HL Deb 24 October 1983 vol 444 cc71-85

7 p.m.

The Minister of State, Department of the Environment (Lord Bellviin)

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

Section 14 of the Local Government Finance Act 1982 requires the Audit Commission, after consultation with the local authority associations and the accountancy profession, to prepare a code of local government audit practice for England and Wales prescribing the way in which auditors employed or appointed by the commission should carry out their functions. The Act provides that the code shall not come into force until approved by resolution of each House of Parliament. The code was first laid before Parliament on 11th July and was approved in another place on 28th July.

Before describing the contents of the code now before us I would like, if I may, to explain some of the background to its preparation. Prior to the 1982 Act the responsibility for overseeing audit and monitoring audit standards in local government lay with the audit inspectorate which answered directly to my right honourable friend the Secretary of State for the Environment. In 1973, under these arrangements, a local government audit code of practice was issued in the form of an annex to a departmental circular. Although it was lodged before publication in the Library' of the House. this 1973 code was, however, not subject to parliamentary approval.

With the 1982 Act the responsibility for overseeing local government audit practice passed to an independent body—the Audit Commission. In the debates on the new audit arrangements both here and in another place great emphasis was placed on the new Commission's need for independence and, in order to reaffirm the commission's status, the Government readily agreed that the commission's code should be subject to parliamentary approval. I am therefore here today to honour that commitment to bring the code to your Lordships' House for consideration.

I must. however, stress that the code is the commission's own, prepared by its members representing many interests in both public and private sectors. As required by the 1982 Act, the commission has not only taken account of its own members' wide experience of financial management and audit practice, but has also consulted local authority interests and the accountancy profession in drawing up the code.

The result is, I believe, a thoroughly worthwhile document and one which will provide a sound framework for the work of auditors in local government. The code takes account of developments in audit practice since 1973 and of the new audit arrangements. It also deals with the additional duties placed on auditors by the 1982 Act including the important duty to consider value for money.

Although the code itself is, as I have said. the commission's own. I would like to outline its main features to your Lordships and also draw attention to the points to which the commission attaches particular importance. Some of these essential features are touched upon in the introduction to the code which also explains the commission's intentions in drawing up a suitably prescriptive document. The main provisions of the code then fall into two sections. Section 1 prescribes the general duties of an auditor and sets out the three factors which the commission believe should characterise his work. These are independence, due professional care and recognition of the public interest. This section also describes how the auditor should communicate his findings to those legitimately concerned. The remainder of the code prescribes how the audit should be conducted and identifies the points to which the auditor should pay particularly close attention in discharging his responsibilities, including that in respect of value for money.

Turning next to the text of the code, the commission's basic philosophy is contained in paragraph 6 which stresses the special considerations which apply to the audit of public funds financed by compulsory levy. The code makes clear that in addition to considering whether such funds have been legally spent and accounted for, the auditor must also address himself to whether money raised from tax and ratepayers has been spent in a way providing value for money. That is not to say that the commission sees a role for the auditor in questioning spending policies. Indeed, at paragraphs 26 and 43 the commission later explains that the role of the auditor is restricted to examining the effectiveness of the arrangements for carrying out such spending policies.

The commission also stresses in the last subsection of paragraph 6 that both the auditors and the commission itself have a duty to ensure not only that the approach to the audit process is consistent but also that information about efficient procedures is transferred from one authority to others. In this way auditors will be able to help the bodies they audit to improve their efficiency. The code also recognises the need for an auditor to co-operate with internal audit staff and seek to understand the aims of the body concerned and what it is trying to achieve. At the same time the commission equally emphasises that the auditor must always bear in mind his responsibilities to the public at large. The code clearly states that if necessary an auditor must not shrink from making any criticisms public.

The code's stance on other possible conflicts of interest is also unequivocal; the independence of the auditor will always be of paramount importance. Thus, paragraph 8 of the code rules that an auditor may not undertake any additional work for the authority he is to audit unless either the cost of this work is de minimis, or he and the authority concerned can satisfy the commission that the auditor's independence will not be impaired and that the additional costs of using another auditor would be excessive. This bar on additional work also extends to the auditor's firm or any organisation in which he has an interest and the commission will enforce this aspect of the code by insisting that every individual case is argued separately before it and that the contracts with firms appointed reinforce the auditor's independence.

In addition to this independence the code singles out in paragraph 9 the requirement for all auditors to exercise due professional care. Even where audit work is shared with others the code makes clear that the auditor retains a personal responsibility and gives examples of the action to be taken to fulfill this requirement.

The final characteristic described in this section of the code is the auditor's responsibility to safeguard the public interest. His duties both to the authority and to those to whom the authority is accountable are set out in paragraphs 10 and 30. The commission have made a clear distinction between routine matters which the auditor should try to resolve with officers during the course of or at the end of the audit and significant matters which are of sufficient importance for the auditor to bring to the attention of elected members. This involvement of elected members was not to he found in the 1973 code and the commission have stressed the need for an auditor to prepare a management letter for such members and to seek a meeting with them to discuss and amplify the points made.

Other procedural matters spelled out in paragraphs 14 to 22 of the code are how the auditor should respond to questions from the public, how he should handle objections and how he should express an opinion on the accounts when the audit is completed. The procedure for dealing with matters justifying a report in the public interest is described in paragraphs 23 to 29. Paragraph 24 gives examples of the kind of matter which might call for a report including unnecessary expenditure, inefficient financial administration or poor value for money. In paragraph 26, however, the commission stresses that although an auditor should not be deterred from making a report because its subject matter is critical or unwelcome, it is not his function to question policy. The auditor is not there to question a council's policy objectives although he may seek to show how those objectives could be more sensibly achieved.

The remainder of the code—Section 2—deals with procedures to be observed by the auditor and draws heavily on work done by the accountancy bodies. In identifying the matters to which particularly close attention should be paid, the commission emphasises the particular responsibilities of the local authority auditor in relation to fraud and corruption.

Finally, I would like to touch upon the last part of the code which deals with the new value for money responsibility to which the Government attach great importance. This responsibility which was conferred on auditors by Section 15(1)(c) of the 1982 Act requires an auditor to satisfy himself: that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in the use of resources". Paragraph 40 of the Commission's code clearly defines the specific meaning to be given to these three terms and the Commission again emphasises in paragraph 43 that, although an auditor has a responsibility to look at the effects of policy and the arrangements by which policy decisions are reached, it is not, the auditor's function to question policy". The Commission has thus made it clear that the role of auditor is quite distinct from that of policy maker and that the auditor cannot question any policy decision as long as that decision is made with the eyes open and in full possession of the facts. This, I am sure your Lordships will agree, is a significant and proper distinction made in a well considered and practical code. I should therefore like to commend this code to your Lordships' House.

Moved, That the Code of Practice laid before the House on 11 th July be approved.—(Lord Bellwin.)

7.11 p.m.

Lord Bruce of Donington

My Lords, the House or those of your Lordships who remain to survive the festivities in another place, will thank the noble Lord for having introduced the Motion. He is always most disarming in the way that he introduces Motions, or even Bills, in the House. He appears so reasonable, often with an air of injured innocence, that it seems almost sinful to register a note of dissent. It is therefore with great regret that I have to register considerable dissent this evening.

This Code of Local Government Audit Practice for England and Wales is a prescriptive document. Section 14 of the 1982 Act gives to this quango the right to prescribe. It gives it the right to issue directions. This is rather an unusual function to attribute to a quango of this type. There is no option. The noble Lord's legal advisers have advised him that this becomes entirely prescriptive, unlike so many other codes of practice which are much favoured by his party which believes in voluntary compliance. There are City codes, codes, for example, for journalists and codes for all kinds of other things which act as a guide but which are never given a prescriptive right sanctified by a regulation. Therefore we have to examine this a little more carefully than is perhaps convenient to the noble Lord.

I refer in particular to the first part of the certificate to be completed by every auditor, whether of the old district audit service or a member of an outside firm of accountants. I must declare an interest in that my firm has made application to be considered for appointment under the provisions of the Act. That application may be a little academic in view of what I have to say. In the certificate, which as far as I can see is not optional, the unqualified audit opinion has to state that the audit has been, completed … in accordance with Part III of the Local Government Finance Act 1982 and the Code of Audit Practice.". I ask my first question by reason of the very detail that is contained in the code. If it is impossible by reason of time and the sheer volume of work involved to cover every part of the code, is it open to the auditor to be able to qualify the certificate and in place of, in accordance with Part III of the Local Government Finance Act 1982 and the Code of Audit Practice", insert the words. "with due regard to the Code of Audit Practice"? As I shall show, for a firm of outside practising accountants—and, I venture to think, a survivor of the district auditing service—to carry out all the requirements of the code would produce an almost intolerable situation. Something would have to give. The cost of the audit would have to go up very considerably or it would be virtually impossible for any auditor to cross his heart and say that every detail in the code of audit practice had been carried out. That is the first question that I have to ask. The noble Lord will find that the attachment to which I have referred does not have numbered pages owing to the efficiency of the Audit Commission, so I cannot give him the page, but he knows perfectly well which it is. It is the page that immediately follows the text.

The code of audit practice covers a very wide field. I am afraid that the ordinary practice of auditing in the United Kingdom is not something that excites much parliamentary debate. It certainly does not evoke much public interest. By and large auditing is a boring and technical subject and emotions are not easily aroused by discussion of its merits or demerits. For my purpose suffice it to say that the responsibilities of an auditor of an ordinary limited company, whether public or an ordinary private company, are themselves pretty formidable.

In accordance with the professional code. which members of professional bodies adopt voluntarily, even though the Companies Acts do not spell out in detail the duties of auditors, the professional bodies have evolved by their statements of practice a code to which most accountants have adhered in interpreting the various Companies Acts. Their task is quite formidable. It includes vouching all the primary documentation to make sure the books and records reflect accurately each particular transaction recorded. They too have to be on their guard against fraud and corruption. Their responsibility is to ensure that the financial statement presented to the shareholders—comprising normally a balance sheet and profit and loss account—presents a true and fair view of the state of the company's affairs. For further elucidation. these days most accounts are accompanied by copious notes which the auditor thinks will assist shareholders and the public to arrive at a fair and balanced appraisal of the company's affairs.

At no stage in the auditor's normal duty. as distinct from his separate function as a management consultant or whatever he may be, is he drawn into a position where he questions management decisions as such or the efficiency in arriving at them. Unless he is separately instructed, he does not delve into the inefficiencies or otherwise that obtain within the company or firm with which he is dealing. That is not so in the case of a local authority and certainly not within the code of Local Government Audit Practice for England and Wales.

Perhaps I ought to make it clear that I and those for whom I speak welcome any moves in order that an auditor in his more extended capacity in local government can contribute to assist a local authority to become more efficient so that all wasteful expenditure can be avoided. That will indeed be very welcome, and I think that my own profession would take easily to it as a public duty. The sole point is really whether it should be spelt out in the particular form in which it has been spelt out here.

We can pass over the code of practice in so far as it relates to independence, or in so far as it deals with the responsibility of auditors to plan their work. These are quite commonplace matters. They are already enshrined in most of the professional bodies' own charters and in their own statements of practice. So, from the outside auditors' point of view, we really do not need to be lectured on the necessity for independence. We do not need to be lectured on the necessity to plan our work or on the conduct of an audit. These are all matters which are our professional responsibility: and indeed in another context I remember a Minister of the Crown sitting opposite lecturing me when the new Companies Bills were going through. I ventured to suggest that they ought to particularise a little more, and the Minister's reply to me and to the House on that occasion was, "We can leave it to the good sense of the professional bodies concerned". The Audit Commission has not left it to the good sense of the professions concerned: it has spelt it out in very considerable detail.

If I may. I should like to refer to some of the extra responsibilities that are laid upon the auditor in relation to value for money. In addition to his normal duties, he has to pay particular attention to: Systems of planning, budgeting and controlling revenue and capital expenditure … Manpower management … Arrangements concerned with the proper management of all the assets of the authority … Arrangements designed to take advantage of economies of scale or skill, particularly in procurement of goods and services. Specific initiatives that have been taken to improve economy, efficiency and effectiveness in the performance of the wide variety of duties which have to be carried out by the authority. I detect a slight political intonation there. A slight departure from the apolitical is that we have to have "specific initiatives" to cover: the wide variety of duties which have to be carried out by the local authority. That seems to indicate a pre-formed view that the less services that are carried out by the authority, the more advantageous it is going to be. The question I have to ask the noble Lord is: why has there been no reference to specific initiatives to investigate the efficiency or otherwise of private contractors by whom work has been carried out?

It would be very interesting to see what would happen if the Audit Commision, or the auditors in charge, had an opportunity to review, for example, the accounts of the Borough of Wandsworth and the Borough of Merton, which have conducted a series of experiments in substituting private contractors to undertake work formerly carried out by direct labour. I am a little surprised that there is no specific reference to them, becuase over the past few weeks there have been in the press numerous examples which quite clearly have revealed that in some cases—I do not want to enlarge the number—the privatisation of services has cost the local authority a good deal more money than if things had been left as they were. The question I have to ask the noble Lord is whether under this code those specific instances will in fact be brought to light and to the attention of the public?

The other new responsibilities of the auditors, over and above those which auditors in commerce and industry normally carry out, are to ensure the, Proper codification of responsibilities, authority and accountability", and to monitor, results against predetermined performance objectives and standards". These are really quite formidable tasks, if they are to be done diligently, as I am quite sure the noble Lord would wish, and thoroughly.

The noble Lord made a point that within the code itself there is specific mention of political neutrality. It has been made quite clear that it is not the auditor's function to question policy. That is a very general term. But what about decisions which reflect policy, or the generality of the policy—matters which normally are the responsibility of local officials and the councillors to whom they are responsible?

Under the code, the new auditor has an additional responsibility. First of all he has to pay attention to, Whether policy objectives have been determined, and policy decisions taken.". This is quite normal, and it establishes the legality of what is done. Then he has to pay attention, To what extent policy objectives are set, and decisions based, on sufficient, relevant and reliable financial and other data, and with the critical underlying assumptions made explicit". The words are explicit, and what they mean is that it is the auditor who really has to decide whether local councillors reach decisions on the basis of adequate data. I should have thought that that was the responsibility of the councillors, or of the councils themselves, and indeed of their officials. The code then refers to, Whether there are satisfactory arrangements for considering alternative options, including the identification, selection and evaluation of certain options". I can understand that advice being tendered to councils, at their request, upon calling in consultants on a particular aspect. But to make it a statutory duty it is in effect a statutory duty—because it is prescribed—to go into all these matters is surely to introduce something totally different into the whole sphere of local government. There are several other points on those lines.

Then we reach paragraph 43 (f), and it is here where I think the auditor's decision, or view, may begin to impinge upon policy. The auditor has to decide in his mind, and has to pay attention to, Whether the costs of alternative levels of service. … have been considered, and are reviewed as costs change". So is it to be the auditor who is to go along to a committee of the council and to the council, or to the officials, and say, "Well, of course, if you reduced home help from four days a week to two days, you could save this amount of money"? Is it required that the auditors should seek to assess the services on that basis? Is it right that when establishing a particular level of service the council should feel that it might be subject to criticism because it has decided not to cut down on that level on the grounds that it sees the value of the service as being commensurate with the cost? I should like the noble Lord's clarification on that.

Moreover, as the noble Lord is well aware and as the Chartered Institute of Public Finance and Accountancy is also well aware, the determination of cost effectiveness, or value for money, over a very wide spectrum of local authority activities, is almost impossible. Some of the home and domiciliary services, some of the education services and so on, would defy, with knowledge as it is at the present time, any concept of whether this or that level of education comprises value for money or does not. These are matters normally outside the audit sphere. This is not to say—I repeat it for the noble Lord—that those of us on this side do not wish to see local authority services carried out with the utmost efficiency and effectiveness. Surely, every citizen must want this. But when, lurking in the background, there are highly trained personnel, known to be querying practically every aspect of decision making and practically every detail, it is not a very encouraging atmosphere in which to carry out local authority work, apart from the time taken to do the work. Speaking as an auditor who likes to he very thorough in his work, I should have to spend many hours if I were to carry out this code. I pass to the additional responsibilities of the auditor in connection with the interest of the public. Unlike the auditor of a commercial company, the auditor under this code, as under the former Local Government Act, has to give information to objectors. If your Lordships have read the report of a debate in another place of 28th July, they will be aware that the honourable Member for Leicester, South rose to his feet and asserted that he had made 17 representations to the district auditor on a particular subject. One can imagine the time that is spent by an auditor in dealing with an objector of that kind. I do not say that he should not do it. I am merely saying that, for a private auditing firm, the cost of getting out the papers, of interviewing this particular Member of Parliament, of making all the necessary inquiries and reporting back, and of holding a series of 17 interviews together with all the ancillary work, would have been very significant. Under the old district audit system, it would have been lost in the broad general cost of district audit work, which was remunerated on a salary basis.

I pass now to the reporting of the auditor. In addition to his normal opinion that he has to give, he is required to draw to the attention of the public any matters that he considers, after complying with the code and the inquiries, should be so drawn. The code does not say exactly how he is going to draw the public's attention to the matter. Presumably, he has to publish something or someone will publish it for him. He has to prepare it. I am not disputing the principle. But it will he very time-consuming, as indeed will be the additional compilation of a management letter to the authority itself drawing attention to the various defects, real or imagined, that he has unearthed. All this is not going to make for the saving of time.

I turn to the form of opinion which is put on the various attachments to the code itself, where the auditor has to state that, in his opinion, the statement of accounts presents fairly, in accordance with the accounting policy set out, the financial position of the authority. We in the auditing profession wonder why the term "presents fairly" was selected instead of, as is normal in the auditing profession, the "true and fair" certificate that is required in the case of limited companies, where we certify that the accounts present a true and fair view. What is wrong with the audit of a local authority being certified on the basis of true and fair? Indeed, if your Lordships recall the Local Government, Planning and Land Act 1980, when it came to the preparation of accounts in respect of functional works being carried out by maintenance departments of the local authority. the accounts and the balance sheet are required to show a true and fair view.

Why depart from "true and fair view" in the certificate that is required? After all, the auditor in his normal practice uses both "true" and "fair". Why do we use these words? It is because we are enjoined by our own professional codes to present the truth as we see it. But we also have to present it fairly. It is possible to present the truth marshalled in such a way—put in certain type or without notation—that, even though it may be true, it is not fair. That is why my profession always adopts "true and fair".

Why, then, "presents fairly"? I think that it is possibly a consciousness of the knowledge that the accounts of local authorities, on their present structure, cannot present a true and fair view of the affairs of the local authority. There is one very good reason. The accounts of a local authority, unlike those of a limited company or commercial enterprise, are not required to disclose to the public the assets that the authority owns. To certify the accounts of a local authority as true and fair would make it necessary for its asset position to be disclosed. This was brought out clearly in the Layfield Report, to which reference was made many times in the course of proceedings on the Bill. Is it precisely because of the terms of the opinion, as presenting fairly, that the Audit Commission considers itself absolved from making any observation on how the assets of a local authority are being used?

Will the noble Lord answer this question? There are a number of local authorities who, under directions from the Government and, indeed, by legislation, have been selling houses at half price. Someone has to determine the price of a house and therefore to value it in order to determine what half price is. It is therefore no case to say that a local authority cannot, or finds it impracticable to, evaluate its assets.

I want to ask whether the auditors will be instructed to reveal to the local electorates how much loss has been incurred of ratepayers' money, paid over many years, by reason of selling off properties at half price. Will it be their responsibility to disclose that?

I should like to ask the noble Lord a further question. It is well known that, where many local authority services have been privatized, the equipment of the local authority has been sold to the new private contractor. I should like to know whether the accounts produced, or the audit report thereon, under the audit code, will be obliged to inform the public what losses have been incurred in flogging off the equipment to the private contractors who have taken over the job.

It is no case to say that local authority accounts have always been drawn up in the way in which they are now and that therefore it is not in the public interest to change them. The Minister himself has taken power under Section 23 of the Act to prescribe the form of accounts that a local authority shall keep. Presumably he did not take that power frivolously. Why therefore will not the Minister direct the local authorities to prepare accounts in such a way that the electors can arrive at a true and fair view not only as to the way in which the income of the local authorities be used but also as to the way in which the capital resources of the local authority, accumulated over the years and costing the ratepayers considerable sums of money, are being used or are being disposed of? It is within the option of the Minister exactly to make those directions so that the accounts of a local authority can present a true and fair view.

I would much have preferred—and, indeed, my profession would have preferred—the Code of Local Government Audit Practice to lay down a series of guidelines which would have been readily understood by the profession and which would have been applied by them diligently and with due regard to value for money in the work that they do. It is true that my profession were consulted about this; but I am bound to say that the amendments made at a later stage by the Consultative Committee on Accountancy Bodies did not find any particular echo in the code with which we are now confronted. So it would be quite unfair to suggest that the code as now written has the full support of the Consultative Committee on Accountancy Bodies. That is no reason of course for the House to take a dim view of it. The accountancy profession is a separate interest and the House—and, indeed, the Government—have to consider a wide diversity of interests outside those of the profession to which I have the honour to belong. But we think—and we are experienced practitioners in this—that it is very unwise to issue a directive (because that is what it is) of this kind which will be most difficult to carry out in practice if it is to be done, as I believe the noble Lord wishes it to be done, with a degree of thoroughness for which my profession is I hope held in high esteem. I therefore hope that the noble Lord will take advantage of those provisions of the Act which enable this code to be revised. There is I believe a statutory provision after five years.

I have tried to address the noble Lord in as reasonable terms as it is possible for me to address him on this subject. He and I have had many conversations about this and I did give his private office notice that I was going to raise matters of this kind. I hope that the noble Lord will take note of what I have said, with a view to seeing whether even at this late stage it is possible to introduce amendments which, while not cutting across in any way his general drive which we entirely support, are far more practicable and in the end will become more cost effective.

My final question to the noble Lord is as follows. Will he take steps to ensure that the Audit Commission itself publishes its accounts with due regard to all the relevant factors that have been outlined in the code of practice so that we shall have an opportunity, following its first report, to be able to judge just whether we have had good value for money or not?

Lord Kilmarnock

My Lords, we on these Benches would like to thank the noble Lord for introducing this Motion with his customary persuasiveness. It seemed to me that the noble Lord dwelt in his speech particularly on two sections; namely: Report in the Public Interest". paragraphs 23 to 29; and Responsibility of Auditor in relation to value for money", paragraphs 40 to 44.

I have only one question which I want to ask the noble Lord. Does not the requirement not to interfere with policy matters—and that is what I think the noble Lord, Lord Bruce, referred to as "political neutrality"—put the auditor in an impossible position in relation to the guidelines under paragraphs 23 to 29 and 40 to 44?

It will not surprise the noble Lord if I tell him that that leads me inevitably back to the Islington affair which we debated before the Recess. Can the noble Lord tell me where the auditor would have stood in that case under this code? If the auditor has no status in such matters, would not the noble Lord agree that the case for legislation against that particular abuse of public funds remains very valid?

Lord Sandford

My Lords, the whole House will be grateful to the noble Lord for having introduced and explained this code, although perhaps it is stretching the terms of that convention to put it quite like that when there have been only seven of us in the Chamber. Nevertheless, we are grateful. I think that local government is grateful, too.

It is true that there have been consultations with all the associations and, despite the strictures of the noble Lord opposite, which certainly came from a rather different source, I think it is true to say that the local government associations—not only the ADC but also the AMA—are content with the code.

As the noble Lord, Lord Bruce, intimated—and the noble Lord, Lord Kilmarnock, too, with this rather wider range of responsibility stretching into economy, efficiency and effectiveness—it will not be all that easy to distinguish between inquiries into those factors and inquiries into matters of policy. But we are grateful to the commission for having spelt out that distinction more clearly and we are also grateful to the noble Lord who has done so tonight as well. But again as the noble Lord, Lord Bruce, quite rightly said from his experience, all this extra work will cost a great deal more.

Local government wants to hear—and if we can hear it tonight from the noble Lord so much the better—what the extra cost of this will be—not in terms of pounds of course but in terms of the percentage increase in the cost of auditing. Local government is under a great deal of pressure both from their own ratepayers and from the Government to economise and we do not want to face extra costs, as undoubtedly we do here, without the House knowing what that extra amounts to.

Lord Bellwin

My Lords, first, I thank your Lordships who have contributed to this discussion and I certainly thank the noble Lord, Lord Bruce, for his detailed observations. I thank him very much for having been in communication beforehand. It is always most helpful when that happens because it enables one to give a more detailed reply at the time.

I should like to try to deal with the various points. First, let me make it clear that to the best of my knowledge the accountancy profession generally has expressed itself to be very happy with the code. I say that based upon what I am told and following up the reservation which the noble Lord had earlier. There may very well be those in the profession who are less happy than others, but that is what I am told and it is obviously very important that it should be so.

Let me deal first with the specific question as to what I would say about the term, "and with due regard" about which the noble Lord spoke at some length. Section 14(1) requires the commission to prepare a code which will prescribe the way in which auditors are to carry out their functions. Therefore, the code must be followed. Discretion to pick and choose which parts to follow cannot be given, and it is not impossible for all of the code to be covered by auditors. I am not sure how far the noble Lord will think that is adequate. We are talking here about technical definitions, and I say of this, as I say of anything else to which I may refer in a moment, that if the noble Lord thinks that what I am saying is inadequate he knows that I will gladly follow it up if he raises it with me.

However, I want to comment on some of his other points. He referred to concern in a political connotation. He asked: why no reference to specific initiatives of private contractors? He mentioned Wandsworth and Merton, and he called them experiments. I wish he had not done that. I do not consider them to be experiments at all. I consider them to be natural extensions of the process of finding out how you can provide a service at a lower cost; because the fact is that they are not costing more, they are costing less—very much less. Exactly how much less will come out when the auditor draws attention to it, as he presumably will if he thinks it is proper to do so. But he may in fact consider that, if there are political overtones, it is something that he would rather not do. However, that would he for the auditor to decide at the time.

The noble Lord said that if the authority had reduced its number of home-helps the auditors may care to suggest that that was a good or a bad thing. For myself, I should not have thought that the auditor would get anywhere near commenting upon whether that was good or bad. He may draw attention only to the cost to the whole of the authority, but he would certainly not make any observations as to the politics of it. Indeed, what comes out very clearly from what I have said about the code is the extreme extent to which the commission, whose own code it is, has gone to emphasise, to stress, its concern not in any way to be involved with policy decisions. I must say that when I read it I was very impressed by that. I think that when the noble Lord, who is very assiduous in the way in which he goes into these matters, looks very carefully at that he will not need to be as concerned as he is.

The noble Lord specifically asked what would be said about a situation where an authority had sold council houses and given a discount of, say, 50 per cent. He asked whether the auditor would then disclose how much had been lost. He would presumably put the same question as to whether the auditor had a duty to say how much profit had been made. I would suggest that unless he felt it had an impact of significance upon the accounts the auditor would not normally go into that, but it would be for him to decide and clearly I would not want to say.

Then the noble Lord asked whether the auditor would tell the public how much had been lost in "flogging off equipment". I might have referred to it slightly differently, but I know what the noble Lord means. I would apply the same response. He asked whether the auditor would have the duty to report to the public on how much profit had been made. I suspect that unless it was in itself significant in the context of the totality of the accounts, he probably would not; but again it would be a decision that he would have to make at the time in the light of the totality of the accounts he was auditing.

The noble Lord raised the point about "true and fair", which seemed to worry him a great deal. This is certainly a very technical point. I think that the commercial term "true and fair certificate" was not considered appropriate to local authority accounts, which are primarily designed to show the financial position rather than the state of affairs. The code, excluding the forms of opinion, has of course been agreed with the Audit Practices Committee of the Consultative Committee of Accountancy Bodies. So certainly the noble Lord has me at a disadvantage in what is clearly a highly technical term. But, again, if he is not satisfied with what I say on that he will come back to me and he knows that I will pursue the point still further.

The noble Lord asked whether the Minister will direct local authorities on how to prepare accounts. No, certainly we would not do that; they would not take kindly to us doing that. Apart from everything else, what will result from the work of the commission—and it is what we have said all the time—is that there will be greater standardisation of accounts. It must be right that there should be. After all, authorities want to draw meaningful comparisons. They know very well if there are circumstances which explain the difference in cost for the provision of a service in their local situation. In my former incarnation, in order to have pointed out that it costs more or less for my authority to provide a service than others, I would never have had the slightest concern that comparisons were drawn. I am sure that if others have proper explanations it will not trouble them, either.

Indeed, I go further. Frankly, I would want to know that there are others who are doing something else. Perhaps I can learn from them. That is what local government is very much about, as the noble Lord himself knows. The noble Lord went on to say that, although this was passed in another place, there may yet be time for amendments. I should not have thought that that was likely. Indeed, tonight I am asking your Lordships to confirm this Motion and to approve this code of practice. I hope that, with all his reservations expressed, at least the noble Lord will feel able to support that. I feel sure he will.

My noble friend Lord Sandford was concerned about costs. Yes, in view of the extra work which they will be carrying out it is very likely that the fees will be more than was previously the case. But surely what is important here is that, if we believe that value-for-money auditing can achieve a great deal, it should very much more than repay an audit of this kind of information that it will produce. I am very enthusiastic about that aspect of it. The betterment that an authority can achieve by having what I believe the auditor will produce by way of value-for-money experience and knowledge will, I think, offset time and time again any additional fees that there may be.

The noble Lord, Lord Kilmarnock, asked where the auditors would have stood in the Islington situation which he previously described. To the best of my knowledge I do not think that they would have been involved in that at all. In fact, the auditor would have been in a pretty impossible position in many ways. I agree that he may be in a difficult position in deciding whether expenditure is or is not lawful on some occasions, but, then, the auditors have had some experience of dealing with these matters. I think that the noble Lord's genuine complaint there is rather more against the state of the law than the state of the auditor who has to decide on the extent to which what is taking place is within the law. But that is for another occasion.

I am grateful to those who have spoken on this rather complex subject. Frankly, personally I am enthusiastic about what we have here; I am very impressed. I think that the Audit Commission has done an extremely fine job in drawing up this comprehensive document so quickly. As I have said, the local authority associations and the accountancy bodies have been fully involved in the preparation of the code. I think that it provides a sound professional framework for the work of the auditor in safeguarding the public interest and in ensuring that ratepayers' money is well spent. With that, I hope that your Lordships will be able to accept the Motion. I certainly commend it to the House.

On Question, Motion agreed to.

Lord Skelmersdale

My Lords, I beg to move that the House do now adjourn during pleasure until eight o'clock.

Moved accordingly, and, on Question, Motion agreed to.

[The sitting was suspended from 7.58 p.m. to eight o'clock.]