Local Audit and Accountability Bill
These notes re fer to the Local Audit and Accountability Bill [HL] [Bill 101 ] as brought from the House of Lords on 31 July 2013.
1. These Explanatory Notes relate to the Local Audit and Accountability Bill as brought from the House of Lords on 24th July, 2013. They have been provided by the Department for Communities and Local Government and the Department of Health in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
summary and background
3. The effect of the Local Audit and Accountability Bill would be to abolish the Audit Commission and to establish new arrangements for the audit and accountability of local public bodies (or ‘relevant authorities’ as set out in Schedule 2 of the Bill) in England. This includes certain health service bodies that were previously audited by auditors appointed by the Audit Commission. In addition to these health service bodies, the Bill makes provision for some consequential changes to the audit arrangements for NHS Foundation Trusts.
4. The Bill also amends the legislative framework for council tax referendums to provide that increases set by levying bodies are taken into account when local authorities determine whether they have set an excessive amount of council tax each year. It will also provide for measures which can ensure local authority compliance with the Code of Recommended Practice on Local Authority Publicity.
5. On 13th August 2010, the Government announced its intention to abolish the Audit Commission and put in place new decentralised arrangements for the audit of local public bodies.
6. The Government’s proposals were first set out and consulted on in March 2011. The Government published its response to the consultation in January 2012 and published draft legislation for further consultation and pre-legislative scrutiny in July 2012. An ad-hoc Parliamentary Committee subjected the draft Bill to pre-legislative scrutiny in the Autumn of 2012 and published their recommendations in January 2013. The Government published its response to those recommendations on 25th April 2013.
7. Local authorities are required, when producing publicity of any kind, to have regard to the Code of Recommended Practice on Local Authority Publicity (the Publicity Code). The Government revised the Publicity Code in March 2011 to introduce recommendations on the frequency, content and appearance of local authority newspapers.
8. The Localism Act 2011 ensured that excessive council tax increases are put to the local electorate for approval in a referendum. At present, levies are excluded from the billing and precepting authorities’ calculations of whether their council tax increase is excessive and requires a referendum to be held. A precepting authority is one that does not collect its own council tax, but instead has the power to instruct another local authority (the billing authority ) to collect it on its behalf. The Local Audit and Accountability Bill makes an amendment to Chapter 4ZA of Part 1 of the Local Government Finance Act 1992 so that the key referendum principle takes account of levy increases in the future.
OVERVIEW OF THE STRUCTURE OF THE BILL
9. The Bill consists of seven Parts and 13 Schedules. The main provisions are as follows:
· The repeal of legislation under which the Audit Commission operates (the Audit Commission Act 1998) and provision to transfer assets, liabilities and continuing functions to other bodies.
· A requirement for relevant authorities other than health service bodies in England to keep accounting records and to prepare an annual statement of accounts, which must be audited. The equivalent provisions for health service bodies already exist within the National Health Service Act 2006 and these continue to apply.
· A requirement on relevant authorities to appoint an external and independent auditor on the advice of an independent auditor panel and to publish information about the appointment within 28 days of appointment.
· A requirement that an audit of a relevant authority (referred to in the Bill as a "local audit") must include a value for money element (replicating the definition set out in existing legislation).
· The creation of a new regulatory framework for local audit which applies, with modifications, Part 42 of the Companies Act 2006, whereby the Financial Reporting Council and professional accountancy bodies would regulate the provision of local audit services.
· The transfer of responsibility for setting the code of audit practice and supporting guidance to the National Audit Office, and provisions for how the code should be approved by Parliament.
· The transfer of the Audit Commission’s data matching powers for the purposes of assisting in the prevention and detection of fraud to the Secretary of State or the Minister for the Cabinet Office. The intention is to transfer the power to the Minister to the Cabinet Office.
· A power for the Secretary of State to commission an inspection of a best value authority, mirroring current powers in existing legislation.
· Powers for the National Audit Office to undertake examinations of thematic value for money issues relating to groups of relevant authorities (with some exclusions), and to access information held by the latter where the National Audit Office needs it to fulfil its responsibilities. Health service bodies are not included within the provision because they are currently within the remit of the National Audit Office for value for money considerations and these provisions continue.
· The Bill also extends existing powers for the Secretary of State to issue codes of practice concerning the publication of information by certain authorities, so that such codes may apply to relevant authorities classified as ‘smaller authorities’ for the purposes of the Bill, and to require those authorities to publish that information.
· Amending the Local Government Act 1986 to ensure that local authorities comply with some or all of a code of recommended practice on local authority publicity.
· Amending the council tax referendums provisions in Chapter 4ZA of Part 1 of the Local Government Finance Act 1992 so that levies are included in a local 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.
territorial extent and application
10. The Bill extends to England and Wales. It applies to relevant authorities in England, and to relevant authorities that are partly in England and partly in Wales (for now, the only relevant authorities which are in both England and Wales are a small number of internal drainage boards).
11. The National Assembly for Wales has legislative competence in relation to internal drainage boards in Wales and those parts of the areas of cross-border boards which are in Wales. On the basis of the constitutional convention that Westminster will not normally legislate with regard to devolved matters in Wales without the consent of the Assembly, we will be seeking a Legislative Consent Motion from the Assembly in relation to the Bill as it applies to cross-border internal drainage boards.
12. As a result of the repeal of the Audit Commission Act 1998, there are some consequential amendments in Schedule 12 to the Bill, some of which extend to Scotland. Because the Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament, if there are amendments relating to such matters which trigger the Convention, the consent of the Scottish Parliament will be sought for them.
13. The Bill does not affect the functions of the devolved administration in Northern Ireland.
PART 1 - ABOLITION OF EXISTING AUDIT REGIME
Clause 1 Abolition of Audit Regime and Schedule 1: Abolition of Audit Commission: supplementary provision
14. Clause 1 repeals the Audit Commission Act 1998 and abolishes the Audit Commission for Local Authorities and the National Health Service in England ("the Audit Commission") .
15. Schedule 1 provides for the Secretary of State to make a scheme to transfer the property, rights and liabilities of the Audit Commission to another body or individual. This includes providing for the Secretary of State to make payments in respect of the Audit Commission Pension Scheme. It also allows for the number of Audit Commission Board members to be reduced to reflect the transitional role of the Commission pending abolition. Upon closure of the Audit Commission, the Secretary of State must prepare a final statement of accounts for the last financial year of the Commission (unless the Audit Commission has already done so) and for any subsequent period up until the abolition of the Commission and send them to the Comptroller and Auditor General to inspect and report on. The Comptroller and Auditor General must then make arrangements to lay the statement of accounts and his or her report before Parliament. The Secretary of State must also prepare a final annual report about the discharge of the Audit Commission’s functions since its last annual report, which must also be laid before Parliament.
16. Schedule 1 also provides for the repeal and revocation of various provisions consequential to the repeal of the Audit Commission Act 1998.
PART 2 – BASIC REQUIREMENTS AND CONCEPTS
Clause 2 and Schedule 2: Relevant authorities
17. Clause 2 defines a "relevant authority" as a body listed in Schedule 2, which in turn lists all the persons and bodies in England to which the provisions apply. The provisions also apply to port health authorities and internal drainage boards that are partly in England and partly in Wales. The Secretary of State may amend the list of bodies in Schedule 2 and, under clause 2, make consequential amendments to any of the provisions in the Bill, or make different provision for a body added to the Schedule.
18. Schedule 13 (discussed below) provides that NHS trusts and trustees of NHS trusts are relevant authorities for the purposes of the Bill, until those bodies are abolished under the Health and Social Care Act 2012.
Clause 3 : General requirements for accounts
19. Clause 3 sets out the general duties of relevant authorities, other than health service bodies as defined in subsection (9), to keep adequate accounting records and to prepare annual statements of accounts for years ending 31 March. Equivalent provision for health service bodies is made under the National Health Service Act 2006 and these provisions are not amended by this Bill.
20. For bodies other than health service bodies these duties follow the pattern of duties laid on companies and charities by the Companies Act 2006 and the Charities Act 2011. They replace the existing statutory duty on local public bodies to make up their accounts each year to 31 March, a duty which reflects the practice in earlier times of writing the year end accounting statements into the books in which the in-year records were kept. The new duties draw a distinction between the records maintained during the year and the annual published statements. Subsection (8) indicates that clause 31 gives a power to make regulations on accounting records and statements of accounts (but not in relation to health service bodies). Subsection (5), taken with s ubsections (6) and (7), gives a power to vary the period of the financial year for relevant authorities, but in future this would be done by regulations rather than as now by direction. This power might be used, for example, if an authority was being wound up at a date other than 31 March. This subsection also allows regulations to exclude or modify the application of the clause to specified relevant authorities.
Clause 4 : General requirements for audit
21. Clause 4 imposes the general requirement that the accounts of a relevant authority must be audited in accordance with the Bill by an auditor appointed by the authority, again in accordance with the Bill. Subsections (3) to (6) define "accounts" as the term applies to the various categories of relevant authorities.
Clause 5 : Modification of Act in relation to smaller authorities
22. Clause 5 gives the Secretary of State the power to make provision about the audit of the accounts of smaller authorities (bodies whose gross income and gross expenditure does not exceed £6.5m in a financial year). The regulations may disapply or vary any of the provisions in the Bill in relation to smaller authorities (s ubsection ( 2 )). Regulations may provide for a body specified by the Secretary of State to appoint an auditor on behalf of a smaller authority, set out procedures for specifying, and de-specifying, such a body, and for arrangements in the event of de-specification for the transfer of the body’s rights and liabilities.
23. Regulations may provide for the body specified by the Secretary of State to set fees and to consult relevant authorities’ representative associations before doing so (s ubsection ( 3 )). Regulations may make provision for smaller authorities to either opt-in or to opt-out of the body specified by the Secretary of State and for the procedures required to opt-in or to opt-out (s ubsection ( 4 )( a ) and ( b)). In addition, regulations may make provision to enable smaller authorities to pay into a fund to cover auditors’ costs in certain circumstances (s ubsection (4)(c)). The regulations may also make provision about the eligibility of an auditor of a smaller authority and about the nature of the audit itself (s ubsection ( 5 )). Regulations may provide for specified types of smaller bodies (for example, this power may be used in relation to relevant authorities with a turnover under £25k in a financial year) to be exempt from the requirement for external audit and the circumstances under which such exemption would not apply or would cease to apply, for example, where a small authority is new or its auditor issued a public interest report (as to which, see Schedule 7) in the previous financial year (s ubsection ( 6 )). All smaller bodies will still be required to have an internal audit.
Clause 6: Meaning of "smaller authority"
24. Subsection (1) sets out how the definition of a "smaller authority" should be applied to a body. In order to avoid bodies flipping in and out of being a smaller authority on an annual basis, a body is not classified as a smaller authority if it has exceeded the £6.5m threshold in the year of audit and in the previous two years. If the body hasn’t existed for those three years then either two years or one year is used as appropriate. Subsection (3) allows estimates to be used when determining whether a body falls above or below the £6.5m threshold, as only estimated figures will be available for its gross expenditure and gross income by the 31st December deadline for appointing an auditor. Subsection (4) gives the Secretary of State the power to make regulations to provide for cases where an authority has been treated as a smaller authority for a financial year, but was in fact not a smaller authority for that year. Subsection (5) gives the Secretary of State the power to amend the clause.
PART 3 – APPOINTMENT ETC OF LOCAL AUDITORS
Clause 7 : Appointment of local auditor
25. Clause 7 provides that an auditor must be appointed by the end of 31st December in the year before the financial year which will be covered by the accounts to be audited. The appointment may last for more than one year but a new appointment must be made at least once every five years. The Secretary of State is empowered to alter this period of time by regulations. The auditor must be eligible to audit the relevant authority’s accounts (as to which, see Schedule 5) and must be independent from the body being audited. Subsection ( 6 ) provides for more than one auditor to be appointed to audit the accounts, enabling different auditors to audit different parts of the accounts, to carry out different functions, or to audit some or all parts of the accounts jointly. Subsection ( 8 ) gives effect to Schedule 3, which sets out further provisions around the appointment of local auditors.
Schedule 3, Par agraph 1 : Provisions applying to certain local authorities
26. This paragraph sets out arrangements for the appointment of auditors by certain types of local authorities. Subsection (1) stipulates that in local authorities operating executive arrangements (i.e. Leader and Cabinet or Mayor and Cabinet) the full council, not the executive, must appoint the auditor. Subsection (2) provides that for local authorities, as defined by section 101 of the Local Government Act 1972, the provisions in that section do not apply and they must not delegate the function of appointing an auditor to a committee or subcommittee, or an officer of the authority, or to any other authority. Subsection (3) states that the Mayor of London and London Assembly must jointly appoint the auditor for the Greater London Authority.
S chedule 3, Par agraph 4 : Provisions applying to other authorities
27. This paragraph enables regulations to be made that address the appointment of an auditor to audit accounts of a relevant authority that is not an authority already covered by paragraphs 1, 2 or 3 of this Schedule. The relevant authorities set out in paragraphs 1, 2 and 3 are local authorities operating executive arrangements, those within the meaning of local authority in section 101 of the Local Government Act 1972, the Greater London Authority, chief constables, Police and Crime Commissioners, the Commissioner of the Metropolis and the Mayor’s Office for Policing and Crime.
Clause 8 : Procedure for appointment
28. Clause 8 requires a relevant authority to consult its auditor panel and take its views into account when selecting and appointing an auditor. To support transparency of the appointment, the relevant authority must publish a notice within 28 days of making the appointment that: states it has made the appointment; who the appointed auditor is; sets out the auditor panel’s advice; and if that advice has not been followed, the relevant authority’s reasons for not following it. Relevant authorities are required to publish the notice on their website if they have one, and if not, in a way that is likely to bring the notice to the attention of the relevant persons as specified in subsection (4). The relevant authority must omit information that would prejudice commercial confidentiality, unless there is an overriding public interest in not doing so. Subsection (4)(b) and (c) describes the requirements for health service bodies in relation to publicising the appointment of an auditor.
Clause 9 : Requirement to have auditor panel
29. Clause 9 requires each relevant authority to have an auditor panel to exercise the functions of an auditor panel under the Bill. Subsection ( 2 ) excludes Chief Constables and the Commissioner of Police of the Metropolis from the requirement to have an auditor panel. This is because they will be audited by the auditor appointed to audit the relevant Police and Crime Commissioner’s accounts (or the Mayor’s Office for Policing and Crime’s accounts in the case of London). Subsection (3) gives effect to Schedule 4, which sets out further provisions around the constitution of auditor panels.
Schedule 4, Paragraph 1 : Options for auditor panels
30. This paragraph sets out the different ways in which a body may meet the requirement to have an auditor panel. It is intended to provide flexibility for different arrangements that can reflect local circumstances and, for example, any joint working arrangements. It provides that the auditor panel can be a panel appointed as such, a shared auditor panel appointed by one or more other authorities, or an existing committee that complies with provisions applying to auditor panels. This paragraph also requires that for the Greater London Authority, the appointment of the auditor panel is a matter for the Mayor of London and London Assembly acting jointly.
Schedule 4, Paragraph 2 : Constitution of auditor panels
31. This paragraph provides that an auditor panel, other than the panel for a health service body (which may be addressed in regulations under paragraph 3), must consist of at least a majority of independent members, and must be chaired by an independent member. Sub-paragraph (2) sets out the definition of independence. If the relevant authority is a corporation sole (such as a police and crime commissioner), the individual holding that office is not considered independent. Under sub-paragraph (9), the Secretary of State may amend the definition of independence at sub-paragraph (2), or the provisions on independence at sub-paragraphs (4) or (8) which address a corporation sole and the definition of a ‘relative’.
Schedule 4, Paragraph 3 : Constitution of auditor panels: health service bodies
32. This paragraph provides the Secretary of State with a regulation-making power to define the constitution and arrangements for the auditor panels of a health service body, including the definition of independence. The intention is that these panels will be the existing audit committees of health service bodies which will meet the independence requirements of best practice for central government audit committees.
Schedule 4, Par agraph 5 : Application of local authority enactments to auditor panels
33. This paragraph provides the Secretary of State with a regulation-making power to modify any local authority enactments in application to auditor panels or their members; and to apply any local authority enactments to auditor panels or their members, to clarify the position of auditor panels in relation to committees of that local authority.
Schedule 4, Par agraph 8 : Meaning of "connected entity"
34. This paragraph defines a connected entity for the purposes of the Bill. This concept arises in relation to matters such as local auditors’ access to relevant documents, provision of information, and definitions of independence of auditor panel members.
Clause 10 : Functions of auditor panel
35. Clause 10 sets out the main functions of an auditor panel and gives a power to the Secretary of State in subsection ( 8 ) to make regulations that may set out further details about these functions, give additional functions to an auditor panel or allow a relevant authority to give additional functions to an auditor panel. The auditor panel must advise the relevant authority on maintaining an independent relationship with its auditor and on selection and appointment of its auditor. Subsection s ( 9 ) and (10) require the relevant authority to publish advice from its auditor panel, with subsection (10)(b) and (c) making provision for publishing such advice in respect of health service bodies. S ubsection ( 11 ) provides that this must exclude information likely to prejudice commercial confidentiality, unless there is an overriding public interest in its disclosure. Subsections ( 12) and ( 13 ) provide that the auditor panel must take account of any guidance the Secretary of State issues in relation to the exercise of its functions, as must the relevant authority in exercising its functions in relation to its auditor panel.
Clause 11 : Relationship with relevant authority
36. The authority is required, on receiving a request from the auditor panel, to provide any information held by the authority that is of relevance to the auditor panel’s work. The auditor panel may require a member or officer of a relevant authority to attend a meeting of the panel to answer questions. However members and officers have the same entitlement to refuse to answer questions as exists for the purposes of court proceedings in England and Wales. The provisions of this clause do not apply to health service bodies or to their auditor panels.
Clause 12 : Failure to appoint local auditor
37. Clause 12 makes provision for cases where a relevant authority fails to appoint an auditor. Subsection (1) requires a relevant authority to inform the Secretary of State if it fails to appoint an auditor, either in accordance with Clause 7 or any other requirement to appoint under Part 3 or a provision made under it. Subsection (2) provides that if a body fails to appoint an auditor by 31st December the Secretary of State may either direct the relevant authority to appoint a named auditor, or appoint an auditor on their behalf. Such an appointment would be essentially the same as one made by the relevant authority, on the terms specified by the Secretary of State. To exercise these powers, the Secretary of State must inform the relevant authority of his or her intention to do so not less than 28 days beforehand, and must also consider any representations made by the relevant authority. However there is provision for the Secretary of State to move more quickly, and without considering representations, if he thinks it likely that a function would need to be exercised by an auditor within 60 days of appointment made or direction to appoint given.
Clause 13: Failure of clinical commissioning group to appoint local auditor
38. Clause 13 makes provision for cases where a clinical commissioning group (CCG) fails to appoint an auditor. The Bill makes separate provision for the situation where a clinical commissioning group, NHS trust or trustees of an NHS trust (see below) fails to appoint an auditor, to take account of the roles of national bodies in the healthcare sector (specifically the NHS Commissioning Board and the NHS Trust Development Authority).
39. Subsection (1) provides that the CCG must immediately notify the NHS Commissioning Board (the Board) of a failure to appoint. If the situation is not resolved by 25 March, the Board must notify the Secretary of State. The Secretary of State, once notified, may direct the Board either to direct the CCG to appoint an auditor or appoint one on the CCG’s behalf; or take either of those steps him or herself. The Secretary of State or the Board must inform the CCG, not less than 28 days beforehand, of their intention to direct the CCG to appoint an auditor or to appoint one on the CCG’s behalf do so and must also consider any representations the CCG makes on the direction or appointment. However, there is provision for the Secretary of State or the Board to act without giving notice or considering representations, if a function would need to be exercised by an auditor within 60 days of an direction to appoint being given or an appointment being made.
40. Paragraphs 8 and 9 of Schedule 13 make similar provision in relation to NHS trusts and trustees of NHS trusts, with those bodies being required to notify the National Health Service Trust Development Agency of a failure to appoint an auditor.
Clause 14 : Limitation of auditor’s liability
41. This clause requires that a liability limitation agreement, by which an auditor limits their liability for negligence, default, breach of duty or breach of trust by agreement with a relevant authority, must meet certain conditions prescribed by regulations by the Secretary of State. Regulations may address the duration of the agreement and the amount to which the auditor’s liability may be limited, and impose requirements for the agreement to contain certain provisions specified in regulations. Regulations may also require disclosure of specified information about such agreements. This clause also provides that a liability limitation agreement that complies with relevant regulations is not subject to section 2(2) or 3(2)(a) of the Unfair Contract Terms Act 1977. These sections would otherwise prevent an auditor from excluding or restricting liability for negligence or for breach of contract (except in so far as the term or notice satisfies the requirement of reasonableness).
Clause 15: Further provisions about liability limitation agreements
42. Subsection (1) provides that the relevant authority must seek and consider its auditor panel’s views on the agreement before entering into a liability limitation agreement. Subsection ( 4 ) provides that only the full council of a local authority operating under executive arrangements can decide whether to enter into a liability limitation agreement. Subsection ( 5 ) provides that this function is to be for the full council of a local authority, even if it operates under the committee system. Subsection ( 6 ) provides that this function is to be for the Mayor and London Assembly acting jointly on behalf of the GLA.
Clause 1 6 : Resignation and removal of auditor
43. Clause 16 provides the Secretary of State with the power to make regulations about resignation or removal of a local auditor from office. These regulations may specify what is required from an auditor (and in turn from the relevant authority) in the process of the auditor’s resignation, and when that resignation can take effect. They may also specify what actions are required, and by whom (such as the local auditor, relevant authority, and auditor panel) to remove a local auditor from office, and following that removal from office. Subsec t ion (4) allows for the Secretary of State to take some or all of the steps in respect of the removal of a local auditor from office in respect of health service bodies. Subsection (5) provides that regulations may apply the provisions for the Secretary of State to appoint, or direct a relevant authority to appoint, a local auditor, to circumstances following the resignation or removal of a local auditor.
PART 4– ELIGIBILITY AND REGULATION OF LOCAL AUDITORS
44. Schedule 5 (which is given effect to by clause 17) sets out the arrangements for the eligibility and regulation of auditors in the local audit framework. This Schedule applies Part 42 of and Schedule 10 to the Companies Act 2006, seeking largely to align the regulatory framework for local auditors with auditors of companies. Schedule 5 sets out the modifications to the Companies Act which are necessary to reflect the differences between statutory and local audit.
45. Many of the modifications to the Companies Act 2006 are to omit those provisions that are not relevant to local auditors or to change references so that the provisions of the Companies Act are appropriate for local audit. More significant modifications have been made in respect of:
· independence, where the Bill sets out specific requirements for local auditors; and
· appropriate qualifications for local audit, where the Bill provides the Secretary of State with a power to recognise a professional qualification specifically for local audit.
46. Part 42 of the Companies Act 2006 sets out the arrangements for ensuring that firms and individuals undertaking local audit have the required skills, qualifications and experience to undertake that work. It also sets out specific independence requirements that auditors must comply with in order to be appointed as a local auditor.
47. Schedule 10 to the Companies Act 2006 sets out the framework governing the recognised supervisory bodies under that Act. Under the Companies Act 2006, eligibility for appointment as an auditor depends on membership of, and compliance with the rules of, a professional accountancy body which has been authorised (or "recognised") by the Secretary of State. These bodies are referred to as "recognised supervisory bodies", and this term is carried across to the Bill in relation to local audit. In practice, the power to recognise supervisory bodies under the Companies Act 2006 is delegated to the Financial Reporting Council. Recognised supervisory bodies are required to put in place rules and practices to be followed by their members, for example, concerning ethical standards of conduct, and the experience and other criteria that individuals must meet before being permitted to carry out an audit and sign off an audit report.
48. Recognised supervisory bodies are also responsible for monitoring the quality of audits undertaken by their members. This is the case for both local and company audit. Schedule 5 provides for an additional level of oversight for the monitoring of the quality of "major local audits", meaning local audits of relevant authorities specified or defined in regulations or in a direction. In line with the monitoring of "major audits" in the companies sector, this role is to be delegated to the Financial Reporting Council.
49. In the local audit framework, auditors will need certain qualifications to sign a local audit report. Individuals will need to hold an "appropriate qualification" which could either be a qualification recognised under Part 42 of the Companies Act 2006, or another qualification recognised under the Bill. The Secretary of State may make regulations setting out the minimum requirements that those other qualifications must meet in order to be recognised for the purposes of local audit. As well as the requirement for an auditor to hold an appropriate qualification, recognised supervisory bodies are required to have rules in place to ensure that those eligible to sign an audit report on behalf of a firm have suitable experience.
50. Schedule 5, paragraph 1(1) outlines the approach taken to applying the Companies Act 2006 and paragraph 1(2) provides definitions for the terms "local audit" and "local audit work" that are used throughout the Schedule. Paragraph 2(1) sets out the general modifications where references need to be substituted throughout. Paragraph 3 specifies a number of provisions to be omitted given that they are not relevant for local audit.
Paragraph 5: Independence requirement
51. This paragraph substitutes section 1214 of the Companies Act 2006, for the purposes of the Bill, to set out the circumstances where a person may not act as a local auditor on grounds of lack of independence. Under subsection (2), this includes where the person is an officer or employee of an entity connected to the relevant authority. Under subsection (4) this includes persons who are officers or elected members of the relevant authority, individuals exercising executive authority as corporations sole (for example, Police and Crime Commissioners), or the partner or employee of such persons. Subsection (6) allows the Secretary of State to make regulations regarding other connections between the relevant authority and the local auditor by virtue of which a person will be regarded as lacking independence.
Paragraph 6: Effect of lack of independence
52. This paragraph omits subsections (2) to (7) of section 1215 of the Companies Act 2006 which set out the criminal sanctions for auditors.
Paragraph 8: Appropriate qualifications
53. This paragraph modifies section 1219 of the Companies Act 2006 to provide when a person holds an appropriate qualification for the purposes of local audit i.e. that he or she holds either a qualification recognised in accordance with regulations made by the Secretary of State, or a professional qualification obtained in the UK which is recognised in accordance with Chapter 2 of Part 42 of the Companies Act. Subsections (2) to (7) set out the matters about which the Secretary of State may make regulations to provide for a qualification to be recognised as an appropriate qualification, including how such a qualification is to be recognised, and the requirements such a qualification would need to meet. Subsection (12) provides that a qualifying body which offers a qualification that has been recognised in accordance with regulations made by the Secretary of State is to be known as a "recognised qualifying body".
Paragraph 9: Provision of documents to the Secretary of State
54. This paragraph provides the Secretary of State, a body to whom the Secretary delegates his or her functions (by order under section 1252 of the Companies Act 2006), or a recognised supervisory body, with the power to require a relevant authority to make available to them their accounts or other such documents that might reasonably be required.
Paragraph 10: Enforcement: general
55. This paragraph specifies modifications that reflect the arrangements for recognising appropriate qualifications for local audit. In the Companies Act 2006, Schedule 11 sets the framework and this is not applied in this Bill. Instead, regulations made under the modified section 1219 of the Companies Act 2006 are to set the requirements for the recognition of appropriate qualifications.
Paragraph 13: The register of auditors
56. This paragraph concerns the register of eligible auditors and modifies section 1239 of the Companies Act 2006, mainly to recognise the differences in eligibility for auditors of companies and those of relevant authorities.
Paragraph 15: The Secretary of State’s power to require second audit
57. This paragraph modifies section 1248 of the Companies Act 2006 to specify that a copy of a direction requiring a second audit is sent to the auditor’s recognised supervisory body rather than the registrar of companies. It also allows for the Secretary of State to specify when the authority must comply with the direction.
Paragraph 20: Delegation of the Secretary of State’s functions
58. This paragraph modifies section 1252 of the Companies Act 2006 so that subsection (2) provides that a delegation order may have the effect of making the body to whom functions are delegated subject to the obligations of the Freedom of Information Act 2000, but only in respect of information held by the body that relates to the exercise of the functions which have been delegated to it.
Paragraph 27: Recognised Supervisory Bodies
59. This paragraph provides for general modifications to Schedule 10 to the Companies Act 2006 and also to specify the experience and training needed by those people carrying out inspections of local audits. Recognised supervisory bodies must comply with guidance issued by the Secretary of State on the appropriate level of competence of auditors.
PART 5 – CONDUCT OF LOCAL AUDIT
60. Part 5 sets out the provisions relating to the role of the local auditors under this Bill. The scope of the audit is set out in clauses 19 and 20, and largely replicates existing provisions in the Audit Commission Act 1998. Clause 18 and Schedule 6 set out the role of the Comptroller and Auditor General of the National Audit Office to set the audit standards through codes of audit practice and guidance. Clauses 23 to 30 set out the additional duties of local auditors in undertaking audits of relevant authorities, retaining the current roles in – for example - reporting in the public interest when necessary or taking questions and objections from local government electors
Schedule 6 : Codes of audit practice and guidance
Paragr ap h 1: Duty to prepare code
61. The Comptroller and Auditor General of the National Audit Office is required to prepare one or more codes of audit practice which embody best professional practice regarding how local auditors should carry out their functions under the Bill. Because audit arrangements are different for some relevant authorities, the code can include different provisions for different types of relevant authorities or there can be more than one code. The Comptroller and Auditor General must consult the listed interested parties when developing the code.
Par agraph 2: Proc e dure for code
62. This paragraph sets out the procedure for gaining Parliamentary approval to a code, which is required before a code can come into force. The Comptroller and Auditor General is required to publish the draft code, which is then laid before both Houses of Parliament by a Government Minister. If, within 40 days after laying, either House of Parliament resolves not to approve the code, the Comptroller and Auditor General must not publish it and must prepare another code of audit practice unless one or more is already in place. If Parliament does not resolve against the code, the Comptroller and Auditor must publish it.
Par agraph 3: Duty to keep code under review
63. This paragraph requires the Comptroller and Auditor General to keep the code(s) under review.
Par agraph 4 : Alteration of code
64. This paragra p h enables the Comptroller and Auditor General to pr epare alterations to a code , if he/she considers it necessary. The same consultation, publication in draft and Parliamentary approval processes apply to an altered code as for any code. If an altered code is not resolved against by Parliament , the Comptroller and Auditor General must publish it clearly showing where the alterations have been made.
Par agraph 5: Replacement of code
65. This paragraph requires the Comptroller and Auditor General to prepare a replacement code at least every five years and enables them to do so more frequently . This means that the code will be reviewed at least every five years, but can be done more frequently should major changes be needed. Because it is not within the Comptroller and Auditor General’s control to ensure that a replacement code is published within five years of the existing code being published, t he duty is on the Comptroller an d Auditor General to use "reasonable endeavours" to ensure a code is published before the end of the five years. I f this is not possible, the Comptroller and Auditor General must ensure that a code is published as soon as reasonably practicable. This ensures Parliamentary oversight to the code at least every five years .
Par agraph 6: Publication of code
66. This paragraph enables the Comptroller and Auditor General to publish a code in such manner as he/she sees fit. A code or alterations to a code come into force on the day o n which it is published, unless a different date is specified. There may be different commencement dates for different purposes .
Paragraph 7: Assistance from relevant authority
67. This paragraph requires a relevant authority to provide information that the Comptroller and Auditor General reasonably requires to fulfil the functions as set out in this S chedule .
Paragraph 8: Savings for codes of practice under the Audit Commission Act 1998
68. This paragraph provides for a code prepared under the Audit Commission Act 1998 to stay in force until such time as the relevant section of that Act is repealed, or until that code is replaced by a code prepared under this Bill and approved by Parliament.
Paragraph 9: Guidance
69. This paragraph enables the Comptroller and Auditor General to issue guidance to local auditors in relation to their functions as set out in this Bill. The guidance may supplement or further explain the code.
Paragraph 10: Application to auditors of NHS f oundation trusts
70. This paragraph covers the application of a code of audit practice to auditors of accounts of NHS f oundation t rusts . Although NHS foundation trusts are not relevant authorities, the duty to prepare a code of practice as regards audit of their accounts applies, as does the power to issue guidance to auditors of foundation trusts’ accounts. Schedule 12 amends the National Health Service Act 2006 so that auditors of foundation trusts’ accounts are required to comply with the relevant code and have regard to any such guidance (see new paragraph 24(4A) of Schedule 7 to that Act).
71. In preparing a code relating to the audit of accounts of foundation trusts, t he Comptroller and Auditor General is require d to consult Monitor (the independent regulator of f oundation t rusts ) and such associations or representatives of f oundation t rusts as the Comptroller and Auditor General thinks appropriate , as well as the other persons mentioned in paragraph 1.
Paragraph 11: Meaning of 40-day period
72. This paragraph explains that the 40 - day period starts from the day on which the code is laid unless it is not laid in both Houses of Parliament on the same day, in which case it begins with the later day. The 40-day period ex clude s days when Parliament is dissolved, prorogued , or where both Houses are adjourned for more than 4 days.
Clause 19 : General duties of auditors
73. This clause sets out the general duties with which a local auditor must comply when auditing the accounts of a relevant authority – except audits of health service bodies: the general duties of auditors for health service bodies are in clause 20. It requires the auditor to be satisfied that the relevant authority’s accounts (the statement of accounts and accounting records) comply with the relevant enactments ; that proper practices have been observed in the compilation of the statement of accounts and that the statement of accounts presents a true and fair view ; and that the relevant authority has made proper arrangements for securing economy, efficiency and effectiveness (value for money) in the use of its resources.
74. Subsection ( 2 ) requires the auditor to issue an opinion on the statement of accounts and a certificate to confirm that the audit has been undertaken in accordance with this Bill . These would usually be issued when the audit is complete , and the opinion would be included within the final statement of accounts. However, subsection ( 4 ) allows the auditor to issue the opinion on the accounts and close the accounts before issuing the certificate if the auditor is still considering objections , the resolution of which would not affect the accuracy of the statement of accounts. This means that the closure of the statement of accounts does not need to be delayed if the auditor is considering objections which would not impact on the statement of accounts thus increasing transparency locally.
75. If relevant authorities are required to keep a separate Pension Fund under the Local Government Pension Scheme , a local auditor is required to provide a separate opinion on that part of the statement of accounts.
76. Subsections ( 5 ) and ( 6 ) require the auditor to comply with the relevant code(s) of audit practice and have regard to guidance which has been issued by the Comptroller and Auditor General in support of the code .
Clause 20 : General duties of auditors o f accounts of health service bodies
77. Subsection (1) sets out the general duties with which a local auditor must comply when auditing the accounts of a clinical commissioning group. It requires the auditor to be satisfied that: the group’s accounts present a true and fair view and comply with relevant legislative requirements; proper practices have been observed in the preparation of the accounts; the group has made proper arrangements for securing economy, efficiency and effectiveness in their use of resources; money provided by Parliament has been expended for the purposes intended by Parliament; resources authorised by Parliament have been used for the purposes so authorised; and the financial transactions of the clinical commissioning group are in accordance with any authority which is relevant.
78. Subsection (3) sets out the general duties with which a local auditor must comply when auditing the accounts of special trustees for a hospital. The auditor must be satisfied that: the accounts present a true and fair view and comply with relevant legislative requirements; proper practices have been observed in the preparation of the accounts; and the special trustees have made proper arrangements for securing economy, efficiency and effectiveness in their use of resources. Unlike the auditors of clinical commissioning groups, audits of the accounts of special trustees of hospitals do not have to be satisfied in relation to money and resources authorised by Parliament, nor that the special trustees’ financial transactions are in accordance with any relevant authority. These requirements are not relevant to special trustees of a hospital, who hold and administer the property of university hospitals and teaching hospitals on trust, for purposes related to hospital services, including research. Special trustees do not receive funds from Parliament.
79. Paragraph 10 of Schedule 13 extends the provision in relation to the audit of the accounts of special trustees of a hospital, so that it also applies to audit of the accounts of NHS trusts and the trustees of NHS trusts.
Subsection (4) makes provision requiring the auditor of a health service body to enter certain things on the accounts of the audited body on completion of the audit of the accounts of the body. The auditor must enter on the accounts a certificate that the auditor has completed the audit in accordance with the Local Audit and Accountability Act, and the auditor’s opinion on the accounts.
80. Subsection (5) provides that the auditor of a health service body may include in their opinion reference to proper arrangements being made for securing value for money in the use of resources only if the auditor is not satisfied that this requirement has been met.
Clauses 2 1 and 2 2 : A uditors’ right to document s and information ; and o ffences relating to section 21
81. Clause 21 supports a local auditor undertaking the functions under this Bill through providing a right of access at all reasonable times to every document that relates to the relevant authority and any connected entities which the auditor considers necessary to carry out their functions under the Bill. The auditor can inspect, copy or take the documents away and specific provisions are made to enable access to documents held electronically. Subsection s (3) and ( 7 ) specify that the auditor may require appropriate persons to provide information and explanation, or to produce the document. Those persons are: a member or officer of the relevant authority; and employees, elected/ appointed people or the auditor of connected entities; or any persons that fell into these categories at the time of which the information required relates. The relevant authority or connected entity must provide the auditor with all of the facilities and information that the auditor reasonably requires. Subsections (10) and (11) preclude statements given in response to the auditor from being used in evidence against the person for any other criminal proceedings except the offences under clause 22.
82. Clause 22 makes it an offence for a person to obstruct the auditor’s right to access information or to fail to comply with the local auditor’s requests for information. The offence is punishable by a fine not exceeding level 3 on the standard scale, and an additional daily fine if the offence continues after conviction of up to £20 per day. Local auditors can recover expenses reasonably incurred in connection with proceedings from the relevant authority if they are not recovered from any other source.
Schedule 7 : Reports and recommendations
83. This Schedule sets out the detailed requirements for local auditors to consider making public interest reports and written recommendations, and for the procedures to be adopted following their issue.
Paragraph s 1 to 3 : Public interest reports , written recommendations and supply of public interest reports
84. Paragraph 1 places a duty on local auditors to consider whether they should make a public interest report on any matter coming to their attention, so that the matter may be considered by the relevant authority or brought to the attention of the public. Paragraph 2 enables a local auditor to issue written recommendations. Public interest reports and recommendations can be in relation to the authority being audited and any entities connected to that authority and can be issued during or at the end of the audit.
85. A local auditor is required to inform the authority’s auditor panel as soon as is reasonably practicable after making a public interest report. This is so that the auditor panel is aware of the auditor’s action but the panel does not influence the auditor’s decision about whether to issue a report, as this could undermine the auditor’s independence from the relevant authority. The auditor must send public interest reports and recommendations to the Secretary of State; the related authority if the report / recommendation is in relation to a connected entity; and to the Greater London Authority for reports / recommendations relating to the London Pensions Fund Authority. The local auditor must send public interest reports to the National Health Service Commissioning Board in the case of clinical commissioning groups.
86. There is express provision which enables the local auditor to recover reasonable costs of investigating issues and preparing public interest reports and recommendations from the relevant authority, further supporting the auditor’s independence from the authority.
Paragraph 4 : Publicity for public interest reports
87. The provisions in this paragraph are designed to support transparency and local accountability. When an auditor issues a public interest report on a relevant authority or connected entity, the relevant authority must publish the public interest report as soon as practicable. It must also publish a notice which identifies the report’s subject matter and explains that the public may inspect the report at a specified location and times, unless the report relates to a health service body. The authority must ensure that the public can inspect and copy the report without payment, or require the relevant authority to provide a copy for a payment of a reasonable sum. The relevant authority must send copies to each of its members (if it has members) and its auditor panel (if it has one). The local auditor is able to notify and send a copy of the public interest report to any person that the auditor considers fit. The requirements for health service bodies to publish public interest reports are set out at sub-paragraph (7)(b) and (c).
Paragraph 5 : Consideration of report or recommendation
88. This paragraph specifies how relevant authorities should consider public interest reports and auditors’ written recommendations. This does not apply to health service bodies, because these requirements are specified in other legislation or through requirements placed upon the health service body by their regulator or supervisor, nor does it apply to the Greater London Authority (paragraph 6 specifies arrangements for the latter), nor connected entities which are also relevant authorities (except reports and recommendations on the Commissioner of Police of the Metropolis). The relevant authority must consider public interest reports and auditors’ recommendations at a meeting within one month of the report or recommendation being sent to the body and to decide at that meeting what action needs to be taken. Police and crime commissioners and the Mayor’s Office for Policing and Crime must decide within one month what action to take. The Secretary of State is able to modify this paragraph through regulations.
Paragraph 6 : Consideration of report or recommendation: Greater London Authority
89. This paragraph specifies how the Greater London Authority must consider any reports or recommendations made by the auditor in relation to the Greater London Authority or a connected entity. This largely mirrors provisions in paragraph 5 and specifies that the London Assembly must consider reports and recommendations at a meeting which the Mayor must attend.
Paragraph 7 : Bar on delegation of functions relating to meetings
90. This paragraph prevents certain relevant authorities from delegating the consideration of public interest reports or auditors’ recommendations. Sub-paragraph (1) prevents a local authority which operates executive arrangements from delegating the consideration of a public interest report or auditor’s recommendation to an executive of that authority. Sub-paragraph (2) excludes the consideration of public interest reports and auditors’ recommendations from provisions in the Local Government Act 1972 which enables a local authority to discharge its functions by a committee, sub-committee or officer, or by another local authority. Sub-paragraphs (3) and (4) preclude the Mayor of London and the London Assembly from delegating the consideration of public interest reports and auditors’ recommendations.
Paragraph 8 : Publicity for meetings
91. This paragraph sets out the arrangements that a relevant authority must follow in publicising meetings to consider public interest reports and auditors’ recommendations. The relevant authority must publish a notice at least 7 days before the meeting specifying the time and location of the meeting; that the meeting is to discuss a public interest report or auditor recommendation; and the subject matter (the full recommendation should be included if possible). When the authority’s members are sent the agenda for the meeting, this must be accompanied by a copy of the public interest report or recommendation.
Paragraph 9 : Access to meetings and documents
92. This paragraph explains that public interest reports and recommendations are not considered as excluded or exempt information with regards to provisions made in the Public Bodies (Admission to Meetings) Act 1960 and the Local Government Act 1972. This means that a public interest report and recommendations should be included with other documents (as set out in the Local Government Act 1972) as being open to public inspection and should not be considered as excluded material if a newspaper requests it under the Public Bodies (Admission to Meetings) Act 1960.
Paragraph 10 : Publicity for decisions under paragraphs 5 or 6
93. This sets out the requirements on a relevant authority for publicising its decision about its response to a public interest report or auditor recommendation, supporting local transparency and accountability. The relevant authority must notify the auditor of its decisions and publish a notice summarising the decision on its website if it has one. The notice can exclude decisions that were made in the meeting while the public were excluded for protection of public interest (under section 1(2) of the Public Bodies (Admission to Meetings) Act 1960), confidential matters (under section 100A(2) of the Local Government Act 1972) or exempt information (under section 100A(4) of the Local Government Act 1972). The notice must also specify if there are any documents that are available for inspection.
Clause 2 4 : Inspection of statements of accounts etc
94. This clause requires relevant authorities, other than health service bodies, to enable local government electors to inspect and make copies of the statement of accounts prepared by the relevant authority and specified reports made by the auditor to the relevant authority. These documents must be made available for inspection at all reasonable times without payment, or if requested, the relevant authority must supply copies of any of these documents upon payment of a reasonable sum.
Clause 2 5 : Inspection of documents
95. This clause provides that any interested person may inspect the accounting records and supporting documents for a relevant authority, other than a health service body, for the audit year and make copies of those documents. The clause also enables local government electors to ask the auditor questions about the accounting records. This precludes the inspection and disclosure of any records containing personal information and information protected on grounds of commercial confidentiality. The auditor is able to recover reasonable costs for their time in undertaking this function from the relevant authority.
Clause 2 6 : Right to make objections at audit
96. This clause provides for a local government elector to make an objection to a local auditor if they consider that there is a matter about which the auditor could make a public interest report or apply for a declaration of unlawful expenditure. This does not apply to health service bodies. The objection must be made in writing with a copy sent to the relevant authority.
97. The auditor is required to decide whether to consider the objection, and if so whether they need to make a public interest report or a declaration of unlawful expenditure. The auditor has discretion not to consider the objection if the auditor considers that it is frivolous; vexatious; repeats a previously considered objection; or where the cost of the auditor’s investigation would be disproportionate to the financial amount to which the objection relates (and if there are no serious governance issues). Instead of considering the objection, the auditor may recommend that the relevant authority take action itself. The auditor is able to recover reasonable costs for their time in considering objections from the relevant authority.
Clause 2 7 : Declaration that item of account is unlawful
98. This clause provides for a local auditor to apply to the courts to declare that an item in the accounts is unlawful. This does not apply to auditors of health service bodies. The court will decide whether to make that declaration and where it does, may order changes to be made to the statement of accounts or the accounting records.
99. If an auditor decides not to investigate an objection made under clause 26 relating to unlawful expenditure or decides not to refer the matter to the courts, the person raising the objection may require the auditor to provide written reasons for that decision and can appeal against the decision to the courts, within six weeks of the auditor’s decision. If the local elector appeals to the court, the court has the same powers as it does if the auditor had applied for a declaration.
100. The court can make an order for the relevant authority to pay expenses incurred by the local auditor authority or local government elector as a result of this action.
Schedule 8 : Advisory Notices
101. This Schedule (which is given effect to by clause 28) does not apply to health service bodies.
Paragraph 1 : P ower to issue advisory notice
102. This paragraph enables a local auditor to issue an advisory notice to a relevant authority if the auditor thinks that the authority or an officer has, or is about to, undertake unlawful action. These unlawful actions are: a decision which incurs unlawful expenditure, unlawful action or entering an unlawful item of account. The advisory notice must: be addressed to the relevant authority or officer; specify the relevant decision incurring unlawful expenditure, unlawful course of action or unlawful item of account; specify that the notice takes effect on the day on which it is served; and specify the notice period within which the authority or officer must inform the auditor if they intend to continue to take the action (which must not exceed 21 days).
Paragraph 2 : Service and withdrawal of notice
103. This paragraph sets out how the advisory notice must be served on the relevant authority or officer and enables the auditor to withdraw it. Within seven days of issuing the advisory notice, the local auditor must also serve a statement of their reasons for doing so.
Paragraph 3 : Effect of an advisory notice
104. This paragraph makes it unlawful for the authority or officer to continue to take or implement the action that the advisory notice refers to while the advisory notice has effect. Sub-paragraph (2) makes an exclusion where the authority or officer has considered the auditor’s notice and the consequence of taking the action, informed the auditor of their intention to take the action and the notice period has expired. The advisory notice takes effect from the day on which the notice is served; and ceases to have effect either when it is withdrawn or if the auditor does not serve a statement of reasons within 7 days following its issue. Sub-paragraph (4) enables the auditor to recover from the relevant authority any costs reasonably incurred.
Paragraph 4 : Further provisions about advisory notices
105. This paragraph provides for the situation where a relevant authority has (prior to the advisory notice being served) entered into a contract to dispose of or acquire an interest in land, where the existence of the advisory notice would mean it would be unlawful to complete the disposal/acquisition. The existence of the advisory notice does not affect the damages that could be available and no action lies against the auditor in respect of any loss or damages as a result of an advisory notice issued in good faith.
Clause 29 : Unlawful expenditure of health service bodies
106. This clause provides for the steps a local auditor of a health service body must take if the auditor believes that the body, or an officer of the body, is about to take or has taken decisions which have incurred or would incur unlawful expenditure, or is about to take or has taken a course of action which would be unlawful and likely to lead to a loss or deficiency. The auditor must, as soon as reasonably practicable, notify the Secretary of State and, if the body is a clinical commissioning group, the NHS Commissioning Board. If the body is an NHS trust or the trustees for an NHS trust, the auditor must notify the Secretary of State and the National Health Service Trust Development Authority. (Paragraph 13 of Schedule 13 provides for this.)
Clause 30 : Power of auditor to apply for judicial review
107. This clause enables a local auditor to apply to the courts for judicial review if the auditor considers that a decision by a relevant authority or a failure by the relevant authority to act would have an effect on the authority’s accounts. This does not apply to health service bodies. Subsection (4) enables the court to order the relevant authority to pay the expenses incurred by the auditor.
Clause 3 1 : Accounts and audit regulations
108. With respect to relevant authorities other than health service bodies, clause 31 provides a power to make regulations on matters connected with their accounts, audit and corporate governance. The power takes account of the new statutory distinction between accounting records and statements of accounts (see clause 3). It is expected that this power will be used to specify aspects of the format of the published accounts, and set out the framework for their preparation, approval and publication. Procedural aspects of the conduct of the audit, including arrangements for the exercise of the rights of the public (clauses 24 to 26), are also likely to be included in the regulations. The clause specifies persons who must be consulted before regulations are made.
PART 6 – DATA MATCHING
Schedule 9 : D ata matching
109. Apart from transferring the power to conduct data matching exercises from the Audit Commission to the Secretary of State or the Minister for the Cabinet Office, the data matching powers set out in Schedule 9 (which is given effect to by clause 32) are largely the same as the provisions inserted into the Audit Commission Act 1998 by the Serious Crime Act 2007.
Paragraph 1 : Power to conduct data matching exercises
110. This paragraph provides for the Secretary of State or the Minister for the Cabinet Office ("a relevant minister") to carry out data matching exercises or to arrange for them to be done on his behalf. Sub-paragraph (3) explains how a data matching exercise works. It involves the comparison of sets of data, for example, taking two local authority payroll databases and matching them. If matches occur, it may indicate an inconsistency that requires investigation. Sub-paragraph (4) defines the purposes for which the data matching powers can be exercised. These purposes are assisting in the prevention and detection of fraud. Sub-paragraph (5) provides that data matching may not be used to identify patterns and trends in an individual’s characteristics or behaviour which suggest nothing more than his or her potential to commit fraud in future and is designed to prevent the creation of individual profiles of potential fraudsters.
Paragraph 2 : Mandatory provision of data
111. This paragraph enables a relevant minister to require the provision of data to conduct a data matching exercise. Sub-paragraph (2) sets out persons who may be required to provide data under this clause. They are (a) relevant authorities (i.e. those authorities subject to audit), (b) English best value authorities (not subject to audit, for example a waste disposal authority) and (c) an NHS foundation trust.
Paragraph 3 : Voluntary provision of data
112. This paragraph provides that where a relevant minister thinks it appropriate, he or she may conduct a data matching exercise using data held by or on behalf of persons not required to provide data under paragraph 2. It also provides that such a person may disclose data to the minister for those purposes. Sub-paragraph (2) clarifies that bodies required to provide data under paragraph 2 may also provide data voluntarily. Sub-paragraph (3) provides that nothing relating to the voluntary provision of data authorises any disclosure which (a) contravenes the Data Protection Act 1998 or (b) is prohibited by Part 1 of the Regulation of Investigatory Powers Act 2000. Sub-paragraphs (4) and (5) make clear that "patient data" – i.e. data held for medical purposes from which an individual can be identified – may not be disclosed. Sub-paragraph (6) provides that the disclosure of information does not breach (a) any obligation of confidence owed by a person making the disclosure or (b) any other restriction on the disclosure of information however imposed. Sub-paragraph (8) provides that data matching exercises may include data provided by a body or person outside England.
Paragraph 4 : Disclosure of results of data matching etc
113. This paragraph sets out the circumstances under which information (obtained for a data matching exercise and the result of any such exercise) may be disclosed by or on behalf of a minister– see sub-paragraph (2). These circumstances are different to those under which disclosures can be made in relation to the rest of the Act (see sub-paragraph (9), and clause 35 and Schedule 11). Sub-paragraph (7) places restrictions on the further disclosure of information disclosed under sub- paragraphs (2) and (3). Sub-paragraph (8) creates an offence of disclosing information (except as authorised by sub-paragraphs (2), (3) and (6)) and sets out the penalty. Those committing the offence are liable on summary conviction to a fine not exceeding level 5 on the standard scale. However as set out at paragraph 4(9), if section 85(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force on or before the day on which this Act is passed, this will remove the limit on the fine on conviction.
Paragraph 5 : Publication
114. This paragraph enables a relevant minister to publish a report on data matching exercises, notwithstanding the limits on disclosure under paragraph 4. Sub-paragraph (2) provides that a report that is published may not include information relating to a particular body or person if (a) the body or person is the subject of any data included in the data matching exercise; and (b) the body or person can be identified from the information; and (c) the information is not otherwise in the public domain. Sub-paragraph (3) provides that a report may be published in such a manner as the minister considers appropriate for bringing it to the attention of those who may be interested.
Paragraph 6 : Fees for data matching
115. This paragraph requires a relevant minister to prescribe a scale (or scales) of fees in respect of the data matching exercises he conducts. Sub-paragraph (2) provides that a person required to provide data in accordance with paragraph 2 must pay the minister according to the fee scales provided for in sub-paragraph (1). Sub-paragraph (3) provides for circumstances where the work involved in a data matching exercise is substantially more or less than originally envisaged. The minister can charge the body a fee which can be larger or smaller than that referred to in sub-paragraph (2). Sub-paragraph (4) requires the minister to consult those persons required to provide data in accordance with paragraph 2 or other persons as he thinks appropriate before he prescribes a scale of fees. Sub-paragraphs (5) and (6) provide that the minister may charge a fee to other bodies providing information or receiving results for data matching and the terms under which such a fee is payable.
Paragraph 7 : Code of Data matching practic e
116. This paragraph requires a relevant minister to prepare and keep under review a code of data matching practice. Sub-paragraph (2) provides that all those bodies and other persons involved in data matching must have regard to the code of data matching practice. Sub-paragraph (3) requires the minister to consult those persons required to provide data in accordance with paragraph 2, such representatives of those persons (for example, the Local Government Association with regard to local authorities), the Information Commissioner, and such other bodies as he or she thinks appropriate before preparing or altering the code of data matching practice. Sub-paragraph (4) places a duty on a minster to: (a) lay the code before Parliament; and (b) publish the code from time to time.
Paragraph 8 : Powers to amend this Schedule
117. Sub-paragraph (1) of paragraph 8 provides for a relevant minister to extend by regulations the purposes of data matching exercises and to modify the application of this Schedule accordingly. Sub-paragraph (2) defines the extent of the purposes which may be added. Sub-paragraph (4) provides for the minister to add or remove public bodies to those listed in paragraph 2(2)(a) and (b), and to modify the application of this Schedule to those bodies. Sub-paragraphs (3) and (5) require the minister to consult certain persons before making any regulations under sub-paragraph (4). Sub-paragraph 6 defines the meaning of public body in this paragraph.
PART 7 – MISCELLANEOUS AND SUPPLEMENTARY
Schedule 10 : Amendments consequential on transfer of role of inspector
118. Schedule 10 (given effect to by clause 33) contains amendments to sections of the Local Government Act 1999. Under that Act, the Secretary of State can direct the Audit Commission to carry out an inspection of a specified authority’s compliance with its best value duties. This Schedule gives the Secretary of State a similar power to appoint a person to carry out such an inspection, following the abolition of the Audit Commission.
119. Schedule 12 includes some amendments relating to this clause.
Clause 3 4 : Examinations by the Comptroller and Auditor General
120. Health service bodies are already subject to examination by the Comptroller and Auditor General under the National Audit Act. This clause amends the National Audit Act 1983 by inserting section 7ZA to provide a power to the Comptroller and Auditor General to undertake and publish examinations regarding the value for money with which relevant authorities have used resources in undertaking their functions. Under that Act the Comptroller and Auditor General may carry out such examinations into any department which it audits; and similar studies may be conducted in relation to bodies that receive more than half their income from public funds and which are appointed (or whose members are required to be appointed), by or on behalf of the Crown. At the moment these powers do not extend to local authorities and many other local public bodies.
121. Clause 34 provides for the Comptroller and Auditor General to undertake thematic examinations relating to relevant authorities, although some relevant authorities are excluded from this power. The examinations must be designed to complement the National Audit Office’s role in holding Government to account to Parliament regarding the resources it provides to relevant authorities, or support relevant authorities to learn from any thematic or systemic issues identified. These powers do not enable examinations of individual relevant authorities and are not designed to produce assessment of the performance of individual relevant authorities or comparative analyses in the form of published league tables.
122. The Comptroller and Auditor General must consult relevant representative organisations of the relevant authorities which are subject of examinations under new section 7ZA and subsection (9) requires the Comptroller and Auditor General to take into account other relevant examinations in developing the programme. This clause enables the Comptroller and Auditor General to access information required for examinations from relevant authorities. It allows the Comptroller and Auditor General to combine examinations under this new power with examinations undertaken within existing powers (i.e. of government departments and other bodies as set out above).
Schedule 11 : Disclosure of Information
123. This Schedule (which is given effect to by clause 35) imposes an obligation of confidentiality in relation to a local auditor or a person or body exercising functions under the Act. It provides that no information obtained in the exercise of functions under the Bill which relates to a particular body or person can be disclosed except insofar as such a disclosure is made in accordance with the exceptions set out in paragraphs 2 to 4. Paragraph 5 provides that a person who discloses information in contravention of this Schedule is guilty of an offence, conviction of which can result in a fine not exceeding level 5 of the standard scale. However as set out at paragraph 5(2), if section 85(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force on or before the day on which this Act is passed, this will remove the limit on the fine on conviction.
Clause 3 6 : S ocial security references and reports
124. This clause enables a local auditor who has discovered social security issues when undertaking a local audit to bring these to the attention of the Secretary of State if the issues are relevant to the Secretary of State’s functions. This is intended to be a transitional measure, only having effect until the Welfare Reform Act 2012 repeals section 139D of the Social Security Administration Act 1992, after which a local auditor will still be required to send copies of any public interest reports to the Secretary of State, under Schedule 7. These provisions are necessary to ensure that powers are provided to auditors to refer any matters coming up through an audit once the Audit Commission is abolished, and before local authorities cease to administer Housing Benefit, as a consequence of the introduction of Universal Credit and other welfare reforms. Subsection (2) makes the necessary amendments to the Social Security Act 1992.
Clause 37: Duty of smaller authorities to publish information
125. This clause amends Section 2 of the Local Government, Planning and Land Act 1980 so that it applies to smaller authorities as defined in clause 6 (other than those already within section 4(4) of that Act; which for these purposes essentially means Passenger Transport Executives). Section 2 of that Act contains powers for the Secretary of State to issue codes of recommended practice as to the publication of information by certain authorities about the discharge of their functions and other matters which he or she considers to be related. Section 2 currently covers some, but not all, of the smaller authorities listed in Schedule 2 to the Bill. This clause will enable the Secretary of State to issue a "Transparency Code" for those smaller authorities. For smaller authorities exempted from the requirement for automatic external audit under clause 5(6), this is intended to facilitate local accountability. Any code will apply only to information relating to a financial year in which a body qualifies as a smaller authority under clause 6. Section 3 of the Local Government, Planning and Land Act 1980 enables the Secretary of State to make regulations requiring publication and to specify the manner and form in which the information is to be published. Before issuing a code or making regulations, the Secretary of State must consult authorities’ representative bodies.
C lause 3 8 : Code of practice on local authority publicity
126. This clause amends the Local Government Act 1986 to provide the Secretary of State with the power to give directions and make orders requiring local authorities in England to comply with one or more of the recommendations made in a code of practice issued under section 4 of that Act (a Code of Recommended Practice on Local Authority Publicity). The Secretary of State may give a direction to a single named authority, or to a number of named authorities, requiring compliance with some or all of the Code. The new section also sets out the procedures to be followed prior to giving a direction and for the withdrawal or modification of a direction. The power to require compliance with a Code by all authorities in a particular class, or by all authorities to which the Code applies, is to be exercised by Order, subject to the affirmative procedure.
Clause 39: Council tax referendums
127. This clause amends Chapter 4ZA of Part 1 of the Local Government Finance Act 1992 to include the cost of levies within a billing or major precepting authority’s calculation of whether its council tax is excessive, and so requires a council tax referendum to be held. In effect, this means amending the meaning of ‘relevant basic amount of council tax’ which is the primary trigger for council tax referendums from the current definition which excludes levies, to one that includes levies. This latter definition is also known as the ‘basic amount of council tax’, and is the amount that people see on their council tax bills.
128. Each year the Secretary of State may set referendum ‘principles’ for categories of authorities. One of the principles must be a comparison between the ‘relevant basic amount’ of council tax set by an authority in the relevant year, and that set in the preceding year. At present ‘relevant basic amount’ is essentially the Band D council tax set by the authority but adjusted to exclude any precepts issued to the authority and any levies received from a wide range of bodies.
129. The amendment made by s ub section (2) requires a billing authority that has set an excessive increase and triggered a referendum to notify any body that has issued a levy or special levy to it.
130. The amendment made by sub section (3) requires a billing authority to notify any body from which it received a levy or special levy of the result of the referendum.
131. The amendments made by sub sections (5) and (8) replicate these provisions for major precepting authorities (including specifically the Greater London Authority).
132. The amendments in sub sections (6) and (7) are minor consequential amendments related to subsections (5) and (8).
133. The amendments made by sub sections (9) to (13) change the definition of ‘relevant basic amount of council tax’ for billing and major precepting authorities (including specifically, in subsection (13), the Greater London Authority) so that it now includes any levies issued to them or anticipated by them. The relevant basic amount will continue to exclude any precepts issued to billing authorities, as precept-setting bodies are individually and separately subject to the referendum legislation.
134. Sub sections (14) to (16) make provision in relation to the referendum principles that the Secretary of State may set for the financial year beginning 1 April 2014. Specifically, they allow the Secretary of State to determine a category of authority on the basis of whether its relevant basic amount of council tax for the financial year 2013-14 would have been excessive if the relevant basic amount in that year and 2012-13 had been calculated in accordance with the newly-amended legislation. In short, this explicitly allows the Secretary of State to consider the impact of previous levy increases when setting referendum principles for the financial year 2014-15.
Clause 4 2 and Schedule 12 : Related amendments
135. This clause gives effect to Schedule 12, which makes a range of amendments to various Acts, related to the changes made by the Bill. Many of these are consequential and remove redundant references to the Audit Commission; however some make more significant changes to existing legislation. Of particular note are the following:
136. Paragraphs 2, 29, 41, 43 and 65 make consequential amendments to legislation setting out the powers and duties of certain inspection authorities: Her Majesty’s Chief Inspector of Prisons, HM Inspectors of Constabulary, HM Inspector of the Crown Prosecution Service, HM Inspectorate of Probation, HM Chief Inspector of Children’s Services and Skills, and the Care Quality Commission. The amendments remove references to the Audit Commission, which previously had powers to carry out inspections of certain local authorities and so would co-ordinate those with other inspectorates. They also insert provisions to enable inspectorates to do anything they think appropriate to facilitate an inspection carried out under new section 10 of the Local Government Act 1999 (see clause 33 and Schedule 10).
137. Paragraphs 47 and 48 amend sections 21 and 22 of the Local Government Act 2003. Section 21 provides a definition of proper practices in relation to accounts and gives a power to define accounting practices by regulation. These powers have formerly been used to apply professional accounting codes to principal local authorities and to establish accounting practices that avoid unwarranted increases in council tax. Section 22 provides a related definition of "revenue account." Both of these sections only apply to bodies that are local authorities as defined in that Act, plus three types of bodies (parish councils, community councils and charter trustees).
138. The effect of Paragraphs 47 and 48 is to extend the list of bodies to which sections 21 and 22 apply to include all relevant authorities under clause 2 other than health service bodies. Any further bodies included as a relevant authority in future will also be brought within sections 21 and 22, unless they are health service bodies
139. Paragraph 75 amends paragraph 9 of Schedule 13 to the Serious Crime Act 2007 by omitting the reference to Schedule 7 of the same Act. Schedule 7 modified section 32D(8)(b) of the Audit Commission Act 1998 by specifying that "... a person who discloses information to which this section applies is guilty of an offence and liable ... on summary conviction, to imprisonment for a term not exceeding 12 months, to a fine not exceeding the statutory maximum or to both". In line with Government policy to reduce the number of new criminal offences, the Local Audit and Accountability Bill does not contain any imprisonable criminal sanctions in relation to data matching.
140. Paragraph 91 amends the Housing and Regeneration Act 2008 to enable the housing regulator to appoint a local auditor to undertake an extraordinary audit of a local authority’s social housing accounts. This is consistent with the regulator’s existing power under that Act to order an extraordinary audit as part of an inquiry under section 206 in respect of a private registered provider of social housing.
141. Paragraphs 114 - 118 make amendments to the provisions in the Charities Act 2011 which concern the audit or examination of the accounts of English NHS charities. An English NHS charity is a charitable trust which has as its trustee an English NHS body, such as an NHS trust (see section 149(7) of the Charities Act 2011). English NHS charities are generally established by English NHS bodies in order to handle their charitable funds.
142. Paragraph 115(2) replaces the requirement in section 149 of the Charities Act 2011 that the accounts of larger NHS charities should be audited by a person appointed by the Audit Commission with a requirement that the audit be carried out by someone who is eligible to act as an auditor under either the Companies Act 2006, the Bill, or who is a member of a body specified in regulations under the Charities Act 2011. Section 144(1) of the Charities Act 2011 provides that this applies to NHS charities whose gross income in the year exceeds £500,000; or whose gross income in the year exceeds the accounts threshold (specified in section 133 of the Charities Act 2011) and whose assets exceed £3.26 million.
143. Paragraph 115(3) requires the trustees of smaller English NHS charities, with income of between £25,000 and £500,000 in the year in question, to appoint either an auditor (in the same way as larger English NHS charities) or a qualified independent examiner. Currently, the Audit Commission decides whether the accounts of smaller NHS charities should be audited or examined. Paragraph 115(4) sets out the criteria for someone to be qualified as an independent examiner.
144. Paragraph 115(5) removes the imposition of the requirements in section 3 of the Audit Commission Act 1998 on the audit of accounts of English NHS charities. The main provisions in that section relate to who should be appointed as an auditor. For NHS charities, these would be superseded by the provision in paragraph 114(2). Other provision in section 3 concerns the terms of appointment of auditors, which would become a matter for the trustees of an NHS charity.
145. Paragraph 115(6) extends the existing provision in section 149(5) of the Charities Act 2011 whereby the Charities Commission can give directions about the carrying out of examinations of the accounts of smaller NHS charities, so that the Charities Commission can also give guidance about the selection of independent examiners.
146. Paragraph 116 has the effect that if an NHS charity is the parent charity for a group of charities that meets the definition of larger group in section 151 of the Charities Act 2011, the auditor for the group accounts would in future be appointed by the trustees of that charity, rather than the Audit Commission. Paragraph 117 makes similar provision where a NHS charity is the parent charity for a group of charities that meets the definition of smaller group in section 152 of the Act.
Schedule 13 : NHS Trusts and Trustees for NHS Trusts: Transitory and Saving Provision
147. NHS trusts provide goods and services for the purposes of the NHS in England . They include acute trusts (hospitals), ambulance trusts and mental health trusts. NHS trusts are moving towards foundation trust status or another sustainable form. Section 179(1) of the Health and Social Care Act 2012 makes provision for the abolition of NHS trusts. This provision has not yet been commenced, pending the transition of all NHS trusts to alternative forms. Given the provision for the abolition of NHS trusts and their trustees , the Bill makes specific provision about NHS trusts and trustees for NHS trusts in Schedule 13, with p aragraph 1 providing that the Schedule will cease to have effect when there are no longer any NHS trusts. Paragraph 2 enables the Secretary of State to make further transitory or saving provision in relation to NHS trusts and their trustees, particularly in relation to the preparation of accounts covering the period during which an NHS trust ceased to be constituted as such.
148. Paragraphs 3 and 4 add NHS trusts and the trustees of NHS trusts to the list of "relevant authorities" in S chedule 2 and the definition of "health service bodies" in clause 3(9).
149. Paragraph 5 defines "accounts" in relation to NHS trusts and the trustees of NHS trusts for the purposes of clause 4 (General requirements for audit).
150. Paragraph 6 concerns the publication by an NHS trust or the trustees of an NHS trust of details about the appointment of an auditor. Specifically it provides that an NHS trust or the trustees of an NHS trust must publish the notice about the appointment of an auditor provided for in clause 8(4) in a way that the trust or trustees consider likely to bring the notice to the attention of patients of the trust.
151. Paragraph 7 makes similar provision to paragraph 6, but in relation to the publication of advice from the auditor panel provided for in clause 10(10).
152. Paragraphs 8 and 9 concern the failure by an NHS trust or the trustees of an NHS trust to appoint an auditor. If this happens, the trust or trustees must inform the National Health Service Trust Development Authority immediately. If the situation is not resolved by the 25 March which is immediately before the financial year for which an auditor has not been appointed, the Authority must notify the Secretary of State. The Secretary of State, once notified, may direct the Authority either to direct the trust or trustees to appoint an auditor or appoint one on their behalf; or take either of those steps him or herself. The Secretary of State or the Authority must inform the trust or trustees, not less than 28 days beforehand, of their intention to direct the trust or trustees to appoint an auditor or to appoint one on their behalf and must also consider any representations the trust or trustees make on the direction or appointment. However, there is provision for the Secretary of State or the Board to act without giving notice or considering representations, if the Secretary of State or the Authority considers that it is likely that a function would need to be exercised by an auditor within 60 days of a direction to appoint being given or an appointment being made. These provisions mirror those for clinical commissioning groups provided for in clause 13, except that the initial notification is to the National Health Service Trust Development Authority, rather than the NHS Commissioning Board; and the Authority, rather than the Board, can take steps to remedy the situation.
153. Paragraph 10 extends the provisions in clause 20 that apply to the auditors of the accounts of special trustees of a hospital, so that they also apply to auditors of the accounts of NHS trusts and trustees of NHS trusts. Paragraph 10 has the effect that the auditor of an NHS trust or trustees of an NHS trust must be satisfied that: the accounts present a true and fair view and comply with relevant legislative requirements; proper practices have been observed in the preparation of the accounts; and the trust or trustees have made proper arrangements for securing economy, efficiency and effectiveness in their use of resources. Unlike the auditors of clinical commissioning groups, audits of the accounts of NHS trusts or the trustees of NHS trusts do not have to be satisfied in relation to money and resources authorised by Parliament, nor that the trust’s or trustees’ financial transactions are in accordance with any relevant authority. These requirements are not relevant to NHS trusts or the trustees of NHS trusts, as NHS trusts supply services under contracts with clinical commissioning groups and others. Any "use of funds" opinion on the accounts of an NHS trust or the trustees of an NHS trust would therefore duplicate the opinions given by the auditors of clinical commissioning groups.
154. Paragraph 11 has the effect that a director of an NHS trust may not act as the local auditor for that trust or the trustees of that trust.
155. Paragraph 12 makes detailed provision on the way in which Schedule 7 (reports and recommendations) would apply to NHS trusts and the trustees of NHS trusts. It provides that where the auditor of an NHS trust or the trustees of an NHS trust makes a written recommendation or a public interest report, the recommendation or report must be sent at the time at which it is made to the National Health Service Trust Authority. This is in addition to the provision in paragraph 2(3) of Schedule 7 that the recommendation or report be sent to the Secretary of State. Paragraph 12 also makes detailed provision on the publication by NHS trusts and the trustees of NHS trusts of any public interest report made by their auditors. Specifically, paragraph 12 provides that the trust or trustees must publish the report in a way that they consider is likely to bring it to the attention of patients of the trust.
156. Paragraph 13 applies where the auditor of an NHS trust or the trustees of an NHS trusts believes that the trust or trustees, or one of its officers, is about to take or has taken decisions which have or would incur unlawful expenditure, or is about to take or has taken a course of action which would be unlawful and likely to lead to a loss or deficiency. The auditor must notify the Secretary of State and the National Health Service Trust Development Authority.
FINANCIAL EFFECTS AND PUBLIC SECTOR MANPOWER
157. The Bill confers several new functions on a range of publicly funded bodies, including the Secretary of State, the Comptroller and Auditor General and local authorities in England, which may give rise to charges on public funds. Overall, the Bill and the wider reforms to local audit, are expected to deliver net savings for central and local government.
158. The Bill will not represent a significant change to public service manpower.
SUMMARY OF THE IMPACT ASSESSMENT
159. A full impact assessment for the abolition of the Audit Commission and the new local audit framework (clauses 1 to 37 of the Bill) is available on www.gov.uk, the United Kingdom public sector information website. Copies have also been made available in the Commons Vote Office and the Lords Printed Paper Office.
160. The impact assessment estimates that the average saving of the ten-year period is £169m per year. Once the new framework is fully implemented local government will see a saving of around £144m per year, and central government a saving of around £25m per year. The net present value of the total savings over ten years is estimated as £1.2bn (with approx £731m being achieved over the duration of the outsourced audit contracts from 2012-2017). This saving can be broken down into the saving to local government, and the saving to central government.
161. A full impact assessment was published when the Code of Recommended Practice on Local Authority Publicity was revised in March 2011 and is available on https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/6056/1841098.pdf www.gov.uk.
162. A full impact assessment for the Council Tax Referendums measures was published alongside the Localism Bill in January 2011 and is available on. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/6026/1829683.pdf
COMPATIBILITY WITH THE EUROPEAN CONVENTION OF HUMAN RIGHTS
163. Section 19(1)(a) of the Human Rights Act 1998 ("1998 Act") requires the Minister in charge of a Bill at introduction (in either House) to make a statement before Second Reading about the compatibility of the Bill with the rights under the ECHR incorporated by the 1998 Act ("Convention Rights"). Having considered the Bill, and in accordance with section 19(1)(a) of the 1998 Act, the Secretary of State, Eric Pickles, has made a statement that the Bill is compatible with the Convention Rights.
164. The Bill potentially engages various rights under the ECHR, namely those under Article 6(1) and (2) (right to a fair trial), Article 8 (right to respect for private life) and Article 1 of Protocol 1 ("A1P1") (protection of property). However whilst those rights may be engaged in various ways, the Government’s view is that any interference is justified as proportionate and necessary in pursuit of a legitimate aim. More detailed analysis of the rights engaged and justification for any interference is set out below.
165. Much of th at analysis is focussed on whether an y interference is justified as described above. The auditing of local public bodies protects the public purse. Audits are essential to ensure that public bodies are capable of managing the financial challenges they face, providing authoritative, unbiased, evidence based analysis of a body’s financial statements. These are of vital public interest in ensuring that public bodies are providing value for money – the audit process can be used to drive value for money in local services. Data can be published to provide authoritative analysis of spending, providing a mechanism to asses the efficient use of, as well as identifying the misuse of, public money.
166. An effective, robust and transparent system of local audit is therefore overwhelmingly in the public interest and necessary for the economic wellbeing of the country.
167. The discussion below considers those provisions in the Bill where rights may be engaged under one or more Articles of the ECHR. Where a clause is not mentioned, this is because, in the Government’s view, no rights are engaged. No issues under the UN Convention on the Rights of the Child arise in connection with this Bill.
Part 1 of the Bill: Abolition of the Audit Commission – Article 8
168. The abolition of the Audit Commission has the potential to engage Article 8 as the Commission holds information collected from previous audits of public bodies. This information may include personal information about those bodies, individuals working within them, or about people associated with them. Section 49 of the Audit Commission Act 1998 Act prevents the disclosure of information and imposes a criminal sanction upon unsanctioned disclosure.
169. To the extent that any personal data were disclosed after the abolition of the Audit Commission this may engage rights under Article 8(1). Personal data is protected as part of an individual’s right to private life under that Article. Processing personal data (including sharing it) may interfere with the respect for private life, requiring justification under Article 8(2) (i.e. it must be in accordance with the law and necessary and proportionate in pursuit of a legitimate aim).
1 S and Marper v United Kingdom (2008) App. Nos. 30562/04 and 30566/04.
2 Hilton v UK (1988), Application no. 12015/86, 57 DR 108.
170. Data that the Audit Commission currently possess will be transferred to other bodies in accordance with any transfer scheme made under Schedule 1 to the Bill or it will be protected under the existing contracts which the Audit Commission has (and which will survive its abolition) with its suppliers. These contracts contain detailed provisions about compliance with the Data Protection Act 1998 ("DPA") and protecting confidential information. To the extent that any data already held by the Audit Commission is personal or sensitive personal data it will of course remain protected under the DPA.
171. As such the Government is satisfied that the treatment of any personal data will be compliant with Article 8. Stone v South East Coast Strategic Health Authority  discussed that the safeguards in the DPA derive from Article 8; the DPA gives effect to the Data Protection Directive, which sets out the Article 8 requirements for the processing of personal data.
1 Stone v South East Coast Strategic Health Authority  EWHC 1668.
172. So far as an individual’s Article 8 rights might be interfered with, the Government views this as justified in the pursuit of a legitimate aim – namely, the economic well-being of the country. Failure to share information that has been collected by the Audit Commission over many years would inevitably place an additional burden on those bodies taking over its roles. The Department therefore takes the view that the sharing of personal data does not overstep the margin of appreciation that has been afforded to the state when striking a fair balance between the rights of certain individuals to respect for their private life, and the conflicting interests of the community as a whole.
1 Hatton v United Kingdom (2003) ECHR 338.
173. In respect of any personal information obtained by a local auditor (or the other bodies exercising former Audit Commission functions) once the Audit Commission has been abolished, this may only be disclosed in accordance with Schedule 11 to the Bill and a person who does otherwise commits an offence. Schedule 11 permits disclosure only in specified circumstances or for the purposes of exercising statutory functions. Persons processing personal data will also be required to do so in accordance with the DPA.
174. For these reasons, the Government is satisfied that any interference with an individual’s rights under Article 8 will be in accordance with the law and both necessary in pursuit of a legitimate aim, namely the economic wellbeing of the country and proportionate to that aim, having regard to the safeguards that are and will be in place.
Part 4 of the Bill: Regulation of auditors – Articles 6, 8 and A1P1
175. Part 4 of the Bill applies (and modifies as appropriate) the regulatory regime for statutory auditors contained in Part 42 of, and Schedule 10 to, the Companies Act 2006 to local auditors. In particular it imposes requirements that local auditors be members of a recognised supervisory body (RSB) and eligible for appointment under the rules of that body. Schedule 10 requires RSBs to have rules that bind their members about matters such as eligibility for appointment, competence to practice, and fit and proper persons. Any rules about the admission or expulsion of members or the grant or withdrawal of eligibility for appointment must be fair and reasonable and include adequate provision for appeals.
176. The cumulative effect of these clauses is to impose a requirement that auditors conform to specific professional standards, and affords the professional regulators with the power to terminate a professional’s right to practice whilst providing procedural protections for an individual auditor. It is the Government’s view that these could fall within the scope of Article 8(1) as interfering with a person’s private life . If a local auditor is deprived of their livelihood as a consequence of the new regulatory regime, any interference would need to be justified under Article 8(2) in the sense that the regime must be necessary in pursuit of a legitimate aim and proportionate to that aim.
1 Niemitz v Germany (1992) 16 E.H.R.R.
177. The Government does not believe that t he requirements imposed by this Part are unusual or onerous and, as indicated, any rules and practices regarding these matters must be fair and reasonable and make provision for appeals. It is common to require professionals to possess a certain degree of competence and to conform to a supervisory or regulatory regime. It is recognised that, in order to safeguard others, individuals or bodies who hold themselves out as possessing certain skills can be subject to regulation. The majority of provisions merely seek to impose the same regulatory standards upon local auditors as already exists for statutory auditors. As highlighted above, it is essential that the public has confidence in the audit process and that the audit of public bodies is properly and effectively carried out to protect the public purse. Requiring local auditors to submit to a regulatory regime is necessary and proportionate to that legitimate aim.
178. The Government is, therefore, satisfied that so far as Article 8 rights are engaged, any interference will be justified under Article 8(2).
179. These provisions might also engage A1P1 in the sense that an auditor no longer eligible to practi s e may be deprived of a contract or contracts that he or she would otherwise have had.
180. In Holder v Law Society , the claimant argued that the exercise of the Law Society’s power of intervention under the Solicitors Act 1974 amounted to a violation of his A1P1 rights . However, the Court of Appeal held that the intervention procedure was in the public interest and involved a balancing exercise of the type required by A1P1.
1  1 WLR 1059.
2 Albeit this case concerned the freezing of the applicant’s client account.
181. The Government is satisfied that any interference with rights under A1P1 would be justified. As highlighted above, the need to regulate auditors is in the public interest, achieved proportionately and balanced with the individual’s rights .
1 Holy Monasteries v Greece  EHRR 1 para 4.
2 Sporrong and Lonnroth v Sweden  5 EHRR 35, para 69.
182. These provisions might also engage rights under Article 6(1) as a determination of an auditor’s eligibility for appointment (and thus right to practice) may be the determination of a civil right within the meaning of that paragraph. Strasbourg case law generally suggests that this is more likely to be the case where the outcome of any proceedings is decisive for the individual’s right to practice his or her profession. As already indicated Schedule 10 requires the rules and practices of an RSB relating to the admission and expulsion of members and the grant and withdrawal of eligibility for appointment to be fair and reasonable and to include adequate provision for appeals. The Government is therefore satisfied that any proceedings against a member will satisfy the requirements of Article 6(1) so far as it is engaged.
Offences under Part 42 of the Companies Act 2006 (as applied by Part 4 of the Bill)
183. A number of offences which are contained in Part 42 of the Companies Act (as applied by Part 4 of the Bill) and which will apply to local audit – modified as appropriate - contain reverse burdens. That is to say they require the defendant to show or prove, on the balance of probabilities, the defence. These may, therefore, engage rights under Article 6(2) (presumption of innocence)
184. Article 6(2) does not prohibit rules which transfer the burden of proof to the accused to establish a defence, provided that the overall burden of establishing guilt remains with the prosecution. Any rule which shifts the burden of proof or which applies a presumption operating against the accused must be confined within reasonable limits.
1 Weh v Austria, App. No.38544/97 2004.
2 Lingens and Leitgens v Austria (1981) 4 EHRR 373 at 390.
185. In establishing what these limits are case law has considered the proportionality of the measure to be relevant, whether the burden imposed on the accused relates to something likely to be within his or her knowledge and the nature of the threat faced by society which the provision is designed to combat.
1 R v Lambert (2001] UKHL 37.
2 Attorney-General’s Reference (No. 4 of 2000) sub nom.
186. It is an offence under section 1213 of the 2006 Act (as applied) for a person to act as a local auditor when they are ineligible for appointment. It is a defence for a person charged with the offence to show that they did not know and had no reason to believe that they were (or had become) ineligible for appointment.
187. This reverses the burden of proof requiring the defendant to "show" that they did not know that they were ineligible for appointment and as such engages rights under article 6(2). However in the Government’s view it is appropriate to place the burden of proof on the defendant in this instance, since these will be matters falling entirely within the defendant’s knowledge and not something of which the prosecution can be aware. Moreover the prosecution is still required to prove the essential elements of the offence: namely that the defendant acted as a local auditor when they were ineligible for appointment.
188. It is an offence under section 1250(2) of the Companies Act (as applied) for a person to hold themselves out as a local auditor in circumstances in which they do not appear on a register of local auditors. Similarly a body commits an offence if it describes itself as, or holds itself out to be a RSB when it is not. It is a defence for a person charged with the offence to show that they took all reasonable precautions and exercised all due diligence to avoid the commission of the offence.
189. Again, this reverses the burden of the defence, requiring the defendant to show on a balance of probabilities that they took all reasonable precautions and thus engages article 6(2). However again, the Government is of the view that it is appropriate to place the burden of proof on the defendant in this instance, since the precautions they took are matters within their own knowledge. The prosecution must still prove the essential elements of the offence, namely that a person held themselves out as an auditor (or an RSB) whilst not on the register.
190. The Government is satisfied that the defences to charges under both sections 1213 and 1250 comply with the relevant case law considered above and for the reasons explained (namely that this information is solely within the defendant’s knowledge and proof of the essential elements of the offence rests with the prosecution) placing the burden on the defendant to show these matters is reasonable and does not prevent a fair trial from taking place and as such is compatible with Article 6(2).
1 Attorney-General’s Reference (No. 4 of 2000) sub nom.
191. Moreover both these offences are already contained in the 2006 Act and so far as the Government is aware, no successful challenges have been brought in respect of them and their compliance with Article 6(2).
Part 5 of the Bill: conduct of local audit – Articles 6 and 8 and A1P1
192. By virtue of clause 21 a local auditor has a right of access to documents and information that relate to the relevant authority and are necessary for the purpose of the auditor’s functions under the Bill. The auditor may also require persons to provide information or explanations. Under clause 22 a person who obstructs that access or fails to comply with a requirement (without reasonable excuse) commits an offence.
193. T he Government believes that these provisions may potentially engage rights under Article 8 in the sense that information or explanations may include personal information and engage the right to private life.
194. Clause 21 is required to enable the auditor to have access to all documents and information that they consider necessary to perform the audit. To the extent it interferes with any Article 8 rights, the Government consider s that it is a necessary and proportionate interference to ensure that the audited bodies are able to rely upon the audit and to enable the public to have confidence in the audit process. This transparency is a key factor in the purpose of the audit, as discussed above.
195. Insofar as rights under Article 6(1) might be engaged ( because a statement made or an explanation provided by a person may subsequently be relied on in evidence against them ), Article 6 does not prevent the use of compulsory questioning powers during the course of an investigation - it is only relevant where the prosecution seeks to adduce such evidence in the course of a criminal trial. To address this, subsection ( 10 ) provides that a statement may not be used in criminal proceedings other than for any proceedings brought under clause 22 (offence of obstruction or failure to comply with a requirement under clause 21).
1 R v Hertfordshire County Council ex p Green Environmental Industries  1 AER 773HL.
196. The right to be protected against self-incrimination is not absolute – the Court will look at the nature of the breach in deciding whether it is proportionate , including factors such as whether the information required of itself proves guilt. In this case any statement made would be admitted for the purpose of establishing whether or not an offence of, for example, obstruction had been committed – not to establish whether or not another potentially more serious offence had been committed. Whether or not a statement has been made in response to a requirement (and the content of that statement) go to the heart of any offence under clause 22. Given this and the fact that the offence provision is necessary as a means of enforcing the powers under clause 21 (which themselves are necessary to ensure effective audit) and that the maximum penalty is a fine of level 3 on the standard scale and an additional daily £20 fine, the Government considers that any interference under Article 6 would be necessary and proportionate.
1 Brown v Stott  2 WLR 817.
197. Clause 25 makes provision about the inspection of accounting records and any documents supporting those records. The Court of Appeal in the case of Veolia ES Nottinghamshire Ltd -v- Nottinghamshire CC  EWCA Civ 1214 found in respect of the forerunner to this provision (section 15 of the Audit Commission Act 1998) that it should be read down so as to exclude from that right confidential information unless its disclosure was justified in the public interest so as to ensure the provision was compatible with A1P1. Clause 25 therefore makes express provision in this regard. Information may not be disclosed if its disclosure would prejudice commercial confidentiality and there is no overriding public interest in favour of its disclosure. In so far as any rights under A1P1 are engaged by the right of inspection, these rights are protected by subsection (4). Personal information is similarly protected to ensure there is no interference with rights under Article 8. This replicates similar protections contained in section 15 of the Audit Commission Act.
Part 6 of the Bill: Data matching – Article 8
198. Part 6 of the Bill confers power on the Secretary of State or the Minister for the Cabinet Office to conduct data matching exercises, comparing sets of data to determine to what extent they match. An example of this would be taking two local authority payroll databases or a payroll and housing benefit data bases and matching them. Matches should not occur – where they do it may highlight fraudulent activity. 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).
199. As the provision and sharing of data may include personal information rights under Article 8(1) may be engaged.
200. Only a relevant Minister may conduct data matching exercises or arrange for them to be conducted on his or her behalf. Data matching is only exercisable for the specific purposes listed in paragraph 1(3) of Schedule 9 – the prevention and detection of fraud. The data matching exercise cannot go beyond this; to predict trends in an individual’s characteristic for the potential to commit fraud in the future for example.
201. The disclosure of any information from a data matching exercise is only permissible in certain circumstances (paragraph 4 of Schedule 9), and any person that acts outside of this requirement commits an offence (paragraph 4(7) of Schedule 9).
202. The Government is s atisfied that any data matching exercise would be undertaken in accordance with the law, and any failure to do so would result in criminal proceedings.
203. As mentioned, the purpose of the data matching exercise is to assist in the prevention and detection of fraud. The Government considers that this is a legitimate aim in the interests of the economic well-being of the country and for the prevention of disorder or crime and that the data matching provisions, coupled with the appropriate safeguards in place, are a proportionate measure of achieving this.
204. Clause 46 makes provision about commencement. Clauses 1 to 37 and 42 (provisions to abolish the Audit Commission and establish the new local audit regime and related amendments ) come into force by order made by the Secretary of State .
205. Clause 38 (provisions to ensure compliance with the Code of Recommended Practice on Local Authority Publicity) come s into force 2 months after the Act is passed .
206. Clause 39 (amendments to the council tax referendums provisions) come s into force on the day the Act is passed.