Levelling Up, Housing and Communities Committee
Oral evidence: Financial Reporting and Audit in Local Authorities, HC 1196
Monday 17 July 2023
Ordered by the House of Commons to be published on 17 July 2023.
Members present: Mr Clive Betts (Chair); Bob Blackman; Mrs Natalie Elphicke; Kate Hollern; Andrew Lewer; Mary Robinson; Nadia Whittome.
Questions 209 to 285
Witnesses
I: Lee Rowley MP, Parliamentary Under-Secretary of State (Local Government and Building Safety), Department for Levelling Up, Housing and Communities; Siobhan Jones, Director, Local Government Policy, Department for Levelling Up, Housing and Communities.
Witnesses: Lee Rowley MP, Siobhan Jones.
Chair: Welcome, everyone, to this session of the Levelling Up, Housing and Communities Committee. This afternoon, we have our final session on financial reporting and audit in local authorities. This occasionally seems a little technical and dry; nevertheless, it is extremely important that we know how local authorities spend our money and that we get forewarning of where things might occasionally go wrong. Really important processes are involved.
We have the Local Government Minister with us—we will come to you in a minute, Minister—but before that, will any members of the Committee put on the record any interests they might have that are directly relevant to the inquiry? I am a vice-president of the Local Government Association.
Kate Hollern: I employ a councillor in my office.
Nadia Whittome: I am a board member of One Nottingham.
Bob Blackman: I am a vice-president of the Local Government Association and I employ councillors in my office.
Q209 Chair: Thank you. Minister, thank you for coming this afternoon. Will you introduce yourself and your official?
Lee Rowley: I am Lee Rowley, the Member of Parliament for North East Derbyshire and the Minister for Local Government and Building Safety. This is Siobhan Jones.
Siobhan Jones: I am Siobhan Jones, the director for local government policy in the Department for Levelling Up, Housing and Communities.
Q210 Chair: Thank you for coming, and thank you, Minister, for the letter that the Committee received just before our sitting. It is good for the Committee to know that starting our inquiry might have encouraged the Department to move at somewhat greater pace on some issues. We will explore that further in due course. Just to begin with, and to set out the details of the issues we are looking at, what is the purpose of having local authority accounts?
Lee Rowley: I was listening to some of the questions that you asked of people who are much more experienced and knowledgeable about this than me, and you can have a very philosophical discussion about it. I think we have to make sure that the accounts are an accurate representation of the financial movements of a particular organisation and that they reflect what is and is not being done, so people can draw judgments wherever they are in the system about the appropriate level of behaviour and the appropriate level of risk. I know you are not yet asking about this, Chair—you may come to it—but there is also a set of broader purposes of the audit system as a whole, beyond the accounts. I am happy to talk through that. Siobhan has more knowledge and expertise than I do in terms of the accounts themselves.
Siobhan Jones: I think that, exactly as the Minister says, it is a true and fair recognition of the financial circumstances, but it also provides that vehicle for local users and accountability. We may get further into the users of the accounts as we go through.
Q211 Chair: So, local users. Who are the accounts actually for?
Lee Rowley: There is a purpose—there is an end in itself—to assurance, in my view. The ability to record what is going on accurately and in a trustworthy way is an important end in itself, as well as a means to opening up other questions. Who is it for? Multiple audiences. That is one reason why sometimes not everybody is wholly satisfied with what they are or wholly satisfied with everything that is in them or the processes that get to them. But they are an aggregate of giving enough people enough information—and there is obviously a question about the level of detail and the complexity of some accounts at the moment—to be able to draw conclusions wherever they stand in the process. Is that perfect at the moment? No, far from it, but that is perhaps where we’ll go to in a moment.
Chair: We will probably explore how we could deal with some of the imperfections and perhaps improve the system in a little while. On the issue of local authority audit, Bob.
Q212 Bob Blackman: The question that naturally follows on from the question about the accounts is, what is the purpose of audit? You have obviously heard some of the answers that we got from some of the experts, and they differ in many different ways. From the Department’s perspective, what is the purpose of doing the audit?
Lee Rowley: I will let Siobhan come in in a moment, to correct me if I say anything that is not strictly along the lines of what we’re thinking. The settlement of central and local government is that local government is independent, albeit that a substantial amount of the money that it spends, and therefore the decisions it makes, is very closely related to central Government, and central Government are always going to have a view about some of the things that local government does.
If we broadly respect that settlement, we want a system that knows what is going on in it, knows who is doing what, knows where the behaviour is appropriate and where it is less appropriate, and knows where risk is held—both risky behaviour and just risk in general. There is risk in every part of life. The audit process should offer that informationally, but also have a system around it where there are checks and balances: where people can have concerns, be it physically through the presentation of a report or the escalating of different reports that can be presented—public interest reports and things like that—and there is sufficient ongoing conversation throughout that process, so that experts who have knowledge in this area can tease out, challenge and check what is occurring in an individual organisation. I think that is pretty much what I would see as the purpose.
Q213 Bob Blackman: Do you think the system is working as it should work at the moment? We will get on to the backlogs later, but when audits are properly done, do they do the job that they are intended to do?
Lee Rowley: Well, you get a product out at the end of it. If one of the manifestations is, “Do I get, on a piece of paper, whether it is a true and accurate representation of how the money has moved, and are there conversations around that in terms of its creation such that there should be reasonable discussions about risk, who is doing what, and whether that is appropriate or not?”, I suspect the answer is broadly yes. I don’t think there is a conceptual problem with it, but there is obviously a series of things that have built up in that process in the course of half a decade or so, rightly or wrongly—again, we can go into that in detail—and that mean that it is not working as effectively as we want it to, hence one of the reasons why you are interested and we are trying to change some of it.
Q214 Bob Blackman: Obviously, one of the things, if we take the evidence we got from—I think I am right in saying, although I am not sure what the person’s exact title was, that it was from Westminster City Council. There were a huge number of pages in the accounts and therefore the audit, compared with huge amounts of extra money being spent on health services but a very much smaller set of accounts—almost impenetrable—for the individual to find. Is that the sort of thing we should be looking at, because if we are talking about democracy and the ability of a voter or constituent to look at this and say, “Aha! I see where the money has gone,” it is very difficult to look at local authority accounts and substantiate that, isn’t it?
Lee Rowley: Yes, it is, in the same way as—without being facetious—it is difficult to look at the accounts for a private sector organisation providing services that are, often, integral to our daily lives and to make sure that the way in which they are doing that works in exactly the way in which we want it to. There is an in-built level of complexity in these processes. A decision was taken many years ago to try to ensure that the standards used in the public sector were commensurate with IFRS, which is broadly a set of standards built on the private sector and access to capital markets and things like that, so there is always going to be a transformational element that increases its complexity.
I think there is a genuine open question about whether everything that is done within this process is the right thing to do, whatever “right” is—I would welcome your views on that in the report. I have views from my brief time as the Minister, but also as somebody who has taken an interest in this; there are definitely areas where, as a layman, I am not sure whether that is the right level of focus. Again, it is one of the reasons why we are trying to change some of that. I was a councillor in the organisation, the council, you have just referenced for eight years a while ago. I don’t remember ever going to the accounts once in my role as a councillor—maybe that says something about me as a councillor, I don’t know—because they were always complicated, even before some of these standards came in. It’s a case of making sure that the audience have enough access and ability to understand, or that there is alternative provision to be able to do that.
Was that fair, Siobhan?
Siobhan Jones: Yes, very fair. The introduction of the value-for-money statements was also intended to help with some of those challenges. This is something that is not quite the 300-page accounts; the value-for-money statement goes a bit more to what many local users might be a bit more interested in.
Q215 Bob Blackman: You have mentioned risk, which is clearly vital. I could run through a series of councils: Croydon, Woking, Northamptonshire—we could go through a whole series of councils where, clearly, things were being done that, frankly, should not have been done, financially. Was that risk ever spotted through the audit process, and if so, what was done about it by the Department?
Lee Rowley: This is one that we have talked about very extensively in the Department. It is difficult to generalise on what is still quite a small number of councils, but admittedly a larger number than we would like. You can point to, within that cohort, councils—I think Croydon is an example; Sandwell is an example—where the auditors were quite instrumental in bringing forward concerns about issues. Then you can highlight areas or councils where auditors were not at the forefront of that, and I think it is a legitimate question to ask why. I don’t want to go into individual circumstances, because we have teams working on them and things like that, but for some of them—in general—it is pretty safe to say everybody knew they were doing things. It was in plain sight for a number of years that their particular investment strategy, the regeneration approach or whatever, had risk associated with it. Some of them got audits signed off without any issues as a result. It is not that large risk is inherently unsafe; it’s when the combination of large risk and whatever else is—
Q216 Bob Blackman: If audit is a case of, “Here’s an invoice. Here’s a remittance; here’s a payment. Yes, they match up,” is there a risk in that? Well, it depends on what is being done with that money, doesn’t it? It doesn’t necessarily lead to risk being identified through that process.
Lee Rowley: It doesn’t. Again, I am trying not to go too deeply into individual council examples, but there is at least one example out there, which we have been dealing with recently, where the strategy was very clear to everybody. It was signed off, I think, by all political parties on the council at the time. It has been very visible for a long time. Everybody always knew that it relied on a high level of borrowing for quite a long period of time. The auditors can only do what they can do in that instance, and we have to wait and see what comes out of that review. We are not able to pre-empt it.
If you take that as a non-specific example, and if those are the parameters, then the auditors are auditing a process that everybody knows has risk in it, and they are checking the individual parts of that process to ensure that there is nothing problematic in it. It then looked in this instance—again, not taking a specific council example too far—that there was just an inherent problem with the strategy.
Q217 Bob Blackman: Are there any changes that you are planning to make, in terms of the purpose of audit, going forward?
Lee Rowley: As I know you have seen, we have put forward this statement that says that we need both to deal with the backlog, but also—
Bob Blackman: We will come on to the backlogs, but I am looking at the generality.
Lee Rowley: Yes, I think we are intending to make some changes, in that, from my perspective, there are a number of areas of the current process that I am not sure are the right focuses. Again, I know that it is important that I add colour to my answers, but I do not want to fixate too much on individual examples. However, there is a genuinely open question about how useful it is, within processes, for councils to audit too deeply fixed assets that are very unlikely to move, to be sold or to change. I have a Roman road going through my constituency; it is not a particularly effective use of Derbyshire County Council’s time to work out whether that road is worth x or y amount, because it has been there for 2,000 years and it is going to be there, hopefully, for another 2,000 or so. So, there is a genuine question about proportionality in the system.
Before we get into this, I just want to say that I think the work that all of the different interested parties have done so far has been very constructive in that regard. Therefore, I hope that we can make some changes, and we will make some changes with the broad support of all of those who have an interest in it.
Bob Blackman: All right. I am sure we will explore those as we go along.
Q218 Chair: Is it written down anywhere what the Government thinks the purpose of accounts and audit is for local authorities?
Lee Rowley: I do not know the answer to that question. I presume that, somewhere in the 2014 Act, or far before my time, there probably was some form of definition, but it is very fluid, as we have talked about.
Siobhan Jones: There is not necessarily one place. There are statements that have been given in the past of the value of local audit, but I think you are asking whether there is a clear definition of, “This is what we mean by audit,” written down. We have made statements, so the publication that the Government put forward in December 2021 did have an articulation of why we think that audit is a critical part of the overall system.
Q219 Chair: And the purpose of accounts as well—is that laid out somewhere?
Siobhan Jones: That probably went into less detail on the purpose of accounts, but we do—again, Catherine Frances, the director general, wrote to all councils earlier this year, and, for example, set out the importance of effective accounts produced by local authorities.
Chair: Thank you for that. Moving on to the local audit crisis, the backlog and your letter, Minister.
Q220 Nadia Whittome: Minister, several of this inquiry’s witnesses have described the local audit system as being in crisis. Do you accept that?
Lee Rowley: I don’t know whether I would use those words, but clearly changes are needed, which is why we have brought forward the proposals that we have brought forward.
Q221 Nadia Whittome: Okay, and your proposal to resolve that crisis is to set statutory deadlines?
Lee Rowley: Among other things, yes. It is to say that we have built up a backlog of audits, some of which, in the extreme, go back seven or eight years—I think there is one that goes back to 2015-16. They go back that far for very good reasons in the individual circumstances, I am sure, but we do not have enough capacity in the system—I think that is worth coming back to in a moment. We have to make sure that the capacity is addressing the most appropriate element of audit so that, if there are the kind of issues that we have just been talking about, they are more likely to be identified. We need the capacity that we have to be focused on the more recent time available, hence the proposal to cap off some of the work on historical audit.
Lee Rowley: We have said that it is possible that there will be some qualifications and disclaimers that are required, yes. So, for earlier accounts that haven’t been signed off and where is difficult to sign them off, we want to move some people we have got and the capacity we have got in the system to look at more recent accounts, so that they are more likely to pull up key issues that are visible.
Q223 Nadia Whittome: What is your assessment of the impact that that will have on councils?
Lee Rowley: Probably not very much, because if you have got a very historical audit that just has not been signed off because of one technicality or whatever it is, that is probably not going to be a particularly substantive issue in the round. And what is more substantive for that council is whether they are doing the right or wrong thing, not eight years ago over one remaining issue, but last year or the year before.
Q224 Nadia Whittome: You mentioned in your letter to the Committee that there might be unintended consequences of these measures and that you will be undertaking work to mitigate those unintended consequences. What do you think the unintended consequences might be and what work will you do to mitigate them?
Lee Rowley: We deliberately put that in because what we do not want to do is to come here—not to make too broad a point, but a lot of public policy tends to work in a vacuum and has done for 30 years, where people claim that there are no trade-offs or people claim that there is nothing that doesn’t need to be considered. Ultimately everything has consequence and ultimately everything has trade-off.
My sense here is that we are where we are—I am very happy to debate why and how, and I am sure we will come on to some of that—but my job as a Minister, working with officials and the relevant actors within this process, is to say, “Are we going to continue doing the same thing, which is not yet resolving the issue, or are we going to change course, accept that there are some consequences for that?” And we want to work with the industry and the sector over the course of the summer to bottom all of that out, but broadly most of the key people—all the key people—have signed up to this statement, so they all broadly are roughly in the same place as we are.
So there will be some consequences but we think they are manageable. And the trade-off you get is that you get the system reset, looking again at the more recent elements of what they need to look at, and so long as you can accompany that with some changes, as Bob was alluding to, in terms of making sure that the day you get rid of a backlog you don’t start building it up again, because there is no point in doing that—if you can make some changes on a unit basis, per audit, hopefully you won’t get into the same problem again in a few years’ time.
Q225 Nadia Whittome: Okay. Obviously, the problem with the backlog is that while auditors are trying to deal with the backlog that exists, a greater backlog is being built up at the same time. And you say: “We must ensure the capacity of the sector is focused on the most recent position as soon as possible.” When is your estimation of when “as soon as possible” might be?
Lee Rowley: I will let Siobhan talk about specific dates. What we want to do, basically over the recess, is to come to—we have got a significant statement here, I think, from people and organisations who have worked very constructively, and I am very grateful to them for doing that. That has taken a while to pull together. We did multiple roundtables a number of months ago; we have worked through with individual actors; and now we also need to work through with the sector, which I will be doing over the course of the coming weeks.
We have got to finish that conversation and then we want to move very quickly. We have put in some intended deadlines here; we want some things by the end of the year. Siobhan, do you want to say anything from a timeline-specific perspective?
Siobhan Jones: One of the things that we will be looking at over the summer is testing, with some of those partners that the Minister has referred to, what the right deadline is. One of the balances here will be that where somebody has done most of an audit and it is virtually all there, you would not want to lose that work that has been done. So, where do you set that statutory deadline to maximise the value of the work that has come out? I think that is the work that we will be testing over the coming months, working out exactly when those statutory deadlines are.
Then, once we have agreed those, you will start to see when the overall system will be starting to resolve and reset. But it is very much about getting that balance of maximising any work that has already happened and getting that out versus drawing a line under this and moving to the next period.
Lee Rowley: We want to close that conversation very quickly. We will announce dates in the autumn. This is not something that will go on and on. The whole point is to baseline this and move on, so we want to do this in the next few months.
Q226 Nadia Whittome: As you will know, Minister, in central Government, accounting officers of bodies that fail to lay accounts by the statutory deadline may have to account to the Public Accounts Committee—they may be summoned to present evidence to the PAC—but there are no equivalent consequences for local authorities. They only have to issue a statement if they miss the statutory deadline. Will the Government introduce legislation to provide a hard time limit for local authorities to produce audited accounts and, if they cannot, that they face suitable consequences?
Lee Rowley: I think the proposal is that there will be strong guidance in the first instance.
Siobhan Jones: So guidance, and particularly in this period while we are re-setting, the causes of delay in any individual circumstances will be quite complicated, as you will have heard from other witnesses. It may be that we want to get the system back on track. In the future that might be worth considering, but at the moment the focus is very much on getting people back on track. At the moment it is not always clear whether that is the local authority’s responsibility or the auditor’s. It is often quite a complicated mix of factors in the short term. There are deadlines, as you are aware, for both the local authority and for the auditor. In recent times the audit deadlines have not been achieved, which is driving the proposal here.
Lee Rowley: Personally, I am open-minded on statutory deadlines. You have to find the time to create them and time in Parliament to do that. I think that is a symptom rather than a cause to some extent, and I would rather focus on the cause. Why is it so challenging to get something by the deadlines? That is a combination of capacity, risk appetite and risk aversion, and the challenge of additional activity that needs to be put into individual orders. I am happy to talk about all of those in a moment. So it is about trying to address those and then seeing whether we need to up the rigour around deadlines. I would rather just—
Q227 Nadia Whittome: So the Department is issuing guidance, but an equivalent to that which exists for central Government—PAC—has not yet been considered for local government?
Lee Rowley: Again, it is one of those things where local government is constitutionally independent of central Government. There are local mechanisms that should bring those things out. The auditor has tools that they can use. There are audit committees and overview and scrutiny committees. All of those things in individual local authorities should be working in a way that minimises the risk around these things and also builds of some of that value for money assessment, and, particularly if there is missing data, explores that. I hope that that system would work. Our job in central Government is to say, “We have a backlog that we need to get moved so that that process can work more effectively in future.”
Q228 Chair: So, in terms of delivering on this letter, the Department is accepting responsibility for that.
Lee Rowley: Yes, we absolutely have responsibility for it.
Q229 Chair: So the Government are now effectively in charge of overseeing the performance of local government audit.
Lee Rowley: Clive, we are trying to fix a problem. It is a responsibility of mine and officials to recognise the problem, which we have done; to put forward a set of solutions, or to work through with partners what the options are; and then put forward a set of proposals, which we are doing. Does that mean I suddenly become the owner of every single element of this? No, I do not think it does. What we are trying to do is owning getting the system back in balance. Broader policy questions about who owns what in the system should be taken in slower time.
Q230 Chair: Okay. What I was trying to get at was whether everybody is accepting the responsibility to ensure that the improvements contained in your letter are delivered?
Lee Rowley: The answer is yes, but if I could just add one caveat—I am relatively new to this area. This is a delicate and in some ways challenging thing to do. First, everybody has to come round the table and accept that there is a challenge and move on. Also, we have to bring the group of people together, and everybody has to move to some extent. CIPFA has been very constructive, the Treasury has been very constructive and the other actors too, but we have a big job in just trying to make sure that it is landed, but yes, the Department has the responsibility for making sure that this is—
Q231 Chair: Just on that big job, Minister, I think we can appreciate that because in your letter, you mentioned your own Department, FRC, NAO, PSAA, CIPFA, ICAEW, LGA and HM Treasury. Is that one of the problems—there are just so many organisations with some sort of stake in this process, that no wonder it does not always work?
Lee Rowley: It is definitely a complex process. One of the reasons why the systems leadership was proposed out of the Redmond review a couple of years ago was to try to acknowledge the complexity of the process. We are in the process of giving the FRC that systems leadership—it has shadow systems leadership at the moment—so I hope that would help. But yes, it is a complicated process, but what I think this is demonstrating—not wanting to count our chickens and all the rest of it—is that everybody is working together very constructively in a way that we do not always see everywhere in Government, if I am honest. But there is a real desire to try to improve this.
Chair: We will come on now—you have just anticipated it—to ARGA, the new system leader.
Q232 Bob Blackman: One of the key recommendations from the Redmond review was the system leader approach to audit. My understanding is the ARGA approach is what the Government propose to implement as part of that. Is that the case?
Lee Rowley: Yes.
Q233 Bob Blackman: Fine. That is very helpful. Clearly, legislation is required to introduce that. When will that legislation be tabled?
Lee Rowley: I cannot answer that in that, first, it is primarily led out of another Department and, secondly, it would be anticipating what comes in a full Session.
Q234 Bob Blackman: This is adding to the confusion, if I may say so. Presumably you would look at the Department for Business and Trade. It will be putting in place a system of audit leadership that looks at local government, which is your responsibility. That suggests there will be some blurring of lines, to put it mildly.
Lee Rowley: BEIS, as was—DBT, as it—has responsibility for corporate governance and corporate responsibility across the piece. While I was not close to it when I was in BEIS, it is working on those proposals around corporate governance and corporate responsibility with ARGA. The sense was, from a local perspective, that it was important that we tried to align where we could with the work going on there. I recognise the point you are making, Bob, but I also recognise it should be conceptually possible for two Departments to work together and that ARGA did have the leadership here. But ARGA will come at the point when parliamentary time allows and so on. In the interim, we are working in DLUHC to ensure that we are building what the FRC is doing in a staged way—
Q235 Bob Blackman: And ARGA will replace the FRC in due course.
Lee Rowley: Yes.
Q236 Bob Blackman: What influence do you have over the system that will be created under Business and Trade? Obviously, we are talking at how we look at local government. Everyone would accept that local government auditing and accounts are different from commercial accounts, so how do we make sure that things are not being done in a different Department that end up blurring the lines, unfortunately not giving us the transparency that we all desire?
Lee Rowley: There is always a risk in that. There is always a risk of arm’s length bodies, which these would be, having their own views. They are deliberately arm’s length to have some of those views, but there is always a risk, and that risk has to be managed. We have to manage the relationship with DBT to make sure that works.
The FRC has two roles. It has this shadow system leader role and the role of reviewing, setting and all the other stuff it does on a day-to-day basis. I have met both sides of the FRC. It has been very constructive and willing to work with this. It is about getting the processes right, which I agree with you on, but it is also about getting the relationships right. Having been here six months, my experience of that organisation, which eventually will become ARGA, or a derivation of it will move into ARGA, has been very constructive, so I hope that will continue in the future as and when the Government—
Q237 Bob Blackman: So you accept that there is a risk. We already have a backlog, which we have talked about. We have a potential new system coming in, which may have changes. That could add complications to the system and add to the backlog. Therefore, the shadow system you are setting up, or have used, may be taken over by a different system that might have different requirements. That will lead to an even greater backlog.
Lee Rowley: There is always a risk. I would welcome the Committee’s views, in your report, as to whether you think there are particular risks we should manage. This was a decision from before my time, but I think the sense is that in aggregate it is better to have an overview of audit in general from a body—both public and private, given that it is ultimately the same companies underneath that are doing it and they have very similar rules and global standards—and that that is less risky than keeping the two things separate.
Siobhan Jones: The Government did consult on how that might work in practice, which you may have seen. There was a consultation on how the local audit elements would go into ARGA and how that would be played out in legislation. It would be replicated in the legislation that establishes ARGA. For example, we would commit to having our own remit letter so that ARGA was not just being distorted, though distorted is the wrong word, and focused just on corporate audit, but would have its own strong focus.
Q238 Bob Blackman: At the moment we are talking about a Bill team that will sit in Business and Trade guiding the legislation. What influence does the Department have over how that will be constructed and how it will work, if any?
Lee Rowley: To be determined—but we would certainly have a substantial and significant role.
Q239 Bob Blackman: So we do not know the timescales, but at the moment there isn’t anything going on. Is that fair?
Siobhan Jones: We regularly discuss with our counterparts at official level to make sure that we are feeding into the draft legislation in the way you would expect us to. There is a regular dialogue, and DBT are regular members of the overall liaison committee we established following Sir Tony Redmond’s report, and DBT are active participants in that. I engage with my counterpart over there regularly as well.
Q240 Chair: You mention having reviews, but both the Redmond and Kingman reports recommended that local authority audit and the oversight of it should be kept separate. Why have the Government decided to ignore that?
Lee Rowley: Ultimately it is a balance, but we think that putting those into a broader, audit-focused authority is sensible. There is not a proposal to change that at this current time. We are still proposing to move that forward. My current focus is on ensuring that the FRC is working within the system as well as it is able to, which it is.
Q241 Chair: But there is a difference, isn’t there? We can talk about oversight of audit in general, but local authority audit has the public interest element, which makes it very different to private sector audit.
Lee Rowley: Yes, but people can do two things at once. I don’t think conceptually it is impossible for them to do both a good job in the oversight of the private sector audit and public sector audit, even though they have different requirements, responsibilities, people and objectives. I do not think it is impossible.
Q242 Chair: Having had two very authoritative reviews—Kingman and Redmond—which both came to the same conclusion, it is surprising that the Government went in a different direction.
Lee Rowley: We think it is possible to do both and to still have very high-quality oversight of public sector audit.
Siobhan Jones: Yes, and I think at the time there was a concern about setting up a new standalone organisation, with some of the costs that that can bring as well. The Government were concerned to make sure that they were offering the best value-for-money proposition, as well as aligning some of the incentives within the FRC.
Q243 Chair: But a standalone organisation for oversight of local government audit would remove the problems that Bob Blackman has just spoken about around the complexity of relationships between DLUHC and DBT in terms of ministerial responsibility.
Lee Rowley: It may do. There are multiple ways in which you can structure this. An equally standalone organisation was deemed 12 years ago to have got itself into a place that did not really work for other reasons as well, hence why there were changes—so it is swings and roundabouts.
Chair: Okay, let’s move on to adequacy of local authority accounts, which we mentioned briefly before.
Q244 Andrew Lewer: Why are local authority accounts so impenetrable?
Lee Rowley: Because the complexity of what local government does has increased over the last decade and half. Since we both were in local government, there has been a change in how some local authorities have approached that. I think there is increased risk aversion in both public and private sectors. There is also a not unreasonable desire to make sure that both public and private audits adhere to international standards; I am not an expert, but I believe there is a transformation element required of local government audits to try to get as close as they can to international standards, because those standards are, in effect, written for the private sector.
Q245 Andrew Lewer: We can see a conflict when there is a desire or need to tick lots of extra layers of boxes and process requirements, but their purpose is not fulfilled because people cannot understand them or work through them. What is the Department’s approach to make local authority accounts less impenetrable than they are now?
Lee Rowley: I am not trying to avoid the question, but our first challenge is the penetrability of the accounts, their appearance and the detail of some of them. We are trying to make progress on two things. The first is the appearance of the accounts: even if they are not that penetrable, we need them to appear more quickly than they are doing. The second is to address the level of detail, some of which I am not sure is necessary to the extent it goes into. Those are the two things we are trying to fix, in inverted commas, in relation to what we were talking about in the statement we released.
You pose a very valid question, Andrew, in asking how we make accounts in the long term more understandable for the layman. Sir Tony Redmond proposed, in effect, a front sheet or equivalent. We have said we will come back to that in due course, when we have fixed these immediate issues. There is a broader conversation to be had about these things.
Q246 Andrew Lewer: Do you regard solving the backlog and the problems that colleagues have touched on as a higher priority than implementing the summary statement that Redmond suggested, rather than seeing both as part of the same solution? Are you saying one, then the other, not both at once?
Lee Rowley: I think we do need to separate them. I am not saying this would happen, but if we prioritise simplification, there is a risk of simplification becoming an overlay on what we already have. If you create another product or sub-product that is required in the overall system, and the system is already taking too long, you are adding another x% increment that slows it even more. I am not saying that that would happen, but it is a risk. I think we have to fix the appearance, fix some of the detail—or at least come to a more proportionate view on the detail—and then look at how they can be made more penetrable.
I am not an auditor, but from listening to what some of the representatives told your Committee, I think there is a sense that for people who know what they are looking for—they do not have to be absolute experts—there are very usable parts of individual audits. But I accept that, in aggregate, they are sometimes very challenging to get through.
Q247 Andrew Lewer: They are indeed. Don’t take this personally—we know you have been in post only for a certain amount of time—but given that getting to the first part of this problem has taken quite a long time already and it has not been resolved, dealing with the second part and having a more armchair-auditor user-accessible summary statement is likely to be some time away.
Lee Rowley: The priority is definitely the first rather than the second. I am pleasantly surprised by the number of armchair auditors, but we should always encourage more people to get interested, and one of the ways to do that is by trying to simplify some of the information.
Q248 Andrew Lewer: Do you think there is any mileage in having different or more proportionate accounting systems for authorities of different sizes, from a small rural west country district council to Birmingham or Manchester city council?
Lee Rowley: We have that to some extent already for very small authorities beneath a certain threshold—I think it is £6.5 million. The challenge to that is that if a Treasury colleague were here—there probably should be one here—they would say that there are international standards, that international standards are there for a purpose and that we need to try to adhere to them. It is correct to say that there are different requirements, isn’t it?
Siobhan Jones: There are slightly different perspectives for smaller authorities—for your very small town and parish councils—but not necessarily for districts.
Q249 Andrew Lewer: Only authorities that do not have statutory responsibilities. The ones that have statutory responsibilities are all above the threshold for the full shebang.
Lee Rowley: You are right: there is a very big difference in the complexity and scale of a £7 million, £8 million or £9 million district council and a multibillion-pound urban unitary. But there is also the need to try to balance off the international standards requirement at the centre.
Q250 Andrew Lewer: I think I am hearing that that, like the summary sheet, is less of a priority than getting rid of the backlog and getting up to date.
Lee Rowley: My priority, rightly or wrongly—I am very happy to take your view in aggregate as part of the report—is the thing that needs fixing, which is dealing with the backlog and then making sure that the backlog does not reappear. That will then open the space to have those kinds of conversations, which there is definitely value in.
Andrew Lewer: That is helpful clarity.
Chair: You have mentioned the requirements to adhere to international accountancy standards, and we have all these statutory overrides for local authority accounts and their complications. Natalie is going to explore those.
Q251 Mrs Elphicke: Minister, you mentioned that the delays in completing the accounts were the symptoms, not the cause. Would you agree that part of the cause of the delays and complexity is the statutory override to the normal accounting practices?
Lee Rowley: Ideally, we would not have statutory overrides. We are not encouraged to have them. We try to minimise them. Again, this is slightly beyond my purview because it is more the Treasury’s, but some of them are there for good reasons. I am not an expert in them. I have dealt with statutory overrides with regard to the high needs block and the like. They are thought through very extensively before being applied, in my experience. I cannot speak about historical ones, but in terms of the ones that have come across my desk, I know a lot of discussion goes on between Ministers and the Treasury before we keep them or add them.
Q252 Mrs Elphicke: In terms of local authorities being responsible themselves, we have touched on the role of central Government and the primary responsibility of local government within that process. That has to be done within a legislative framework, so would you accept that the legislation needs to reduce the number of these statutory overrides as, for example, CIPFA has suggested, in order to reduce the complexity and increase the speed and responsiveness of local authorities?
Siobhan Jones: As the Minister says, ideally we would not have statutory overrides. I don’t think that is a position that anyone takes lightly. In certain examples, the statutory override is intended to alleviate some of that burden. The most recent one on infrastructure assets was deliberately introduced to try to alleviate some of the pressure and reduce the prospect of delays. That is time-limited. We may seek to extend, but that was there to try to solve the problem. It is still not ideal. That is one of the longer-term works referred to in the letter to try and find a sustainable solution that does not require it.
Lee Rowley: Again, I am going slightly beyond my knowledge as a non-audit expert, but, as I understand it, a lot of the changes that the international financial reporting standards have gone through in the past decade or so have been because of the failures in the private sector to understand the value of the company and the value of the assets beneath the company as a whole. In some instances, for very good reasons and with very good intentions, that has meant that people end up—as I think was outlined by some of your witnesses—sending surveyors multiple times to schools or to roads to work out what the value of the road is this year and whether it is still going to be there next year. Although the principle is that statutory overrides are minimised, that seems a reasonable approach to take.
Q253 Mrs Elphicke: Just drilling down on that a little, in different sectors there is different guidance on particular asset classes and approaches within the international standards and how they would be applied. Thinking about the issue of how you will deal with the backlog, if that is driving some of the complexity with the backlog, is it realistic to do the research before tackling the issue of ensuring that the framework in which it operates is as easy to use, effective and comprehensive as possible for councils to apply?
Lee Rowley: Yes. We want to do it in tandem. You are right, Natalie, that there is absolutely no point in culling 500 or whatever in the backlog—it would not be 500, because that is very recent, but x hundred—only for the backlog to start going up by one or two a week from that point onwards. We have to reset the situation so that people are not still working on 2016 or 2017 audits that are no longer likely to be material, while at the same time having to change the unit or the individual process per audit in a way that makes it more sustainable.
One of the reasons why, as Clive rightly indicates, the statement has so many different parties is that we need each of those parties to come to the table and to be willing to move on the process itself, not just the backlog. We will need stronger guidance on asset valuation, for example, from one organisation—that is correct, I think.
Q254 Mrs Elphicke: Must that therefore include legislation to be applied to the statutory rights?
Lee Rowley: It might require some secondary legislation, but we will see, because we have to get to the end first. It is not unreasonable to suggest that it may do. My interest is in understanding what would be helpful for the sector and what everyone is willing to sign up to, with a bit of pushing and encouragement from the Department, and then we will work out what the methodology is to get that to work.
Q255 Mrs Elphicke: In relation to the backlog, we have had evidence from some councils, or perhaps one council that has managed to comply, and it is a council that does a range of activities. To what extent have you considered putting a sort of amnesty into the process? How will you identify that this may be representative of risk in those organisations, that they have not been able to comply and to complete their accounts? Looking at that timeframe, for long-dated assets—in particular, the infrastructure classes—it will be relevant to consider what happened at the beginning of those assets and all the way through, so how will you assure yourselves that you are identifying risks within councils as part of the process and that the timeframe for where you will draw the line is the correct one in relation to different asset classes or accounts?
Lee Rowley: They are all absolutely valid questions, and ones that we have been wrestling with for a number of months. We can easily argue ourselves into diametrically opposed positions. We can say, “The system isn’t working, so let’s just stop everything tomorrow and restart it, not worrying about anything that went on before, as of yesterday”, or whatever. Equally—I have done both these things—we can argue ourselves into a place where we say, “We can’t really do anything, because there is risk underneath and we need to make sure that we are incrementally still understanding everything that is going on.”
Again, I will appreciate your views in your report, but I think my judgment, rightly or wrongly, is that what we are coming forward with—which is not the finished product, but saying that we need to spend another few weeks going through this, understanding it and making sure that it will do what we hope it will do—is broadly the contours of what something should look like. We are making a choice between two types of risk and where we want to focus our capacity: either the risk that in an ideal world it is important to quantify and close in the normal way, but that happened a number of years ago; or whether we move that capacity on to more recent things, which have the potential to be more problematic if they are not visible and not looked at in more detail. My preference is to do the latter rather than the former, when I do not have the capacity to do both.
Q256 Mrs Elphicke: One final follow-up on that: will that be transparent? Will you make it public which authorities you have decided to draw the line under for their residents to see? How will that be communicated, where you said, “Okay, we are letting you off the hook and you don’t need to complete those,” as opposed to those that have had a clean bill of health and managed to keep up to date?
Lee Rowley: Again, this is the detail we have to work through—we have already done a lot of it, but we have to conclude it over the summer. The starting principle is that we should try to close things where we can. If that is not possible, we should minimise the things that cannot be closed. We then make clear statements that anybody can pick up, both within the local political sphere, and more broadly for media or people who are interested, so that it is perfectly visible. We also need to conclude the discussion that is going on at the moment and ensure that when an individual council’s position is picked back up after two things have been derogated in, for example, 2019, it does not have a ricocheting effect in future years.
Siobhan Jones: It will be transparent which councils have had their audits completed. That will partly need to be a conversation with the audit firms as well, in terms of how they prioritise their capacity to ensure as many as possible get finished. We are also encouraging them to ensure that the VFM reports are still completed. That is the vehicle for highlighting any concerning risk, to go back to your earlier question.
Lee Rowley: We have said as a principle—I think it is on page 2—that where auditors have concerns about a council, they should absolutely do what they think they need to in order to work through those concerns.
Chair: Kate, do you have a question on the code of practice?
Q257 Kate Hollern: Given that local authorities are required to have regard to the accounting code, should the Government fund CIPFA’s production of that?
Siobhan Jones: The system we have set up is actually very reliant on experts. CIPFA has been set up in order to have that at arm’s length and have the professionals setting the overall code. That is quite a long-established practice. It is not something that we would look to directly fund, but other sectors have a similar model of applying IFRS.
Q258 Kate Hollern: At least a third of local authorities do not purchase the accounting code in any given year. How can councils that do not purchase it adhere to the guidance in the code of practice, if they cannot even afford to buy it?
Siobhan Jones: Going back to the Minister’s points about the local-central divide that we have, it is the CFO’s responsibility to ensure that the accounts are fair, true and representative. If he or she feels that there is a way to ensure that and that does not require purchasing the accounting code, they are within their rights. They are required to sign off that they feel those accounts are a true and fair articulation of what that council has spent. I would argue that it is their responsibility to determine how comfortable they were with that.
Q259 Kate Hollern: It may be their responsibility, but surely if that were a service that was free to local authorities, we would not be in the state we are in, with huge backlogs.
Lee Rowley: In fairness, I think they are different. We have an issue with backlogs because of a general issue in audit, as I understand, of quite a lot of auditors leaving the profession. That is impacting both public and private sectors. We then have an issue with the risk aversion that is starting to creep in because of challenges around how people audit. I do not think that is down to what you are saying.
What we have to try to do is ensure that the system works, but there will always have to be a level of agency for individual councils to make decisions about how they staff, what they focus on, what they put in an internal audit, and how they ensure they run themselves in a way that minimises risky behaviour or manages risk appropriately. What we want to do is to ensure through those actions that the broader audit ecosystem, which looks at all of that, is in a place to do so in a timely manner. At points, at the moment, it is not. Being timelier, it can pull up issues more rapidly.
Q260 Kate Hollern: You have said a number of times this afternoon how much more difficult and complex it has got over the years for councils to get sign-off on their accounts. I’d be interested in whether you have looked at your own council’s accounts.
Lee Rowley: I have, yes. I have them here.
Q261 Kate Hollern: You have printed them off, but do you actually understand them?
Lee Rowley: I am not an auditor, but I worked for an accountancy firm before I came into politics, and I learned how to read balance sheets when I was a Westminster councillor many years ago. Could I answer every single element of this? Probably not, but I could probably work most of it out. As I say, they are not the easiest things to read and—on Andrew’s point—we have to think about how we try to improve that over the course, but they can be understood by most people. It is about the time that it takes to do that.
Q262 Kate Hollern: It seems you are not keen to accept that if the Government funded the accounts code, it would make it much simpler, particularly for smaller authorities, to produce accounts in plain English, so that the purpose of an audit is fulfilled and people can look at it and question it. You seem to be making things more difficult for local authorities, rather than more transparent.
Lee Rowley: Forgive me if I have misunderstood. We fund the ability for people to understand the guidance. The guidance is still guidance for a system that needs change. If I have to make a choice between the two, my preference is that we look at how we make the system simpler. The guidance should be simpler so that when councils decide to buy it, in whatever shape or form that is, it can be done easier, quicker and in a more timely way, so that when people look at these things, they can understand them more, and there is a virtuous circle. I get your point, Kate, but I am not sure my sense is that that is the biggest lever we have to pull in trying to fix this issue.
Q263 Kate Hollern: So you would not be keen on the Government funding it, even though it possibly could make the whole process much simpler and much more transparent. Surely your job is to help local authorities.
Lee Rowley: Siobhan has explained why there is a division of responsibilities. My focus is on trying to fix the backlog and make the process simpler. It is not that at the moment.
Kate Hollern: We’ll leave it there.
Q264 Chair: The chief finance officer in a local authority is required to state in the accounts that they have complied with the code, which, in some cases, the local authority does not even possess a copy of. Is that their problem and responsibility, and nothing that the Government would want to address?
Lee Rowley: People should have confidence that they are signing off the right things.
Chair: A very diplomatic answer. Let’s move on to audit appointments in the future.
Q265 Andrew Lewer: I dread the expression “going forward”, but as you know, public sector audit appointments provide a procurement opportunity for local audit. Although opting in was supposed to be voluntary, it was not really, because everybody did, and the incredibly, vanishingly small number of people who did not ended up doing so in the end, pretty much. It was very tight; it looked like it was not going to happen, and then it just did, but at the cost of a big increase in audit fees. How concerned are you that PSAA might not be able to manage that when it looks at the next procurement round for after 2027?
Lee Rowley: I don’t know if I can answer that with confidence. PSAA have clearly recognised that in the element of the system that they have purview over, they have some levers to pull. They have pulled some of those levers, because they have moved the contract from £50 million to whatever it is—over £100 million. They have clearly realised that they have a role and responsibility in this, and have done that. I have not spoken to PSAA recently on this, but I would imagine that they will be waiting to see what the impact is. They have demonstrated their ability to change their approach, so I have no reason to think that they would not be able to do the same in the coming years.
Q266 Andrew Lewer: When he gave evidence to us, Professor Heald said that we were very, very close to a complete collapse of the system. It was only by pulling all the levers, as you describe it, that PSAA just about managed to get this over the line. I am sure you have a risk register for this. This has to be pretty high risk, given how tight and close things were last time. What does your risk register tell you about how damaging it would be if it went wrong, given that it nearly did this time? What would the Government’s approach be to rectifying it: throwing more money, which we have not got, at it, or looking at the attractiveness of local authority audit for audit companies in general? Local authority audit does not seem to be attracting those companies at the moment.
Lee Rowley: There is clearly a lot of work to be done to minimise the chance of a problem in the future. One of the reasons for the statement is to recognise that we have to change not just the immediate problem in front of us—the backlog—but the process in order to avoid a backlog again. That will hopefully improve the situation and, ergo, the attractiveness. We have to look at how we can bring more people into the system, full stop. That is one of the reasons why some of the local audit—I can’t remember the word—
Siobhan Jones: Local audit qualification.
Lee Rowley: Indeed. We are working on trying to get that going. There is a broader conversation for the audit sector as a whole; if you read the FT, there are quite often articles from an auditor saying, “We are struggling to get people into the sector.” That is something that everybody is trying to work through. There is value in going into local authority audit. It supports organisations that do great work, and people will gain great respect from that. We have to try to make it as attractive as possible, but in a way that fixes the problem and does not just put sticking plasters on it.
Siobhan Jones: After the procurement, the PSAA spoke to some of the audit firms that decided not to bid again to understand the rationale behind that, and that has very much fed into the work plan that the Minister has described. That includes thinking about what things led them to make their decision this time around.
Q267 Andrew Lewer: Did that give you ideas for the changes you are proposing to get rid of the backlog and make local government audit more attractive to people in future? Or do you think this is about the wider point that we have heard, and that it is a bigger system issue with audit altogether? Is DLUHC looking primarily to change things around a little bit, as we have discussed, or is there a bigger Treasury discussion to be had about changing the nature of the attractiveness of audit?
Siobhan Jones: It is a mixture of those things, and the weighting the audit firms gave the different factors depended on which one I was speaking to, but definitely the work that the Minister has outlined, and what is in the statement about what we might do in the future, would be a factor for some of them. That is about the sort of system we are operating, proportionality and complexity. That was definitely a factor they would be considering, as well as capability and the long-term draw for individuals—do they feel that they have a career in this space? It was less the whole system side, but as you would expect, any firm is thinking, “Well, I can put some of my people on this corporate audit, or on local audit,” and wondering how they balance those decisions. Some of the measures that are outlined here should help them.
Q268 Andrew Lewer: The Department’s main mitigation, to try to make sure that the next procurement round is successful—given how close this one was to not being successful—was those internal changes, rather than a bigger approach.
Siobhan Jones: It is one of them at the moment. I would expect us to continue those conversations, and not just with the incumbents; as you will be aware, we have two new entrants to the market and one returner. I would want to keep talking to them, to learn from their earlier experiences, so that in four or five years’ time, when we get to the next procurement, we are on a stronger basis of understanding. In the run-up to the last procurement, all the actors listed in this statement came together to make sure that we were providing as much clarity as possible. I would very much want to do that again ahead of the next procurement.
Q269 Mary Robinson: As you are having these conversations, two things come to mind, in terms of whether a previous auditor would return. One is risk aversion, which the Minister mentioned, and the other is whether the remuneration is right. Those seem to be two obvious things. Are they the most common factors?
Siobhan Jones: Based on the conversations I had, it is certainly no secret that the audit firms did feel under the previous contract that the remuneration had got out of step with the wider corporate market. That was definitely a comment we heard from audit firms, and I think you would have heard it in previous sessions as well. Remuneration was definitely a factor, but it was not the only one, as you say. There were other things in play. Could they be confident about the stability of the market? As with many private firms, stability was a phrase that came up a lot, so if we can offer some sense of what the Government are intending to do in this space, as was outlined, that would appeal.
Q270 Mary Robinson: Was there any indication that, if an auditor was working to tight margins on a contract that it had signed up to through procurement, it would want to do a pared down version of an audit? Did you feel that that was the case?
Lee Rowley: I think they would just go slower, effectively.
Siobhan Jones: Yes.
Lee Rowley: I think that if there is a fixed amount of money in the system, the audits get signed off more slowly. That may be part of the reason for the situation that we are in. The complexity has increased, and because the contract was perhaps not where it needed to be—though that is for discussion—that has been part of the reason for the backlog build.
Chair: Moving on to the expertise in councils on these matters, I call Kate.
Q271 Kate Hollern: Do councillors get enough training and support to understand audits clearly? You accepted that audit was complex, and that people need to be confident before signing off, but a recent survey showed that councillors had a severe lack of confidence about and understanding of audits, the accounts, what they are supposed to do, and how they are supposed to come to understand them. Do you think that the Government should fund training?
Lee Rowley: As a principle, I do not think the default position should automatically be that the Government intervene every time there is an issue with local government.
Q272 Kate Hollern: I didn’t say “intervene”.
Lee Rowley: I know; sorry if that was not what was intended. I respect the constitutional position of local government, and we cannot—even for a good reason, which this may or may not be—have the Government help here, there and everywhere, because then it will become an everywhere request. In my view, it is for local authorities to decide on the appropriate level of training to give their local councillors, and local councillors have a responsibility to understand their authority to the extent that they can. They have agency in this process.
Q273 Kate Hollern: So despite the problems with producing accounts, audit and general understanding, which is why we are here, you do not think the Government have any role—not even in setting out clear guidance for elected members, so that councils could issue it and perhaps train themselves. You do not think that there is a role there.
Lee Rowley: If you apply that threshold to everything, Kate, the Government would issue guidance on everything, and there would no longer be a responsibility or requirement for local government, because we might as well do it ourselves. I had a similar discussion about enforcement with you and Ian. I push back a little bit in these areas. I totally get the point you are making; you see the problem, and you say, “What can Government do to mitigate it?”. My view is that we should try to define the problem, and then fix that.
I am just not convinced that an ever-growing circle of guidance, and central Government paternally trying to look over councils, is the way to go. In May, my council had elections. I was not that keen on some of the people who got elected, but the electorate made a decision, and actions have consequences. I want to make sure that those people are supported as much as they can be, that they have appropriate training, and that local councils work through providing appropriate support to people.
Councillors and councils have agency. Not every councillor needs to know absolutely everything in that report, but they need to be able to get through it, and councillors should have the support and intellectual curiosity to do that, and a place to go. When I did not understand, I rang the finance department up at Westminster, and they gave me half an hour and explained it. That should be possible to do.
Q274 Kate Hollern: You would think, yes. I am just concerned that everybody is saying that things are getting much more complex each year. There is this huge backlog, and we see lots of problems there. I just think it would be in the best interests of the Government to give some guidance, in plain English, that councils should follow. In turn, councils could involve the public, so that they understand what is published.
Lee Rowley: I will just say one additional thing. We are giving councils £15 million a year of support for this over the course of this settlement—well, that funding goes a bit broader than this area, but it is for their finance functions, and to ensure that they have enough financial capability to do audits and other things. It is ultimately for councils to decide how to use that money; it is not ringfenced. If councils want to use some of it to educate their councillors, and they think that is reasonable, I guess they could.
Q275 Kate Hollern: We will leave that there. There is a convention that local authority audit committee chairs should be appointed by opposition members of the local authority. Should that convention be codified?
Lee Rowley: I think it is for individual councils to make those decisions. It is not an area I am that familiar with.
Siobhan Jones: We agreed with Sir Tony’s recommendation on independent members, but we have not necessarily opined on the chair. There is guidance from CIPFA, I believe, that sets out how you might want to do that through local authorities, rather than the Government stepping in.
Q276 Chair: Moving on to value for money, auditors do not have to come to a view about whether value for money has been achieved in a local authority; they simply have to decide whether arrangements are in place for the authority to secure value for money. Is that process worth anything to anybody?
Lee Rowley: That is another pretty nuanced and balanced judgment, but historically the Government have come down on the side of ensuring that there are processes to confirm value for money, as opposed to confirming it, because the contrary can end up happening, though it does not have to. People get too reliant on single words from the audit commission. That is where it ended up when I was in council, 10-plus years ago.
Q277 Chair: Is it of any use to Government if the auditors say something like, “Arrangements have been put in place to secure value for money”?
Lee Rowley: Yes, because I derive from that that an auditor has a decent level of confidence that value for money is being considered in the processes. There is always this question about whether you can legislate for virtue. You cannot, but you can ensure that the processes broadly consider things that you think are important, and then it is ultimately for councillors, officials and officers to decide how they want to apply that.
Q278 Chair: What happens if the auditor says that those arrangements are not in place? Does that come to your desk in any form?
Lee Rowley: I presume they use the tools that they have available, if they consider the matter to be of sufficient gravity. It would then come to our attention, if there were public interest reports, or Government reports or whatever. We have acted on some of those previously.
Q279 Chair: When was the last time an auditor did that?
Lee Rowley: Didn’t we act on Sandwell?
Siobhan Jones: Sandwell actually conducted a governance review as part of its powers. That was very much picking up on “the systems are not in place”. A lesson that has come out of previous occasions where the Government have had to intervene is that very often governance failures have been part of the problem. Sandwell is an example of our intervention very much being triggered by the auditor’s governance review.
Q280 Chair: On value for money, Oflog will want to look at issues to do with the comparators between local authorities. I did a session with Amyas Morse at the LGA conference, and he made it clear that Oflog is not the audit commission reinvented, but how will Oflog relate to the audit process when it comes to value for money? Indeed, should the value-for-money elements really be detached from the audit process in some way? Are they a separate issue?
Lee Rowley: We have debated this with Amyas Morse multiple times over the last few months, because we want to get Oflog right. Oflog will be an iterative process, and we will welcome the Committee’s view on it in time, if you are minded to look at it. We hope that initially Oflog will build up the dataset—we have started putting it out into the public domain—and then start looking at how it can fill the gap between the group of councils that are just getting on with things without many issues, and those that fall into stewardship or challenge. There has to be a bit in the middle where councils can come to Oflog and say, “We may have issues. Can you help us before they are quite serious?”. Alternatively, because of indicators from the data that has been put into the public domain, Oflog may want to say, “Are you sure everything is all right?”. That is what Amyas is going to build up over the coming months.
You are right that we have to avoid duplication in terms of the Department’s stewardship function when councils have problems. We also have to avoid duplication of what an auditor does. That is what Amyas has been trying to work through since we launched Oflog two weeks ago.
Q281 Chair: So the extent to which it relates to value for money is under consideration as part of the new arrangements.
Lee Rowley: Amyas has said that he wants to look at how Oflog can be helpful in the space between failure—which is necessarily, as per the best value judgment, a failure of value—and no issues whatever. He wants to try to fit it in earlier in the process, but it is fair to say, from our conversations with him, that that is still a work in progress, and that he is still trying to work out exactly how to do that without duplicating.
Siobhan Jones: Indeed, and he has also been quite clear that he does not want to replace local systems. One of the advantages of the audit value for money report is that it is a report for the council. If concerns are identified, it is for the council and the councillors to act and solve them themselves, rather than waiting for them to be spotted by a national body like Oflog.
Chair: Mary, you may want to explore that further, and then we will go on to some other issues about local accounts.
Q282 Mary Robinson: Thank you, Chair. You have gone through quite a lot on this issue. To clarify, how will the work of Oflog complement the system of local council audits? Will it run alongside them? Will its remit be to complement that system?
Lee Rowley: It will definitely run alongside; there is no attempt to replace here. The auditors will do whatever the auditors need to do. Obviously, we are looking at trying to change elements of individual processes, but auditors will continue to need to do that entirely independently of Oflog. Through the work that Amyas and Josh Goodman, the interim chief executive, have started, Oflog will need to work out how they complement. It is important that they complement, first, because auditors have statutory functions that they need to carry out anyway, and clear guidance, so we do not want duplication;, secondly, we want to make sure that Oflog works for local authorities and does not create undue burdens.
Q283 Mary Robinson: Finally, in the spirit of finding solutions, Ed Hammond at the Centre for Governance and Scrutiny has argued in favour of creating new bodies called local public accounts committees, mirroring the parliamentary Public Accounts Committee. He says that they would “bridge current gaps in accountability.” He has argued: “we think that local PACs present a solution to a pressing need, irrespective of policymakers’ position on the political spectrum.” Do you agree?
Lee Rowley: I would ask why a council’s finance overview and scrutiny committee could not do most of that already, with appropriate terms of reference. Unless I am missing something, there is no inherent reason why that couldn’t be done by a council, with appropriate changes to governance, if it is not already done.
Q284 Mary Robinson: One of the issues that we explore again and again is that councils don’t appear to be doing it. We are searching for a solution, and sometimes saying that they should be doing it does not lead to a framework for fixing this. Have the Government explored this view at all?
Lee Rowley: Obviously, the last decade or so has been challenging in general—we have political debates about the causes of that all the time—but most councils are getting on and doing what they are designed to do, and in many instances, they are doing it very well. Most of us have examples of where that is working. Nothing is ever perfect, and there is always controversy. Councils make mistakes, just as Members of Parliament and Governments do, but in the main, local authorities do a really good job in really challenging circumstances. There are obviously a small number that have got themselves into difficulties, but that does not necessarily mean that the system is fundamentally unworkable.
This goes back to the point about ensuring that local authorities have the space for their own agency—a point that we can obviously debate, and on which I welcome your views. Forward-thinking chief execs, senior officers and politicians would welcome robust internal scrutiny, and would set up processes to ensure it, because it makes their performance better in the long run; I would hope that most of them see that. I was told very recently that I was interfering in parts of local government, so I am particularly keen to ensure that I respect the local government settlement as much as I can. One part of that settlement is that local authorities get to make their own decisions, which I think is appropriate.
Q285 Mary Robinson: One issue is that neighbouring councils—they can be small councils—do things in different ways. One proposal is that this could be operated on a sub-regional level, looking at value-for-money principles across the wider piece. Is that an attractive proposition?
Lee Rowley: Mary, I am trying to think of how I can answer that in the best way. My starting position is that it is for local councils to decide how they want to structure their own scrutiny. I would not want to be prescriptive in this area because, while everything sounds good on paper and even if things are good in isolation when implemented, often the fact is that it does not all hang together right on aggregate. My preference is to allow people and organisations to make their own decisions, recognising that they have both rights and responsibilities to do that. If people think that councils have got it wrong, they can kick those involved out every so many years.
Chair: Minister, thank you very much for coming this afternoon and answering a range of questions about important issues, some quite technical. We appreciate that you have quite a bit of work to do over the summer to continue to address the backlog. We will have a further report on that in due course. We will consider all the evidence we receive, and will produce our report for your consideration after the recess. Thank you both for coming.