HL Deb 13 May 1982 vol 430 cc373-410

House again in Committee.

[Amendment No. 51 not moved.]

Clause 6 agreed to.

Lord Bruce of Donington:

I beg leave to move Amendment No. 51A standing in my name on the Marshalled List, to insert the following new clause: After Clause 6, insert the following new clause:

("Responsibility for preparation of accounts etc.

. It shall be the responsibility of the local authority or other body to whom this Part of the Act applies to take all necessary steps to ensure—

  1. (a) that the accounts are prepared in accordance with the accounts regulations and comply with all other applicable statutory requirements;
  2. (b) that proper practices have been observed in their compilation.").

This is a probing amendment, in the sense that it is not one that I intend pressing to a Division. Its purpose is to give the noble Lord, Lord Bellwin, an opportunity to speak, in view of the provisions of Clause 9 of the Bill (in which your Lordships will observe that certain responsibilities are laid upon the auditors to satisfy themselves about certain matters). It seems, in view at any rate of the Consultative Committee of Accountancy Bodies—to which view, incidentally, I subscribe—that if one is going to impose the responsibility on the auditors of certifying certain matters, there should be laid on the authority itself the responsibility to perform those things to enable them to certify them.

It may be said—I would defer to the noble Lord on this; we are seeking a constructive solution and are not seeking to make any political point—that there is a common law responsibility for the local authority to do exactly what I have put in this particular amendment. I am told that that is so, but I may be wrong because I am not a lawyer. If it is so, I shall be quite happy, but, if it is so, the noble Lord himself should be capable, in responding to this amendment, of demonstrating precisely where this is so and of quoting the appropriate common law case law in support of the proposition that there is a responsibility on the local authority to do all those necessary things which are required in order that the auditor himself may perform his function. I beg to move.

The Deputy Chairman of Committees (Lord Drumalbyn)

Amendment proposed, to insert the new clause printed on the Marshalled List, less paragraph (c).

8.4 p.m.

Lord Bellwin

I hope that I can help the noble Lord, Lord Bruce of Donington, on this latter point because, to put it briefly, we do feel that this is covered. We would say that it is implicit in common law, and in particular I will quote the case known as Roberts v. Hopwood in 1925. The point is that the amendment would appear to be capable of meaning that any failure to maximise value for money would actually be unlawful if it was attributable to shortcomings in the local authority's arrangements. There are difficulties to this. The auditor might have to seek a declaration that expenditure was unlawful if he thought there was a defect in the authority's arrangements. If he did not do so, objectors might appeal against him. But, under the Bill as drafted, his duty is more to assist by drawing the local authority's attention to shortcomings. The auditor's penal powers only come into operation on a value for money issue, if an authority has incurred expenditure which, although for a lawful purpose, is so excessive as to be unlawful.

The Deputy Chairman of Committees (Lord Drumalbyn)

I do not know whether the noble Lord heard me saying, when I read out the amendment, that it was less paragraph (c). The amendment as moved only contains paragraphs (a) and (b).

Lord Bellwin

Yes, I did. I have tried to deal with this rather briefly, but I am anxious to give the noble Lord the assurance which he very fairly requires on a matter of this kind. The fact is, if I can take the provisions in order, that the first provision would require local authorities to comply with the accounts regulations and all other statutory requirements. The Committee does not need me to dwell on the point that statutory requirements must be observed and do not need other statutory requirements to say so. I would suggest that there is here an element of tautology

Secondly, the authority is required to ensure that proper practices have been observed in the compilation of the accounts. I would suggest that, in a technical and a legal sense, this is not necessary, in that any body which is required to keep accounts must be expected to keep them properly. I would have thought there was no need to have a special statutory provision on this point. I hope that the noble Lord, Lord Bruce of Donington, will feel that without my going into more detail—which I can if he wishes—he can consider what I have said (for he did say that it was a probing amendment) and either we can just leave it at that or we could talk about it again later. I really feel that this is not a necessary amendment but perhaps the noble Lord will tell us what he thinks about this.

Lord Bruce of Donington

I am grateful to the noble Lord and I entirely accept his suggestion that we may give this consideration between now and the Report stage. But may I draw the noble Lord's particular attention to Clause 9(1)(b)—and I must refer him there even though we shall be discussing the details at a later stage. Clause 9(1)(b) says that the auditor shall satisfy himself, that proper practices have been observed in the compilation of the accounts". I trust that I shall not expose my ignorance of the matter, but I do not understand what is meant by "proper practices". Clause 9(1)(a) states, that the accounts are prepared in accordance with regulations made under Section 17", and so on. If the accounts are properly prepared, what is the relevance of "proper practices…observed in the compilation"? If the accounts are all right and they comply in every material particular with all the statutory requirements, of what relevance are the methods by means of which this particular result is accomplished?

Perhaps I may draw the noble Lord's attention to an analogy. When a firm of professional accountants does an audit of a firm's accounts, it applies all the criteria which are set out in the statements of standard accounting practice which are put forward by the CCAB or by the respective institutes and bodies belonging to it. The form of its audit working papers may differ, they may be in a different sequence, and they may use different methods. The practice, in terms of how the ultimate correct audit position is arrived at, is, so long as the criteria are correct, entirely immaterial. There will be many different and varying practices between firm and firm according to their tradition, their history, their concept internally as to how the job can be done most economically. The important thing is that they arrive at the correct result.

I understand in some ways the noble Lord's position, because of course there is no statutory form in which the accounts of a local authority have to be presented. I must say this surprises me in view of the very detailed terms of the Bill and the explicit directives it gives. I would have expected that along with this Bill there would have been presented a form of accounts which a local authority and other similar bodies have to apply. I am not making any criticism of the Government about this; it applies to the previous Government of my own political persuasion. I am not seeking to apportion any particular blame.

But if I may take the noble Lord's mind back to the history of what has happened in connection with commercial and industrial accounting, it is of course a fact that the profession itself over the years has developed a form of accounts which are presented for commercial and industrial enterprises. Indeed, my own institute, which celebrated its centenary a couple of years back, has played a leading part in the whole standardisation, if I may use the term, of the presentation of accounts for commercial, industrial and ordinary private purposes. The state has in due course acknowledged the wisdom of my profession in ultimately adopting the form of accounts, which, after the recent EEC directive, was formally put into the Companies Act 1981.

I am wondering why the same should not have been done here because I am troubled by the vagueness of Clause 9(1)(b), and it is for that reason that in moving this amendment I seek to lay on the local authority the responsibility for doing something which the auditors thereafter have to satisfy themselves upon. I realise that this may be unfairly addressed to local authorities. What I am really saying is that, before putting into Clause 9(1)(c) phrases about the auditor satisfying himself that proper practices have been observed in the compilation of the accounts, the noble Lord should address himself to telling the local authorities, or enshrining in the legislation, precisely what the proper practice is.

If he knows the proper practices now, then it would assist your Lordships if the noble Lord would tell the House what they are, because, speaking as a professional accountant for the moment, I am left completely in the dark. I do not ask the noble Lord to go into any very great detail now. The only reason why I have spoken at this length is that we on this side wish to be as constructive as we can be in developing this matter, and I thought that if I gave my preliminary thoughts on the subject now it would give the noble Lord an opportunity to consider them in some detail before we return to the matter on Report. The amendment is moved only in that sense.

Lord Bellwin

I entirely understand the way the noble Lord is bringing this forward and I will want to read what he has said. Perhaps I can help a little at the moment by saying that Clause 8 mentions that the Audit Commission will be drawing up a code of practice, and that may be one move in that direction. I think, also, that Clause 17 gives the Secretary of State the power to make provision with regard to the form of the accounts. That is another area which we will want to look at before I come back to the noble Lord on it.

On his query regarding definition of proper practice in Clause 9(1)(b), this, as I understand it, means proper accounting practices; that is, practices which are appropriate and meet the requirements of approved standards of practice. The noble Lord will know better than I do that statements of standard accounting practices are being reviewed as to their applicability to local authorities. As I said, I would want to look carefully at what the noble Lord has said and perhaps be in communication with him before the next stage. Certainly from my own knowledge it is true that authorities have tended to produce their accounts in different ways. I think this may well be one of the good things that will come out of the commission.

Lord Bruce of Donington

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 [Appointment of auditors]:

[Amendment No. 52 not moved.]

Baroness Birk moved Amendment No. 53: Page 6, line 34, at end insert ("and, if that body objects to the auditor or auditors the Commission proposes to appoint, no such appointment shall be made until the Secretary of State has considered any representations or objections the body wishes to make to him").

The noble Baroness said: If the right for authorities to choose their auditors from a list had not been lost there would not have been any need for this amendment. This amendment is in a very much lower key but on somewhat the same point. It is to ensure that a local authority do obtain some safeguards against the imposition of auditors on them when they might not be very happy about the particular auditors. The increasing involvement of auditors, including district auditors, with policy matters shows how sensitive an area this has become. The system needs some checks and balances, and what this amendment does is to provide a modest minimum safeguard, the right of appeal by the local authority against the commission to the Secretary of State. It is just a small check on the Audit Commission's powers. It is not as good as we would have preferred—the opportunity to choose their own auditors. I beg to move.

Lord Bellwin

This is an interesting amendment and I am obliged to the noble Baroness for highlighting the relevant issue carefully. I feel I am not persuaded by the arguments, which run contrary to the Government's policy, and also it seems to me in some ways contrary to some of the views that were expressed earlier on today from the Opposition Benches.

I would like to put forward three reasons for the Government's resistance to this amendment. The first is the importance of audits being independent and being seen to be independent, as we were saying just before the adjournment. I sought also to explain in our Second Reading debate that we attach particular importance to the independence of audit in government —and, I say again, central Government as well as local government—because independence is especially important for the actual appointment of auditors. I cannot feel apologetic about the proposal in the Bill that this should rest with the commission acting independently with no power for the Secretary of State to intervene. Moreover, intervention by the Secretary of State would undermine the commission's authority.

Secondly, I would remind noble Lords that there are other checks and balances built into the commission's decision-taking arrangements. The Bill deliberately and explicitly requires the commission to consult each of the bodies concerned before appointing their auditor. My colleagues and I in your Lordships' House and in another place have sought to make it clear that local government itself will be represented on the commission, so a substantial role will be played by local government in each appointment decision.

My third argument is perhaps an extension of my first. I regret I have to say that the amendment is defective because it provides no power for the Secretary of State to overrule the commission's decision if he were to be persuaded by the representations made to him. Of course, one always hesitates to make debating points about technical drafting matters. They could always be put right at a later stage if that was the only problem. But the point here is much more than a technical one. The flaw in the amendment could only be satisfactorily remedied, as I see it, if the Secretary of State were given a power to direct the commission about which auditors they should appoint. This would be quite contrary to the Government's policy. I thought it was also contrary to the views earlier expressed by noble Lords opposite. I thought they were very concerned about the extent of the Secretary of State's powers in relation to the commission, and wanted to see them reduced. But in this case the logic of the amendment, if it is to have any purpose at all, is that the Secretary of State should be given an extra power.

The Government see such a power as especially undesirable because it would inevitably apply to individual local authorities. The Secretary of State's power of direction in paragraph 3 of Schedule 1 is deliberately restricted, so that he cannot give a direction in respect of a particular body. We see this as a most important restriction, and we would not want to weaken it.

I hope I have explained why it is that we feel unable to accept these amendments. Perhaps the noble Baroness may even have felt that some of the arguments struck an answering chord in the views which she herself expressed earlier in the day. If so, I am sure that she will be content to withdraw the amendment.

Baroness Birk

I thank the Minister for that careful and full reply. The trouble is that one is caught between the devil and the deep over this matter. One is trying to find some flexibility and one is left only with one long stop which is the Secretary of State, and so one goes back to him. I am trying to find some way of getting some sort of movement. I can see that this amendment will not progress. I accept that there are some points against the amendment. But I wonder whether, between now and the next stage, we can try to find a different way round this very difficult and important problem. I do not think that this is the way—in any case it is quite clear that the Minister will not accept this amendment. Therefore, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees

I understand that Amendments Nos. 54, 55, 56 and 57 have already been spoken to with another amendment. Does the noble Baroness wish to move those amemdments?

Baroness Birk

No, they are not moved.

[Amendments Nos. 54, 55, 56, 57 and 58 not moved.]

Clause 7 agreed to.

Clause 8 [Code of audit practice]:

8.22 p.m.

Lord Bruce of Donington moved Amendment No. 58A: Page 8, line 3, after ("Parliament") insert ("for approval by each House of Praliament").

The noble Lord said: I beg to move Amendment No. 58A. This is a very minor amendment. It will be recalled that Clause 8 deals with the commission's preparation of a code of audit practice. Subsection (3) says: The code shall not come into force until approved by a resolution of each House of Parliament, and its continuation in force shall be subject to its being so approved at intervals of not more than five years". Then subsection (5) says: The Commission shall send copies of the code and of any alterations made to the code to the Secretary of State who shall lay them before Parliament". All my amendment does is to ensure that the same treatment is given to the alterations as was given to the original code, so that the alterations are subject to the approval of both Houses of Parliament. I do not think that the noble Lord could have any objection to that and I invite him to support it with his usual spirit of benevolence so that we can pass on to higher and better things. I beg to move.

Lord Bellwin

I confess that I found this amendment a little confusing on reading it. Perhaps I should very briefly begin by describing what the relevant parts of Clause 8 are designed to achieve. Clause 8 of the Bill deals with the code of audit practice. In response to representations in another place, and in view of the importance of the code to the audit process, the Government agreed that it would be right for the code to be subject to parliamentary approval, both initially and thereafter at intervals. Clause 8(3) makes the necessary provision.

However, it would be undesirable to require Parliament to approve every single amendment many of which will very likely be of an extremely minor nature; that would take up a lot of parliamentary time, and make the code very inflexible. Accordingly it was agreed in another place that the code could be altered between parliamentary approvals, though the alterations would of course be subject to approval when the time for parliamentary consideration next came. Clause 8(4) makes the necessary provision.

Finally, it was felt desirable that Parliament should at least be told of changes in the code as and when they were made, and so Clause 8(5) requires the Secretary of State to lay the alterations before Parliament. It is at this point that the amendment would insert the words: for approval by each House of Parliament". Strictly speaking, this amendment might mean that each House had to approve the alterations as and when they were made. If so, as I think the noble Lord, Lord Bruce, would agree, it would tend to conflict with the policy provided for in Clause 8(4); the changes in the code might admittedly be very small ones, and it really would be, I think, an unnecessary taking-up of Parliament's time for each and every amendment to be subject to approval in that way. It would also make the code unduly inflexible. And technically it would make the legislation very mysterious to read, with an apparent conflict between Clauses 8(4) and 8(5).

I must say that it did occur to me on reading the amendment that the intention was merely to make it clear that alterations must in due course be subject to parliamentary approval. In that case I am sure that Clauses 8(3) and 8(4) combined already have the desired effect. Equally, I am sure that it is right to provide, as Clause 8(5) presently does, for Parliament to see the changes as and when they are made. Even if each change is not to be approved there and then, Parliament has an interest and should know what is going on.

I wonder whether the noble Lord felt that this, too, was a probing amendment to get some clarity or whether he is satisfied with the explanation that I have given on this somewhat technical point.

Lord Bruce of Donington

I am grateful to the noble Lord, but he has given me, if I may say so and without offence to those distinguished people who advise him, the typical Civil Service answer to a question of this kind—namely, that it would mean that every time there was a small amendment, a new resolution would have to be presented to each House, and so on. Things do not work out quite like that, but that is a very useful weapon for anybody who wants to resist greater accountability, which I am quite sure the noble Lord does not wish to resist; after all, he is one of its leading protagonists.

The code of audit, which we shall be talking about presently in rather greater detail, is an important document. That is why initially the other place agreed—and it is in the Bill—that the code itself should be laid before both Houses of Parliament for approval. "Code of audit" sounds very dry and as though it has very little relevance to modern living, but it is an extremely important document. It is extremely important to those of us in the professions who have to carry it out. It is not something to which the professions should be subjected arbitrarily or by dribs and drabs. Certainly if the Audit Commission, after having determined the initial code of practice, proceeded to have a paragraph amendment every three weeks or a small word amendment every three weeks, I would not have judged them up to the competence which one naturally would have expected from an august body of that kind.

I am really concerned about some fundamental alteration that might conceivably be made in the code of practice which, although of a purely technical nature so far as those in my profession are concerned, might be of significance to Members of this House and another place who, I assume, would keep a critical eye on the whole business. On the whole, I should have thought it would have been far better for the Audit Commission (after having established its initial code and on the assumption that it receives the affirmative resolution in both Houses) if it finds in the light of experience that alterations are quite properly required, first, to consult with the Consultative Committee of Accountancy Bodies and possibly also with the local authorities; perhaps it could have circulated a memorandum and have collected views; then finally, perhaps after about six months, to have collected the whole together and said: "These are the following substantive amendments we require to make. While we are about it, we will cross the odd 't' and dot the odd 'i' that may have emerged in the meantime".

This is how it would work, or ought to work, in practice, as distinct from the technical argument which has been so ably presented to the noble Lord by his advisers in order to reply to me. On the assumption that it works that way in practice, it is only right that both Houses of Parliament, having approved the original code, should be made aware, not every five years, but when the substantive alterations happen, that those alterations are happening.

The noble Lord will immediately reply—as, indeed, he has already indicated—that they will be laid before the House. I know from personal experiece exactly what that means. I have been in the other place and have had the privilege of serving in your Lordships' House. It is very difficult under pressure of business. Most of us in your Lordships' House have to pursue an occupation additional to the one which we are privileged to perform in this House, and the other place is largely occupied and its Members are very hardworking people. It is not always possible for them to know or to appreciate when something is laid; in fact, I have had difficulties in connection with another Bill, when I was told that an order had been laid but it had not been laid at all; I searched in both Libraries for it and it was not there. There are these complications.

If there are significant alterations to the code of practice, this proposal would be of no real inconvenience to the Minister, although it might be to his civil servants. If they are sufficiently important, the way of directing Parliament's attention to them—both in this House and in another place—is to have the affirmative resolution. Then Members would know, because they would appear on the Order Paper and they would begin to trace their papers and everything else, and the whole matter would be given proper attention. I think that it is most ulikely to happen, save at rare intervals. I do not envisage the little dribble-drabble that has been fed in for the purpose of providing the noble Lord with a reply. I think that it will happen at odd intervals; but those intervals are important, and I think the House should have them and that they should be made available in that way.

I do not propose to press this amendment to a Division or to create any further argument about the matter here. However, I am hopeful, and I do not ask the noble Lord to commit himself; that would be unfair. I ask him to think about this again. I know that he will take what I say into account (we have a mutual respect for one another on these matters) and I hope that it may not be necessary for me to raise the matter on Report. I hope that he may—and I do not ask him for an undertaking—be able to consider making the amendment himself. It would be much more in accordance with the practicalities of the situation and, indeed, the upholding of parliamentary values. We must never allow it to be thought outside Westminster that Parliament is of no consequence and that Parliament is not concerned with these important matters, even though they may appear small, technical and have little impact on the life of ordinary individuals.

I think that the noble Lord will agree that they are of importance and that he will pay careful attention, as I know he will, to what I have said. In view of the noncontroversial nature of his responses to me, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8.36 p.m.

Baroness Stedman moved Amendment No. 58B: Leave out Clause 8 and insert the following new clause:

("Code of audit practice. 8. The Commission may, after consultation with the bodies referred to in section 7(6)(a) to (e), prepare or adopt a code embodying what appears to the Commission to be the best professional practice with respect to the standards, procedures and techniques to be adopted by auditors carrying out their functions under this part of this Act.").

The noble Baroness said: For some reason, which has so far escaped me, I have been asked by the Chartered Institute of Accountants for Scotland to table some probing amendments on their behalf. This is the first of them. They are concerned that the accountancy bodies, who are very well placed to prepare a code of audit practice, feel that there should also be some safeguard, that the commission should be given a reserve power to prepare a code if the accountancy bodies fail to do so. Therefore, in the amendment before us, Amendment No. 58B, I have used the word "may" rather than the word "shall", and also the words "prepare or adopt".

The Scottish accountants feel that it is not possible to prescribe auditing procedures and techniques. They tell me that in the auditing standards and guidelines that are issued to date by the accountancy bodies, the auditing standards prescribe the basic principles, but the procedures and the techniques to put those basic principles into effect are covered by guidelines which are not prescriptive. So professional judgment has to be employed in the selection of the appropriate procedure and techniques for the particular circumstances of a particular audit.

As the proposed code is supposed to cover detailed matters, such as the procedures and techniques, my friends in Scotland believe that it should not be prescriptive, but that it should be highly persuasive of best practice. They tell me that that means that it would be ignored by auditors at their peril. This is only a probing amendment in order to find the views of the Government. I beg to move.

Lord Bellwin

As the noble Baroness has said, this amendment deals with the code of audit practice. This is an important issue, and I am obliged to the noble Baroness for this amendment, which allows me to say a few words about the code, which I hope will be helpful to her and her friends to whom she referred.

The Government see the code as being important to the audit process. The purpose of the code is to ensure that a consistent approach is adopted by auditors—who will come from the commission's own staff and from a number of different private firms—across the range of local authorities.

I would hope that local government would welcome the objective of a consistent approach. And I venture to think that the accountancy profession will come to value the help the code gives in what is, after all, the relatively specialised field of local government audit. Of course, the Bill as drafted requires that both the local authority associations and the profession be consulted on the preparation of the code.

I recognise that there is some concern that the code might in some way cut across the auditor's professional judgment. Let me stress that that is not the intention. We see the code as providing a consistent framework; but within that framework it will be for the auditor to exercise his own judgment within the circumstances of each case.

Perhaps I might now turn to the amendment tabled by the noble Baroness. It may not come as too much of a surprise to her if I say that I could not accept it. But, of course, I want to explain why. There are two main reasons. The first is that the noble Baroness's wording only says that the commission "may" draw up a code. I have explained, I hope, that we regard the code as very important; that is why we felt it right, indeed essential, to make it a duty of the commission to prepare the code. I fear that "may" is, in the Government's view, too insubstantial a word for a matter so central to the audit process.

My second main reservation about the amendment is that it does not provide for any parliamentary approval of the code. Noble Lords will probably know that Clause 8(3), which makes such a provision in the Bill, was added by the Government in another place, after representations in Committee. I feel that the need for parliamentary approval duly reflects the status and significance of the code, and I could not recommend your Lordships to delete the provision at this stage.

There are some other drawbacks to the amendment. Perhaps I should mention them. It does not, for example, provide for the local authority associations to be consulted on the preparation of the code. This was another amendment made in another place which I think we should retain. Nor does it provide for the code to be published, which I think would be a regrettable omission. I suggest to your Lordships that it is right that a document such as this should be available for all to see.

The amendment speaks of the commission "preparing or adopting" the code. The word "adopt" implies the commission taking over something that has been drawn up by another body. The commission may well want to draw on work done elsewhere, for example by the Chartered Institute of Public Finance and Accountancy. But the full responsibility must rest with the commission, and the code must, in the last analysis, be its own; so I see "prepare" as being the clearer word.

There are some other technical points on which I shall not dwell. I always find, if I may say so, that it is worth paying close attention to anything that the noble Baroness suggests, and I sometimes do that in self-defence, but on this occasion I fear I must conclude that Clause 8 is best left as it stands in the Bill. I hope that that is helpful to the noble Baroness. If she—or her friends—feels otherwise and gets in touch with me, I shall be delighted to try to expand on that and to give any other information that she may require.

Lord Bruce of Donington

The noble Baroness, Lady Stedman, made it clear that hers was a probing amendment, but I am grateful to her that she raised this point because it is one of some importance. When we are talking of a code of practice we are talking about something in the future which, so far as local authorities are concerned, will approximate to the statements on standard accounting practice which all professional accountants are now required to comply with in their auditing of the affairs of limited companies, whether public or private, in the United Kingdom.

As I understand it—and I hope that the noble Lord will be able to confirm this—according to some guidance notes which have been issued by the Accounting Standards Committee: Arrangements are being made whereby, as future statements of standard accounting practice are developed, a panel of specialists in local authority accounting will advise the Accounting Standards Committee on how the particular characteristics of local authorities should be catered for". At a later stage in the Bill there is some mention of the powers of the Secretary of State in connection with instructing the commission as to its functions. I trust I may take it from the noble Lord that one of those instructions will be, if indeed instructions are necessary, that there will be this initial and effective liaison between the new audit commission and the Accounting Standards Committee, because it is vital that early contact should be established there so that a common language can be used.

In the meantime, according to the guidance notes issued to professional accountants, which were issued last month, it is said that the requirements of these SSAPs—that is, the ones under which we are now operating as a profession—are not generally appropriate to local authorities as the various activities of local authorities are not usually organised through separate legal entities. Therefore, quite clearly there will be need for some considerable amplification, variation and reconciliation of the new code with the existing statement of standard accountancy practice. I should be grateful for the assurance from the noble Lord that there will be quick and effective liaison between the new body and the Accounting Standards Committee.

Lord Bellwin

I am grateful to the noble Lord, Lord Bruce, for what he has said. Certainly I shall want to discuss it with colleagues, and we shall read it carefully. I assure him on that point.

Baroness Stedman

I am grateful to the noble Lord for his lucid explanation. I understand it a bit better myself now I have heard him, and I am pleased to ask the leave of the Committee to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 agreed to.

Clause 9 [General duties of auditors]:

8.45 p.m.

Lord Bruce of Donington moved Amendments Nos. 58C and 58D: Page 8, line 17, leave out from beginning to ("; and") in line 18. Page 8, line 18, leave out from ("accounts;") to end of line 20.

The noble Lord said: I beg leave to move Amendments Nos. 58C and 58D, which seek to amend the provisions of Clause 9 of the Bill. Clause 9 lays out the responsibility of the auditors who are appointed. Subsection (1) says: In auditing any accounts required to be audited in accordance with this Part of this Act, an auditor shall by examination of the accounts and otherwise satisfy himself—

  1. (a) that the accounts are prepared in accordance with regulations made under section 17 below and comply with the requirements of all other statutory provisions applicable to the accounts;
  2. (b) that proper practices have been observed in the compilation of the accounts; and
  3. (c) that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources".
The two amendments which I am putting forward seek to eliminate the last two paragraphs.

It is quite clear that the audit that is envisaged by Clause 9 as it now stands is totally different from the type of audit which professional firms of accountants carry out as a matter of routine, and have carried out for a number of years. In the accountancy profession in commerce and industry, the auditor is required to audit and to certify that in his opinion the accounts present a true and fair view of the affairs of the undertaking which he is auditing. True and fair. He is not required to explain why the company has made a loss, if indeed it has made a loss. He is not expected to praise a profit, if it makes a profit.

All he is required to do—I say all; it is often a matter of some complexity and some very hard work indeed in complying with all the statutes—is to certify that the picture presented by the accounts is a true and fair one. However bad the results may be, it is not his responsibility to make any comment on that. If he is doubtful at any point whether the accounts as presented by the directors, and insisted upon by them, show a true and fair view, either because certain information is incorrect or because certain information is omitted, which, if it had been there, would have changed the picture, then of course he must qualify his report. But the basic essence is the certification of a true and fair view.

The position under the local authority situation with which we are confronted is that it is now sought to involve the auditor in value judgments. There is no reason why that should not be so. My profession is well accustomed, though not part of its formal auditing capacity, to making valuations and investigations into the affairs of companies (conducted in accordance with the various mandates presented to them) to find out where they are working inefficiently or can be improved, and so on. That is frequently done.

I do not know whether the position has improved since, but about 10 years ago one could normally go into a firm which was engaging one's services as a consultant (accountants are frequently engaged for that purpose) and, if it was a manufacturing enterprise, it was usually possible to be able to tell the managing director that one could recover one's fee by the saving of movement within the works, by the internal transportation system. It is undoubtedly true that an accountant can be uniquely equipped to carry out that sort of investigation and advise his clients. But that is not part of his audit job and is a most difficult job to certify.

I hope the Committee will permit me to elaborate on that a little further. I am sorry if noble Lords think I am being somewhat pedantic, but I assure the Committee that it is a matter of some importance. The magic words are that an auditor must" satisfy himself" and that imposes a considerable responsibility on auditors generally. It is one which we are willing to accept, but the responsibility is onerous. And when we come to subsection (1)(c)— that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources"— that becomes a very onerous duty indeed, and I shall explain exactly why." Resources" means exactly what it says—all resources. The position at present for local authorities in particular is that they are not required to account for their assets at all. Indeed, the point was made by the Layfield Report, which referred to the position of local authorities in regard to accounting for capital assets and said in paragraph 49, at page 129: Local authorities do not practice capital asset accounting. As elected bodies with powers of taxation, their basic approach is to account for the money they raise. Unlike private sector enterprises, the regular assessment of the total value of assets is not of vital concern". Then, in paragraph 50: However, we consider that there are arguments in favour of identifying the value of the use of assets owned by local authorities. We believe that local authorities have a duty to ensure they are putting their assets to the best possible use". It went on, in paragraph 53: Accounting for assets is being studied as part of the development within the accountancy professions, stimulated particularly by the Sandilands Report". It concluded on that: However, there is a need for a different form of capital accounting to provide information on the cost of using the assets of local authorities and deciding on their use". Layfield made the point: The assets owned by local authorities belong to the community. It is just as important for local authorities to be accountable for the use of those assets as it is for them to be accountable for the money they raise from the community in the form of taxes. Local authorities are amongst the biggest landowners in the country. Even during periods favourable to the growth of services, it will be increasingly important in future to ensure that the best use is made of the resources available within each area". It went on to give two examples, the under-utilisation of schools and the sterilisation of valuable building sites.

I return to subsection (1)(c) and reiterate that the accounts produced by local authorities do not require them to show their capital assets; they have no balance sheet in the conventional sense of the term. And even if they did, we would not be required in this instance to express whether they showed a true and fair view. The provision with which we are dealing is designed to ensure that proper arrangements have been made, for securing economy, efficiency and effectiveness in the use of resources". How is the accountant to know, in the absence of accounts which show the assets of the local authority, what the resources are, what their value is and what their extent is, let alone the use to which they are put? One can see that that is imposing a very difficult responsibility. I repeat, the wording is: that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in the use of resources". Those are aspects which obviously can be studied outside the normal ambit of audit.

If I wanted to ensure that a local authority was functioning properly—I am speaking personally and off the cuff—one of the first things I would do would be to ask for an organogram of the local authority showing its executive structure of responsibility, and I should need to find out what the responsibilities and duties were of each individual, how much time that occupied, how authority was delegated down the line, whether there were two many chiefs and not enough Indians, or the reverse as the case may be; I should have to make some rudimentary effort at some sort of job evaluation before I felt I could be seized of the situation to see whether the authority really was functioning fully and effectively as it should do and was not, for example, carrying a lot of dead wood. A whole series of matters of that kind come to mind. It might even extend to an age and sickness analysis and an examination of the turnover of executives to see what kind of organisation it was, whether it was happy and cohesive and so on.

It is a formidable task to be able to satisfy oneself in that respect, and it bothers me that it should be in the statute. Or, if it is in the statute, it bothers me that it should be assumed to be part of an audit. An audit should be concerned with facts and the establishment of facts. It should be able to establish whether transactions are valid, their legality, that everything is absolutely correct and that there has been no fraud or anything of that kind; in other words, that everything is straightforward. But once an auditor, acting as an auditor—I repeat, acting as an auditor; he could do it in another capacity, for example as a consultant—is required to get into those fields, he is on uncharted ground.

Moreover, local authorities might find it extremely expensive as well. Clearly—we shall come to this in detail later in the Bill—the way in which auditors, particularly in the private sector, are to be remunerated depends largely on the expenditure levels of the authority, if the code scale is anything like that published in Standing Instruction 116/9 of 1974. If they are anything like that, modified to take account of inflation, it could happen that for an authority with expenditure of, say, £40 million—and therefore involving a very large fee—it could be done very smoothly if everything was absolutely perfect and there was no trouble. In such a case it could be quite economic. Equally there might be an authority with a revenue of nearly £1 million, which was extremely badly run, and which would need a very lengthy time to research, which would therefore involve considerable cost.

What I am suggesting—and I am trying to be as tidy as possible—concerns the so-called "value for money" audit, which is an invented term, which is meaningless. There is no such thing as a value for money audit. There is such a thing as a value for money study, as there is a feasibility study, or a comparative study; but even though they are very valuable, they ought to be excluded from the audit practice.

I have spoken at some length on this matter, and I regret if I have wearied the Committee, but the noble Lord might feel constrained to consider that there is something in what I say and that there is a case for eliminating words from the provision as proposed in the amendments and incorporating them as either comparative studies or something else of that kind, somewhere else in the Bill, unless the wording can be so modified that the auditor is not required to satisfy himself. Perhaps the phrase "report upon" could be used; but "to satisfy himself" is a very wide term, and I fear that there would be very few accountants who could accept such an onerous responsibility imposed by statute, unless they were permitted to conduct an investigation so thorough as to enable them in all cases to satisfy themselves accordingly. I beg to move.

9.3 p.m.

Lord Mottistone

I should like to intervene before my noble friend on the Front Bench replies. The Committee should be indebted to the noble Lord, Lord Bruce of Donington, for raising this subject and exploring it so fully. I question his amendments as such—the principle at which he is aiming—because it seems to me that Amendment No. 58C is really cutting out Clause 9(1)(b), while Amendment No. 58D would leave a truncated situation in the middle of Clause 9(1)(c). So as amendments they are not up to Lord Bruce's standards. But he has done a good job.

First, I should like to take the proposed elimination of Clause 9(1)(b). I would question whether it is right to say that it is not fair to require the accountants to satisfy themselves that proper practices have been observed. I should like to refer to my experience of dealing with accountants handling my audits, and the noble Lord, and indeed the Committee, must accept the fact that my accounting practices have been very elementary and amateur, but I have had to look after people's funds. In my experience the accountants take jolly good care to ensure that my proper practices have been observed, and this seems to me to be very much part of their way of tackling things when it comes to people who are not experienced accountants in major companies; and that is what we are talking about.

We are into a new ball game—and here I think the noble Lord put his finger on it—in that we are introducing what you might call commercial accountancy into a world that does not necessarily want to make both ends meet. I say that very fundamentally, because here we have the problem. When one has the discipline of having to make both ends meet, as a company has to have, one must have an attitude of mind that is different from that of someone who is in a non-profit-making organistion, of which local government is an example, or in many cases an example on a vast scale. There is the terrible problem—which is discussed again and again in your Lordships' Chamber —that there are a large number of bodies, which on the whole noble Lords opposite favour, which do not have the essential discipline of having to make the books balance. This is where we are in difficulties and where I consider the Bill is absolutely right. It is trying to cross-connect the essential disciplines through to the people who need those disciplines.

So I think we can discount Amendment No. 58C, since I do not consider it necessary, nor indeed relevant. But Amendment No. 58D is important because I think the noble Lord, Lord Bruce, is absolutely right in saying that the Bill is asking accountants to do not only their own, ordinary job, but a consultant's job as well. He is, I think, saying that this is a bad thing, or if it is a good thing, that the accountants will have to be paid a lot of money for it because it will take time and special expertise; and with that I would agree.

But I do not think that it is a bad thing that they should do it, since I believe that paragraph (c) is extremely important—and there are other examples in the Bill of the same line of thought—because it is trying to introduce commercial disciplines into local authorities and saying to them, "Do you need two people where one might do?" I shall not elaborate on the example; members of the Committee understand what I mean. At the moment—and this is no criticism of them—local authorities do not have a yardstick, they do not have an outside person who is properly equipped, and who is knowledgeable about the competitive world, to ask them essential questions as to whether they need two people where one will do. That is what paragraph (c) is about.

I agree with the noble Lord, Lord Bruce, that when one looks at the Bill what is proposed is apparently just an ordinary audit, but it is not; it is something very special. He is so right to have raised this point, but I think that it is a very essential part of what needs to be done. I also think that it ought to be paid for. If, when we come to consider the question of paying for these services, the payment does not appear to be satisfactory, I shall probably find myself on the side of the noble Lord, Lord Bruce; it will be terribly difficult, but I shall be there.

The Government are absolutely right in introducing this proposal. I hope that I am not overstepping the mark so far as my noble friend is concerned. I hope that he was not going to try to pretend that the proposal is not as radical as this. I think that it is radical, and right, and therefore the amendment is wrong because it seeks to remove the radicalism from the Bill, which I think is very necessary. Let us hope that the Government persist with this, and that in due course the noble Lord withdraws his amendment having explored the situation—and for that I very much applaud him.

Lord Houghton of Sowerby

I am sure that the noble Lord, Lord Mottistone, is right in most of what he said. I think there is a very big difference indeed from the conditions inside a commercial enterprise, an industrial enterprise, which is being tested in its efficiency, in its accounting, in its economy and in the use of its resources by means of factors which do not apply to institutional life. When things go wrong in institutions—and some of our nationalised industries have tended to become institutions—they rely on external help to get them out of their difficulties, and no not apply their minds, as they should, to putting things right inside.

My noble friend Lord Bruce of Donington is raising an important matter. He was speaking about this, in fact, at Second Reading, and I was very restive when he was doing it, because the matter he is really raising is that of the functions of the auditor, and I think he is taking an unnecessarily narrow, pedantic view of the functions of the auditor. If my noble friend agrees that these three matters in Clause 9 should be looked at, that somebody should be satisfied about them, who is going to satisfy himself if it is not the auditor? I think this is what my noble friend has to consider. Who else is going to conduct the efficiency audit?

On the Salmon Commission we went into this very fully indeed. We had the accountancy profession to give evidence on the very issue that these amendments raise: what are the functions of the auditors in local authorities? How far should they go? Should the range of their concern and their right to disclosure go beyond what would normally be, in commercial life, the functions of the auditor? We on the commission felt very strongly that they should, because we did not know who else would do it. I think our report on this particular matter was less clear, or less incisive, than it ought to have been, but that was due to the fact that the accountants themselves appeared to be undecided about the full range of their responsibilities in local government audit.

Let me remind the Committee that we were dealing with Poulson, and the aftermath of Poulson—corruption on a very big scale indeed. There are more aspects of corruption in local government than the kind of thing that Poulson was doing. We have only to read our newspapers from time to time to realise what difficulties those engaged in local government can get into. I will not read them to the Committee—I do not want to take up time unnecessarily—but I would draw the attention of noble Lords to paragraphs 242 and 243 of the Report of the Royal Commission on Standards of Conduct in Public Life.

In my opinion we have never had adequate debates on the contents of the report of that Royal Commission, but in the course of our own work we studied the recommendations of the Redcliffe-Maud Committee, which had been sitting just prior to the setting up of the Royal Commission and had been studying some of the ground that we had to cover. Both reports stressed the importance of the internal audit. This is the issue —the internal audit to supplement the external audit. Where does the internal audit come from? It was to be an efficiency audit. It said: The best practice is to extend internal financial audit into a review of efficiency and the observance of procedural requirements, including safeguards against malpractice, and this is being increasingly adopted by public sector bodies". Who is doing it in the case of local authorities? Is there a Public Accounts Committee there? I think my noble friend said a moment ago that there is no such thing as a value-for-money audit. When I was chairman of the Public Accounts Committee it was the principal job of myself and the Comptroller and Auditor-General to conduct a value-for-money audit. We did not do the accounts; what we dealt with were the discoveries of the Comptroller and Auditor-General on the misuse of resources—on not getting value for money. He did not question policy, but he sometimes questioned how it was applied; and here we are, I think, in a similar area in local government.

If my noble friend thinks that the auditor should be excluded from this responsibility, he has a plain duty to tell us who will do it. It needs to be done; believe me, it needs to be done. Whether we should have an examination of the word "resources" is another matter, but I do not wish to dwell on it. The mere fact that a local authority does not have to include a list of its assets in a balance sheet does not remove some of its assets entirely from observation or examination, to see whether the fullest use is being made of its resources. I stop there. I hope I have made my point. I think that whatever is done we must get the internal audit, and this is what the accountant is asked to assure himself about. It does not say that he must do it himself; he must satisfy himself it is being done.

I think that we should use the opportunity of this Bill to carry out on a mandatory basis the recommendations of the Redcliffe-Maud Committee and the Royal Commission. We shall have failed in our duty if we do not do that. Let us have an internal audit required in a local authority. The only question is: Who is to be satisfied that it is there? If not the auditor, it must be somebody else who has an overriding responsibility for conducting efficiency audits throughout local government. That is not in the Bill. I think the best compromise is to regard the auditor as having enough ability, common sense and judgment of what he is doing. I am sure he has all those things. The accountant that my noble friend described I do not think would be worth his money. We should have this on a more comprehensive basis and that will do the job.

Lord Bellwin

My noble friend Lord Mottistone and the noble Lord, Lord Houghton, made much of the case that I wanted to make. I will say to the noble Lord, Lord Bruce, that as with all the other things he is going to say on these technical matters, I shall want to look at everything he has said. One or two observations on this amendment I must make. First, the amendment would delete the requirement that the auditor should satisfy himself that the proper practice has been observed in the compilation of the accounts. The noble Lord says that they may have no place in Companies Act audits, but they have long had a place in local government audit. I think that it would be a retrograde step to remove it. It seems to me a reasonable requirement, indeed a minimal requirement, representing one of the basic steps in the audit process. I cannot see advantage in its removal from the auditor's duties.

When the noble Lord defines, as he does, with his experience, "satisfy himself" and what it means, I have to listen. He is a professional man and he knows what it says. My lay interpretation of it is something along the lines of what Lord Houghton was saying. When we look at Clause 9(1)(c) I wonder if the noble Lord appreciates that the auditor must satisfy himself that local authorities have made proper arrangements for securing value for money. That does not mean that they have to satisfy themselves that the local authorities have received value for money; they must be satisfied that the correct steps or processes have been set up. That is their duty. The amount of detail into which they go to do this is something that will have to come out in the code of practice. That is one of the things in discussion with the profession and others that will have to come forward.

If the noble Lord is saying that "proper practice" is not defined and is too subjective, then I would say that the Bill requires all auditors to be qualified and it is reasonable to expect such people would know what the proper practices are in the compilation of accounts. The code of practice can be expected to give such guidance as is appropriate on any special features of practice in local government. On the point that Lord Bruce made about the amount of work that may be required in a £40 million authority compared with a £1 million authority—and there would not be a lot of £1 million ones—I know the point he makes. Maybe he is right. I am sure he is. Under Clause 15(4) the commission is enabled to increase or decrease the audit fee for the amount of work that would be involved.

I think that the point the noble Lord, Lord Houghton, made touched not only on this amendment. There are a number of things which we seek in this Bill; but one of the strong features of what we are seeking is the very thing that he was saying. We want the maximum amount of openness, the maximum amount of accountability. It should not only be there but be seen to be there to restore confidence where it is not there and confirm confidence where it is. The auditor must become involved in the procedures. This is all we are saying but it is a very big "all". It could be a significant advance.

When debating with my noble friend Lord Ridley, I said that I see the commission as a real step forward, not as an imposition upon local authorities. The people who work in them in the main are people who genuinely want the reputation of local government to be at the highest possible level. Through what we are proposing in this audit commission, with its code of practice and its involvement in a new area of accountancy work, there is a great chance to advance all that local government does.

Perhaps I have digressed slightly but I am glad of the opportunity to say why I, with my local government background, am not only unhappy about local government but am anxious to see here a real opportunity for it. That is why I welcome it. On the technical matters, we will look at them carefully and I have tried to respond as best I can.

Lord Bruce of Donington

I am very grateful for the response to the matters that I have raised. Part of the difference between us has been due to semantics. As an auditor, I know exactly what an audit is. An audit in the strict sense of the term—and the noble Lord must accept this—does not comprise the matters to which he has been referring. That does not mean that they should not be considered or that they should be excluded from the Bill. I entirely agree that they should be in the Bill. I am not suggesting for one moment that an auditor or firm of accountants employed by a local authority should not be responsible for doing precisely the things that the noble Lord has set out. Let there be no doubt about that. My noble friend seemed to be under the illusion that I wanted the outside supervisory or auditing interest confuted merely to legality. I accept the purposes that the noble Lord has in mind.

I do not think that they should be in this particular Part of the Bill, however. I still maintain that the word "satisfy" to an auditor has a much greater significance than the noble Lord really imagines. It is not a general feeling that everything is all right. Being satisfied to us—because we like to be thorough in what we do—means being really satisfied. That can be a very time-consuming process. In my view, it could be made rather more the subject of a special study. There are powers in the Bill which would enable the auditor to be engaged upon this inquiry function—because that is all it really is—a study and inquiry function, and a reporting function after that, additional to the legal requirement of audit and those precise terms.

This is the only point that I have to make. I trust that the noble Lord, Lord Mottistone, will acquit me of any desire that the accountancy profession should seek in its association with local authorities to avoid these issues. On the contrary, we welcome them. So far as we are concerned, the more efficient people can become, the more help we can afford to them to become so and the more that we shall like it. Auditing sometimes tends to be a rather boring process and very repetitive. The opportunity for accountants to exercise a more creative function in helping people to do better, to economise and to be more efficient is very agreeable to my profession and we love to do it rather than the formal but thorough and painstaking auditing process. So there is no difference between us there. I will leave the noble Lord with this thought: if he could give consideration as to the real propriety of including these particular items where they are and giving the commission facilities to initiate inquiries and receive reports on them on these lines, I should be happier.

The noble Lord may think I am being unduly pedantic, but in the accountancy profession we have to study law and from time to time give expert evidence to the courts. We have learned from long and bitter experience that words in a statute are very often interpreted differently from the way it is thought they might be when we consider the seductive tones in which they are sometimes introduced into the legislature by politicians of all parties. This makes us cautious, and indeed if we were not cautious, if we were not prudent and if we were not thorough, we would not be of any service to you anyway. I beg leave to withdraw the amendments.

Amendments, by leave, withdrawn.

9.27 p.m.

Lord Bruce of Donington moved Amendment No. 59: Page 8, line 24, leave out subsection (3).

The noble Lord said: Clause 9(3) reads as follows: The auditor shall consider whether, in the public interest, he should make a report on any matter coming to his notice in the course of the audit in order that it may be considered by the body concerned or brought to the attention of the public, and shall consider whether the public interest requires any such matter to be made the subject of an immediate report rather than of a report to be made at the conclusion of the audit". In its present form this does not command very much professional support. Auditors do not like to be in a position where they have to define public interest. It is not the function of an auditor to define public interest. There may be many other functions that an auditor has, and I know that perhaps I invite ribald comments by giving anybody the opportunity to make some suggestions on the subject; but it is really not good enough to put the auditor in a position where he has to define public interest. It relates to any matter.

This provision, again, is very wide. If we are going to report immediately on matters of public interest, we would like a little closer definition. In practice —and I will give way to the noble Lord in a moment when I have developed my point—obviously what happens is that if an auditor finds something strange when he is engaged on his inquiries in between the various other duties I shall be enlarging upon in a moment and which do not arise at this particular stage, his immediate reaction is to get in touch straight away with the chief finance officer or whoever it might be. He might even telephone the commission or, in exceptional circumstances, if the chief financial officer himself is involved in the matter, he might go direct to the leader of the council. There are a variety of ways in which he can report extraordinary events without the necessity of making an immediate report, because a report in the accountancy profession does not mean merely a note on a small sheet of paper but a report which sets out the whole context, circumstances and detail.

This is the essence of our profession—to ascertain, marshall and present facts. That is what we are there for, and we just query the reason behind this. It may well be that the noble Lord in his reply can say something that will reassure the profession. At the moment the purpose of it eludes us and we shall be grateful to have it put into more precise terms. I give way now to the noble Lord.

Lord Morris

I hesitate to interrupt the noble Lord, but in the context of this Bill may I just ask him one question? What on earth, other than the public interest, is the auditor representing? That is the only standard. He is representing the public interest, and he has every right to report at a time that he considers best—either at the end of an audit or in the middle of it. If he reports early—this is the great strength of this subsection—he will give further strength to the report, rather than if he allows time to muddy the waters in regard to the interest on which he is reporting.

Lord Bruce of Donington

I entirely agree with the noble Lord. All I am complaining of is that this is a matter in a statute. I know exactly what I would do, as a member of a firm of auditors engaged in a matter of this kind. I am just bothered about the form of the wording here, and as to exactly what the Government have in mind. It may be that what they have in mind is perfectly agreeable. If the noble Lord will forgive me—I am quite prepared to give way to him later—I think that the noble Lord, Lord Bellwin, might shorten the discussion by telling me what he has in mind, and what the purpose is. I am not hostile to the intention and the noble Lord—in case he has not been here throughout the debate—should know that my attitude on this clause of the Bill has been quite constructive; or, at least, I hope that it has. I just want to know, and my profession will be interested in the reply. I beg to move.

Lord Lloyd of Kilgerran

May I say a brief word or two? I am always fascinated by listening to a distinguished auditor, such as the noble Lord, Lord Bruce of Donington, but, in my experience, it is a very unhappy thing to include in a statute the words" public interest", as has been done in this case. If there is a matter of dispute, judges want to know what is the public interest in relation to the statute concerned. So I should have thought that the Government ought to consider whether the words "public interest" should be removed, or whether they should give some guidelines, as the noble Lord, Lord Bruce of Donington, has indicated, to show what they mean in the context of local government.

I have been only a co-opted member in relation to education committees. The public interest has arisen there, and the shades of public interest depend upon the political constitution of that local government. It is inevitable that that should happen. Therefore, I would support any move by the noble Lord, Lord Bruce of Donington, to delete the words "public interest", or the Government should explain in the context of local government what is meant by those words.

Lord Mottistone

I should like to support, in principle, what the noble Lord, Lord Bruce, has said, and indeed what the noble Lord, Lord Lloyd, has said. It seems to me that what is missing from this clause is an understanding of the attitude of mind of the auditor who is doing the job. We have agreed that he should conduct the business which is in Clause 9(1)(c). But if he is going to do that, then to impose upon him the responsibilities of Clause 9(3) is, in my experience, unsuitable for the kind of person that we are talking about.

I agree with the noble Lord, Lord Lloyd, about somehow modifying Clause 9(3). It is necessary for someone to do this, in the same way as it is necessary for someone to do what is in Clause 9(1)(c). It is also necessary that there should be some kind of requirement for the auditor to perform the functions which the noble Lord, Lord Bruce, told us he would perform if he were doing the auditing, such as ringing up the commission, the chief finance officer or whatever. It is necessary to include that in the Bill, but I suspect that the wording of Clause 9(1)(c) is unduly onerous in the way that it is phrased.

Perhaps my noble friend could have another look at Clause 9(1)(c) to see whether or not he can psychologically phrase it so as to get his answer, which is necessary, without frightening auditors into thinking that they have got to be for ever thinking about The Public Interest—in great capital letters—when that is not what they are being asked to look at. They are being asked to look at the interests of the ordinary community.

Baroness Gardner of Parkes

May I support the retention of the clause as it stands? Many people in this Chamber do not appreciate that in some local authorities at the moment there is such a threat to democracy that the auditor is the only person left to guard the public interest. I believe that this clause covers that point. I take the point made by the noble Lord, Lord Bruce of Donington, that it may not be fair to ask accountants to define "the public interest", but I do not think we have ever had quite such a horrifying situation regarding the public interest as we are now seeing in some quarters in regional government. This clause as it stands would protect the public.

Lord Houghton of Sowerby

I am sorry to come in again, but we cannot allow this to become merely an exchange of opinions between the two Front Benches. We are all in this debate and we have a point of view. I feel very strongly about the matters on which I am speaking. This is the first opportunity I have had for a number of years to express my discontent at the neglect of recommendations which were made by a committee and a Royal Commission on issues which are connected with the Bill. My noble friend Lord Bruce of Donington has got a point on the wording of the Bill when he speaks about "any matter".

The auditor might be told that an official of the council is rather too friendly with the wife of a building contractor who has business with the council. He may suspect malpractice somewhere and he may think that somebody should know something about it. Let me remind the Committee that when I was chairman of the Public Accounts Committee the Ferranti scandal came to our notice in the middle of our work. We made a special report to the House of Commons on our discovery. That was not discovered by a zealous professional accountant. It was discovered by a zealous executive officer. His own diligence and imagination led to that investigation. But in certain circumstances an auditor may discover a relationship between a contractor and the council which ought to be brought to public notice.

One can raise hypothetical considerations: that there may be all sorts of problems which come within the scope of his audit related to contractors and business of the council. Most of the scandals in local government have been about relations between councils and contractors. One wants to be sure that "any matter" is not literally "any matter but any matter within the scope of his audit or within the range of his responsibilities. This is what must be intended. He may wish in certain circumstances to make a report public, but normally he would draw the attention of the leadership of the council to what be had discovered. However that may be, something of this kind should be retained in the Bill.

I agree with the noble Baroness who has just spoken that there are conditions in local government which are extremely dangerous from the point of view not only of the wellbeing of democracy but of the probity of local government. It is these cases which must come within some provision of the statute law and the vigilance and oversight of those who are appointed to watch the public interest. They know what the public interest is when they see it staring them in the face. As the noble Lord said, if they do not know what the public interest is, what are they doing there, anyway? They are not just clerks or accountancy underlings. They are fully fledged, professional men. We are really not here to protect the interests of the accountancy profession. We do have a duty here which goes far beyond even defining the range of their activities or safeguarding their professional interests. We want to look at this broadly and with greater emphasis on what is good for local government, if I may say so with great respect, rather than what is good for the accountancy profession.

Lord Lloyd of Kilgerran

I hesitate to intervene once again, but in view of the speech made by the noble Baroness, Lady Gardner of Parkes, this should serve as a warning to the Government to pay great heed to what was said by the noble Lord, Lord Bruce of Donington, about the undesirability of having words like "in the public interest". The noble Baroness was quite right in the basic themes she put forward, particularly in the context of local government, in which she is so famous for her activities. But her suggestion that the auditor should take upon his shoulders dealing with matters with which the noble Baroness is familiar through her activities in local government, is putting a great load upon the auditor, and it is not the kind of matter that should be included by the Government in a statute of this kind.

9.42 p.m.

Lord Bellwin

The noble Lord, Lord Houghton of Sowerby, said that this should not be a debate between the Front Benches, but this part of the Front Bench has not been able to speak as of yet, but is glad of the opportunity now to do so.

With regard to the observation made by the noble Lord, Lord Lloyd of Kilgerran, that the remarks made by my noble friend Lady Gardner of Parkes should be a warning to the Government, if by "warning" he means it should serve as confirmation that we are on the right lines here, then I would accept that. If he meant a warning in the sense that we are embarking upon some path where some of our proposals are misguided, then he knows I would not accept that. I would want to think that the noble Lord meant the former, but we shall see.

It might be helpful if I were to explain the intention which lies behind Clause 9(3) which the amendment would delete. Clause 9(3) is the main provision dealing with reports by auditors. In some respects it merely repeats Section 157 of the Local Government Act 1972, which I venture to suggest has stood the test of time. Auditors' reports have always been seen as an important part of local government audit procedure. I do not think there is anything controversial in that. Indeed, my noble friend Lady Gardner of Parkes said a moment ago how vital they are; she said that auditors' reports are the only thing now left to protect against some of what is going on. There can he no argument as to that. These reports are the way in which the auditor tells the local authority, and indeed the public, that there is something he thinks they should know about.

In the private sector company auditors tend to use audit reports—qualified opinions, to be more precise in terminology—rather sparingly; and such observations in reports tend to mean that something is wrong with the company's books. But in local government the situation is different. Elected bodies are in a special position. There are issues which go wider than profit and loss and accountability to shareholders, important though these matters are in the private sector. Local authorities should be accountable to their electors; I would use the word "stewardship". Ratepayers cannot just sell their shares, take their money, and go.

Accordingly, the local government auditor will tend to make a report rather more frequently than his private sector counterpart qualifies his opinion on a company's accounts. Reports by a local government auditor do not necessarily imply criticism; they just mean that there is something which he thinks the local authority or the public—and I cannot over-stress the word "public" —should be aware of.

Perhaps I could turn to the details of the subsection. Your Lordships will doubtless have compared it with Section 157 of the 1972 Act and will have noticed two ways in which the reporting provision has been enhanced in the present Bill. First, the Bill now requires the auditor to consider whether he should report immediately rather than wait until the end of the audit. This is only a point of timing, but I think it will prove very helpful to the auditor and also to the local authority and the public. Audits can occasionally take quite a long time to complete; for example, if there are a lot of objections to be heard. This matter of timing I think is an extremely important one.

Secondly, the Bill enables the auditor to report on any matter "coming to his attention in the course of the audit". The form of the words in the 1972 Act was "arising out of or in connection with the accounts". We propose this change so that the auditor can report as soon as he becomes aware of a matter with financial implications, rather than wait until it appears in the accounts. We think this is very valuable. It means, for example, that the auditor can even draw something to the local authority's attention before money is actually spent, something that may be referred to in the minutes of what is proposed.

Of course some words remain the same as in the 1972 Act. One of the most important provisions is that the auditor must consider whether it would be —here I come to the words referred to by the noble Lord, Lord Lloyd—" in the public interest "for him to make a report. This is a phrase that has worked perfectly well for the 1972 Act and I do not see why it should not work well in the future. I think that "in the public interest" will serve as a reassurance to any of your Lordships who might have doubts about the scope of the clause. It is simply not open to the auditor to report on anything that takes his fancy. Any report must be in the public interest, and I think that is a very important test.

In trying to help the noble Lord when he says: "Well, what is in the public interest?", one could say—I am making quite a collection of some Civil Service definitions, and this is one of the easiest—something that has stood a 10-year test is therefore of value; I would say in carrying out the duty under Clause 9(3) the auditor will need to ask himself whether the matter under consideration is something about which the public ought to know. I think that is probably as far as I could go on that. Although it may not be completely satisfactory, I think it explains at least what I think it means, something about which the public ought to know. If they ought to know, it is in their interest. There will be people who will give better definitions, I am sure, hut that is my answer to the noble Lord.

As to the practical workings of the report procedure, I should emphasise that the report will not descend on the local authority out of a clear sky. The auditor will inevitably discuss it with the authority first, not least to make sure that he himself has understood the matter properly. Any report will be after those discussions, and indeed the discussions may satisfy the auditor that a report is not necessary.

I hope what I have said will give some reassurance to noble Lords about what lies behind Clause 9(3). I think the more we are debating the detail as we go along the more is coming out as to the real importance of what we are proposing in this Audit Commission. It is not just an attempt on anybody's part to interfere and want to take central control or dictation. It is not that at all. It is all about accountablity and clarity and openness and doing things better. I do not see why one should be apologetic or defensive about it. I think the noble Lord, Lord Bruce, with his amendment is being most helpful in that it enables us to bring these things out in a better way than perhaps we were doing earlier when we were debating the principle behind this. I hope the noble Lord will feel that I have commented on what he has had to say, and certainly I look forward very much to reading all these debates on the matter.

Lord Bruce of Donington

I am most grateful to the noble Lord for his response. As he is aware, and as I believe I informed him some time ago, the purpose of these amendments is not antagonistic to the purposes of the Bill. We want to make as good a job of it as we can. We have a reputation in this House that, when a measure has been through your Lordships' House it very often emerges better, and very often the other place accepts the wisdom of what we collectively do here; and these amendments are moved with precisely that in view.

I am sorry to fall foul of my noble friend, Lord Houghton of Sowerby. Certainly the House does not exist and this Bill does not exist for the benefit of accountants. But accountants are very often left with a lot of slovenly work on their plate. The noble Lord will forgive me if I say that if some members of some royal commissions and some legislators phrased what they said with greater precision rather than waffling on principles, it would be of very considerable help not only to the accountancy but to the legal professions.

All that I am asking for, and all that I sought to ask for by raising these amendments, were the replies which have come from the noble Lord and his noble friends. My profession will read them with interest because they will be wanting to know what the reaction is to the various points that I ventured to put forward to your Lordships. I would like to point out one danger to the noble Baroness who, drawing on the basis of her long and extensive experience in this field, was 100 per cent.—in fact, almost 150 per cent.—in support of the clause as it was.

In view of the recent cases of corruption, to which my noble friend has just referred—some of which have been quite sensational as the noble Lord has said—and the other evidence of corruption which fortunately is rare within our life in this country in the Civil Service, whether it be local or national, there is the tendency to be so appalled by these matters and suddenly to become conscious that all is not right in the State of Denmark that one immediately unloads the responsibility for correcting it on to somebody else. There might be a tendency, I put it no higher, for everybody to say—and my profession is quite willing to take up the challenge, I can assure your Lordships— "Well, it is all up to you accountants to sort out". So be it; we have to live like everybody else and we will accept any challenge that is given to us.

But I think that there is a danger, because the roots of all these things lie in ourselves as citizens and we cannot abdicate our responsibilities as citizens, as local councillors, as officials or as legislators by saying, "Well, it is all right, the accountants will pick it all up anyway. They will report on the whole thing. They will sort the whole thing out". I repeat, we shall be quite happy to use our best endeavours, but the art of being a citizen, particularly in a great country like the United Kingdom, is for every citizen to endeavour to behave as much as possible as a citizen, and to bear his or her individual responsibilities, rather than perhaps tending to leave it to the specialised professions to sort out on their behalf.

I am very grateful for the response which I have received. I hope that the noble Lord will have another think about this matter before the Report stage because there may be time for some reaction from the profession before then, although I do not know when the Report stage is coming. However, I would be grateful if the noble Lord would give the matter further consideration. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9.55 p.m.

Lord Bruce of Donington moved Amendment No. 60: Page 8, line 30, at end insert— ("(4) For the purposes of this section all decisions taken in the lawful exercise of discretion and declared to be matters of policy by the body whose accounts are required to be audited, whether such declaration be made at the time of the decision or at any time thereafter, shall be treated as policy decisions and shall not themselves be the subject of any enquiry, examination or report by the auditor under this section.").

The noble Lord said: I beg to move Amendment No. 60. The purpose of this amendment is very simple and once again it will not be pressed to a Division. It is raised in no hostile spirit, but it seeks to depoliticise some of the contents of the Bill. I am afraid, and some of my colleagues are afraid, that we may become involved in the political argument that exists between the parties on any council and which is reflected in the national parties and, indeed, in the national press. Some policies may be carried out by local authorities which, although they appeal to one section of the people and may be covered by an electoral mandate, nevertheless do not appeal to the other section, and this can apply both ways. It would be a little unfortunate if the auditor, in reaching opinions on certain of the matters on which he is required to give an opinion, were to obtrude into the political sphere.

There is a case in point. The noble Lord will recall that the other day he answered a Question which I asked him in the House on the magazine called The Londoner. There was an objection to some particular publication put out by the GLC, and in his remarks the noble Lord made it quite clear that this was a matter for the district auditor. I believe that similar considerations have recently arisen in the Royal Borough of Chelsea, where someone has objected to something that the Chelsea Borough Council has put out.

What I want to ensure, and what I hope to be able to ensure by this amendment, is that the auditor does not become involved in the political argument. There can be a danger of that. Noble Lords may not think that that is so, but there is a fear in this direction, and the amendment seeks to underline that. It reads: (" (4) For the purposes of this section all decisions taken in the lawful exercise of discretion and declared to be matters of policy by the body whose accounts are required to be audited, whether such declaration be made at the time of the decision or at any time thereafter, shall be treated as policy decisions and shall not themselves be the subject of any enquiry, examination or report by the auditor under this section."). There may be better words for accomplishing the object. I am not a parliamentary draftsman and have, indeed, even been known to pass uncomplimentary remarks about some of them, particularly in connection with the Companies Bill 1981. So if there are any better words to accomplish the same purpose, I should be greatly obliged.

By and large, the auditing profession is there professionally and does not care to be involved in the political cross-fire that may emerge between parties, and may, indeed, be referred to by individual electors in the exercise of their rights to inspect documents and so on, to which I shall refer at a later stage when we discuss a later section of the Bill. This is the main purpose of the amendment. If the noble Lord thinks that he is in a position to suggest some alternative words that could be inserted in an appropriate part of the Bill to make quite certain that auditors are not called upon to make political judgments on what has been done, as distinct from economic judgments, legal judgments and judgments as to the propriety of what is done, I should be most obliged.

I sincerely hope that the noble Lord will be able to reassure me and, if he cannot, I have no doubt that the noble Lord, Lord Houghton of Sowerby, will be able to help. I beg to move.

Lord Bellwin

As we have heard, this amendment is concerned with a matter of great importance—the auditor and politics. I recognise that the noble Lord is concerned that the auditor might become involved in politics, but I would repeat what I said in our Second Reading debate, that that is neither the intention nor, in the Government's view, the effect of this legislation. I also mentioned in our Second Reading debate the statement which my right honourable friend the Minister made in another place on the role of the Government auditor. The Minister sought to make it clear that the auditor should not be concerned with the merits of local authority decisions on any political basis, and that this would continue under the proposed audit commission. A local government auditor's task is to consider whether items of account are lawful, and whether the accounts are properly prepared.

While it would be quite wrong for an auditor to pursue a matter for purely political reasons, equally it would be quite wrong to prevent an auditor from carrying out his duty to satisfy himself that the local authority has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources, just because it was alleged that the arrangements were based on a political decision. Political merits are a separate issue, and it is not the auditors' duty to consider them.

I confess that when I first read the amendment I was somewhat confused as to precisely what it meant, but now, having had the benefit of listening to the noble Lord, I think I understand it. I would, however, venture to suggest that others who have to put this Bill into effect might also be confused should they come upon these words without the benefit of explanation. And I think we would all agree that confusion in legislation is to be avoided above all. But, even if it were clarified, I fear that this amendment would be open to objection. It seemed to me that it might have two possible meanings. One of them would imply that the provision is positively harmful; the other that it is merely redundant. Let me, as quickly as I can, explain. In either case I should make it clear here and now that the auditor does not audit "decisions" as such; that is not his job. He is only concerned with the expenditure or income which arises from decisions; that is a different point.

As to the possible meaning which seemed to me harmful, it might be assumed that the amendment means that the auditor cannot look at anything that arises from a policy decision. That is to say, if a local authority declares that a particular decision is a matter of policy, then the auditor would be prevented from examining any expenditure that arises from it. On that interpretation—and I say again that it is others, after us, who would have to interpret these words in practice—I suggest that this is undesirable. It would effectively give a local authority carte blanche to exclude the auditor from whole areas of the accounts. Indeed, it might almost prevent the auditor from examining the accounts at all, because almost all local authority spending can be traced back to a policy decision one way or another. Even where the authority is obliged by central Government to provide a service, it is usually a policy matter for the local authority as to how and to what extent to provide it, or what priority to give it alongside its other objectives.

This exclusion from accounts would mean that the auditor would be wholly unable to carry out his essential duties, which are quite separate from matters of policy. It is his role to check that spending has been properly recorded, and that there are proper systems for its control. This "regularity" auditing, as it is called, may not sound dramatic, but it is essential, as the noble Lord, Lord Bruce, knows very well. And of course there is the local authority auditor's duty to satisfy himself that the authority has made proper arrangements for securing value for money. This is something we have been talking about and have touched upon. On this basis, the effect of this amendment could be that the auditor could have virtually nothing to do. And yet, under the cloak of a policy decision, the most scandalous, or at least remarkable, practices might be going on. I leave it to your Lordships' imaginations what the implications might be.

The second possible interpretation would be that the auditor could carry out all his routine duties which I have described, but that he should stop short at criticising or commenting on the policy decision itself, provided that it is legal. On that basis, I do not question the principle of the amendment; I even endorse it. But I do suggest that it is redundant. And I do not think that we should proceed with it if it is not really necessary. I say that the amendment is redundant because, by definition, it is not for the auditor, once he is satisfied that expenditure in pursuance of a decision is lawful, to question the decision itself.

I have more here on this subject in front of me. I have been anxious to explain to the noble Lord, Lord Bruce, not just why we do not want to accept the amendment but in detail because, as he rightly says, there will be others who will want to know precisely what is the Government's line and why are they taking this view. Because this is even more drawn out than I have said now, I would tell the noble Lord, if he would wish to pursue it even further, that I shall be glad to do so afterwards, but I hope I have said at least enough to indicate why we cannot accept the amendment as it is.

Lord Bruce of Donington

I am grateful to the Minister for his response and I shall certainly take advantage of his offer to pursue the matter further and in detail because it is a subject in which my profession is interested. My interpretation of the amendment is not that of the noble Lord's, and I was simply seeking to ensure that the decision itself should not be the subject of audit; I can see that it would be the responsibility of an auditor to go into all items of receipts and expenditure, rather than auditing the decision itself.

Perhaps I might give an illustration of something which might be a matter of controversy. It is well known that many authorities in the United Kingdom maintain swimming baths on a dead loss basis. It might be decided in an area to modernise the local swimming baths so as to bring them up to ordinary health and other standards. That would cost a great deal of money and the income would be very small, so that could be a matter of controversy. On a value for money investigation, it would be said that such a development would make a loss anyway, and therefore, by one concept, it would be a waste of money and it might attract adverse comment.

Difficulty arises because of the social content of many decisions that are made by local authorities. They are bound to run certain sections of their affairs, deliberately and as an act of social policy, at a loss—as a burden, if you like, on the ratepayers—and that cannot be helped; unless it is in the mind of the Government (I cannot search their mind; perhaps the inscrutability of the noble Lord, Lord Cockfield, has had more influence than I suspected) to privatise all swimming pools, but I dismiss that as being completely irrational.

The noble Lord, Lord Bellwin, will have the point I am making; namely, that certain decisions, judged in economic terms, will appear to be a dead loss and therefore something which should not be done, whereas on social grounds they should be done. That is where controversy sometimes arises. While I do not suppose there would be much controversy over the sort of stark instance I have given, it is the sort of case with which the auditor might find himself involved. I am obliged to the Minister for his reply, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

10.9 p.m.

Baroness Stedman moved Amendment No. 60A: Leave out Clause 9 and insert the following new clause:

("Audit: general provisions

9.—(1) Every body whose accounts are required to be audited in accordance with this part of this Act shall make proper arrangements in all its areas of activity for securing economy, efficiency and effectiveness in its use of resources and in the carrying out of its policies.

(2) The auditor shall assess in a number of areas of activity conducted by the body for securing economy, efficiency and effectiveness in accordance with subsection (1) above.

(3) The Commission shall determine which areas of activity carried out by the body are to be the subject of an assessment by the auditor in accordance with subsection (2) above.

(4) The auditor shall report to the Commission the results of the assessment carried out under subsection (2) above and the Commission shall publish the report.").

The noble Baroness said: I shall, with permission, speak at the same time to Amendment No. 60B. It seems that chartered accountants in Scotland share some of the views of the noble Lord, Lord Bruce, because they tell me they believe it is impracticable to report in the terms of subsection (1)(c) as drafted; that the auditor can only assess the arrangements for securing economy, efficiency and effectiveness in a very limited number of areas of local authority activity in any one audit.

I understand that the chartered accountants from Scotland have had some correspondence or conversation with the noble Lord's department, and that officials there indicated to them that this impracticability could be recognised in the code of audit practice. For example, they suggested that the code could be used to amend the Bill in this way, especially if the code is not to be prescriptive. But my advisers feel very strongly that this is not a matter which should be dealt with in any code of practice. Deciding the areas of activity for the auditors' view of arrangements is an important policy decision for the commission; the code ought to be limited to technical matters, and should not extend to questions of policy. Once the policy has been decided, then any code ought to indicate what is considered to be the best professional practice in fulfilling that policy objective.

It could be better for the Bill if it would recognise, as in subsection (2) of the new clause in Amendment No. 60A, that the auditor can only assess the arrangements for securing the effectiveness, efficiency and economy of a limited number of areas of local authority activity in any one audit. So the commission should direct the auditor as to which areas of activity are to be examined, as we detail in subsection (3) in Amendment No. 60A, and then—going on to subsection (4)—the report should be published by the commisson.

If the term "public interest" were deleted from Clause 9(3) of the Bill as it stands, it would have the effect of widening the scope of the clause to cover matters which, although they do not necessarily affect the public interest, should be the subject of an immediate report to the body concerned. So in subsection (2) in Amendment No. 60B the reference to "public interest" has been removed.

My advisers feel that the auditor ought to be given the power to draw the attention of the commission to any matters relevant to the economy, efficiency and effectiveness coming to his attention during the course of the audit, as we detail in subsection (3) of Amendment No. 60B. This also provides an opportunity rather than a responsibility, and thus, in the amendment I have used the word "may" rather than the word "shall". I beg to move.

Lord Bellwin

I must say that I feel uneasy about these amendments. An amendment on similar lines was discussed in another place and my right honourable friend there sought to make it clear that local authorities do indeed already have a duty to seek value for money. The fact that it is not embodied in statute does not make it any less real. It is a common law obligation and there are a number of relevant cases. I referred earlier to Roberts v. Hopwood, in 1925—which was a leading case—and more recently we have had the Bromley v. GLC case. These cases established that local authorities owe a duty to their ratepayers to conduct their affairs in a businesslike manner as if they were trustees of the money contributed by the ratepayers. However, we run a great risk in making an explicit obligation on the face of the Bill.

The effect of the new Clause 9(1) would be to impose on local authorities a statutory duty to make arrange ments for maximising value for money. The question then arises as to what is the consequence of imposing this express statutory duty. Here I must confess that I am in some difficulty. From the drafting of this proposal, I do not know whether its effect would be merely to enable the auditor to report on the body's attainment of value for money, or whether it is effective to enable him to act in pursuance of Clauses 13 or 14 to recover unlawful expenditure incurred in disregard of the duty, or require a loss to be accounted for. If indeed that were the effect of the new clause—as to which, I must repeat, I am not certain from its terms—I see grave difficulties. What is best value for money is often only a subjective view; there are few absolute yardsticks as yet. Under the amendment any failure to maximise value for money would contravene the provision if it were attributable to shortcomings in the arrangements, unless presumably the authority could demonstrate that it has acted reasonably.

The auditor's duty on value for money matters, far from being assisted, could become entrammelled in legal issues. If he found some deficiency in an authority's value for money arrangement, he could very probably be obliged by the legislation actually to declare the matter to be one of apparent illegality, rather than one where he could report and give advice to the local authority. If he failed to take legal steps, then some public objector might be able to appeal successfully to the courts against him.

Such court actions would be especially worrying, because I am advised that the effect of the explicit duty as in the amendment would be to transfer the burden of proof. Under the present situation it is necessary to prove that the local authority has acted unreasonably; but the effect of the amendment could be to shift the onus on to the local authority, requiring them to prove that they had acted wholly reasonably. I suggest that, taken as a whole, this is just the sort of legal nightmare that we are all anxious to avoid. It would be bad for local government and bad for the courts.

Of course, it may be that the noble Baroness has sought to limit the damage (and I am afraid I must use that word) by restricting the role of the auditor in respect of value for money. But I fear I do not feel happy about that either. The amendment would, if I read it right, restrict the scope of the auditor's value for money examination to certain selected areas only; and it would be for the commission to make that selection.

I would first express disquiet that the auditor should restrict himself to certain selected areas only. He, too, already has a common law duty to examine value for money, and I would be very sorry to see that restricted. I know there has been some concern as to how the auditor will fulfil such an apparently wide-ranging duty—indeed, we were talking about this at some length earlier on—but my reply is that this is the sort of issue with which the code of practice could deal. In fact, the code may well advise the auditor to examine certain areas in depth; but it would be a very unhappy piece of legislation, I suggest, that did not enable the auditor always to have value for money in his mind in all parts of the audit.

I made an offer to the noble Lord, Lord Bruce, on the last matter we were discussing, which really is most important—as, indeed, this is, too—and I would make the same offer (if I can put it in that way) to the noble Baroness. If her friends who are so anxious about this would like to pursue the matter further than I have gone—and I have tried to give some indication, at least, as to why we are not happy about this amendment—then I would be very pleased to see that that was followed through to any extent that they would wish.

Lord Houghton of Sowerby

My noble friend Lord Bruce was in such a hurry to withdraw his last amendment that he did not give me a chance to give him the help for which he had asked. I was very disappointed about that, because I could make amends to him for the little assistance I had been able to give, I thought.

I am very glad that the noble Lord the Minister has just mentioned what I was going to ask about, and that is the code of practice. It seems to me that the code of practice should cover some of these rather difficult areas of definition in the statute law; and since the code of practice will come before Parliament, that might give an opportunity to see how well they have defined it for the purpose of guidance to the auditor. I think that should be borne in mind when we are trying to sort out these different slants of application in the case of the same set of principles. That is really what we are doing in this amendment, as we were in the case of the previous one. So I think we ought to take important note of what the noble Lord has just said.

Baroness Stedman

I am very grateful to the noble Lord for his reply, and, it being a rather detailed one, I will certainly read it tomorrow. I am quite sure that my friends in Scotland did not intend it to be taken in the rather rough way that it might perhaps be taken, but rather more as a question of drawing attention to what was happening; and it is quite obvious that there are defects in the drafting of it if we have not made that plain enough. But with the permission of the Committee I will withdraw the amendment and take further advice; and I will take up the noble Lord's offer, if necessary, to come back to him.

Amendment, by leave, withdrawn.

Clause 9 agreed to.

[Amendment No. 60B not moved.]

Clause 10 agreed to.

Lord Bruce of Donington moved Amendment No. 60C: After Clause 10, insert the following new clause:

(" False statements etc. to auditors.

.—(1) An officer of the body who knowingly or recklessly makes a statement to the auditor which—

  1. (a) is misleading, false or deceptive in a material particular, and
  2. (b) is a statement to which this section applies
shall be guilty of an offence.

(2) This section applies to any statement made to the auditors of the body (whether orally or in writing) which conveys, or purports to convey, any information or explanation which they require, or are entitled to require as auditors of the body.

(3) Any person guilty of an offence under this section shall be liable—

  1. (a) on conviction on indictment to imprisonment for a term not exceeding two years, or to a fine, or to both; or
  2. 408
  3. (b) on summary conviction, to imprisonment for a term not exceeding six months, or to a tine not exceeding £400, or to both.").

The noble Lord said: The noble Lord will not be surprised that, as a party firmly in favour of law and order, we feel that a clause of this kind is necessary. The responsibilities of the auditors which have been laid down in the Bill so far, in addition to those which will emerge, are very onerous. We willingly accept them; but, as the noble Lord will appreciate, we rely to a very large extent, and must inevitably do so, on the information and explanations given to us verbally. This applies in the realms of commerce and industry where we do an audit and the Companies Act 1976 at Section 19 has laid down penalties for those officers of a company who give misleading or false information to auditors. This is merely an adaptation of Section 19 of the Companies Act 1976 which makes it an offence for those officers on whom auditors rely to give false or misleading information deliberately in the same sense as intended in the Companies Act 1976.

The amendment needs very little more explanation than that, except that I am bound to say, on the basis of such experience as I have had, that it must be extremely rare for any officer to give misleading information to the auditors of the authority. I myself have not heard of a case. There may be some reported cases; I have not read through all the law—I have not had the time. I think it is rather rare, but even if it is rare there is no harm in putting this provision in. I beg to move.

Lord Bellwin

One might say there is no point in not doing so. I recognise that the amendment echoes the provision of the Companies Act 1976. I can see there might at first sight be an argument for applying it to local authorities. I am sure that one can only agree that making false statements to auditors is not to be encouraged but condemned. As the noble Lord said as he sat down, it has not been a problem in the past and I wonder why we should impose it now. I agree with him that we are not saying that standards of truthfulness among local government officers have fallen so low so suddenly. I think that is the position.

May I remind the Committee that the Companies Acts must cover the whole range of companies, including the most disreputable backstreet concerns. I do not say that standards in the company sector are generally low; but I would say that in local government they are generally very high. I think we would all agree with that. I would urge the Committee not to press that we should put on to the statute book another set of criminal penalties for which there is no need now in local government, and for which I am confident there will be no need in the future. As with everything else the noble Lord has said, we will be talking about it later. But that is our first feeling and impression on seeing this amendment.

Lord Bruce of Donington

I am again grateful to the noble Lord for his reply. I must say I find a little odd some of the statements that have been made by some of his noble friends this evening and some of the more blood curdling remarks of my noble friend Lord Houghton (who, I note, is unfortunately no longer with us) which would lead one to suppose that something is very wrong with the whole of local government in the United Kingdom; and that is the precise reason why all these powers of investigation and otherwise are being given to auditors and it is why all this legislation restricting local authorities in what they do has been passed through this House and is now before us. You cannot have it both ways. If the noble Lord is saying that all local government officials are angelic, a proposition from which I would not dissent, then I willingly agree that this clause is not necessary. But his previous arguments used in Second Reading and elsewhere about the unreliability of local government policies and local government actions now all seem to be watered down a little. But I shall not look a gift horse in the mouth. With the assurance that the noble Lord is convinced of the complete probity in every respect of local government—a proposition which I entirely share—I beg leave to withdraw the amendment.

Lord Bellwin

Before the noble Lord sits down, I must get on the record that, of course, I did not say that at all. What I have all along been concerned about is that it is the procedures—this is the point I have tried to stress—about which we have to be careful, not the individuals. If the procedures are properly investigated, properly the province of the auditors, then we will know that matters will be looked at properly. I did not set out—nor did any who have spoken earlier—to speak about individuals as such. It was the opportunities that were there which must be watched carefully because that is the duty and that is the public interest.

Amendment, by leave, withdrawn.

Clause 11 [Public inspection of accounts and rights of challenge]:

10.27 p.m.

Lord Bruce of Donington moved Amendments Nos. 60D, 60E and 60F: Page 9, line 40, leave out ("previously"). Page 9, line 40, after ("received") insert ("at least seven days before it is made"). Page 9, line 45, at end insert— ("(6)Where any person objects under subsection (3) above the auditor shall, if so requested by the body to whose accounts the audit relates or by any officer of the body who may be concerned, afford to that body or officer as the case may be, an opportunity of appearing before and being heard by the auditor with respect to that objection.").

The noble Lord said: This clause deals with the rights of public inspection of accounts and the right of challenge. The clause raises a lot of issues which will arise at a later stage of our debate. These amendments are designed to give the auditor at least seven days' written notice of a proposed objection by a local elector. It also aims at ensuring that where an elector makes any objection then the local authority officer concerned shall always have in effect the right of reply. I have paraphrased it; the noble Lord knows the purport of what I am trying to do.

I shall not expatiate tonight on the difficulties of auditors when they have to supervise the inspection of books, records and documents, answer questions, and all the rest of it. That would take rather too long and it is important that these matters should be dealt with in some detail. On the one simple point about being given adequate notice, I cannot help feeling that I shall have the sympathy of the noble Lord. Also, there ought to be a right of adequate reply. If the noble Lord does not like the wording that I have put in, if he will tell me to put down something on Report then I will withdraw the amendments. The purpose is to make it fair to the auditor and the other persons concerned. I beg to move the amendments.

Lord Bellwin

I think I understand exactly what the noble Lord is trying to do, and he is trying to be helpful in this. Concerning Amendments Nos. 60D and 60E I should like to have another look at them. Mention has been made of tabling amendments at Report stage.

So far as Amendment No. 60F is concerned, I cannot be so helpful. Here we are talking about the Scottish audit legislation; but there has never been any such provision in the audit legislation for England and Wales. The reason for this is not that we believe that local authorities and officers should not be heard by the auditor. Rather, it is a difference in the nature and status of the objection process. In Scotland it is really an administrative process with no particular consequences. In England and Wales, it is a quasi-judicial process which can be a preliminary to proceedings in the courts. I think that the safeguard of natural justice will continue to apply under the provision of the Bill as it now stands. The amendment, I think, would not give greater protection. Rather, it could create doubt about the applicability of the wider common law requirements. Perhaps when the noble Lord considers this again he may want to agree with this, and certainly we would take that line over this amendment.

Lord Bruce of Donington

I am most grateful to the noble Lord. I am in fact an emigré Scot. We left Scotland around the 16th century and have returned only at intermittent intervals ever since. But it does not prevent us from taking the line we have taken here. I thought it might commend itself to the Committee, regardless of what the existing position in Scotland was. I think it should stand on its own merits. I am grateful for the noble Lord's attitude towards this. I will myself give some further thought to it before Report stage. I still feel that a little protection is required for anybody who is unjustly accused. The noble Lord referred to common law rights and natural justice. I am not a lawyer and do not have the noble Lord, Lord Mishcon, with me at the moment. I beg leave to withdraw the amendments.

Amendments, by leave, withdrawn.

Clause 11 agreed to.

[Amendments Nos. 60G, 60H, 60J and 60K not moved.]

Clause 12 agreed to.

Lord Denham

I think this may be a convenient stopping moment. I therefore beg to move that the House do now resume.

Moved accordingly and, on Question, Motion agreed to.

House resumed.