Session 2010-11
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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 763-vi

HOUSE OF COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE THE

COMMUNITIES AND LOCAL GOVERNMENT COMMITTEE

AUDIT AND INSPECTION OF LOCAL AUTHORITIES

MONDAY 4 APRIL 2011

AMYAS MORSE

GRANT SHAPPS MP

Evidence heard in Public

Questions 461 - 606

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Communities and Local Government Committee

on Monday 4 April 2011

Members present:

Mr Clive Betts (Chair)

Heidi Alexander

Bob Blackman

Simon Danczuk

David Heyes

George Hollingbery

James Morris

Mark Pawsey

Steve Rotheram

Examination of Witness

Witness: Amyas Morse, Comptroller and Auditor General, gave evidence.

Chair: Good afternoon.

Amyas Morse: Good afternoon.

Q461 Chair: Welcome to our final session on the audit and inspection of local authorities. For the record, could you introduce yourself and say what organisation you represent?

Amyas Morse: Certainly. My name is Amyas Morse. I am the Comptroller and Auditor General. I am also in charge of the National Audit Office.

Q462 Chair: Thank you very much for joining us. For the sake of clarification at the beginning, could you tell us whether you’re here this afternoon expressing personal views, or has any formal position been taken by the Public Accounts Commission, to which I understand you report on these matters?

Amyas Morse: I report to the Public Accounts Commission for funding purposes, so I’m not here expressing a view that it might take.

Q463 Chair: So you’re simply expressing a personal view at this stage, in your capacity as Comptroller and Auditor General.

Amyas Morse: That’s right.

Q464 Chair: The Government made their announcement about the abolition of the Audit Commission on 13 August. Were you consulted about that beforehand or did you learn about it from the media, as I did?

Amyas Morse: I was aware of it shortly beforehand, yes.

Q465 Chair: Aware but not consulted?

Amyas Morse: In a way consulted, in that there was some visualised role for us and obviously we were asked whether we were able to carry out that role.

Q466 Chair: But the consultation was purely-specifically-on that narrow issue about the possible role for the National Audit Office?

Amyas Morse: It wasn’t on the policy issue.

Q467 Chair: Have you had discussions subsequently about the particular role that the National Audit Office might perform with the Secretary of State or the Minister?

Amyas Morse: I have only met the Secretary of State once, the day before the announcement, but my team, mainly, and I from time to time, have met officials. My team have played a part in a steering group where the Audit Commission was also represented and have regularly met officials, talking about the shape of the consultative document and how all that might be organised.

Q468 Chair: I understand there may be particular roles for the National Audit Office to perform, but as the person who might be seen as the country’s senior auditor, you must have a view about the whole approach to the abolition of the Audit Commission and whether the decision was taken in line with the arrangements for best audit practice and value for money.

Amyas Morse: Just for a moment, if I may, I’ll explain why I haven’t given you a written submission or anything of that sort. It’s because I’m an Officer of Parliament and, in order to do our job, we very much are enjoined not to get involved in policy and political issues, so normally I would not want to be on either side of a debate. In this case, it was pretty clear, as soon as we became aware of this, that it was a policy-driven decision. It wasn’t a question of merit or demerit. Then if I add my private comment to that, while I have a lot of respect for and good relationships with many in the Audit Commission, I think that both the Audit Commission arrangements have pluses and minuses to them and, as a matter of fact, I think that the proposals being put forward are also practicable-different but practicable.

Chair: Okay. We’ll probably explore those in a little more detail as we go along.

Q469 George Hollingbery: I am intrigued by the idea that this was a policy-driven decision. It may have been a decision taken in isolation from evidence by the Secretary of State. Does that make it policy driven?

Amyas Morse: What it means is that, as I have always understood it, it was to do with the consideration of wanting to decentralise the arrangements-not to have a large Government body running them and so forth. I took that to be a policy-type decision. I didn’t understand it to be a scorecard; I understood it to be a decision to have a different set of arrangements.

Q470 George Hollingbery: As a matter of interest, let’s say that the Secretary of State had come to you with a question about value for money, about how much was being spent, about efficiency and about what the Audit Commission had done and had produced. Did you have any evidence or research that you could produce that would have told him about that?

Amyas Morse: I would have only had evidence of what I had been able to observe, which wouldn’t have been systematic.

Q471 George Hollingbery: So no systematic undertaking of any research by the NAO on what the Audit Commission had done in its how many years of auditing?

Amyas Morse: We are auditors of the Audit Commission, so we’ve obviously audited its accounts and to some extent we look at that, but that’s a different question from, leading up to this decision was some evaluation done? No.

Q472 George Hollingbery: So not on its effectiveness or efficiency at all. You had done nothing of that sort. You had not undertaken any Audit Commission-type review of the Audit Commission?

Amyas Morse: Have we prepared some unannounced report on our evaluation of the efficiency of the Audit Commission? No.

Q473 Mark Pawsey: With regard to the audit of local authorities, which is the issue we’re investigating currently, does it matter if the auditor is appointed by the local authority? In your view, would that make the auditor less impartial than if he was appointed by the Audit Commission, as has been the case?

Amyas Morse: The independence of the auditor is very important and is one of the fundamental principles of public audit, which we support. I think it’s quite practically achievable to get independence of appointment through arrangements that involve having an audit committee with strong non-executive and external elements in it. I think it’s achievable to get a suitably independent appointment through that means. The reason I think that is that I’ve seen it quite a lot in the commercial world and therefore I’m not amazed by the idea that you could do it.

Q474 Mark Pawsey: But does the audit of a Government body necessarily have to be carried out by a Government organisation? Is it appropriate for the audit to be carried out by a private sector body?

Amyas Morse: It is a question of the quality and the surrounding buttressing, not of the inherent nature of whether the body is private or public.

Q475 Mark Pawsey: Would you say that there is no reason why a private sector body should not be capable of auditing a local authority?

Amyas Morse: No, I cannot see an inherent reason why.

Q476 Chair: You are absolutely certain that the measures, as proposed, can safeguard the independence of auditors? That seems absolutely crucial.

Amyas Morse: Let me, Chair, be as clear as I can. Like many things, it is not a question of what is being proposed. Can it possibly do it? Yes, it can. The question is, will the safeguards be put in place and will they be enforced rigorously? In other words, it is as much about implementation as about concept, and, actually, the implementation needs rigorous attention. So, yes it can be done, but it needs a strong approach, not just a bit of lip service to it.

Q477 Chair: This is a fundamental change, isn’t it? Going back-well, as long as anyone can remember-local government and councils have not appointed their own auditors. I think that the last major look at this was the Layfield commission, which recommended that that principle should stay. So, this is quite a change of principle, isn’t it?

Amyas Morse: The principle is independence. I have thought carefully about this, because I guessed that you might ask me these questions-and quite rightly, too. In my view, the question is, is the appointment independent? That is the question. It is not a principle that it must appointed by a public or an external body. If you get the right arrangements in place, I believe it is possible to get independent appointment, because through the consultation process we could come to a viable set of independent appointment criteria.

Q478 George Hollingbery: What is your recommendation to the Committee for ensuring that this is an independent process? Is it statute? Is it direction from Government? How does that work? As a new MP, I am afraid that I am not familiar with the potential processes.

Amyas Morse: First, there is a proposal that it should be compulsory that there be an audit committee. If you do not have an audit committee and you don’t have it also laid down on a statutory basis that there must be a significant balance of independence in the appointment activity, setting aside what you might do for the rest of the audit committee’s supervisory activities, I think it is essential that, for the appointment activity in particular, there must be a very clear, demonstrable independent majority-that would be my view, personally-to be sure of getting independence.

As we go through the debate, it may be possible to buttress that further and further, but it is important that it be clearly demonstrable that that committee does not have a majority of those involved in the council in detail for that function. If you get it right in that way, it is feasible to have demonstrably independent appointment. That would be my view.

Q479 Mark Pawsey: How would you enforce that? How would you make sure that that happened?

Amyas Morse: If you have a clear set of duties on the audit committee, and they are clearly set forth in statute, you are in a position where it is a public duty that is either carried out or not carried out. There are clearer responsibilities and they can be called to account by the Department, or whichever body is nominated.

Q480 Mark Pawsey: So you would enshrine it in law, rather than leaving it up to the individual local authority to decide what is best for them.

Amyas Morse: Yes. I do not think it should be open to them to decide what is best for them in matters of independence of that kind.

Q481 Chair: May I take this further? You talked about independence of the audit committee, but as I understand it in the Government’s consultation document the audit committee would not have a veto over the appointment of auditor and, probably even more importantly, would not have a veto over an authority’s decision to sack an auditor. Is that something you would want to see strengthened?

Amyas Morse: Forgive me, Chair, but I am going to keep on saying that, rather than picking individual pieces of the arrangements, we have to be satisfied that the overall result is that this is an independent appointment process. So, whatever the combined elements that are put together as we go through consultation and go towards finalising the proposal, what has to be absolutely clear is that it is demonstrably independent. That, I would say, would be true whether we were doing that or whether we were looking at unchanged arrangements through the Audit Commission. You have to be able to demonstrate independence of appointment.

Q482 Chair: If the final decision rests with the whole council, which is the council effectively being the auditor, will that process be demonstrably independent?

Amyas Morse: As you have described it, I would not be automatically sold on it. I would be looking for something that had a strong external voice in the appointment process.

Q483 Simon Danczuk: Are you comfortable with the new responsibilities that the Government are proposing for the National Audit Office following the abolition of the Audit Commission?

Amyas Morse: Largely, yes.

Q484 Simon Danczuk: In terms of the capacity and skills within the National Audit Office, do you think that it is capable of delivering what is required?

Amyas Morse: For the most part, yes. There may be some specialist skills that we need to have. We would not say that there is nothing we should learn, but as we sit here, yes, I think so.

Q485 Simon Danczuk: There has been a big debate about savings around the abolition of the Audit Commission. Do you expect some funds to be transferred from the Audit Commission to yourselves or do you expect to deliver it all within your existing £95 million annual budget and 900 staff?

Amyas Morse: First, I would not want to receive any funding from the Government. I am funded by the Public Accounts Commission, and I have been very open with it. So far, I have not asked it for any additional money, because I did not know exactly what we would be asked to do, and I still don’t. Once we get to the end of the consultation process and these matters become firm, I will go back to the Public Accounts Commission if any additional funding is required. It is certainly not my ambition to have any material change in the size of my organisation as a result of this, but obviously there may be something that I need to do.

Q486 Chair: May I pick up on one phrase you used? It is worth me trying to dissect the answers just to dissect the accounts. When you were asked about the capacity of the National Audit Office to carry out the suggested work, the word "largely" came in.

Amyas Morse: I am only being prudent. It is not because I have some special secret flaw in mind. We deliver a substantial number of studies that take account of local delivery. However, if there are a significant number of things you are being asked to do-which, on the face of it, you think you can do-it would be a bit foolish to say that there is nothing else that you need until you have precise responsibilities and understand the task properly.

Q487 Simon Danczuk: Does that not make it difficult for the Government to predict what sort of savings they are likely to make? They have been talking about £50 million a year savings. How can they reach that figure if they don’t know what funds you may or may not require?

Amyas Morse: The amount of resources that I would require for this would be quite marginal. I am just trying to avoid making a statement that I regret later on.

Q488 George Hollingbery: I ought to know, but don’t know, where your funding is derived from and where it is voted from. Can you tell me exactly?

Amyas Morse: I am going to get this right, so I may have to turn round to my team. We propose a budget to the Public Accounts Commission. It is voted directly from Parliament, so it is a direct vote, and you will see it as a separate line in the requisitions of the parliamentary vote. We propose a budget every year, and we appear before the Commission twice yearly-once to propose a budget and once to report on how we are doing. We are quite tightly controlled. For what it’s worth, we are in the process of reducing our costs by 18% over three years.

Q489 George Hollingbery: But it is a fine matter, is it not, to contend that your money does not come from the Government? It comes directly not from Government, but from Parliament, and therefore the taxpayer. Ultimately, that is correct, is it not?

Amyas Morse: That is absolutely correct, but it is not a fine distinction but a very significant distinction. Neither Ministers nor officials have any say in the amount of our funding. I am asked by the Chair, "Have you got the funding you need to do the job properly?" It is up to me to say yes. I have proposed that we make a reduction in our budget, primarily because I don’t want to be in a position of looking at and reporting on colleagues in the civil service, and looking as if we are not practising what we preach. I wasn’t invited to do that by the Commission. So, to be clear, it is very careful not to do anything that could be construed as interfering in our ability to do the work we need to do.

George Hollingbery: That’s a useful distinction. Thank you very much.

Q490 Simon Danczuk: May I ask a quick supplementary? So that I am clear, is it not Parliament that should determine the expansion of your responsibilities, or it is the Government and Ministers?

Amyas Morse: That’s correct. I didn’t answer properly. I have a clear understanding with the Public Accounts Commission that, before I commit to any additional resource or activity, I will seek its agreement.

Q491 James Morris: May I press you a bit more on the capacity of your organisation to take on the role, for example, of producing the audit code of practice? Doesn’t that imply a high degree of specialisation and skill? You said earlier that you didn’t evaluate the effectiveness or value of the Audit Commission’s work; you were merely the auditor. Isn’t this a very specialised area? The Chair referred to your word "largely". Isn’t it underestimating the scale of the task of taking on this new function, because it implies detailed knowledge of how local government works, which your organisation doesn’t have?

Amyas Morse: We have people who have worked in local government, and we’ve taken care to have more of them, so we have experienced people who can be directed at that work. If I wasn’t confident of that, I wouldn’t be saying this. But there is a reason for having a fairly fluid community. We have people with significant local government experience already.

Q492 James Morris: You don’t envisage this costing you any more? Do you have an estimate?

Amyas Morse: It may do, because we’re doing something we don’t do now, so there is a certain amount of time to allow us to see that we’re doing it-

Q493 James Morris: Do you have some estimate of what you think it will take to take on that particular role?

Amyas Morse: No, but I am talking about relatively small numbers.

Q494 James Morris: When you say "relatively small", what does that mean?

Amyas Morse: Okay. Setting the standards and, more importantly, consulting with local authorities about standards, which, by the way, I regard as crucial to this-

Q495 James Morris: There are quite a few local authorities to consult with.

Amyas Morse: I don’t have an estimate, but I think it is a few million a year, not more than that. If you want to know what a few is, it is less than five. Is that all right? I am trying my best to be clear.

Q496 George Hollingbery: I am sorry to return to the previous question, but Mr Danczuk has stimulated another question in my mind, and again it is a fine question. If you take over a role, you are not part of Government budgets. Is that correct? You are part of parliamentary budgeting, not part of Government budgeting.

Amyas Morse: That’s right.

Q497 George Hollingbery: Therefore, anything you take over from Government is automatically a reduction in Government spending, and becomes someone else’s problem. Is that correct?

Amyas Morse: You may take that view, sir.

Q498 Heidi Alexander: Under the fragmented local audit functions that could exist in future, I wonder how confident you feel that you will be in a position to provide assurances that public money is being properly spent.

Amyas Morse: Well, apart from auditors, local authorities have something to say about that. I believe that it’s feasible for us to talk about the focus of audit, which will be governed by the practice guidance to some extent, and to ask whether, in the opinion of the local authorities and in our opinion as the appointed auditors, it focuses sufficiently on the issues that really matter, even at the moment, and whether it could focus better on them. I don’t believe that the only possible outcome of the change is that things could get worse. For example, you could focus more on the processes for establishing value for money through good governance statements, rather than through VFM activity. You could do VFM work when there is a large project or a reason for examining value for money. In other words, it might be possible to have something rather more targeted that looks more deeply at budgets and things of that sort.

That is something that, in dialogue with local authorities, was seen to be very valuable, yet, on an objective basis, we felt we could support. If different firms were applying that code, you would have to make sure that they all understood the code, and that the authorities understood it and were making sure it was being applied properly. That is not a difficult task.

Q499 Heidi Alexander: There are quite a number of changes in terms of the provision of future services. The Government talk a lot about making sure that different providers can get involved in the provision of local authority services-whether that is community, voluntary or third-sector organisations. There has been a lot of talk about community budgets and the reduced audit requirements for smaller bodies. In light of those changes and the changes to the audit regime, what is your thinking on the overall assurance that you can give about the expenditure of public money-whether it is value for money and whether it is being used in the best way possible-given your national responsibilities?

Amyas Morse: You are quite right to talk about my national responsibilities, which are primarily to Parliament, to follow taxpayers’ money and ensure that we have reasonable assurance that it is being used efficiently and effectively and that it is being applied as intended. You are right about that. Some of the changes on localism have nothing to do with what is happening with the audit arrangements. If you look at some of the proposals for community budgets and so forth, what they hold out is an opportunity in some cases for the more efficient use of resources. If there is enough information for those who are carrying out the activities to be in reasonable management control of them and know what’s happening-what’s being done with the resources and what’s being delivered-there should be enough information to get assurance on it.

I am not appalled by the fact that there may be different and more flexible models locally. It is possible to obtain assurance on those just as much as if you have a very formulaic model. It is possible to do so, yet you need to adapt to that. Auditors are capable of and used to adapting to that, so it can be done. If I can add to that, the important point is that the audit approach should focus on what really matters in a particular area. If nothing much is happening and you have a fairly simple set of services, the main issue is, as pressure comes on in terms of the scale of funding that you’ve got, the main focus should be on the adequacy of budgeting and on the financial sustainability of the body. If there are no major projects and nothing much is going on that needs to be examined for value for money, perhaps we should allow ourselves to focus our efforts on where the action is. That is not a bad way of going. It is a slightly more flexible approach that involves focusing on what really matters in a particular local authority.

Q500 David Heyes: In the consultation papers, the Government envisage an NAO role in value for money studies in local government, which is work currently undertaken by the Audit Commission. Is that another area that you feel largely comfortable about in terms of your ability to undertake it?

Amyas Morse: In many ways, the Audit Commission does a good job on that. However, to be clear, it is not territory that is unknown to us. I shall just name a few of our many studies on services and local delivery. In the past year or so, we have done work on tackling the problems of drug use and seeing how that impacts locally. To take another example, we have looked at how people with autism are supported and how that works through different communities. I have about 20 such examples.

It is not as if all we ever do is look at central Government activity. We’re quite accustomed to looking at applied programmes to see how they have worked. I believe that there’s quite a lot we can do to help as we take up this role. In particular, I think we’ll be able to look at how cost reduction is being carried through, and how it is being managed. We’ll look at financial resilience across the population and at different delivery models.

It is interesting to look back from local government at central Government and see how heavy a burden central Government place on local government and how they interact with it. We’re already developing a study at the moment on whether local government gets a huge volume of communication, different guidance and directives from central Government, and whether there’s a more organised and more cost-efficient way of giving that guidance that doesn’t place the same cost burdens on local government.

Q501 David Heyes: Indicative figures suggest that the Audit Commission spent about £5 million last year on 20-odd value for money studies. That’s the kind of work that I guess you’re expected to take on. If it cost £5 million to conduct those studies, it will be a considerable demand on your current resources. Is it something that you’ll be able to do?

Amyas Morse: We do 60 reports a year at the moment. We’d have to assess how much we could fit in with the scope of our existing capacity, and to what extent would we need any new resource to do that work.

Q502 David Heyes: Would your approach to this produce a lower or similar average cost per report?

Amyas Morse: I haven’t made a comparison. The cost of our reports is going down as we get more efficient.

Q503 David Heyes: Indicative figures that we’ve seen suggest that the Audit Commission reports typically cost half of what the NAO’s value for money reports cost. Does that sound familiar to you?

Amyas Morse: That may well be; it’s a question of what you do in writing the report. While they are valuable, many of the reports that the Audit Commission is doing involve comparing information that is already available on a number of local authorities, whereas our value for money reports mostly involve going in and investigating large projects and programmes, which entails a great deal more investigative and research work. In many cases, the reports are different types. If you look at the average cost, it’s not strictly comparable. My idea of it is that some of the work that we already do could quite reasonably be redirected into doing these projects.

Q504 David Heyes: I guess that the Local Government Association has a view on this value for money work. Have you discussed this with the LGA?

Amyas Morse: Yes.

Q505 David Heyes: What was the gist of those discussions? What was the outcome?

Amyas Morse: It was interested in these systemic, value for money reports.

Q506 David Heyes: Does it value them?

Amyas Morse: Yes, it does, and it’s clear to me why. We’ve done a bit of work to try to understand it. I’ve personally visited two or three local authorities and met the Local Government Association to try to get some understanding of its views. It’s clear that the LGA regards these wider systemic reports that allow people to draw comparisons as in some way valuable.

Q507 David Heyes: Has it voiced similar concerns to what was inferred by my question-that you might not have the capacity to continue doing the same quantity or quality and depth of reports that the Audit Commission managed to do in the past?

Amyas Morse: It hasn’t expressed that. Frankly, I’m not feeling worried about that.

Q508 James Morris: May I ask one specific question? It may be slightly tangential to value for money, but in answer to an earlier question you said that you have never done an evaluation of the efficiency or otherwise of the Audit Commission. Then you talked about wanting to understand about costs and central Government’s interaction with local government. Has any work been done that’s identified the cost of compliance for local government with the requirements of the Audit Commission or any wider agencies? In response to the Lyons inquiry, the National Audit Office estimated that the cost of compliance for local public bodies is somewhere in the region of £2 billion. Is that a number that you recognise?

Amyas Morse: The fact that I don’t doesn’t mean it’s not true. It may just mean that I haven’t covered it in my preparation for this.

Q509 James Morris: It’s quite surprising that the National Audit Office hasn’t done any systematic work on that, because the cost of compliance is critical to value for money for central Government. If you evaluate the cost of compliance, there’s huge scope for saving there. Isn’t it quite surprising that it hasn’t done that kind of work?

Amyas Morse: I am not very surprised that, out of all the areas we look at, we haven’t done that particular one. If you’re suggesting the subject as a future study, it may well be a good one to do.

Q510 George Hollingbery: To develop the line of questioning a tad further, you’ve had some fantastic results, frankly, in the financial impacts that you’ve achieved. We understand that £890 million in financial savings has been made-mostly cashable, as far as I can see-across Departments. The Audit Commission itself doesn’t have any figures on what it might or might not have saved across its remit, but it says that with spending of £200 billion, if 1% in savings is achieved, it is clearly worth while. Do you think the NAO will be able to achieve similar levels of success when examining local government in its value for money studies?

Amyas Morse: What we will be doing in terms of direct examination will be only on studies across local government, so I really couldn’t make any prediction on that. It should be that if we draw lessons out of such studies generally-they affect a lot of local authorities, so they should be of considerable value-of course that value only comes if there is action on them.

In our work on central Government, in addition to agreeing the value that has come from our work with the Departments concerned, which is where we get our figures from, we also review very closely whether or not, when there’s been a report and recommendations have been made and accepted by a Department, the Department then carries them out. In many ways, I regard success in identifying issues as when a Department does something, moves forward and improves capacity. We really think that’s the most important measure of success-not that it should necessarily do exactly what our findings say, but that it does something that ups its game in that direction-because we know we’re having a beneficial effect. There is a surprisingly high correlation in that area.

Will we be able to do that in local government? Will we be able to find correlations like that? I hope so, and I am optimistic we can have a positive effect, but you might find that the Audit Commission could have done just the same, if it had correlated the evidence in that way. I’m not assuming we’re going to be miraculously better than the Audit Commission.

Q511 George Hollingbery: It’s quite an interesting juxtaposition. I have in my head the idea of your being internal audit for national Government. That is a truism, I guess; that is what you are, ultimately.

Amyas Morse: We are not just internal audit. We actually carry out the formal audit of the accounts. That is to say, we give an opinion on a true and fair view of the regularity of the application of the funding and the statement of internal control signed off by the accounting officer. We also do value for money reports on Government. The value for money piece of our activity is the one that’s closest to an internal audit.

Q512 George Hollingbery: I remember receiving, as a little tiny councillor, lines saying, "Action: has it happened?" and so forth. The reason why I bring that up is that it occurs to me that, to take it down the scale into local government, there are only so many themes that are really large enough at your level of examination to register on your radar. Therefore, it seems to me that there is a potential gap between what you can provide at that level and what internal audit can provide at the local council level. Is there not, potentially, a gap in between, where there may be a scale of activity that isn’t examined?

Amyas Morse: I am fascinated by trying to improve the efficiency of what happens in the public sector. If we find there’s a gap, we’re not going to just sit and look at it; we’ll find some way of working with the local authorities to see that it is addressed. I don’t mean that that will necessarily be done by us, but perhaps it would involve looking at the remit of the local auditors, providing the auditors with better information as to what they should be looking at or making sure that we join up tightly with them. If these proposals go into statute in the form that they are now, I would certainly take that view-a positive, developing view.

Q513 George Hollingbery: I’m very attracted by that proposition, but do you believe that the consultation and your proposals, as they stand, give you that authority to make different arrangements from those that currently exist out in the field?

Amyas Morse: I think it’s feasible, through the guidance arrangements that we have, that we could do that. Through the proposals, I think that’s feasible. There’s an opportunity for regular discussion and consultation, which, I hope, would let that happen.

George Hollingbery: And potentially lead to solutions that are local, but inspired by national guidance.

Q514 Simon Danczuk: Some 20% of your audit is done by private sector auditors and 30% of the Audit Commission’s work is done by private sector auditors, and that’s going to dramatically increase according to the Government’s proposals. Why is your figure so low? Should the amount of private sector audit work not increase?

Amyas Morse: That is a perfectly reasonable challenge. Our percentage is low, because we use the private sector to supplement what we do. For completeness of disclosure, it’s probably becoming even a bit less, because as we work more efficiently and use our resources better, we find it cheaper to work our in-house resources. So, quite honestly, on the one hand, that’s true.

Why don’t we propose to use the private sector more and act, effectively, as a commissioning house, which is a model that you could say should be there? In our case, with central Government, we’re talking about quite a restricted number of very large Departments. Without a substantial degree of continuity all the way through the Departments and an awareness of the issues that run through them-you’d be amazed how we find the same issues occurring again and again in central Government, with people not using information properly, not knowing what things cost and not having strong enough financial management-we wouldn’t be able to identify all those issues and see how they run through those very large Departments and through the non-departmental public bodies that they set up and run. I’ve asked myself that question, because it’s a perfectly fair challenge. I genuinely think there’s a big difference in kind between auditing central Government and auditing devolved local government.

Q515 Simon Danczuk: The history of the Audit Commission shows that it took on more roles and responsibilities and a greater work load as it developed, to the point where it was seen as unwieldy and had to be abolished-that’s one story. Are you not worried that that’s what’s going to happen to the National Audit Office?

Amyas Morse: My primary role is working for and with Parliament-I don’t lose sight of that for one minute. I’ve been very careful to state that as my primary role here. If you think about it, we’re very careful in what we say we’ll do. I really believe in what we do for Parliament. We need to see strong local authority audit arrangements, and we’re prepared to play a part in that, but I’m trying to stay to our primary function of supporting Parliament in holding the Executive accountable. If I thought anything that we were proposing might take away from that, I would be strongly against it.

Q516 Chair: Can I pick up on one point there? You were explaining the benefits of having one organisation audit across Government Departments to pick up the same problems and issues, and then you said that that doesn’t really apply in the same way to local government. But those of us who know local government would say that exactly the same problems and issues come up from one council to another, so you could have learning across the piece.

Amyas Morse: Yes. I can understand that may well be true, but I would simply say that, in central Government, these are actually the same organisation. You get a lot of issues in, say, the Ministry of Defence or the Home Office, some of which are cross-Government issues, and we draw those out. Many are particular to the particular Ministry, but common across all branches of that Ministry. If you’re in the Department for Transport, it’s really valuable to understand what’s happening across the spectrum of transport activity in order to do a good job.

Q517 Chair: You said at the beginning that you hadn’t been consulted about the principles involved in the Government’s decision, but if you had been asked at the beginning to design from a blank sheet of paper a system of audit for local government in this country, would it have been anything like that which the Government are now proposing?

Amyas Morse: That is a question that I am really not able to answer. It’s a completely hypothetical question. As I have said, I keep out of policy questions; I’ve never even allowed myself to think about it.

Q518 Chair: Right. Let’s bring you back to the world of reality then and look at the proposals before us. I’m sure you’re aware that the other day the House of Lords Committee that has been looking at audit in the private sector was very critical of the regulation of accounting and auditing, which it said was "fragmented and unwieldy with manifold overlapping organisations and functions." If it is Government policy, as it is, to get rid of the comprehensive area assessments, get rid of a body having a commissioning role for the audit of local councils and get rid of a body nationally that does the audit of local councils, a number of regulatory functions are left and they have to be done by someone. Would it make more sense to have those regulatory functions done by one organisation, perhaps even the National Audit Office?

Amyas Morse: Thanks for the thought, Chair. What’s being discussed is that the Financial Reporting Council would act as the quality regulator on the auditors. It is, in my experience, a pretty ferocious regulator, and it is very experienced across the whole of the audit market in the UK. I know that, because we use it on some of our work, so I’m speaking from personal experience. For us to set up as a regulator would be a big new activity, and I don’t fancy starting from scratch on that.

Q519 Chair: Are there any dangers that there might be functions of the Audit Commission that the Government want to continue but which could somehow fall between the cracks of the various bodies that will be involved in this process in the future? Perhaps you will share with us things that you have concerns about and which you feel need addressing as part of the consultation exercise.

Amyas Morse: I understand that the audit practice is going to be mutualised, and I understand what’s to happen on the regulatory front, but I think it’s important that with those functions of the Audit Commission that aren’t going to go somewhere else-the elements that may remain-which are, in my view, mostly Executive activities of Government, such as the national fraud initiative and possibly, if it were thought necessary, some sort of management of the audit market, it would be very significant to hear that the department really did have the capacity and the people to carry out those functions.

You’re quite right to say that in all these changes, we don’t want something to drop to the floor and we don’t want unnecessary risk to be taken. I understand and support that. I understand your question: I am just taking stock of that range of activities, and the ones that I’ve mentioned are probably the ones that don’t have a natural home and need to be taken care of by the department itself, which involves making sure that it actually has the capability and resources to do that. I’m sure that it’s got the capability, but the question is whether it has got the resources.

Chair: Thank you very much for your time this afternoon.

Examination of Witness

Witness: Grant Shapps MP, Minister for Housing and Local Government, gave evidence.

Q520 Chair: Minister, good afternoon and welcome. May I say at the beginning, it was extremely helpful to have your consultation document, so that we had a chance to look at it before you came this afternoon? That was very helpful, and timely in its production.

The obvious question is, was it necessary to abolish the Audit Commission?

Grant Shapps: We think that the Audit Commission had lost its way, I suppose you would say. It had itself become quite unwieldy, as a way of auditing local authorities. Things move on-it has done a good job in the past, but things move on and, with localism and transferring a lot of the power and responsibilities locally, we think that the right thing to do is to send some of the audit locally as well.

Q521 Chair: We have had quite a lot of evidence from a range of different organisations and individuals, and I think it is true to say that not many have come along and said, "Everything should remain as it is. The status quo should be kept." But if the Government were intent, as they were, on getting rid of comprehensive area agreements and the Audit Commission’s role, and if Government had a view for localism, saying that auditors should be appointed locally and that that function should not be a national body, then what about the rest of the functions of the Audit Commission? Wouldn’t it have been easier to have left those with the Audit Commissioner as a regulator of the situation?

Grant Shapps: One of the things that the Government have been very keen to do this first 10 months is to remove duplication and to cut through some of the bureaucracy. If you look at the role of the Audit Commission, it is quite an old-fashioned role. I have been reading some of the evidence from other witnesses you have had here, and one thing that came through to me, which perhaps had not done as much-even before reading what it had to say-is just how centralist the Audit Commission is. It is the regulator, the commissioner and, for the most part, it is the provider as well. There are not that many other spheres even of public life where we think that one organisation should go in and do all those things, let alone a sphere of life involving auditing, which is so transparent and open and has a proper market around it out there in the real world, with private companies being audited all the time, every single day. It seemed extraordinary that, in the end, we had settled on a system that was rather centralist. For those reasons, and many others, we thought that it was time to ensure that we can do this better, more efficiently, more locally, more transparently and with better value for money.

Q522 Heidi Alexander: Last week, you published a consultation on the future of local public audit. Why did you decide the fate of the Audit Commission before you carried out this consultation?

Grant Shapps: Governments have to have a view on things. Ministers are there to lead-we have had these conversations in Select Committee before. We are put in place to take some broad decisions, and a broad decision, in our view, is something along the lines of, "It doesn’t make sense to have a national public body in control of the regulation, commissioning and the providing", and we think that that could be done better, either through a mutualisation, more market competition or a combination. In any case, a lot of the work done by the Audit Commission is impacted in other ways by work done by other agencies. The National Audit Office is an obvious example. It produces the remit-the regime-within which audit takes place.

We think that the Minister’s role is to make the big headline decision, the consultation should decide the final outcome and we will publish a draft Bill, as you know, to ensure that Parliament has plenty of time to consult on it. I welcome the fact that the draft Bill idea has been welcomed by the Committee.

Q523 Heidi Alexander: So it was about grabbing a headline?

Grant Shapps: No, not at all. It’s about leadership.

Q524 Simon Danczuk: When do you expect the Audit Commission to close?

Grant Shapps: There is a process, as you know. The consultation-a full consultation-runs for 13 weeks, from last week when I kicked it off. We will then get the responses, and we will look at those through the summer. We will then draft a Bill to let Parliament take a proper look at this issue. I am pleased to have improved on some of the arrangements that were pointed out in at least one of this Committee’s earlier investigations into the code on local government publications. We try to work together to ensure that you actually get to publish your reports and then we can take account of them. We are doing it to the right timetable and we are sticking to our overall objective of doing this post-2012. Post-2012, we will find that audits are no longer being done in this centrist, top-down way.

Q525 Simon Danczuk: Post-2012? So that could be 2013, 2014, 2015, 2016 or 2017?

Grant Shapps: If you are referring to some of the comments by the Audit Commission chairman in the weekend’s press, I don’t recognise that sort of timetable. I want to point out to the Committee that there could be a vested interest, of course, in extending the timetable, if you happen to be involved in the organisation. But we are very much pushing ahead with this process. The consultation is out there, the draft Bill is the next step and, as with all things in Parliament, you need to have the legislative slot to put the legislation through. So I can’t give you an actual date, but in our view the process is running on track.

Q526 Simon Danczuk: You are right, because the chairman of the Audit Commission has said, "The latest we’ve been told by officials is that they were looking at the latter part of 2014, possibly the end of 2014". He went on to say, "If somebody gave me decent odds, I might have a small wager on 2015...it’s a possibility." So you’re saying it will happen well before 2015, but after 2012?

Grant Shapps: I saw that story, and I don’t recognise those timings at all.

Q527 Simon Danczuk: But you can’t estimate.

Grant Shapps: I can tell you that we’re progressing with it in the proper manner, which is to put out the consultation document first. That document is out there. There’s no delay. The draft legislation will follow, once we’ve had a chance to look at the consultation responses and, by the way, your own report, which we are very keen to take into account. Then, as soon as we have a legislative slot, we’ll put the Bill in there. I don’t think any of that should take the kind of time scales mentioned in that weekend article.

Q528 Simon Danczuk: The reason why I mentioned it is that if you are going to abolish a large public institution, is it not reasonable for you to inform the public and, just as importantly, the Audit Commission staff about when you are going to close the organisation? Should you not give an estimate?

Grant Shapps: We were very disappointed that it was the Audit Commission itself which chose to tell its own staff ahead of a formal announcement of these plans. I thought that that was very inappropriate. I absolutely agree with you that we want to provide certainty for members of staff. It would be helpful if the Audit Commission itself stopped briefing the weekend press on rumours and started to hear what we are saying as Ministers, which is we are moving ahead with the abolition of the Audit Commission to exactly the time scale that we had always envisaged. I would have thought that the fact that the consultation is out there, that we’re publishing a draft Bill and that we are doing this with due process in mind would have been welcomed by every parliamentarian.

Q529 Simon Danczuk: Could it not be the case that the Audit Commission will now have to recruit staff to work to the timetable that you are suggesting?

Grant Shapps: The Audit Commission will do whatever it needs to do to ensure that it can continue its statutory function; it is not for us to tell it how or when to do that. We try not to interfere, apart from when the Secretary of State blocked the £240,000 that was asked for the chief executive’s salary last year and apart from when we encouraged it to reduce its costs, which I am pleased to see it has done-at least it says it has done-by £11 million. It is not for us to tell it in precise detail.

It would help if the commission were not going around sending out smoke signals about varying timetables and spreading uncertainty. There is no uncertainty as far as the Government are concerned. In front of you there is the process. You know exactly what the process is. I don’t see what is to be gained-for the staff, in particular-from the chairman going around saying these things.

Q530 Simon Danczuk: My final question is this. One of the problems with your not being able to set a date by which the Audit Commission will close is that you cannot then estimate what the savings are. The Secretary of State initially estimated that £50 million would be saved each year. Does that figure still apply or are you revising it?

Grant Shapps: Yes, no, very much so. In fact, I think that the deeper you go into this the more you realise that there are some really significant savings to be made through local audit and the additional competition that it provides, for example. As the Committee will now be aware, 20% is charged on every audit that is carried out by the Audit Commission as a sort of surcharge. As the Committee may also be aware, that 20% is charged when the Audit Commission sends in a private company to do the work, which happens in 30% of cases. It charges a 20% surcharge on that work as well.

I think that there are certainly much more efficient ways in which these audits can be carried out. If anything, the evidence since the initial guesstimates has been large and I certainly do not recognise some of the Audit Commission’s views. I see that it has said that there may be only £10 million to save or something like that. In fact, that might be representative of where the Audit Commission, which thinks nothing of spending £53,000 on designer chairs-some at £900 each-has got to, that it thinks that £10 million is just a drop in the ocean.

Q531 Chair: Can we have a note on the Government’s latest calculations of what the savings would be?

Grant Shapps: Yes, it will be in the impact assessment when we publish the draft Bill, so we will give you chapter and verse at that time.

Q532 Chair: Is it not possible to have the information now?

Grant Shapps: No. That work has to be done as part of the draft Bill. There are all sorts of decisions that are made in drafting the Bill, some of which will be reflected on from the outcome of the consultation. You would not expect me to prejudge a consultation. You would not expect me to want to prejudge your own report. So we are very sensibly taking into account some of the feedback that we get from that before creating an impact assessment.

What I can tell you is that there is nothing that I have seen since the announcement of the abolition and the headline £50 million figure that leads me to suspect that the number is any smaller. In fact, the more you look into this, the more you see how money is being spent by the Audit Commission-£18,000 on bespoke photography for the launch of the report into the comprehensive area assessment, for example-there is nothing that does not lead you to think that you could save a lot of money by abolishing it.

Q533 Chair: There must have been some work done to arrive at the £50 million figure. So could we have that calculation?

Grant Shapps: Yes. What is available is in the original announcement. We know that things like the overheads that I have described-

Q534 Chair: So can we have the £50 million figure broken down?

Grant Shapps: The £50 million figure that we have already put out there is a headline figure. It was there when we said that we would abolish it. In outline terms, it includes things like the comprehensive area assessments, which have gone; the overheads-I have described how the commission charges a premium of 20% on audits both ways, even when it is private-

Q535 Chair: So there is a calculation that applies to that figure? Can we have that?

Grant Shapps: It is a ballpark figure. There is no further detail that I can give you on that until the impact assessment, at which point you will get chapter and verse and all the detail that you could possibly want.

Q536 Chair: So the £50 million figure is not based on any detailed calculations?

Grant Shapps: The £50 million figure was based on what we think it is possible to save. I have given you some very practical examples and I would be interested to hear these enormous salaries-

Q537 Chair: But Governments don’t make announcements about saving £50 million unless someone, somewhere in the civil service has done a calculation about which Ministers feel, "That’s okay. I can agree with that and announce it."

Grant Shapps: Yes. We think-

Q538 Chair: So can we have the figures?

Grant Shapps: We think that if you look at the costs involved in the Audit Commission-these are costs that we talked about at the time. Some £28 million-

Q539 Chair: Can we just have a statement on how the £50 million was arrived at?

Grant Shapps: I can’t give you more than is already in the top-line statement.

Q540 Chair: Today you can’t, but presumably there is something back in the Department somewhere?

Grant Shapps: I think you’ve got everything you’re going to get on the subject. But when you get to the impact assessment, you’ll have chapter and verse on what can be saved each and every year. What I am saying to the Committee is that everything that we have seen subsequent to the announcement leads us to believe even more that there are some really big and significant savings to be made. We will be not at all backward in coming forward with that in considerable detail, but the correct time to do that is at the time of the impact assessment, when we can provide detail on the decisions that are being made as an outcome of the consultation and your own work.

Q541 Simon Danczuk: Is there a clear breakdown of the £50 million saving? The headline figure, as you called it.

Grant Shapps: No. It is an estimate. We’ve said all along, "We estimate that there is £50 million."

Q542 Simon Danczuk: But somebody calculated the estimate.

Grant Shapps: The whole basis of an estimate is that you come to an approximation that you think is in the ballpark. In fact, as I have said, not only do I think it is £50 million, but from the work that has been done since, and depending on the way things shape up, it could be more.

Q543 Simon Danczuk: It’s a guess.

Grant Shapps: It’s an estimate. We can go into the dictionary definition of an estimate, but when you make an estimate what you do is look at the costs, including the cost of things such as the comprehensive area assessment, the 20% that is charged to both sides of an audit, and so on.

Here is a very simple figure: the Audit Commission has a turnover of £120 million and it charges 20% on all its audits. There is a sum of money, therefore-it could be in the tens of millions-that we know is a charge made on its audits. We know that the Audit Commission was very top-heavy when it came to corporate administration-so much so that, now we have announced this, it seems to have managed to drop £11 million from its figures.

We know many such things and, by adding up those different elements, we come to a ballpark, an estimate. We never said that it is £50 million.

Q544 Simon Danczuk: But nobody added them up and the figure hasn’t been written down. Is that what you are saying?

Grant Shapps: I just told you that the add-up is some £50 million. Are we going to go into detail on that? No. Are we going to go into considerable detail on what we think the precise saving, or a more precise saving, will be? Yes. The difference is that one is an estimate that we think we can achieve.

Q545 Simon Danczuk: Either somebody has written it down and added it up-in which case, can we have that list?-or they haven’t, so we can’t have the list. It is one or the other, isn’t it?

Grant Shapps: It is written down in the press release announcing the abolition. I have given you some ideas about how the figure has come about, but you will have to wait until the impact assessment, which will give it in considerable, painstaking detail.

Q546 George Hollingbery: We shall move on from that clearly explained point. At least we’ve gone as far as we’re going to go on that one.

I am interested to know the balance in the decision between saving money, which the Government have made quite a lot of, and the policy issues on how the Audit Commission works. Where is the balance in your taking that decision?

Grant Shapps: We think that in today’s world it is an archaic system in which one organisation takes on all of those different roles and is, in fact, quite proud of the idea that it has become the fifth largest auditor in the land. That worries us. We don’t think that the role of the state is to challenge innovation and enterprise.

Thinking that it is an achievement, as I was once told by the Audit Commission, to have become the fifth largest auditor displays an attitude problem at least. As I have explained, having the regulator, the commissioner and the provider wrapped up in one organisation is an inappropriate model of localism, transparency and the rest of it, for the 21st century.

There is a principle that, from a public administration point of view, local audit would be a better way to go about things, but we also think that, as we have just explored in some detail and will go back to in much more detail in the future, there is a very large and substantial saving to be made each and every year by having a more commercially based audit regime.

Q547 James Morris: We were just talking to the National Audit Office, and it was quite a revelation that no work has been done to estimate the cost to local government of compliance with a top-down inspection regime or audit practice. The only time when the National Audit Office has made a comment was in response to the Lyons inquiry, in which it estimated that the cost to local government and local bodies of compliance was some £2 billion a year. Do you agree that that would be worth exploring further, not only in terms of potential cost savings from the abolition of the Audit Commission, but in terms of the cost to local government of compliance more generally?

Grant Shapps: That is absolutely right. Stories may have to be written retrospectively on this-in five years, at the end of the Parliament as opposed to the beginning. At the beginning of the Parliament you still had comprehensive area assessments and different sources of funding. There were an enormous number of different variables pitched in. There were 90 to 100 different funding streams to local authorities, which had to be independently audited. Ministers had been sending them down the line to be spent on individual sums and so on and so forth.

The 2006 report on mapping of local government performance said that up to 80% of officials’ time was spent answering questions to central Government with an enormous regulatory cost and burden attached. Although I accept that some of that had been removed-the Local Government Association thinks perhaps 25% of it had-that still leaves an enormous looking up, not looking down-or looking out, rather, to your residents as a regulatory cost to the local authority.

You need to view the changes that we are making as not just being about a body called the Audit Commission, a conglomerate doing all these different things, but also about the job that we are asking to be done on the ground-this gets to the point of your question-which is much reduced. I can say to members of the Committee today that if that is not £50 million a year, I will eat my hat at the end of 2015, because it seems to me that there is enormous waste in the system.

Q548 Mark Pawsey: Minister, may we move on to consider the impact of the changes that will be brought about by the abolition of the Audit Commission? One of the key principles of public audit is the independence of the auditor, and of course that was ensured by having the auditor appointed by the Audit Commission. Under the new regime, there will be a strong audit committee. What evidence exists that, and can you explain how, local councils will be able to recruit and retain an audit committee of sufficient calibre and independence to ensure that that principle will be maintained?

Grant Shapps: Sure. First, it is worth saying for the record that I do not think there is anything particularly spectacularly independent about a regulated commissioner or provider being the same body and often providing itself to do the work. There is nothing inherently independent about that situation.

Secondly, perhaps it is worth explaining the kind of vision for this as we see it. First of all, the National Audit Office produces a code of practice answerable to Parliament. There is therefore a proper democratic independent approach to the auditing itself. Then we have the professional bodies regulating the auditors themselves, so it is not a case of having any Tom, Dick or Harry coming in to become an auditor. You have already got to be an auditor of some considerable reputation, which you would want to defend, before you can become an auditor doing this kind of work.

Then the audit committees themselves, which you have alluded to, would have to be made up of more than 50% independent members, who are independent of the council. That means that they cannot be councillors, they cannot work for the authority and they would need to have an independent voice and oversight of this. So the intention is to set up a kind of good, solid but very transparent process so that everyone can see what is going on, and the independence is increased by not just having a largely monopoly supplier.

Q549 Mark Pawsey: Sure. But what evidence is there that local authorities will be able to recruit such people?

Grant Shapps: About 80% of authorities already have some type of audit committee-not necessarily independent ones; possibly 50% could be classed as independent. I read some evidence to the Committee suggesting that there simply are not good people out there who would be willing to come forward. That is not my experience in local government.

You don’t have to look far to see examples of all sorts of people prepared to pitch in and help their community. We think that there will certainly be people available and willing to do that in a sprit of public spiritedness. Also, of course, local authorities can share-in fact, it makes them more independent when they share their audit committee, if they want to do that, which potentially cuts down considerably on the number of people required to do the job.

Q550 Mark Pawsey: Even the TaxPayers’ Alliance saw some dangers in this relationship and spoke about the possibility of cosy relationships between public bodies and private companies. In light of that, would it be appropriate for there to be some kind of statutory framework?

Grant Shapps: Sure. I am very sensitive to the idea that we end up with some sort of cosy relationship with the same auditors put back in place time and again. We have specified probably five years and then we would reappoint it for one five-year term, which should be the maximum for any one firm, and the lead auditor could not stay in place for more than seven years.

We are certainly very aware and concerned to ensure that there are potential changeovers in the system. This is not all brand new stuff, because very large businesses in this country, and many smaller ones, have turnovers of over £6.5 million and are audited successfully by the private sector. I see no reason why the same should not be the case for a local authority.

Q551 Mark Pawsey: But there is a large number of local authorities, which vary massively in size. Under localism it is appropriate that the auditor is appointed locally, but there may be bodies that need some help and support from somewhere. Is that something that your Department might continue to do in future?

Grant Shapps: Yes. You would still have the professional bodies, which are pre-selecting for you in the first place. Your field of choice does not include every auditor that you find on Google; it is companies that specialise and have been signed off to do that kind of work. So you know that whichever one you pick will be a company that is capable of doing the job.

At the moment, the Audit Commission acts as regulator and sets your price, whereas with this system, as with any other marketplace, the customer gets to choose who they go with and there has to be proper competition. That seems to be a perfectly obvious approach to buying services. Local authorities are well used to going out and competitively buying services-by the way, they could club together and buy them, too-so we have every reason to think that they will do so efficiently, which will help to drive down costs and increase the saving even further.

Q552 George Hollingbery: We are interested to hear what you have just said about the five-year limit or the seven-year limit, but the Comptroller and Auditor General has just been in front of us, and he was concerned that an independence of audit should be absolutely cast-iron insured. I got the impression-this is my interpretation, not necessarily exactly what he said-that he was looking for an independence of audit committee. Paragraph 3.6 of the consultation document relates to advice from the audit committee to a council; there is not an independence of audit committee to appoint the auditor itself.

Grant Shapps: That is a very interesting point. People are elected to authorities to make decisions. This is similar to the original question, "What made you think you had the right to make a decision?" The answer is that you are elected. People can agree or disagree with your decisions.

We think that councils and councillors are in the same position-they have a right to make that decision-but it becomes incredibly embarrassing and difficult if your audit committee on one hand says, "Actually, we disagree, and we are going to make a public statement of disagreement." Again, sunlight and transparency would help greatly.

As you have mentioned, that is a point in the consultation, and the consultation is genuine-we are very interested in people’s views. We will be taking, among other things, the outcome of the Committee’s judgment into account before we issue that Bill, which is a draft Bill, so people will have a chance to see it in more detail. I am certainly sensitive to taking those views on board.

Q553 George Hollingbery: You gave a commitment to set the provisions about with rules in statute that ensure an absolute observable transparency and independence to setting who the auditor is on a regular basis.

Grant Shapps: Absolutely. There is nothing perfect about today’s audit position if you still end up with a Doncaster, or what have you. Any system will have its shortcomings, and in the Government’s view, the best way to protect against things going wrong is for everything to be transparent. The disinfectant of sunlight, the transparency and the knowledge of the fact that the audit committee is not happy will put enormous pressure on people who are elected. But ultimately, we think that it is right that elected people are able to make decisions. One of the biggest changes that we are making with localism is to ensure that many more decisions can be made at a local rather than a national level.

Q554 Chair: I want to come back on the same point about the Comptroller and Auditor General, which is very important. Generally, I am very much in favour of localism and local councillors deciding things, but the audit of the accounts is something that requires a degree of independence. It is about not only the appointment, but the dismissal, of auditors, which is, in some ways, more worrying. If an auditor appears to be an inconvenience who is doing the wrong things, whatever the audit committee says, the council might be able to live with the embarrassment to get rid of the auditor. Should there be consideration of strengthening the code of practice?

Grant Shapps: We would, were it not for the fact that the auditors are regulated, their reputations are so important to them and you are not talking about thousands or, potentially, hundreds of auditors involved in this marketplace. Essentially, any auditor who gets involved knows that their reputation is worth more than that individual audit, which is the check and balance on ensuring that any auditor who comes into place will be pretty certain to write what they really think.

Q555 George Hollingbery: The point is in reverse. If that auditor is doing precisely that, we do not want to see a council dismissing them because they are making waves.

Grant Shapps: The trouble for the council, if it was minded to do that, which it shouldn’t be, is that not only would it have to overcome its independent audit committee exposing it, but the council would have to deal with the next auditor it chose telling it to do exactly what it did not like in the first place. The system is a pretty good check on itself. We will take the representations on that point seriously and listen to what you and others have to say.

Q556 Bob Blackman: On the point about regulation, you said that the Audit Commission has a multiplicity of roles. One of the concerns, which has been echoed, is that, potentially, we are into a very much more fragmented arrangement, with one or more professional bodies doing the regulation, the Financial Reporting Council doing a bit and the National Audit Office doing a bit. The one strength that the Audit Commission had was that it brought all that together. It seems as if it will be very much more fragmented and difficult for the public to understand how it all works. In your consultation, you seem willing to listen to ideas. I wonder where your mind is on that at the moment.

Grant Shapps: Can I present this with a different direction of sunlight? We are simplifying what is a complicated situation. The idea that the public understand that the Audit Commission duplicates some of what the professional bodies are about is not likely to be, in the real world, a particularly well understood situation. Yet, that is exactly what happens. Doing away with the Audit Commission and letting the professional bodies be responsible for regulating the auditors is a simplification. At the moment, you have the professional bodies and the Audit Commission both regulating the auditors, of which there are only three or four involved externally anyway, which is the basic problem with the current model.

The new system will be very clear. The National Audit Office, answerable to Parliament, will get to debate its code of practice. The professional bodies will get to regulate the auditors and set the bar for how good you have to be to take on this kind of work, so that a council or audit committee-when they make a recommendation for an auditor-can be absolutely certain that any of those people will be right and that the differences will be more to do with fit and how much they will charge and so on.

That is a simple structure that most people will understand. After all, people do not say, "My goodness, it is incredibly confusing to work out which auditor to bring in." I was in business for 20 years, and I was never confused about where to find an auditor or which one to bring in. We want to make this a bit more like the very successful audit that takes place in the private sector.

Q557 Bob Blackman: The one issue that will be different, which auditors will tell you, is that local authority and central Government auditing are different from private sector auditing. You could bring someone in, but as a local authority you may end up teaching them what to do to create the market.

Grant Shapps: We want this to be a more level playing field. We think that the Companies Act 2006 provides a good basis for that. We understand that we are dealing with public money; there are not shareholders to hold the audit process to account. Instead, we need to have something in place, which is why we will have the code of practice from the National Audit Office.

If the NAO thought that something was systemically going wrong with the entire process, it would have a role. We think it is not enough that any chartered accountant can come in as an auditor. In fact, out of the thousands of chartered accountants, there will probably be only a much smaller number of firms that are capable of doing this work. We have many different levels of protection. The last thing I would want is to leave the Committee with the impression either that we don’t take seriously the need to understand that this is public money and that there isn’t the influence of shareholders, so there needs to be additional protection, or that we have not thought about and proposed to put in place steps every bit is good-and, I would argue, better-as the existing audit arrangements, which, after all, took a long time to uncover what was going on in Doncaster, to name but one example.

Q558Heidi Alexander: May I ask you a very quick follow-up question on the discussion about the ability of full council to appoint or dismiss an auditor, taking into consideration, one way or the other, the advice of the audit committee? Given the very high tests that you talked about for spending public money, wouldn’t it be simpler to say that decision of the audit committee is final?

Grant Shapps: The audit committee, in this sense, is a bit like a quango and it will take over some powers, which would otherwise be correctly exercised by democratically elected people directly answerable to the public. We like democracy a lot and we think that the public should have a much stronger hold on the people whom they elect, who should be answerable for the decisions they make.

This is one place where we can link back up the fact that I vote for someone as my local councillor and they have a duty to hold the auditors to account. The right place to do that is in full public glare in a meeting like this one-a full council meeting with the local press in attendance-to let the sunlight in. There is a judgment to be made on where decision making lies, but we think that, on balance, it lies with democracy rather than with quangos.

Q559 Heidi Alexander: Okay. I have a couple of questions on the future scope of local government audit. Four options on the scope of audit are outlined in the consultation. You were talking earlier about the importance of leadership and politicians saying what they think early in the process, so do you have a preference out of the four options?

Grant Shapps: That is a cleverly worded question. No, I’m not going to prejudge the consultation. We’ve established that Ministers have concluded, just looking at the overall picture, that things can be done better, but I don’t want to prejudge the different options in the consultation now. There is enormous space for innovation in how things work. I was totting up a list of other people who could be involved if the information and data were out there and the audit was of the right size and scope to allow for involvement. We are all familiar with websites such as UpMyStreet, mySociety and TheyWorkForYou, and when any MP ever said to me, "Well, transparency surely won’t work," I used say, "Well, how many constituents know about our voting records from TheyWorkForYou?" I am for ever meeting people who have gone online and checked out that kind of information. There are many other organisations, such as Openly Local and spotlightonspend. There are lots of ways that openness can blossom. I am not sure whether I am getting to your question about scope.

Q560 Heidi Alexander: I am particularly interested in the value for money judgments that are currently included in the scope of local audit. Will you insist that they are retained?

Grant Shapps: I am not an absolutist on this. Value for money is very important. This is technical work and it is difficult for a member of the public to go to those websites, or the many others that may spring up in future, and be able to crunch the data. We need to be careful about not ripping the whole platform away.

Value for money will probably need to be one element. I do not think it needs to be as it was in the past. Local authorities would say, "Unless we set up this back office that says it’s checking off X on every occasion, we’ll be marked down for not being good for value for money." I don’t know how having somebody sitting in a back office checking off a form has any impact at all on value for money. We certainly don’t want a prescriptive version of value for money to go in place, but there is space for an audit to involve the value for money comments and questions.

Q561 James Morris: Is not one of the tensions with localism that 70% of central Government money will still be allocated to local government-and what happens in the resource review-but quite a complex picture is developing in terms of the interactions of different bodies on the ground? We are moving towards community budgeting and will have a much more diverse use of the social enterprise sector. Are there not challenges around making sure that the public money that is spent within that complex environment is properly monitored?

Grant Shapps: First, I will comment on localism. Some people hear localism and assume that we mean that everything will be settled quietly locally, there will not be a problem and that’s it. So, the art of politics, which is the art of resolving conflicts through verbal reasoning, would suddenly disappear. That, however, is not the concept of localism at all. The concept is that people have arguments, debates and discussions, and come to agreements on a local level. I certainly don’t think that localism has any role, and nor should it, in trying to end debates.

You are absolutely right that an existing conflict is that 70% of the money comes from central Government. We have declared our intention to try to move away from that system and we have said that we will do that in two different ways. First, a very good, early example of the way that we are working is what happened today: I issued a statement to Parliament saying that £200 million is being allocated, based on the new homes bonus.

That is a very unusual piece of Government funding. It does not judge something from the last census and try to decide how many people in category A live in a certain area. Instead, it responds to decisions that have been made by the leadership of a local authority about how many homes are built, so people can have an impact on how much money they get as an area. Because of the distribution of that £200 million today, local authorities will now be going around saying, "Actually, we’d like to get a bit more of that next year, and we can do that by providing planning permissions and having those debates, and so on."

Q562 James Morris: That is a really interesting description of the paradox, isn’t it? In that sense, in moving towards that world, isn’t there more danger in having a devolved way of accounting for that money?

Grant Shapps: No, I don’t think so at all. A much bigger, potentially much more significant element than the new homes bonus is the review that is under way now into the financing of local government, full stop. As you know from the terms of reference, if business rates were kept locally, in an awful lot of cases, you would end up with councils that do not have to have big redistribution from central Government and that do not have to wrestle with all the different issues. You could, therefore, move to a world where 70% of funding isn’t from central Government, and then, of course, those decisions about what happens on the ground become even more relevant and much more localist again.

This is just not a free-for-all. In a way, I predict that this will be a bit like seat belt laws and perhaps even not smoking in restaurants, because when you step back and look at this in 10 or 20 years’ time, it will be extraordinary that the state ever employed a quango to regulate, commission and provide audit services. We don’t do it for private business, and it will seem extraordinary that we ever did for public businesses. It is just not necessary, and it is not a particularly competitive way to do things. Just because-to name two companies-British Telecom is audited by one private auditor and name-your-other telephone company is audited by another, we don’t think that that is a fragmented market. The market is actually very skilled at looking at both sets of accounts and then working out how those companies are doing respectively.

Q563 James Morris: Do you think that the private sector could have a greater role in auditing central Government in future?

Grant Shapps: There is a clear and sensible principle here, which is that wherever you can, you want to introduce competition into the marketplace. I am the first to admit that there is a difference between private and public, not least in the way that I was describing-the lack of shareholders and the importance of value for money and protecting taxpayers’ money, so the requirement to have checks is there. Nor is it the case that state checks-even at local government level, if you want to put it that way-won’t take place in the future. We will still have children’s services, adult social care and schools, so this is not perhaps quite as radical as someone seeing the subject anew might think. So, I don’t know. I wouldn’t want to predict the future direction. It certainly isn’t contained in today’s discussion.

Chair: It could be that Ministers don’t want to upset the National Audit Office for fear of what might happen.

Q564 David Heyes: We know from your consultation document now that public bodies with expenditure of up to £6.5 million will be exempt from full audit-£6.5 million is the threshold that has been suggested. Collectively, that could be quite a significant amount of local government expenditure. Your consultation document says, for example, that at level 4-that’s bodies with expenditure between £250,000 and £6.5 million-there are 675 such bodies. Collectively, that has got to be a huge pot of money. Do you know how big it is? How big is that pot that you’re exempting?

Grant Shapps: There are two things to know here. First, that is in line with the private sector level of £6.5 million turnover. Secondly, only if expenditure is less than £1,000 does nobody ever come and talk to you-only then do you get no intervention at all. Between £1,000 and £6.5 million, as you all know, there are various different levels at which there will be a proportionate inspection. It is not that you are just not inspected at all, because you are right that £6.5 million or anything more than a few hundred thousand-or less-is a considerable amount of money. We propose tiered provision within that range. It’s only after £6.5 million, however, that it becomes a full audit.

People in business will be aware that the same thing operates in the private sector; every company has to file accounts, which you still have to send back to Companies House, but you don’t have to call in the auditor, although you must call in an accountant, to sign those off. You’re relying to an extent on the professionalism and the professional reputation of the firm that comes in and does the work. After all, its reputation is probably always worth more than your individual-I won’t call it audit under £6.5 million-accountancy work.

Q565 David Heyes: The figure that’s being set is, I am sure, being welcomed by some of the representative bodies for the smaller organisations; the logic is accepted. I am trying to get at how much of the total pot of local government expenditure this collectively represents. Maybe you don’t have the figure in your head, but it must be available in the Department.

Grant Shapps: May I offer to write back with that figure? I don’t have the figure in my head, as you have rightly guessed, but I would be very happy to come back to the Committee with it.

As you have said, there are a few hundred organisations in that position. Bear in mind that in private business there are probably hundreds of thousands of companies in that position, so a few hundred is not unmanageable at all, but I would be very happy to write back with some sort of indication. Again, the consultation is genuine consultation in this regard, and we are interested to hear the Committee’s opinions on whether we have got these different levels right and the level itself correct.

Q566 David Heyes: Just to be clear, what would be helpful to the Committee is, if possible, the breakdown between each of the levels 1 to 4 that appear in the consultation document. If that is too complex and too demanding a request, the total local government-local public body-expenditure represented by those four groups would be helpful for the Committee.

Grant Shapps: Sure. We will pull together some figures to try to satisfy exactly that.

Q567 Bob Blackman: May I clarify one issue? Is the £6.5 million level going to be increased in line with inflation each year?

Grant Shapps: Not each year. As I understand it, the £5 million figure came in with a piece of primary legislation, and it went up to £6.5 million under an SI. We have pitched the £6.5 million, because it’s the same figure as the private sector. The more you can unify some of these things, the easier it is to introduce more companies, and therefore competition, into the marketplace. That is why we suggest the same limit. It would be a proposal-a suggestion-to keep this in line with private industry, but I think it probably requires a statutory instrument rather than just a statement to Parliament. There may be a little bit more to it than I can commit to in giving you that assurance.

Q568 Bob Blackman: It would be helpful, if you are going to clarify the other issues, to detail how that will be set up.

Moving on to another area, the Audit Commission’s work as auditors is quite well respected by people. I think you have said it is the fifth largest auditor.

Grant Shapps: It tells me so.

Q569 Bob Blackman: One of the concerns will be how that expertise is retained. How are you proposing to transfer that expertise into the private sector?

Grant Shapps: We have made no secret of the fact that we would quite like to see a mutualisation as one potential outcome from this, so it could just be retained within a body that is doing very similar work. That is one possibility. People spend years, of course, getting their audit qualifications, and they don’t give them up lightly or just cease to practise. Certainly, all the accountants and auditors I know tend to stay within the sphere. So my expectation would be that they would either work for the successor organisation, or perhaps for a different audit firm which is now involved in this line of work. Again, that goes back to the earlier question. It is irresponsible to go out there, in newspapers, suggesting spurious timelines that are not the ones that the Governments have agreed or are working to, which just provides uncertainty for people who work very hard. We have been very clear that we are not critical of the audit work on the ground. What we are critical of is the structure that has been built up around the Audit Commission.

Q570 Bob Blackman: One of the concerns that has been expressed, which I share, is that were this to go to a managed buy-out or some sort of organisation that immediately gets bought out by one of the big four, then immediately you have distorted the whole marketplace quite radically.

Grant Shapps: May I just say this to the Committee then? I am very conscious that what needs to end up coming out at the other end of all this is more competitiveness, not less-this is not some kind of QinetiQ-style stitch-up-that does not over-reward those who just happen to be in the right place at the right time, but instead rewards the real workers at the Audit Commission, if the Audit Commission goes down the mutualisation route. We will investigate all those points in the draft legislation as an outcome from the consultation, but I am very clear about one or two of the things that it should not be, and you have just mentioned one of them.

Q571 Bob Blackman: So are you proposing some restrictions that would prevent one of the big four from buying any organisation that emerges?

Grant Shapps: As I have said, the objective is very simple. We must increase, not decrease, competition in the marketplace. Because the Audit Commission is a large player in the marketplace, simply having it disappear and not having more firms come in and trade in the space would clearly be counter-productive to the approach that we seek to push.

Q572 Bob Blackman: Are you saying that the local authority marketplace will be a marketplace where the Competition Commission will have oversight, and would therefore become subject to the competition legislation?

Grant Shapps: Perhaps we will have to wait for the outcome of the consultation and the draft before we can get into that type of detail, but what I can say is that it should be a more competitive marketplace. If it were not for the fact that it had a national quango overseeing it right now, it would probably already be subject to competition queries, because it cannot be right that there is one 70% player and another four in the private sector which make up the other 30%. This is not a balanced marketplace at the moment. I do not believe that it is working to the competitive advantage of its clients-ultimately, taxpayers and local authorities. That is one of the reasons why I am so confident that there is a large amount of money to be saved by having a more competitive marketplace.

Q573 Bob Blackman: An alternative approach to the managed buy-out might be to break it up and sell off different sections. Has that been a consideration?

Grant Shapps: We will have a look at all the various possibilities. We are not closed-minded about the way that this ends up, other than to say that it must increase, not decrease, competition in this particular marketplace.

Q574 Bob Blackman: In terms of these options, have you formulated a preferred route for how the Audit Commission goes into the private sector? You have mentioned mutualisation as being quite attractive. Is that the preferred route?

Grant Shapps: In fact, this is, again, beautifully transparent, because if you read the consultation document, it is only at the points where we say, "This is our lead option, tell us what you think," where we have a preferred route. Other than that, it is a very genuine consultation, a genuine draft Bill and a genuine desire to know what the Committee has to say. So, we are not trying to push one particular outcome, but the principle of further competition has to be at its heart.

Q575 Bob Blackman: What resources would you commit to enable the managed buy-out or mutualisation to actually get up and work? One issue of concern is that the Audit Commission might be very good at auditing, but it is not very good at bidding for work, because it has not had to do it.

Grant Shapps: Again, what resources we will commit is a premature question for this stage of the process. By the way, we might as well put on the record that we recognise that there are, of course, some costs involved in any kind of change. What we are confident about are the ongoing year-on-year savings. The addition to competitiveness will far outweigh those initial costs, but, no, we have not got to the point where we think it will cost x to come to y conclusion, which is the point of consulting on various options.

Q576 Bob Blackman: So, you are consulting on the options at the moment; you will reach a conclusion; and then there will be a draft Bill. At what point is that decision going to be made?

Grant Shapps: A draft Bill is exactly what it says on the tin. It gives a clear indication-even clearer than a White Paper, and certainly clearer than a Green Paper or a press release-of what we think should happen in the future. If you ask what is in our mind, you will have a clear view of what we think when you see the way in which we have described it in the draft Bill. By not going into further detail, I am not being evasive to the Committee. Sometimes consultations get a bad name, so I want to row back and make sure that consultations are worth while, achieve something and are useful. Other than setting parameters and saying that there is a better way of doing this, so we are going to get rid of the one organisation that has all the responsibility for regulating, commissioning and providing, we are genuinely open-minded about the matter.

Q577 Chair: Minister, you have said today that Government have said that there is support in principle for "our mutuals". Is there a recognition that some additional support-at least initially-might be needed to ensure that a successful mutual is created?

Grant Shapps: Again, you are drawing me further than I am able to go. A mutualisation, as I have discovered from studying the subject, is not one thing. There are lots of different ways to mutualise. Of course, we would have to look at that and at the other possibilities, and work out which one is most cost-effective for the taxpayer. Again, this is real bread and butter stuff for the impact assessment. We are getting to the real nitty-gritty of the upfront costs and the savings.

Q578 Mark Pawsey: May we come back to the issue of the competitive environment and the ability of local authorities to choose from a larger number of providers of private audit services? You have made it clear that you think that a more competitive environment will lead to lower costs of audit. Have you any assessment of by how much the average local authority’s audit bill might fall?

Grant Shapps: We know, don’t we, that there is a 20% surcharge no matter what happens, which covers the corporate overheads of the Audit Commission. I don’t think that there is any good reason to have a state surcharge tax on auditing in that way, and that is before you have introduced competition into the model. It stands to reason that if you want to win the work, you need to be competitive enough to do it. Whatever the number we start off with, if the professional bodies were to say, "Yeah, they are good enough to regulate. Go out and regulate our various local authorities," other people would enter the marketplace. We want to open this up properly to allow people to shape themselves up to specialise in this area.

Q579 Mark Pawsey: But larger bodies won’t have that much choice. There are the big four plus the new mutual. That is not an enormous amount of competition.

Grant Shapps: I don’t think that that is necessarily right. By the way, it is not the big four that are in this market. There is the big three, not the big four, and then there is Grant Thornton, so it is not the big four. Clearly, this could go much further. Local authorities cover an enormous range. The idea that only that auditor is capable of auditing both the budget of my local authority of Welwyn Hatfield, which is between £14 million and £20 million, and the budget of my county of Hertfordshire, which will have £1 billion, must surely be complete nonsense. You could probably get much better fits if you had competitors coming into the marketplace. They could say, "What we do is specialise in audits of this type." You will get more competition, because you are allowing people to specialise.

Q580 Mark Pawsey: We know that when a new market emerges, which is what will be happening here, private contractors pitch in at very cheap prices. What are you doing to prevent local authorities from being made hostage by accepting a very cheap price for years one and two, but having to pay a great deal more later. If the savings exist, how will you ensure that they are savings in perpetuity?

Grant Shapps: Those of us who have started up businesses or been in private business know that when you get fed up with your auditor playing that old trick of enticing you in with a low price and then putting up the prices you get rid of them. You just get rid of them. You don’t put up with it. Our big argument with the existing set-up is that you just have nowhere else to go. If the Audit Commission says that it’s okay, you can have a private auditor come and do it, as long as you pay the Audit Commission 20%. It is that lack of competition.

By the way, I don’t want to be unnecessarily critical of the Audit Commission, which has done a lot of good work over the years, particularly on the ground, but in answer to the earlier point-I should have mentioned this earlier-one reason why it is difficult to work out precisely what the savings are from the Audit Commission’s own accounts is that they are the least transparent accounts that I’ve ever read. It is almost impossible to see what’s going on in them, so they are not a good example.

Q581 George Hollingbery: Minister, is there not going to be a natural tendency, acknowledged in paragraph 3.7 of the consultation, to coalesce, and to have regional groupings of authorities that allow audit firms to bid for their work? Clearly, smaller councils will be picked off if they’re not careful, or not find auditors at all. Large ones will find it easier. I can imagine a real impetus for councils coming together to have pitched at them inducing rates. In the end, is that not likely to favour bigger providers rather than smaller ones? That is the first point. Secondly, is there not also an issue about capacity because of the coterminous year-end of all councils?

Grant Shapps: On the first point, it’s possible to construct almost any "Won’t this happen, won’t that happen?" end scenario, but we know what happens in the private sector. That’s a well-worn road, and we can see how auditing is done in a vast number of companies, many of which are at least as big as or much bigger than many of our local authorities, particularly at district level. You’d think this is a model that has never been tried or tested anywhere in any circumstances, but the opposite is the truth. To auditors this is just bread-and-butter work, and they do it all the time.

In terms of coming together to buy services, yes that’s possible and to be welcomed, but local authorities will be conscious of wanting flexibility. If the whole of Buckinghamshire, for example, gets together and decides to have the same auditor, that is fine, but it starts to limit their ability to dismiss an auditor and get someone else if they don’t like the pricing structure and so on. They probably won’t want large, nationwide deals, but it is up to them. One assumes that the market will take over, and if it becomes too large an area, someone else will go to that area and say, "Hold on, we can do a better deal for you". The market will sort it out. We don’t have to second-guess it for them-

Q582 George Hollingbery: In that commercial companies have their own year-ends throughout the country?

Grant Shapps: In totality, the capacity already exists in the auditing world if we include the country’s fifth largest auditor. I said that I don’t expect the auditors, who are experts in their field, and the Audit Commission to disappear. Many of them will continue to work in the Audit Commission or in other private business, so we we’re not losing resources. What we’re doing is getting rid of what has become an unwieldy and overblown Commission that had started to lose its way with its various overheads and priorities.

Q583 Chair: So your expectation is that the audit fees of councils on average will fall by around the 20% that is the Audit Commission’s current surcharge, and then probably an extra amount due to increased competition. Is that the expectation?

Grant Shapps: No. Bear in mind that the regulator sets a price at the moment, so we don’t know what the market price is doing, because it is setting the price of audit, and then charging 20% on top of whatever it is.

Q584 Chair: You’d expect the savings to be at least 20%.

Grant Shapps: I am steering clear of saying I think the correct price is the current price less 20%, and that that’s the market price. That probably isn’t market price because the regulator is setting the price at the moment. But we know that it must be attractive enough to draw four other firms in at the moment, and at the current price. We can see from that that it must be high enough, as things stand, to be attractive to private business. In any rational conversation about it, you realise that if it’s high enough to attract them in at the moment, plus 20% for what the Audit Commission creams off the top, then a market price is probably rather more competitive.

Q585 George Hollingbery: Are you sure it’s not a loss leader?

Grant Shapps: I don’t think so, unless someone can correct me. I don’t think that, just because you are Grant Thornton and you work at the Audit Commission’s commission on a council’s audit, you can somehow get money from some other place in Government for it. No, I don’t think it can.

Q586 Chair: So you might argue that the more work that goes out there, the more the price would go up?

Grant Shapps: It would be counterintuitive if it did; it would be completely against what happens when you introduce more competition to virtually any market. What I am arguing is that the fact that there are private companies that are already prepared to go and do the work on the basis of current payment suggests to me that with a more competitive marketplace, prices would fall-and that’s before you add the Audit Commission’s 20% on to that.

Q587 Simon Danczuk: Just a quick one. On the 20%, is it not what the Audit Commission indemnified? It’s sort of an insurance that it provided for the auditors.

Grant Shapps: That’s one element of it, but the rest of it runs its corporate back office services and pays for things such as drinks and receptions for five grand at-sorry, I didn’t mean to cheapen it by mentioning its Royal Horseguard Hotel’s reception.

Chair: That’s a lot to drink, to get to £50 million.

Grant Shapps: Not when you consider that at this particular knees-up, only 34 people attended-for five grand of expenditure.

What I am saying is that that 20% doesn’t just pay for indemnity, but for corporate costs. There have been very few claims, by the way, of indemnity, so if it were for just indemnity, it would be building up quite a nice little pot.

Q588 James Morris: Turning now to the inspection of performance management function that the Audit Commission had, one of the arguments in favour of the performance management regime that it implemented was that the quality of local government rose. At the time when the Audit Commission was established and throughout the whole period, there was a need to raise performance across the country. We’ve now got to a stage where the sector has achieved a level of maturity that people such as the Local Government Group argue that the sector is capable of assessing itself, in a kind of peer review model. Now, that’s fine as far as it goes, but what happens where we have a serious issue of service failure or another issue that arises? Would the public buy the idea that says, "Oh, there has been a failure, and by the way, local authorities were looking after themselves in evaluating where those failures may happen"? Does that not worry you?

Grant Shapps: First, I want to agree with your assessment. I think it is true that quality has gone up. I pay due regard to the Audit Commission for helping in that process-perhaps not in its recent years, but earlier on; that is all true before it got all bureaucratic. We are living in a very different time; it is much more transparent. When the Audit Commission was set up, the internet didn’t exist and people couldn’t find out what was going on in their local area, and the transparency and localism agendas of this coalition Government weren’t in place, so we were in a very different place.

You asked about who sounds the alarm when something is going wrong under the new system. The answer is that there are still many different protections in place. Transparency is a new one; in addition, people can really see what is going on locally. Secondly, the auditors would still have a role. We have investigated the extent to which they and audit committees could sound the alarm. In fact, the Secretary of State can still have concerns and have a team sent in to investigate, so there is no lessening of that.

I want to stress that even under the extraordinary number of investigations that took place-comprehensive area assessments and the rest of it-Doncaster still wasn’t spotted particularly early in the process, so it is not that the current system has an incredible track record of sounding the alarm very early. Peer inspection and peer review have an important part to play in all of this as well. There are multiple different mechanisms to sound the alarm when something is going wrong.

Q589 James Morris: Do you think that there may be some issues? It is quite a significant cultural shift for local government, going from the culture of top-down inspection to a peer review model. Do you think that there is a danger in the process of that shift? Performance may plateau or go down among certain local authorities that are not the high-performing ones at the moment.

Grant Shapps: I think you could argue that, but you can equally vociferously argue exactly the opposite, which is that, given a little time and independence, and if you stop sending the inspectors in to tell people exactly what to do and where, when and how to do it, quality can go up. It is notable in my area of housing, that when Portsmouth employed a housing person who started to the ignore the advice of the Audit Commission, which thought that it was more important to tick boxes to get two stars than it was actually to respond to the desires, will and real concerns of the tenants in the housing stock, the real quality of service provision started to improve. I am just so certain that if we can get beyond a tick-box mentality and beyond sending in the auditors to tell people whether they’ve got one or two gold stars, and if we can get to a situation where people are really focused on what their customers-their tenants, their service users, their residents-want, we can drive standards up, just as much as down. Of course, peer review is nothing new; it’s been going on for quite some time. Across the House, people believe it’s been very good, and those in this room who’ve been councillors will know that it’s a good and worthwhile process and every bit as useful as formal auditing.

Q590 Heidi Alexander: I want to pursue this line of questioning a little. We could liken the peer review process, as proposed by the Local Government Group, to telling a class of undergraduates, "We’ll get other people in your class to mark your essays." A lot of people might look at that and say, "We’re not actually sure that that process will give us a comprehensive, professionally done inspection of the work that’s going on." How confident are you about the Local Government Group’s ability to carry out this function robustly?

Grant Shapps: If that were the only mechanism in place-let’s say that at some extraordinary extreme, the proposal was to have no audit at all and that we would just have peer group review-that would certainly be completely mad, and it would become a problem. But that’s not what we’re suggesting; we’re still suggesting full audits. Anyone who’s been through an audit in the private or public sector will know that they can be pretty intensive, quite harrowing processes, which genuinely make you look back at your processes and so on and so forth. The peer review groups will be able to reflect on what auditors have said and will, I guess, have that sixth sense you have because you kind of understand things when you do them yourself. I think peer reviews have several benefits on their side.

Q591 Heidi Alexander: Admittedly, the audits will be available, for exactly the purposes you’ve talked about. You referred to Doncaster and the perhaps malign influences that might exist at the top of an organisation where relationships aren’t working properly. Who would you see making the judgments and interventions in future? How and when would they do that?

Grant Shapps: I’m just trying to get to the bit of the council you mean. Do you mean the officer at the top of the organisation is in conflict with somebody else?

Q592 Heidi Alexander: It could mean a whole variety of things. It could mean relationships between senior officers and the politicians weren’t functioning in a healthy, creative way. You’re saying that the last mechanism didn’t adequately address the Doncaster issue. How do you see the new one working?

Grant Shapps: First, as to what’s great about peer review, the very first question you ask somebody-we all have these conversations as Members of Parliament-is, "What’s your relationship, as the politician, vis-à-vis the chief exec of your council?" That’s a conversation I can easily imagine having with colleagues in this room, and each of our relationships will be somewhat different. Someone might say, "That’s interesting. I find if you do this, they do that." Peer review will actually be quite a valuable way of looking at potentially reassessing those relationships or raising a flag and saying, "Hold on, there’s something going horribly wrong here, because the political leadership and the officials are running in exactly the opposite direction, and that’s causing a problem."

In the case of a Doncaster-type situation, you’ve got the audit, the peer review and the councillors, and the Secretary of State is able to send somebody in. There are many contributory factors to Doncaster, but anyone who knew anything about it knew that everybody knew there was something wrong. It’s just that everyone assumed that the Audit Commission was the body that had to do something about it. Again, there is a bit of an empowerment question about who can raise the alarm. One of the outcomes of doing away with the Audit Commission will be that there is a responsibility on other people’s shoulders. People will not feel that it must be somebody else’s job to raise the alarm when they have done a peer review and there is something horribly wrong. They will know that a quick letter to the auditor, the Secretary of State or whoever is required, is in order. It is a bit like taking personal responsibility-social responsibility-for it. All of that will help a lot as well.

Q593 Heidi Alexander: Under what circumstances will the Secretary of State decide to send someone in?

Grant Shapps: The powers are very similar at the moment. We are not proposing great changes on this. Again, it is a case of removing a bit of the bureaucracy, so that you can get on with these things. I don’t know about others here, but I was certainly aware-Doncaster is a case in point-that there were problems in Doncaster. I suspect that everyone knew of it, but somehow a formal inspection didn’t take place, even though I think I am right in saying-apologies to the Committee if I have got this wrong-that a CAA inspection didn’t get to the point of pulling in a proper formal investigation until within a year of the formal investigation. So something wasn’t working there. What is put in place, including the peer review, should provide people with the necessary muscle and confidence to raise the alarm much sooner.

Q594 Simon Danczuk: You mentioned the comprehensive area assessment. One of the good things about CAA is that it encouraged local public services to come together and work together better. My concern is that now that that has been taken away, that won’t occur. I did some quick calculations. I estimate that it is going to cost taxpayers about £100 million each year in the loss of joint working. I am not prepared to publish the calculations, obviously-[Laughter.] Post-CAA, what is going to drive effective partnership working?

Grant Shapps: First, I should say that I respect your decision not to publish the £100 million calculations. But, a few months down the line, I expect you to publish a very detailed analysis indeed, giving us chapter and verse on that.

I don’t recognise the CAA as you do. The CAA was largely a complete and utter waste of time. My Department paid £28 million for it in the one year that it took place. I don’t think that was value for money. I can speak from local experience of the CAA and tell you that, as far as my local council was concerned, it ate up a load of its time. If you added that up throughout the country, you’d have well over another £28 million wasted in terms of officers’ and officials’ time spent answering questions on the CAA.

I have to tell you that the outcome did not make one jot of difference on the ground in our area. Let us bear in mind that those involved with the CAA went around analysing, speaking to people and repeating things. Unlike the comprehensive performance assessments before it, that was not generally primary work, apart from going in and annoying the officers in your town hall. The rest of it involved looking up old data for all that money. I just don’t recognise your plucked-out-of-the-air figures and, unless you can give me an impact assessment, I shall be querying them for ever and a day.

Getting back to the 2006 report that showed that officers spend 80% of their time looking the wrong way and to Ministers like me, and therefore only 20% of them work for their residents, that is an absolute disgrace. How can we expect local democracy to work and more than a third of people to go out and vote if people think that it doesn’t matter for whom they vote because the local council always wins? We have to create a situation in which democratic values are at the heart of the matter. That means that rather than being answerable to me as the Minister, officials need to be answerable to their members and, through them, to members of the public. That’s the big, big change we need to see.

Q595 George Hollingbery: I have to ask this, Minister, with a slight grimace, on the basis that I’m not sure that I necessarily believe that the Audit Commission allowed comparison between authorities, but do you think it did? If you don’t, how do you envisage the marketplace, the £500 transparency and the armchair auditors working in a sufficiently consistent way to allow people to make comparisons between authorities?

I shall interject briefly to give an example. I have bored the Committee with it before, but planning costs in one area can vary enormously with planning costs in another simply because they are different places-one has lots of historic buildings and one doesn’t-and you need very different sorts of staff. How do you make that comparison in value?

Grant Shapps: At the moment, we’re supposed to understand whether we’ve got value for money only because one public body has come and inspected and told us. Some fledgling services, such as UpMyStreet, mySociety and others that work for us, are getting in and starting to expose things. We believe that all the signs are-because it’s happened in every other area of public and private life-that if you provide the right climate, with transparency, data openness and data that are available not as PDF spreadsheets, then people will step into that breach.

We’re starting to see the TaxPayers’ Alliance, for example, becoming much more active in making some of these comparisons; and lobby groups such as Age UK will take data. Shelter, one of the organisations that falls within my housing rather than the local government remit, recently published a fantastic website that compared the affordable housing required within any given area-required by independent inspection-saying, "Here’s a league table of authorities and how they’ve done."

The chief executive of Shelter told me that it came in for an awful lot of stick, and I said, "Great. We’ve got to go it again." The truth is that this was much more meaningful. There was a proper news story, whereas the publishing of a comprehensive area assessment went down in my area almost entirely unnoticed. You can do a lot more in the 21st century with open data, transparency, and with lots of social organisations such as FixMyStreet comparing data rather than thinking that the only way to do this is to have the Government come in and do it for you.

Q596 George Hollingbery: You and I both come from a private business background. I suspect that you have discovered, as I have, that the Government do not operate in the same way. Yes, of course there are value for money issues, and of course there is a price for pencils and plastic cups, but what is the price of a particular social policy decision-something that has to be done in a certain way? How do you put a value on that for accounts? How do you drill down into the accounts to find out the social policy intention of a council, and value one against another?

Grant Shapps: I agree that that is a huge question, which we grapple with in Government all the time. When we propose a policy such as neighbourhood budgets or something like that, we try to work out how much it would save in the longer run, but those calculations are never as easy as you think they should be. The idea that anyone has ever been asked to open up a comprehensive area assessment and solve the problem is, I’m afraid, so far from the truth that it is meaningless.

Q597 George Hollingbery: With respect, we haven’t got them any more. They’ve gone. Why did yours work better?

Grant Shapps: It is a bit like my practical example with Shelter picking up on one piece of data; it was understood to be a specialist in housing, and was able to compare data and make significant changes. After it published that, we were seeing a real change in town halls, in some of their planning assumptions or policies, towards affordable housing provision, because they didn’t want that story next year in the same newspaper.

Specialists who understand the subject are able to provide a much clearer steer for the public, and through public opinion you’re able to make much greater shifts. The public are very savvy about these things. I mentioned before that turnout in elections is so small because people aren’t stupid; they know that these decisions have all been taken out of their hands. When you return democracy to a local level, it’s quite likely that over a period of time-a generational shift will be required rather than what happens in May alone-people will go back to the ballot box when they understand that the decisions they make there have an impact on local services.

If I want to see better housing provision in my area, then I know that I have to vote in a particular way because I’ve heard that candidate talk about it. Unlike at the moment, that candidate has some influence on the outcome, because of a range of policies such as the New Homes Bonus and so on. But it is much more than that. It’s a different mindset.

I understand why people struggle so hard to grapple with the idea that judging, for example, how good a service is will not in the future simply be a matter of asking one auditor to make a single judgment. As I described in respect of Portsmouth, as it so happened the judgment was complete and utter nonsense. It was not helping the tenants in terms of housing; it was just satisfying a tick-box exercise that was not worth the paper on which it was written.

We will reach a much better position. I am not taking an absolutist view. I have already said that the value for money work still continues within audit. We will not throw the baby out with the bathwater. It is incredibly important to make sure that people have good authoritative sources on which to base their judgments, but we need to get into a world in which people can reach judgments and not just be told what they think.

Q598 Chair: The public interest reporting will remain. When we met the professional bodies and the Financial Reporting Council at our previous sitting, they raised concerns about whether a serious conversation between the auditor and the auditor body was likely to occur, particularly when the auditor body will be asked to pay for the privilege of having a public interest report done. Will that arrangement really work?

Grant Shapps: I have heard that argument lots of times. It is not incredibly dissimilar to what happens to a private company when an auditor is hired, and whether auditor has to be paid is queried and the answer is yes. For that matter, it is not dissimilar from the Audit Commission acting as the regulator, commissioner and provider at the moment and saying that it has to be done and the audit has to be paid for.

Q599 Chair: But the Audit Commission fixes the cost.

Grant Shapps: No. Let us take, for example, the Doncaster situation right now. Doncaster is paying for the work that is being done by the Audit Commission having to go in and do the additional work. It is charged back at the moment and it will be in the future.

Q600 Chair: Let me go to the issue that Bob Blackman raised, which relates to my first question about the fact that the Government clearly decided that the Audit Commission’s roles for commissioning will go. It will not be the provider of audit services, but there are regulatory functions. Your consultation very much mirrors what happens in the private sector for auditors, with some of the same bodies doing things. The other day, the House of Lords Economic Affairs Committee carried out a report on market concentration, which looked at audit. It was pretty condemnatory of the regulation of accounting and auditing, which, it said, was "fragmented and unwieldy, with manifold overlapping organisations and functions."

We will change what is a perfectly simple system with the Audit Commission doing everything into the same system under the private sector. Would it not be better to take all those regulatory functions and put them in one body-whether it is the National Audit Office or another body?

Grant Shapps: I disagree with that. Effectively, the current set-up has everything that we will have in the future, plus the Audit Commission on top of it. In fact, we are simplifying matters rather than making them more complicated. As I hinted earlier, the Audit Commission overlaps with professional bodies, which also look at whether, for example, audit companies are fit to do the work. You have duplication. If an audit firm wants to do an audit right now, not only does it have to satisfy professional bodies, but it separately has to satisfy the Audit Commission. Removing the Audit Commission, therefore, is a simplification, not a complication, of the structure.

Q601 Chair: Well, you satisfy the professional bodies in terms of being an organisation that is capable of doing it, but not in terms of actually being an organisation capable of doing local authority audits per se. That is the Audit Commission’s role. That is a role that will get transferred back into one of the regulatory bodies, which is currently not with them.

Grant Shapps: My point is that you end up wanting to do an audit and you have to be signed off by more people than when the new process comes into place. If anything, this is a stripping away of a layer of bureaucracy, not a complication.

Q602 Chair: So in terms of the consultation, your mind is made up about the split in regulatory functions among a number of bodies.

Grant Shapps: My view, of course, is exactly as in the consultation, but I challenge the idea of not having an Audit Commission with everything vested in one place. At its extreme, you could apply that argument to almost any industry and say, "Wouldn’t it be easier if we didn’t have competition in every area of life?" I guess that is why communism looks so attractive: the state could organise everything and tell us how many tractors to produce and so on. We know that the reality is that a free market, which probably-if you drew a diagram on paper-would look a lot more complicated, turns out to be a lot more efficient. There’s a good summation of the reforms that we are putting in place with local audit. The bodies will be just much more efficient.

Q603 Chair: But you did indicate that the National Audit Office might have a role to look at any systemic failure that might occur.

Grant Shapps: Yes. The National Audit Office has a role with the code of practice as well; it is answerable to Parliament on the code of practice and any systemic failure-that is right. Just in terms of getting through to producing an audit, if I am a firm that wants to compete in this market, I need to be fit to be able to carry out these kinds of audits. I now have to satisfy the professional body, but I don’t have to satisfy it and then go off and get qualified by the Audit Commission, which I gather qualifies very few people to do the work.

Q604 Chair: Finally, the Comptroller and Auditor General, when he was here, said that these matters were not simply a question of identifying savings improvements, but of making sure that they were implemented. Are we going to see the Government put in place a rigorous system for measuring whether, over a period of time, the improvements and cost savings that you have referred to today actually come about?

Grant Shapps: Yes. What we are going to do is to remove capping and invite local people to carry out a referendum if the local authority is so inefficient that it has to put up its council tax by more than whatever percentage.

Q605 Chair: I am still thinking about the audit arrangements, not just local government generally.

Grant Shapps: My answer to your question is that we are transferring the responsibility to the public, who will be able to decide through referendums and through elections whether they have an authority that has done the right things. If it has, it will be efficient and able to provide the services that are required locally, and have a council tax that is reasonable; if not, local people will presumably boot it out of office.

Q606 Chair: What about whether the Government have done the right thing-whether your savings from abolishing the Audit Commission come about; whether the cost of auditing fees goes down; and whether there are improved audit arrangements? Are you going to put in place steps to make sure that those matters are measured and that Parliament can have information about whether you have achieved the success that you believe you are going to achieve?

Grant Shapps: Of course, starting from where we are and up front, the impact assessment will go into incredible detail about the savings that we think can be made. The code of practice will be debated in Parliament. Parliament will be perfectly at liberty to check, and to call in Ministers to see whether the system has done what it is supposed to do. Parliament-and Select Committees, for that matter-will no doubt take a very close interest in it.

There will be lots of different ways to test whether all this stuff down on paper actually comes out with the savings. I have to say that logic on every single level tells you that it literally has to, because you remove a very big, expensive regulatory body, operating in a centrally driven way, and replace it with a bit of market competition, which-through our discussion of the 20% extras and what have you-we have at least established could make a very considerable saving overall.

Chair: That still remains to be seen, but we will leave it there. Thank you very much for your time, Minister.