§ 7.51 p.m.
§ Lord Hesketh rose to move, That the code laid before the House on 26th November 1987 be approved [9th Report from the Joint Committee].
§ The noble Lord said: My Lords, Section 14 of the Local Government Finance Act 1982 requires the Audit Commission to prepare, and keep under review, a code of audit practice prescribing the way in which auditors are to carry out their functions under Part III of the Act. The code must receive parliamentary approval at intervals of not more than five years. The present code was approved by the House on 24th October 1983. The Audit Commission has now prepared this revised code which is before your Lordships' House.
§ The code, as I have said, is the commission's code. It has been prepared by the commission, the members of which represent a wide range of interests in the public and private sectors and reflect wide experience of financial management relevant to the audit of local government accounts. It has been the subject of consultation, as required by the 1982 Act, with the bodies most directly concerned—local authority associations and the accountancy profession. It has also been the subject of consultation with the commission's auditors, the district audit service and the private accountancy firms.
§ My role in this matter is limited to bringing the code to your Lordships for consideration and, I hope, approval. As time is short, I believe that noble Lords would not wish me to trespass on the time available for debate by describing the changes from the original code. These have been helpfully summarised by the commission in the attachment which follows page 23. The effect of the changes is principally to update the code to reflect developments in accounting and auditing practice since 1983 and to clarify certain matters in the light of practical experience.
§ The further attachment summarises the major matters raised during the commission's consultation on the draft and the commission's response to those points. I hope that your Lordships will agree that the commission has produced a well-considered and practical code which will provide a sound framework for the work of auditors in local government. I therefore commend the code to your Lordships' House.
§ Moved, That the code laid before the House on 26th November 1987 be approved [9th Report From the Joint Committee].— (Lord Hesketh.)
Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord for having given a short 569 introduction to the Motion to approve the code of conduct in relation to local authority audits in England and Wales. I have already been in touch with the Minister about certain questions that I think it would be wise to clear up. I did so in the hope that instead of eliciting the reply often heard in your Lordships' House that the Minister would write to the person asking the question. I would receive answers this evening.
The first question that I ask arises from remarks that fell from the lips of the noble Lord, Lord Henderson of Brompton, at Question Time this afternoon. It is whether the code referred to and authorised under Section 14 of the Act has the force of law or whether it is purely a consultative document, although the auditors by contract have undertaken to comply with it. Is there any legal enforceability or not? This is a matter of some importance. I shall give way to the noble Lord if he can answer the question straightaway.
§ Lord Hesketh
My Lords, the noble Lord, Lord Bruce of Donington, asked about the legality of the code. The code has already received approval in another place and once your Lordships' House has approved it, compliance will become mandatory on all auditors appointed by the commission, whether for the district audit service or private firms. Section 15(2) of the 1982 Act makes that a requirement. With regard to private sector auditors, compliance with the code will form part of their contract with the commission.
Lord Bruce of Donington
My Lords, I am not sure whether that answers the pertinent question put forward by the noble Lord, Lord Henderson of Brompton. I shall have to examine it. If the code now before the House, which is largely the same as the original, with one or two minor modifications, is legally enforceable, then firms of private auditors should consider seriously their position in relation to the performance of their duties. In any event, they should look at their professional indemnity policies because the detailed requirements to the code of practice, if followed meticulously, as the Act requires, would place (as unsatisfactory performance today places) such a burden on auditors that considerable expense, far beyond the scale of fees authorised by the Audit Commission, would be needed to cover them satisfactorily.
I suspect that some portions of the code of practice, although stated in precise and commanding terms, are such that in the normal way they lie outside the realm of the auditing profession and should have no place in the code. I do not know, nor is it for me to say, how the leading accountancy bodies, with which I understand the Audit Commission arrived at an agreement, can possibly agree to the adoption of a code of this character. It has so much scope as to almost usurp the whole function of management in local authorities.
If the noble Lord looks at the examples of the form and opinion certificate on the statement of accounts as reproduced at pages 20, 21, 22, 23 and so forth, he will find that the certificates relate in every case to the audit of the authority's accounts for the year 570 ended—whatever it may be—in accordance with Part III of the Local Government Finance Act 1982 and the code of audit practice. It is quite true that parts of the code of practice specifically refer to the procedure to be followed and the considerations to be taken into account in the audit of the accounts. There can be no doubt about that and I do not query its validity. I am surprised at the continued inclusion in the code of practice of matters which are not required to be certified so far as the accounts are concerned. Those are comprised principally in paragraphs 35, 36, 37 and so on in the code of practice. Perhaps I may give one example. Paragraph 36 says:The achievement of economy, efficiency and effectiveness depends upon the existence of sound arrangements for the planning, appraisal, authorisation and control of the use of resources.In other words, the auditors have to be satisfied as to the entire work of the local authority. The local authorities' responsibilities are precisely encapsulated in the phrase "planning, appraisal, authorisation and control of the use of resources". What does that mean in practice? In addition to accounting matters, an auditor has to satisfy himself as to the management of the entire undertaking, the management of the entire local authority. As one who has had some experience in management work, I can tell the noble Lord that if this were to be done thoroughly as the code requires, it would involve an examination of every individual employee's job specification as incorporated in the proper procedure manual and that each specification would accurately describe the functions of the employee. It would have to define to whom the employee was responsible, first, for authorisation and for accountability; and, secondly, the sideways responsibilities which the employee had for informing people either in an equivalent category or those in a lower or higher category.
Then the auditor would have to define who was responsible to him or her and for what. He would outline the facilities to be afforded to the employee or the staff to enable the functions as described in the job specification to be carried out. Then, following the examination of each job specification, it would be the responsibility of the auditor to make quite sure that these interlocked with other specifications within a proper procedural manual. There would then have to be the allocation of responsibility for defects, either to the local authority or to central government themselves.
Since the passing of the original Act in 1982 there has been progressive intrusion by central government into the realms of local government. Local governments no longer accept or feel that they have the final responsibility for the conduct of their functions. Then in order to assess the precise matters which are set out in paragraph 36 which I have read, the auditor would have to satisfy himself that there are proper arrangements to get the best out of staff. That is because of course management involves managing people and getting the best out of them. Under paragraph 36 the auditor would have to satisfy himself as to that.
What has happened is that the Government themselves, although intervening more and more in local authority work, circumscribing their own 571 initiatives, their own responses to local people, are progressively becoming more and more involved in the management of authorities themselves. As I see it, under the Act and under the code auditors would be required to make a report upon these matters.
The intrusion of auditors into what must be a management function is entirely unwarranted. Either the political chiefs of the local authority trust their managements or they do not. But to make the auditors in effect responsible for what may be defects in the organisation itself, whether or not these arise from the defects of central government, is in my opinion a responsibility which auditors to whom this code applies ought not to have thrust upon them. If it is thrust upon them and if they exercise it thoroughly, unless they are prepared to make colossal losses on the expenditure of staff and subordinates to undertake all this investigative work into management and to assess it, they cannot possibly, within the confines of the code, comply with it in the detail which has been set out. I therefore wonder why these clauses remain within the code of audit practice.
I now pass to the concept, which again remains in the code of practice. In the debate which took place in this House on the original code I drew attention to the question of why the concept should be included. I am amazed to find that one of the principal responsibilities of the auditors, who are normally there to see that the accounts reflect a true and fair view and that the accounts are a proper record of the authority's activities, is the concept of value for money. "Value for money" is a term which has tripped off the tongues of government spokesmen for a long time now. It originated with the noble Lord, Lord Bellwin, who waxed very eloquent on the subject in the course of the original Bill itself.
We on this side of the House tend to take the view that the Government know the cost of everything but the value of nothing. How is value for money to be determined by an auditor? The auditor is bound to look at the quantity of the goods and/or services delivered for the money, the quality of the goods and/or services which are provided in return for the money and the utility of the goods and/or services which are provided for the authority. How on earth can an auditor, in respect of a myriad of transactions, or even by representative sampling, satisfy himself as to value for money?
However, endeavours have been made. I do not want to trivialise this issue, I want to deal with the important aspects of it, but let us take the case of bed-and-breakfast payments by local authorities. Does the noble Lord think and do the Government think that the exorbitant sums charged by private hotels and other institutions in London for bed and breakfast provide value for money, even within the quite generous definition which I have given? Mind you, the local authorities or Government can share the views of the noble Lord, Lord Young of Graffham, that there is something very praiseworthy about the efforts of these providers of bed and breakfast. Are they not creating wealth for themselves? Perhaps the Government are prepared to condone this bed and breakfast provision.
572 I am interested in what observations the auditors have made to the local authorities concerned or in turn the Audit Commission. What observations have they made to the Government and to the public on the economy, efficiency and effectiveness of these particular arrangements? I should be interested to know whether under this Act there have been any reports by auditors to local authorities about value for money in connection with bed and breakfast, or alternatively whether there have been any reports by the commission to the Government and to the public on the efficiency, economy and effectiveness of these measures.
What therefore is the auditor required to do? If he draws attention, which he might, to these inefficiencies and lack of effectiveness within the terms of the code, is he to content himself with an observation on this? Or is he entitled to say on an objective examination of the facts that two of the reasons that the local authority is driven, on reduced funds, to spend vast sums of money on bed and breakfast for the homeless is the refusal by the Government to permit sufficient funds to be made available for the repair and bringing into use of empty property, and the refusal of the Government to allow local authorities to spend capital receipts from the sale of houses? Is the auditor entitled or expected to make observations of that kind?
If he does not make those observations is he failing in his duty? I should not wish to prejudice either any appointed district auditor or a firm of private auditors who are unfortunately afflicted with the task of investigating the accounts of local authorities who pay out vast sums in bed and breakfast payments, but what are they expected to do? What attention will be paid either by the Audit Commission or by the Government if they report these gross examples of Government-induced inefficiency, waste and lack of effectiveness? I should be glad if the noble Lord will reply to that point.
Now we come to a matter which is not within the code at all. The code mentions "value for money" but it does not mention money for value. I should have thought that that would have been one of the matters to which the attention of auditors and the public should be drawn. There is no mention of what happens to receivables. There is no mention of what happens in the case of somewhat odd disposals of assets. I give the noble Lord a specific example of which I gave him notice so that he could reply. In January 1987, it should have been round about the 15th, there should appear an entry in the books or on the computer—whichever records it uses—of the Westminster City Council recording a receipt of 15 pence from a firm called Growise Limited. That was the proceeds of sale of three cemeteries at Hanwell, Mill Hill and East Finchley.
I do not know, because I have not seen the books, whether that money would be too small to be recorded. Some local authorities keep their accounts to the nearest pound. Perhaps it did not appear at all, but was an investigation made into the circumstances of a disposal for 15 pence for three cemeteries which a fortnight before had been valued at £1.25 million and which were later put on offer by those who ultimately bought them for £2.5 million? Then the 573 Westminster City Council, after having sold three cemeteries at five pence a piece, incurred a further bill of some £70,000 in order to secure for the purchaser vacant possession of the lodging places situated in the cemetery itself.
There has been some political talk, very often in Government circles, about the "Loony Left". What about the Loony Right? Those who were responsible for this kind of sale, for whatever reason, want their brains examined. It is no good blaming the officials of the local authority for this. I can assure the noble Lord that I have seen the extracts from the minutes of the council so I know who is responsible.
The questions I have to ask concern the concept that there should be money for value as well as value for money. What action was taken by the auditors as regards this item of 15 pence receipts from Growise for the property and the payment of £70,000 to secure vacant possession? What observations, if any, were attached to the accounts of the authority for the year 1986 to 1987, or do these items feature in the accounts for the year 1987 to 1988, which have still not been compiled?
My second question is: what action has been taken by the commission under Section 22(1)(a) of the Act following notification of this most extraordinary and bizarre event which has involved the ratepayers of the City of Westminster in such a colossal loss? What report has been called for by them and what action has been taken by the Secretary of State under Section 22(2) of the Act? For convenience, and as I have not quoted from any part of the Act so far, I shall quote from Section 22(2):If it appears to the Secretary of State that it is desirable in the public interest that there should be an extraordinary audit of the accounts of any such body as aforesaid he may require the Commission to direct such an audit by an auditor or auditors appointed by it.What action has been taken by the Secretary of State?
What rights have the individual electors under Section 24 of the Act in regard to the accounts for the year 1986–87 now that these extraordinary events have come to light? What rights have they got? What rights will they have for an examination of the accounts and the questioning of the auditors in relation to the 1987–88 accounts?
My final question is: in the light of this extraordinary event, what action does the Secretary of State propose to take to ensure amendment to the code of practice so that it includes a regard that the auditors should have to ensure that money-for-value provisions are inserted in it in order to prevent a repetition of matters of this kind?
I am sorry to have to detain the House so long on those points. However, they have to be raised. They are derived essentially from the columns of the Evening Standard for 1st December 1987, 3rd December 1987, 4th December 1987 and 12th January 1988. I do not put myself behind the allegations that are made. I could not do that unless I had audited the accounts myself and observed the documents. I am very reluctant to think, however, that the features in that newspaper can be without foundation. I should like to ask the noble Lord what action he proposes to take upon them for the protection of the interests of the individual electors of 574 the Westminster City Council and the Westminster constituency, and also to protect the staff of the council and the auditors that are employed at present.
§ Baroness Stedman
My Lords, I am grateful to the Minister for his introduction of the code. I do not have the expertise or the accounting qualifications of the noble Lord, Lord Bruce. I can only look at the matter from the point of view of one who has spent almost a lifetime as an elected member of local government.
As I understand it, this is the review of the code which has been in existence since 1983. I was interested to see, at the end of the copy which we have, the points which were raised with the Audit Commission by the various commentators and also the commission's response to them. I believe that the commission either explained why it was doing what it was doing or it made the necessary alterations or amendments which proved that it took note of the comments that had been sent to it.
I know that the Association of Metropolitan Authorities has shown some concern about the question of the report in the public interest and also the phrase "lack of prudence". However, I have had no representations from the other local authority associations, and indeed I understand that the Association of County Councils, of which I am the vice-president, has not raised any serious objections.
It seems to me that it has been very difficult for the commission to try to define the boundaries within which auditors should operate. I think that they have made an honourable attempt at it. I think that we accept that that will be a matter for the auditor to decide and that he may not always please all of us in the decision which he takes. However, I am sure that with good will and a good relationship between the local authorities and the Audit Commission—that should not be beyond the wit of either the local authorities, their associations or the Audit Commission—we shall have no more problems with the code until we come to review it again in another five years.
§ Lord Hesketh
My Lords, I am most grateful to those who have contributed to this useful and interesting discussion. Like the noble Baroness, Lady Stedman, I am also not an accountant. I should like to thank the noble Lord, Lord Bruce, for his thoughtful observations on a rather complex subject and also for his courtesy in having communicated with me in advance of the debate.
As I said earlier in introducing the code, it is the commission's code. The commission, as your Lordships will know, is an independent body. Although the Secretary of State appoints its chairman and members, the commission's powers and duties are prescribed by Parliament rather than in ministerial guidelines. It is funded entirely from audit fees paid by local authorities and receives no government money. Your Lordships will also know that the commission has robustly demonstrated its independence of the Government on many occasions and especially in the reports it has produced looking at the impact of central government policies on value 575 for money in local authority service delivery. My role in the matter is therefore limited to bringing the code before your Lordships' House. I should, however, like to try to deal with some of the points which have been raised during the debate.
Both the noble Lord, Lord Bruce of Donington, and the noble Baroness, Lady Stedman, mentioned the relationship of the auditor and local government. The noble Lord remains concerned, as he feels that there is an intrusion of auditors into local government. The question of whether auditors should examine the management arrangements of local authorities is that it is a requirement of the primary legislation that auditors should satisfy themselves that authorities have made proper arrangements for the achievement of value for money. It is not a management function of the auditor; rather the auditor reviews whether the management arrangements are in place and are effective. It used to be commonly thought that it was no part of an auditor's duty to concern himself with value for money. The 1982 Act (followed by the 1983 Act governing the National Audit Office) made it clear that value for money is an essential element of public sector auditoring. Increasingly it is, I understand, also regarded as part of good practice in commercial auditing.
I was therefore surprised that the noble Lord. Lord Bruce, should raise the question again in view of the substantial and widely acknowledged impact which the commission and its auditors have made in demonstrating the scope for improvement in value for money even in the better managed authorities. In its last annual report the commission recorded that a total of £490 million of value improvements had been identified as achievable in the service areas studied, of which around £80 million per annum had already been fulfilled. Those are figures of annual savings and the totals are increasing year by year. Even on the basis of savings achieved so far, the commission's value for money efforts have already paid for themselves many times over.
It is the commission's role to point the way to improved value for money and best practice. But it is for authorities themselves to make the decisions. Paragraph 38 of the code makes it clear that:It is not the auditor's function to question policy. It is., however, his responsibility both to consider the effects of policy and to examine the arrangements by which policy decisions are reached".I believe that that is the right distinction to make and the one which quite properly separates the role of auditor from that of policy maker.
The noble Lord, Lord Bruce, also made a number of points concerning Westminster City Council cemetery transactions. He asked about the applicability of the code in dealing with certain transactions which the council are reported to have made in disposing of a number of cemeteries. Each local authority property transaction is subject to the normal processes of audit. I understand that those cases have been raised with the auditor by a Westminster elector. The code makes appropriate provision for dealing with such matters. If the auditor feels that a report in the public interest is called for, he is required to make such a report. Paragraphs 40 576 to 46 of the code prescribe the way in which he should proceed. If the matter raises questions of illegality or loss due to wilful misconduct, the code, supporting the legislation, will direct the auditor to take action using his special powers under Sections 19 and 20 of the 1982 Act.
The noble Lord, Lord Bruce, asked me whether the Secretary of State has directed the commission to order an extraordinary audit. The Secretary of State has not directed an extraordinary audit of the accounts of Westminster City Council. Such a direction would serve no useful purpose as the matter is already under consideration by the auditors.
The noble Lord also raised the question of the applicability of the code in respect of accounting for payments for bed and breakfast accommodation. I understand that it was audit inquiries which revealed the irregularities in the bed and breakfast payments made by one authority to which the noble Lord has drawn attention. The commission has, as a result, compiled a guide for auditors in dealing with such payments and is also considering a special study. I believe that that provides a good example of a matter which raises questions about the arrangements for securing economy, efficiency and effectiveness in the use of an authority's resources and which is properly within the auditor's purview.
At the start of the debate, the noble Lord, Lord Bruce, drew my attention to what he described as the burden on firms employed by the commission. The noble Lord is quite correct in saying that the code places significant burdens on the auditor. However, it is proper to say that the firms appointed by the commission are perfectly happy to endure that burden and to comply with the code before us.
Finally, the deputy controller of the Audit Commission, who has been listening to the debate, will, I am sure, take note of the points that have been made. The commission has done a thorough and highly professional job in revising the code. I believe that it will provide a sound framework for guiding the work of the auditors in local government. I hope that your Lordships will be able to accept the Motion. I certainly commend it to the House.
Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord for his reply. I should be glad if he would convey my felicitations to the deputy controller in his examination of the proceedings that have taken place this evening.
§ On Question, Motion agreed to.