DPRR/13-14/08
LOCAL AUDIT AND ACCOUNTABILITY BILL
Memorandum by the Department for Communities and Local Government
to the Delegated Powers and Regulatory Reform Committee
INTRODUCTION
1.
This memorandum sets out the provisions in the Local Audit and Accountability
Bill which confer delegated powers, explains why the power has been taken and the
nature of, and the reason for, the procedure selected.
BACKGROUND
2.
In August 2010 the Government announced its intention to disband the Audit
Commission, transfer the work of the Audit Commission’s in-house practice to the
private sector and put in place a new local audit framework. In this framework, local
bodies would be able to appoint their own auditors from an open and competitive
market. A robust regulatory framework would be established, ensuring that high
standards of auditing continue to be upheld. Between March and June 2011 the
Government consulted on its proposals for the new audit framework and in July 2012
the draft Local Audit Bill was published. On 17 September 2012 an ad hoc committee
was established to consider the draft Bill. The committee took evidence in November
and December 2012 and published its report on 17 January 2013. On 25 April 2013 the
Government published its response to that report.
3.
The Bill seeks to implement the Government’s policy to abolish the Audit
Commission and the existing audit regime, and sets out a new audit framework for local
bodies, including the process for the appointment of auditors, and the regulatory
framework for local public audit.
4.
The Bill repeals the Audit Commission Act 1998 (c. 18) (“1998 Act”). The
1998 Act sets out the current external audit regime for local authorities and various
health bodies in England. Many of the powers contained in the Bill reflect, replace or
replicate those contained in the 1998 Act. The Bill also establishes a new framework
for the appointment and regulation of auditors. This reflects and replicates in part that
made by Part 42 of the Companies Act 2006 (c. 46).
5.
The Bill applies to the public bodies and persons listed in Schedule 2 to the Bill.
These are referred to in the Bill and in this memorandum as "relevant authorities".
Relevant authorities include health service bodies, which are defined to mean clinical
commissioning groups and special trustees. Pending the coming into force of section
179(1) of the Health and Social Care Act 2012 (which abolishes NHS trusts in
England), the Bill also applies to NHS trusts subject to the transitory and savings
provisions contained in Schedule 13 to the Bill.
6.
The Audit Commission currently carries out a number of other functions and the
Bill also makes provision in respect of these. Value for money studies carried out by
the Commission under the Local Government Act 1999 will, in an amended form, be
carried out by the Comptroller and Auditor General. Data matching powers which
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enable the Audit Commission to undertake data matching exercises for the purposes of
detecting and preventing fraud will be conferred, in almost identical form, on the
Secretary of State or the Minister for the Cabinet Office.
7.
In addition to the provisions on audit the Bill gives the Secretary of State power
to direct compliance by local authorities with the existing Code of Recommended
Practice on Local Authority Publicity and also extends the scope of the Code of
Recommended Practice for Local Authorities on Data Transparency to all relevant
authorities. The Bill also amends the council tax referendums provisions in the Local
Government Finance Act 1992 to include levies (demands for payment issued by
levying bodies) in an authority's calculation of whether its council tax is excessive for
the purpose of determining whether it is required to hold a council tax referendum.
DEVOLUTION
8.
The Bill extends to England and Wales only. However, amendments, repeals
and revocations made by the Bill have the same extent as the relevant part of the Act or
instrument amended, repealed or revoked.
9.
The new audit framework will apply to authorities and bodies in England and
internal drainage boards partly in England and partly in Wales.
10.
The provisions on the publicity code and council tax apply in relation to England
only.
PART 1 – ABOLITION OF EXISTING AUDIT REGIME
Clause 1 and Schedule 1
Powers conferred on: Secretary of State
Powers exercised by: scheme
Procedure: none
11.
Part 1 provides for the abolition of the Audit Commission. Schedule 1 enables
the Secretary of State to make a scheme for the transfer of property, rights and liabilities
of the Commission to a person (or persons) specified in the scheme. As is common
with such statutory schemes it is not subject to any Parliamentary procedure.
PART 2 – BASIC CONCEPTS AND REQUIREMENTS
Clauses 2(3) to (6), 3(5) to (7), 5, 6(4) and (5)
Powers conferred on: Secretary of State
Powers exercised by: regulations (or by order under clause 2(5))
Procedure: affirmative and negative (as set out below)
Clause 2
12.
Clause 2 and Schedule 2 define “relevant authority” for the purposes of the Act.
This is subject to the power of the Secretary of State, by regulations, to amend Schedule
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2 by adding, modifying or removing an entry (clause 2(3)). The purpose of this power
is to provide a mechanism to ensure that the list of bodies which are subject to the audit
provisions in the Bill can be quickly amended to take account of future changes in local
public bodies and health bodies, or the creation of new bodies, without the need for
primary legislation each time. The power is subject to the safeguard set out in clause
2(4) that it can only be used to add a new person or body where that person or body
exercises functions of a public nature in relation to an area wholly or England (or partly
in England and partly in Wales). Regulations using this power are subject to the
affirmative resolution procedure.
13.
In addition to this power, clause 2(5) and (6) gives the Secretary of State power,
by regulations or order, to make provision about the application of the Bill to a person
or body that comes to fall within Schedule 2. The purpose of this provision is to ensure
that the appropriate modifications can be made to the audit arrangements of the new
body to take account of its particular circumstances and constitution. So far as those
regulations or an order amend the Act they are subject to the affirmative resolution
procedure, otherwise they are subject to the negative resolution procedure. This is
consistent with the approach adopted elsewhere in the Bill, and we believe, provides an
appropriate level of scrutiny.
Clause 3
14.
Clause 3 makes provision for accounts. In particular it requires relevant
authorities (other than health service bodies) to keep adequate accounting records and to
prepare a statement of accounts in respect of each financial year. A financial year is
defined for the purposes of the Bill as a period of 12 months ending with 31 March.
15.
Clause 3(5)(a) is a regulation making power enabling the Secretary of State to
vary the period of the financial year for relevant authorities (other than health service
bodies) or specified (relevant) authorities (see subsection (7)). The power includes
power to amend the Act in its application to a relevant authority, or apply it with
modifications. Flexibility is required to do this in regulations if need be, although we
anticipate that the power would only be exercised exceptionally. It may be necessary,
for instance, if an authority is being wound up on a date other than 31 March. So far as
regulations amend the Act, they are subject to the affirmative resolution procedure,
otherwise they are subject to the negative resolution procedure. The purpose of the
power is essentially technical and limited to a very narrow purpose, nevertheless it does
enable primary legislation to be amended so in that respect we consider the affirmative
resolution procedure to be most appropriate, otherwise we believe that the negative
resolution procedure provides an appropriate level of scrutiny. It is worth noting that an
equivalent power to clause 3(5)(a), contained in section 2 of the 1998 Act, is exercisable
by direction and not subject to any Parliamentary procedure. Clause 3(5)(b) enables the
Secretary of State by regulations to make provision to exclude or vary the application of
this clause. This is necessary so that provision can be made, for example, for those
authorities that have no financial transactions or assets and liabilities during the
financial year (some parish meetings will fall into this category) or in circumstances in
which one authority is merged with another part way through a year. As this is a largely
technical provision, we consider that the negative resolution procedure is appropriate
for this power.
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Clause 5
16.
Subsection (1) of clause 5 enables the Secretary of State to make provision in
regulations about the audit of the accounts of smaller authorities. Smaller authorities
are defined in clause 6 as those whose turnover does not exceed £6.5 million in a
financial year. The Secretary of State may, in particular, make regulations under
subsection (1) excluding or applying with modifications any provisions of the Act in
relation to smaller authorities. Regulations may also make provision for matters such as:
the appointment of an auditor by a specified person in relation to the audit of accounts
of smaller authorities, the eligibility of persons appointed as auditors and the nature of
the audit itself; opting-in or out of such arrangements by smaller authorities; and the
setting of fees by the specified person and the requirement to consult relevant persons
before doing so. Regulations under subsection (1) are subject to the affirmative
resolution procedure.
17.
The purpose of this power is to enable a more appropriate and proportionate
regime to be applied flexibly in relation to smaller authorities. These arrangements will
be similar to the limited assurance audit arrangements currently operated by the Audit
Commission in respect of smaller authorities. Not all auditors of smaller authorities for
example may need to be subject to the full regulatory regime in respect of registration,
and we anticipate that a body will be specified to appoint auditors on behalf of smaller
authorities. Authorities with a turnover of less than £25,000 are likely, with certain
safeguards in place, to be removed from the requirements of routine external audit
altogether. Flexibility will be needed to allow the new audit regime to apply
proportionately to smaller authorities and to respond to the needs of the sector itself
without the need to amend the primary legislation.
18.
Given that this provision might make extensive changes to the application of the
Bill to smaller authorities, we consider that the affirmative resolution procedure is most
appropriate for this power.
Clause 6
19.
Clause 6 defines “smaller authority”. Clause 6(4) enables the Secretary of State
by regulations to provide for cases where a relevant authority has been treated as a
smaller authority for a financial year, when it was in fact a larger authority. This might
be the case, for example, where a newly created authority assesses that it meets the
qualifying condition based on estimated gross income or expenditure in its first year of
existence but it subsequently transpires that it did not. In these circumstances
regulations will make provision about the application of the Act in that year and how
the authority is to be treated thereafter. As the purpose of the provision is technical only,
we consider that the negative resolution procedure is appropriate.
20.
Clause 6(5) enables the Secretary of State by regulations to amend the definition
of smaller authority. This might be used, for example, to change the gross income or
expenditure threshold in line with inflation or to add in additional conditions. As this
would involve textual amendments to the primary legislation and may bring more
authorities into, or exclude them from, the smaller authority regime, we consider that
the affirmative resolution procedure is most appropriate.
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PART 3 – APPOINTMENT ETC OF AUDITORS
Clauses 7(4), 9, 10(8),12(2) to (5), 13(3) to (7), 14(2) to (6), 16 and Schedules 3 and 4
Powers conferred on: Secretary of State
Powers exercised by: regulations and direction (as set out below)
Procedure: affirmative and negative (as set out below)
Clause 7
21.
Clause 7 requires a relevant authority to appoint an auditor to audit their
accounts. They must do so by 31 December in the preceding financial year and whilst
they may appoint an auditor for more than one year, they must make a further
appointment at least once every five years (subsection (2)). Clause 7(4) enables the
Secretary of State, by regulations subject to the affirmative resolution procedure, to
amend subsection (2) so as to alter the period after which a further auditor appointment
is required. This provision is included so that the Secretary of State may, if necessary,
reflect any changes that are made regarding rotation of statutory (company) auditors.
These are matters which have been of interest in recent years to both the UK and
European Union authorities. As such a change would involve textual amendments to
the primary legislation we consider that the affirmative resolution procedure is most
appropriate.
22.
Paragraphs 1 to 3 of Schedule 3 make further provision about the appointment of
auditors to specified authorities. Paragraph 4 enables the Secretary of State to make
regulations about such provision for authorities not covered by paragraphs 1 to 3. This
is so that specific provision can be made for how the appointment function is to be
exercised by specific bodies and so that these provisions can be applied flexibly to the
different governance arrangements that exist amongst relevant authorities included
currently, and to make any necessary modifications to those that may be added in the
future. As its purpose is administrative and procedural only we consider that the
negative resolution procedure is appropriate.
Clause 9 and Schedule 4
23.
Clause 9 requires each relevant authority to have an auditor panel. Schedule 4
makes further provision about such panels. Paragraph 2 of that Schedule makes
provision about auditor panels for authorities other than health service bodies. It
provides that the auditor panel must consist of a majority of independent members.
Sub-paragraphs (2) to (8) set out what is meant by "independent" for this purpose, and
sub-paragraph (9) enables the Secretary of State by regulations to amend paragraph 2,
so as to make provision about the members of an auditor panel who are or are not
independent for this purpose. This power is necessary to enable provisions around
independence to be reviewed and modified quickly to ensure that they are working
correctly and strike the right balance. Different provision may also need to be made to
reflect the different governance arrangements of different authorities (this provision
taken together with clause 40(2)(a)). Regulations are subject to the affirmative
resolution procedure which we think provides the appropriate level of Parliamentary
scrutiny in these circumstances.
24.
Paragraph 3 of Schedule 4 makes provision about auditor panels for health
service bodies. This provision enables the Secretary of State to make regulations,
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subject to the negative resolution procedure, about the independence requirements of
members of a health service body’s auditor panel, the chair of such a panel and the
meaning of “independent” for the purposes of that paragraph. The subject matter of the
regulations to be made under this section will be technical in nature and we consider
that the negative resolution procedure is appropriate for these delegated powers.
Paragraph 4 of Schedule 4 enables the Secretary of State by regulations, subject to the
negative resolution procedure, to make provision about the constitution of an auditor
panel which may include the matters mentioned in paragraph 2(1). The regulations may
provide for any of the matters listed in paragraph 4(2) to be determined for a relevant
authorities auditor panel by the authority – we consider that this further sub-delegation
to the relevant authority is appropriate for these procedural and administrative
measures, which cannot affect the overarching duty in Schedule 4 to appoint an
independent panel. We also consider that the negative resolution procedure is
appropriate for these delegated powers.
25.
Paragraph 5 of Schedule 4 enables the Secretary of State by regulations to
amend or otherwise modify any enactment which relates to local authorities or
committees or joint committees (or members of such bodies) in its application to auditor
panels or their members or to apply such provisions to auditor panels or their members.
An auditor panel, at least when acting as such, will not be a committee of a local
authority, and therefore, would not be subject to certain powers or restrictions which
apply to local authority committees and which would enable a panel to fulfil its
functions. This might include, for example, section 104 of the Local Government Act
1972 which provides that a person who is disqualified from being a councillor is also
disqualified from being a committee member. Conversely we might need to limit the
application of certain provisions to ensure that they apply in an appropriate fashion.
The power to make regulations under paragraph 5(1)(a) (amending or modifying a local
authority enactment) is subject to the affirmative resolution procedure; but regulations
under paragraph 5(1)(b) (applying a local authority provision which would not
otherwise apply) are subject to the negative resolution procedure. This approach is in
line with similar powers in relation to police and crime commissioners contained in the
Police and Social Responsibility Act 2011 (see sub-paragraph (1)(a) and (b) of
paragraph 36 (application of other legislation) of Schedule 6 to that Act and section
154(2)(a) (orders and regulations)).
26.
Paragraph 8 defines “connected entity” for the purposes of the Bill. It is used
for the purposes of a number of provisions (see clause 21 (local auditor right to
documents and information), clause 24 (inspection of statement of accounts) and
Schedule 7 (reports and recommendations). In Schedule 4, being an officer or
employee of a connected entity means that that person is not treated as independent. The
definition of connected entity is subject to the power of the Secretary of State to amend
it by regulations subject to the affirmative resolution procedure. The purpose of the
power would be to update the definition in the light of experience to ensure that proper
account continued to be taken of bodies connected with relevant authorities, or to
amend it to reflect changes in accounting practices.
Clause 10
27.
Clause 10 makes provision about the functions of the auditor panel of a relevant
authority. In particular, an authority’s panel advise the authority on the maintenance of
an independent relationship with its auditor, the selection and appointment of an auditor
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and, if asked, any proposal by the authority to enter into a liability limitation agreement
(see below). Subsection (8) enables the Secretary of State to make regulations to
provide more details about an auditor panel’s functions, confer or impose additional
functions in relation to the audit of an authority’s accounts, and confer power on a
relevant authority to confer or impose such additional functions. The purpose of these
powers is to provide a mechanism for giving further detail of an auditor panel’s
functions, to allow flexibility, in light of the experience of how they operate or to add
additional functions to ensure their effectiveness. For example this might involve
setting out how the panel should fulfil its function of overseeing the maintenance of an
independent relationship between the auditor and the relevant authority, or clarifying
the scope of advice to the relevant authority on the selection and appointment of its
auditor. We consider that the negative resolution procedure is appropriate for these
administrative matters.
Clauses 12 and 13
28.
Clause 12 deals with the situation where a relevant authority (other than a
clinical commissioning group) fails to appoint an auditor in accordance with Part 3 of
the Bill. Clause 13 makes similar provision where there has been a failure by a clinical
commissioning group. If it appears to the Secretary of State that there has been such a
failure, the Secretary of State may direct the authority or group to appoint a named
auditor, or may appoint an auditor on behalf of the authority or group. The clauses
contain procedural safeguards on the exercise of the power (i.e. giving the authority etc
an opportunity to make representations first except where there is a pressing need to
make the appointment). These powers are necessary to ensure that every relevant
authority and clinical commissioning group complies with Part 3 and has an auditor;
they may need to be exercised at short notice. We do not consider that any form of
Parliamentary control is necessary for this reserve power.
Clause 14
29.
Clause 14 makes provision for liability limitation agreements, that is to say,
agreements where auditors purport to limit their liability in matters such as negligence
and breach of trust. This provision is based on similar provisions contained in sections
532 to 538 of the Companies Act 2006 (“the Companies Act”).
30.
Subsection (2) requires liability limitation agreements to comply with
regulations made by the Secretary of State. Those regulations are subject to the
negative resolution procedure. Subsections (3) to (5) make further provision about the
matters that may be included in the regulations. Section 535 of the Companies Act
contains a similar regulation making power to that in subsection (2) (and in particular
the matters referred in subsection (4)). Subsection (6) also gives the Secretary of State
power, by regulations, to make provision requiring a relevant authority that has entered
into a liability limitation agreement to disclose such information about the agreement as
may be specified in the regulations (and in the manner so specified). This is similar to
section 538 of the Companies Act. It is anticipated that the regulation making powers
in subsection (2) will be used to make similar provision, as appropriate to local auditors,
as is made in sections 534, 535 and 538 of the Companies Act. As the regulations under
the Companies Act are subject to the negative resolution procedure, and as the
regulations under this Bill will be largely administrative and technical in nature, we
consider the negative resolution procedure to be most appropriate.
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Clause 16
31.
This clause enables the Secretary of State, by regulations, to make provision
about the resignation of a local auditor or the local auditor’s removal from office. These
provisions are necessary to ensure the independence of the auditor, and that proper
procedures are followed in respect of both resignations and removals. Regulations under
this clause may make provision for the Secretary of State to appoint, or direct the
appointment of, a replacement auditor, including for a limited time or for limited
purposes. This is to enable appropriate provision to be made, if necessary, to address
any gaps between the resignation or removal of an auditor and the appointment of a
replacement by the relevant authority. With regards to health service bodies, the
regulations may provide for some or all of the steps in connection with the removal of
an auditor to be taken by the Secretary of State. As detailed administrative and
procedural provisions will be required we consider that is appropriate that these matters
concerning the resignation and removal of local auditors are set out in regulations rather
than on the face of the Bill. It is anticipated that the provision made will, adapted as
appropriate, be similar to that which applies to statutory auditors and which is contained
in chapter 4 of Part 16 of the Companies Act. As the regulations will contain largely
administrative and procedural matters we consider that the negative resolution
procedure is most appropriate.
PART 4 – ELIGIBILITY AND REGULATION OF AUDITORS
Clause 17 and Schedule 5
Powers conferred on: Secretary of State
Powers exercised by: regulations and direction
Procedure: affirmative and negative (as set out below)
Clause 17
32.
Clause 17 introduces Schedule 5 which makes provision for eligibility and
regulation of local auditors. It operates by applying, with modifications, Part 42 of, and
Schedule 10 to, the Companies Act 2006. In practice, this will mean that to be eligible
for appointment as a local auditor, a person will need to be a member of a recognised
supervisory body. In order to be recognised, a supervisory body must establish and
maintain a regulatory system which ensures that its members are qualified, and are fit
and proper persons, to carry out local audits. Subsection (2) enables the Secretary of
State to amend Schedule 5 by regulations, subject to the affirmative resolution
procedure. This power is necessary to ensure that the Secretary of State can ensure any
amendments or modifications to Part 42 of the Companies Act properly reflect the
statutory framework for local audit. It may be, for example, that modifications are
required to changes made to Part 42 which would otherwise apply, or that further
modification is required to existing provisions. This would be a reserve power to be
exercised if, for whatever reason, the modifications set out in Schedule 5 were not
amended at the same time as amendments to Part 42. As such regulations may entail
changes to the primary legislation, we consider that the affirmative resolution procedure
is appropriate.
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Schedule 5
33.
Schedule 5 sets out the modifications to be made to Part 42 and Schedule 10 in
their application to local auditors – and disapplies certain provisions (see paragraphs 3
and 27 of Schedule 5). The substantive modifications to delegated powers are set out
below. Part 42 and Schedule 10 also include some existing delegated powers (listed
below). We have not separately described them as they will apply, and be subject to the
same Parliamentary process, as currently applies under Part 42. We think it is
appropriate to extend Part 42 to local auditors and consequently we think that it is
appropriate to extend the delegated powers in this established Act in the same way. The
existing delegated powers are as follows:
(a)
section 1240 – power to make regulations requiring auditors etc to
keep and make available to the public certain information;
(b)
section 1251 – power to make regulations prescribing fees for a
recognition order;
(c)
section 1254 – direction to comply with international obligations;
(d)
section 1261(3) – power to make regulations to modify Part 42 for
purposes of application in relation to any firm etc;
(e)
paragraphs 1 to 3 and 5 of Schedule 10 – recognition orders;
34.
Section 1214 of the Companies Act, as substituted by paragraph 5 of Schedule 5,
requires auditors, in relation to an authority, to be independent within the meaning of
that section and prohibits their appointment if they are not. Subsections (2) to (4) set
out certain relationships (such as if the person is a member or member of staff of the
relevant authority) which preclude a person from becoming the local auditor of that
authority. Subsection (5) enables the Secretary of State to prescribe in regulations,
subject to the negative resolution procedure, connections with a relevant authority (or an
entity connected with it) that will prohibit a person’s appointment as that authority’s
local auditor. This power is essentially the same as that contained in the existing section
1214, which enables further connections to be prescribed. We consider that this
provision is necessary so the Secretary of State (or the appropriate regulatory authority
– see below) can respond to concerns about relationships between auditors and
authorities that are not otherwise prohibited. As the power in the Companies Act is
subject to the negative resolution resolution, and given that this largely concerns
administrative and technical matters we consider that the negative resolution procedure
is most appropriate. Powers under subsection (4) of existing section 1214 have been
delegated to the Financial Reporting Council and it is anticipated that this will also be
the case in respect of the powers under subsection (4) of substituted section 1214 (see
the Statutory Auditors (Amendment of Companies Act 2006 and Delegation of
Functions etc) Order 2012, [S.I. 2012/1741], article 7).
35.
Section 1219 of the Companies Act, as substituted by paragraph 8 of Schedule 5,
provides that a person holds an appropriate qualification for the purposes of the Bill if
they hold an appropriate qualification for the purposes of Chapter 2 of Part 42 of the
Companies Act, or if they hold an appropriate qualification in accordance with
regulations made by the Secretary of State, under this modified section 1219. The
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regulations may only provide for a qualification to be an appropriate qualification if it is
a professional qualification in accountancy, is obtained from a body established in the
UK, and meets specified requirements. Subsection (4) enables the regulations to
provide for the Secretary of State to make a “recognition order” recognising a
qualification offered by a qualifying body, make provision about an application for, and
directions and other requirement in respect of, such an order. Subsection (5) specifies
the requirements that may be specified in the regulations for a qualification to be an
appropriate qualification and subsection (6) enables the regulations to confer power on
the Secretary of State to give or withhold recognition or approval. Subsection (7) is a
savings provision in respect of qualifications to which section 3(5)(c) of the Audit
Commission Act 1998 applied (immediately before commencement of Schedule 5).
The delegated powers in substituted section 1219 are subject to the negative resolution
procedure. We consider that these powers are appropriate, given the various safeguards
imposed by the section, so as to provide for the detail of what is an appropriate
qualification and to provide flexibility to ensure that the system for recognising
qualifications operates effectively. We expect to exercise these powers so as to make
provision similar to that in Schedule 11 to the Companies Act (recognised professional
qualifications) Given the administrative nature of these powers we consider that the
negative resolution procedure is appropriate.
36.
Existing section 1239 of the Companies Act requires the Secretary of State to
make regulations requiring the keeping of a register of certain details relating to the
eligibility of auditors. Paragraph 13(4) extends the scope of the regulation making
power so that they may provide that any register required to be kept under the
substituted provisions can be kept with the existing register. Paragraph 13(5) substitutes
a new subsection (5), but makes similar provision to the existing subsection (5),
allowing the Secretary of State to impose such obligations as the Secretary of State
thinks fit on recognised supervisory bodies and other specified persons. These powers
are based on the existing section 1239 of the Companies Act 2006, and we consider that
the negative resolution procedure is appropriate, in line with that section.
37.
Section 1248 of the Companies Act, as substituted by paragraph 15 of Schedule
5, enables the Secretary of State to require a second audit (or review the first audit), if
the first auditor was not an appropriate person for any part of the audit. The power,
which is intended to be a reserve power, is exercisable by direction and not subject to
any Parliamentary procedure and is, on the application of the Secretary of State,
enforceable by injunction (see section 1249(3) as substituted by paragraph 16 of
Schedule 5). This is in line with the similar power in existing section 1248 of the
Companies Act.
38.
Section 1252 of the Companies Act enables the Secretary of State, by order, to
delegate any of his or her functions under Part 42 of the Act. This will also apply to
functions relating to the audit of relevant authorities. A delegation order has the effect
of transferring to the body designated by it, all functions of the Secretary of State under
this Part, subject to such exceptions and reservations as may be specified in the order,
and except his or her functions in relation to the body itself. Section 1252 sets out a
number of matters that must be reserved to the Secretary of State (or subject to
concurrent decision making). Where a delegation order is made, Schedule 13 to the
Companies Act has effect with respect to the status of the body designated by the order
in exercising functions of the Secretary of State under this Part, the constitution and
proceedings of the body where it is established by the order, the exercise by the body of
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certain functions transferred to it, and other supplementary matters. The power to make
an order is subject to the affirmative resolution procedure if its effect is to transfer or
resume any functions, otherwise it is subject to the negative resolution procedure.
Paragraph 20 of Schedule 5 modifies section 1252 to limit the application of any
designation under the Freedom of Information Act 2000, to the extent that the body to
whom functions are delegated is exercising functions transferred or conferred by the
delegation order – excluding any information held by the body which does not relate to
the exercise of those functions. Section 1253 makes provision for the case where the
Secretary of State intends to make a delegation order which designates an existing body.
39.
Given that the precedent already exists for powers of this nature, we consider
that the extension of the scope of Part 42 to local audits (see paragraph 1 of Schedule 5)
is appropriate. The Secretary of State’s intention is that certain functions would be
delegated to the Financial Reporting Council (as under the existing section 1252). We
also consider that the requirement for the affirmative resolution procedure to apply in
certain circumstances provides an appropriate level of Parliamentary scrutiny.
40.
Schedule 10 to the Companies Act makes provision for recognised supervisory
bodies. Paragraph 13 provides for the monitoring of audits and includes requirements
relating to the conduct of a major local audit. Paragraph 13(10) provides that “major
local audit” is a local audit if the authority is specified in, or of a description specified
in, regulations made, or a direction given by, the Secretary of State. Regulations may
specify descriptions by reference to income or expenditure and are subject to the
negative resolution procedure. A direction may only be given if the Secretary of State
thinks that there is a significant public interest in the authority, or in authorities of the
description, specified in the direction. Our current intention is that the power to direct
would be delegated to the Financial Reporting Council. This would allow them, on an
annual basis, to consider whether any bodies not specified in the regulations should be
subject to similar additional monitoring.
PART 5 – CONDUCT OF LOCAL AUDIT
Clauses 18, 23 and 31 and Schedules 6 and 7
Powers conferred on: Comptroller and Auditor General, Secretary of State
Powers exercised by: code of practice, regulations
Procedure: negative procedure
Clause 18 and Schedule 6
41.
Schedule 6 imposes a duty on the Comptroller and Auditor General to prepare
one or more codes of audit practice prescribing the way in which local auditors are to
carry out their functions under the Bill. The code must embody best professional
practice with respect to the standards, procedures and techniques to be adopted.
Schedule 6 includes various procedural safeguards and includes a requirement for it to
be laid in draft before Parliament. If either House, within a 40 day period, resolves not
to adopt the code it cannot be published. A similar procedure applies to any alteration
or replacement code. The duty imposed by paragraph 1 includes a duty to prepare one
or more codes of audit practice relating to audit of NHS foundation trusts (paragraph
10), which are not otherwise relevant authorities for the purposes of the Bill. These
duties are similar to the existing duty imposed on the Audit Commission by section 4 of
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the 1998 Act, albeit that section 4 imposes an affirmative resolution procedure (and
requires re-approval by Parliament at least every 5 years).
42.
We consider that it is appropriate to provide the detail of how an audit should be
carried out through such a code, rather than on the face of the Bill. It allows for
flexibility, and will enable the Comptroller and Auditor General to ensure that the code
embodies best professional practice and can be revised when necessary. Although the
1998 Act provided that the code should be subject to approval of Parliament, the code
has not been controversial. Consequently we consider that while it is appropriate to
retain a form of Parliamentary scrutiny, the negative resolution procedure provides an
appropriate level of scrutiny.
Clause 23 and Schedule 7
43.
Paragraph 5 of Schedule 7 provides for the consideration of a public interest
report or recommendation made by an authority’s local auditor. Paragraph 5(9) gives
the Secretary of State power, by regulations, to apply paragraph 5 with modifications in
relation to a relevant authority specified, or of a description specified, in the regulations.
The purpose of this is to provide flexibility, so that the detailed procedural steps set out
in Schedule 7 can be modified for particular bodies, to take account of their own
particular circumstances. The default position is for relevant authorities to consider the
public interest report or recommendation at a meeting held within one month of the
report or recommendation being sent to the authority (reports or recommendations can
be made at any time during or at the end of an audit). The regulations are necessary to
be able to modify arrangements for some relevant authorities, for example where an
authority is not required to have public meetings, in which case we would specify that
the body would need to consider it within one month, or as soon as practicable.
44.
Paragraph 5(10) gives the Secretary of State power, by regulation, to provide for
any of the provisions of the Public Bodies (Admission to Meetings) Act 1960, Part 5A
of, or Schedule 12 to, the Local Government Act 1972, if they do not otherwise apply,
to apply to a meeting of the local authority under paragraph 3. The purpose of this
power is to ensure that the public has a right of access to a meeting of a relevant
authority to consider a public interest report made by a local auditor, or to consider a
recommendation made by the auditor. It allows the Secretary of State to take into
account the particular characteristics of the authority and apply those provisions on
public access accordingly. Regulations under either sub-paragraph are subject to the
negative resolution procedure. Although the regulations change the effect of the
primary legislation, we think it is appropriate to have the negative resolution procedure,
given that the purpose of the modifications is simply to ensure that the provisions in
paragraph 5 work for all bodies, without undermining the principle of the legislation,
and given that these relate to procedural matters.
Clause 31
45.
Clause 31(1) enables the Secretary of State to make regulations about the
accounts, audit and corporate governance of relevant authorities, other than health
service bodies. It is based on, and replaces, the current power in section 27 of the 1998
Act. The provision allows regulations to make detailed provision about the form and
contents of accounting records, statements of accounts, publication, the financial
management of relevant authorities and their maintenance of systems of internal
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control. Before making regulations, the Secretary of State is required to consult the
Comptroller and Auditor General, representatives of relevant authorities and the
recognised supervisory bodies. We consider that the negative resolution procedure is
appropriate for such technical regulations, and this is consistent with the existing
position whereby regulations under section 27 of the 1998 Act are subject to the
negative resolution procedure
PART 6 – DATA SHARING
Clause 32 and Schedule 9
Power conferred on: the Secretary of State or the Minister for the Cabinet Office
Power exercised by: regulations, code of practice
Procedure: affirmative, negative and none (see below)
46.
Schedule 9 provides for the Secretary of State or the Minister for the Cabinet
Office (described as a “relevant minister”) to conduct data matching exercises for the
purpose of assisting in the prevention and detection of fraud. These powers replicate
existing provisions contained in Part 4 of the 1998 Act and powers in substantially the
same form conferred on the relevant audit authorities in the devolved administrations.
They currently form the basis of the National Fraud Initiative which operates
throughout the United Kingdom (by the relevant audit authorities exercising the powers
described). The National Fraud Initiative’s data matching exercises have been an
important tool in assisting with the safeguarding of public funds from those who seek to
make fraudulent claims, having identified over £1 billion of fraud since its inception in
1996. Paragraph 6 requires the relevant minister to prescribe by regulations a scale or
scales of fees in respect of data sharing exercises and the mandatory provision of data
by a relevant authority, a best value authority which is not a relevant authority or an
NHS foundation trust. The fees are intended to cover the development and cost of
running the exercises, distributing the results back to the participants and providing
support and guidance in interpreting the results to best effect. Before prescribing the
scale of fees, the relevant minister must consult such authorities and their
representatives, as well as any other persons the relevant minister thinks appropriate.
The power to prescribe a scale of fees is subject to the negative resolution procedure
which we think provides an appropriate level of Parliamentary scrutiny.
47.
Paragraph 7 of Schedule 9 imposes a duty on the relevant minister to prepare
and keep under review a code of practice with respect to data matching exercises. The
relevant minister must consult relevant authorities, best value authorities that are not
otherwise relevant authorities, their representatives, the Information Commissioner and
such other persons as the relevant minister thinks appropriate. The code, and any
alterations to it, must be laid before Parliament and published. No further Parliamentary
procedure is prescribed, which is consistent with the existing provisions contained in the
1998 Act, and which we think remains appropriate.
48.
Paragraph 8 of Schedule 9 enables the relevant minister, by regulations, to
amend Schedule 9 to add a purpose for which a data matching exercise may be carried
out (relating to the prevention and detection of crime, other than fraud, to assist in the
apprehension and prosecution of offenders and to assist in the recovery of debt owing to
public bodies). These powers are intended to ensure that the initiative is able to
continue to assist in the identification and prevention of fraud by providing the scope
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for it to further develop its capabilities as the fraud landscape evolves. The regulations
also allow the relevant minister to add a public body to the list of persons who may be
subject to a mandatory data matching exercise (with modifications) or to remove a
person. There is a duty to consult before making regulations (including where the
relevant minister proposes to add or remove a body or person from the scope of the data
matching powers, that body or person). We consider that the affirmative resolution
procedure is most appropriate for this power.
PART 7 – MISCELLANEOUS AND SUPPLEMENTARY
Clauses 33, 37, 38, 42, 43, 44 and 46 and Schedules 10 and 13
Powers conferred on: Secretary of State
Powers exercised by: direction, code of practice, regulations and order
Procedure: affirmative, negative and none (as set out below)
Clause 33 and Schedule 10
49.
These provisions substitute a new section 10 into the Local Government Act
1999. Section 10 gives the Secretary of State power to appoint persons to carry out an
inspection of compliance by local authorities with the best value duties imposed on
them by that Act. Subsection (4) allows the Secretary of State to direct how to carry out
the inspection or the matters that should be examined. The power of direction is not
subject to Parliamentary procedure. It is similar to the existing power of the Secretary
of State under the 1999 Act.
Clause 37
50.
The Code of Recommended Practice for Local Authorities on Data
Transparency is issued by the Secretary of State in exercise of his or her powers under
section 2 of the Local Government, Planning and Land Act 1980. Section 3 of that Act
gives the Secretary of State power to make regulations requiring authorities, to whom
section 2 applies, to publish any description of information specified in a code issued
under that section, if in his or her opinion it is necessary to make such regulations in
order to ensure that authorities publish information of that description. They are subject
to the negative resolution procedure. Section 3 also contains an order making power to
add to the categories of information that can be included in the regulations – that is
subject to affirmative resolution procedure. Section 4 gives the Secretary of State a
power to direct certain authorities not covered by the code to publish information.
51.
Clause 37 extends the application of those sections to authorities they do not
already cover and which are 'smaller authorities' under the Bill. We consider that this is
an appropriate extension of the existing provisions and their procedural requirements –
which will help ensure full and open public transparency. As indicated above, the
Government’s current intentions are that smaller authorities, with a turnover of less than
£25k per annum, will be exempt from the requirements of routine external audit
(although an auditor will still be appointed to enable local electors’ concerns etc to be
raised and investigated). Requiring such authorities, so far as they are not presently
covered, to publish financial and governance information under section 2, will provide
local residents with greater transparency, and will enable any questions or objections
relating to the authority’s accounts to be raised with the auditor, who can then
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investigate them as appropriate.
Clause 38
52.
Section 4 of the Local Government Act 1986 provides that the Secretary of State
may issue codes of recommended practice on local authority publicity. That section also
provides that local authorities must have regard to any such code that is applicable to
them when taking decisions on publicity. The existing code includes specific guidance
on the frequency, content and appearance of local authority newspapers to protect local
commercial newspapers from unfair competition from council newspapers. A code
may not be issued unless a draft of it has been laid before and approved by a resolution
of each House of Parliament – any revisions are subject to the negative resolution
procedure.
53.
Clause 38 gives the Secretary of State a power to direct an authority to comply
with any provision of such a code. A direction may be given to one or more specified
authorities in England, all authorities in England of a specified description or all
authorities in England. A direction may be given whether or not the Secretary of State
thinks that the authority is complying with the code, and there are procedural steps that
must be taken before a direction is given (including giving notice to affected
authorities). While there has been widespread compliance with the existing code, a
small number of local authorities are failing to comply, by either publishing council
newspapers more frequently than the code permits, or by issuing publicity, funded by
the taxpayer, that carries a political message that can be critical of the Government. The
code has been debated and agreed by both Houses of Parliament and we consider it
unacceptable, without good reason, that some local authorities are not abiding by its
recommendations. We also consider it is unacceptable that there continues in certain
areas to be unfair competition against local commercial newspapers by council,
taxpayer funded, publications, not least given the importance of an independent local
press to sustaining effective local democracy. The power to issue a direction is not
subject to any Parliamentary process, but as noted above, the Secretary of State is
required to undertake certain procedural steps before doing so, during which time
affected authorities may make representations to him or her about the proposals.
Clause 42 and Schedule 12
54.
Schedule 7 to the National Health Service Act 2006 makes provision for the
constitution of public benefit corporations. Paragraph 24 requires a public benefit
corporation to keep proper accounts and proper records in relation to the accounts.
Paragraph 24(1A) provides that the Secretary of State may, with the approval of the
Treasury, give directions to the corporation as to the content and form of its accounts.
Sub-paragraph (5) provides that in auditing the accounts the auditor must comply with
any directions given by the Secretary of State as to the standards, procedures and
techniques to be adopted.
55.
Paragraph 55 of Schedule 12 amends paragraph 24 of Schedule 7 to the 2006
Act by adding three new sub-paragraphs. Sub-paragraph (4A) provides that in auditing
the accounts, the auditor must comply with the code of audit practice applicable to the
accounts, that is for the time being in force (see clause 18). Sub-paragraph (4B)
provides that the auditor of the accounts must comply with any directions given by the
Secretary of State as to arrangements, to monitor the standard of the auditor’s work in
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the performance of the audit. Sub-paragraph (4C) provides that the arrangements
mentioned in sub-paragraph (4B) may include arrangements made by the regulator or
by any other person the Secretary of State considers appropriate.
56.
The purpose of the power is to enable the Secretary of State to set a process of
monitoring and inspection of Foundation trusts audits, and a process to delegate this to
Monitor or another body as the Secretary of State considers appropriate. This is a
direction making power which puts on a statutory footing Monitor's requirements for
inspection and monitoring of Foundation trust audits set out in the Audit Code for
Foundation trusts. The original direction making power which Monitor relied on to
issue the code set out in paragraph 24(5) of Schedule 7 to the NHS Act 2006 was not
subject to any Parliamentary procedure. We do not consider that any form of
Parliamentary control is necessary for this power.
Clause 43
57.
Clause 43 enables the Secretary of State to make consequential, incidental or
supplementary provision by regulations. If the regulations amend or repeal an Act, they
are subject to the affirmative resolution procedure, otherwise they are subject to the
negative resolution procedure. This power is necessary, in particular, to ensure that
consequential amendments arising from the abolition of the Audit Commission, may be
made.
Clause 44 and Schedule 13
58.
Clause 44, and paragraph 2 of Schedule 13, make transitory and saving
provisions relating to the abolition of NHS trusts. In particular, paragraph 2(3) gives
the Secretary of State power to amend the modifications of the Act, made by Schedule
13, and to further modify the Act. The use of these powers is wholly dependent on the
commencement of the provisions which repeal NHS trusts legislation, together with
related savings provisions set out in sections 179(1) and (3) of the Health and Social
Care Act 2012 (“2012 Act”). The delegated power provides additional flexibilities to
deal with the commencement of the repeal and savings provisions in the 2012 Act, as
they affect NHS trust provisions in this Bill. There is no Parliamentary procedure for
commencement of the repeal and savings and repeal provisions in the 2012 Act. The
powers set out in paragraph 2(3) of Schedule 13 are technical in nature and we consider
that the negative resolution procedure is appropriate for this delegated power
Clause 46
59.
Clause 46 provides for commencement of the Bill by order. It is not subject to
any Parliamentary procedure. As is usually the case a commencement order may make
transitional, transitory or saving provisions. That may in particular enable a function or
functions of the Audit Commission under the 1998 Act, or sections 139A to 139C of the
Social Security Administration Act 1992, to be exercised by a person or body for the
period specified in, or determined by, the order. The Secretary of State anticipates in
particular that functions of the Audit Commission will be conferred on another person
or body for a period following the Audit Commission’s abolition in 2015, until the
expiry of existing contracts that the Audit Commission has with its (private sector)
suppliers of audit services.
Department for Communities and Local Government
9 May 2013
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