAAP would not necessarily apply. The private sector has never considered accountancy practices as they relate to such assets. Will the Government comment on that problem and explain the inter-relation between the amendment and clause 21, to which the Minister referred? Those parallel provisions are designed to achieve different objectives. They do not necessarily compete with each other, but it is important to be careful about how Governments use the two different powers, because one could envisage them coming into conflict in certain circumstances.
§ Mr. RaynsfordThe hon. Member for Kingston and Surbiton (Mr. Davey) raised some interesting questions relating to trading, but I have to say that I am advised that his concerns are unfounded because trading will have to be carried out through a company. As he knows, that is the provision in this part of the Bill, and anything done by a company will be caught by companies law, which provides the essential safeguard. The new clause will not change it. Group accounting comes in at a later stage when a local authority amalgamates its accounts.
I have explained that we originally believed that clause 21 would provide us with powers to achieve the wider aims that I mentioned in my opening statement on the amendment. I went on to explain that, in the context of the application of the whole of Government accounts exercise and other potential changes that might arise, we were conscious of potential needs that went beyond the powers contained in clause 21. That is why the additional powers in the amendment were necessary and why we want to include them in the Bill.
§ Lords amendment agreed to [Special entry].