Contribution
My Lords, I will focus my remarks on the amendments standing in my name and that of my noble friend Lord Jamieson, which concern the proposed local audit office. Having read the statement of intent and the consultation on local audit reform, we recognise that the Government have identified three systematic challenges. Two are particularly pertinent. First, on capacity, there is a severe shortage of auditors and too few firms in the market. Secondly, on complexity, financial reporting and audit requirements are overly complex and difficult to deliver on time. They are modelled largely on corporate auditing, rather than tailored to local public bodies. That encourages risk aversion and delay.
We do not dispute that there are real problems, but we want clarity over the proposed solutions in this Bill and in the transition plan published last November. Our opposition to Clause 74 standing part is not an attempt to frustrate reform; it is a probing step to understand the necessity and design of the proposed local audit office. What specific problem does a new statutory body solve that reform of the existing framework could not?
Regarding capacity, how does establishing a local audit office increase the number of qualified auditors in the system? Will it expand the training pipeline and make local audit more financially viable or attract firms that have previously exited the market? The Bill provides that the office will determine audit fees, while audit firms must nominate a lead partner for each audit. On what basis will the fees be set, and will local authorities and firms have any input at all? If fees remain inadequate, capacity constraints may persist.
There is also the question of delivery. If public provision is intended to sit alongside private provision, what scale of direct audit activity is envisaged for the new body? If it begins conducting audits itself, what impact would this have on competition and the long-term health of the market?
We are also told that the local audit office will reduce the audit backlog and strengthen relationships between local bodies and their auditors. Will this be achieved through simplification of reporting requirements, reform of risk and liability expectations and the adjustment of fee structures, or simply through centralised oversight? We need solutions to underline market weaknesses, not just structural governance reform.
The proposed local audit office will have regulatory functions, including maintaining a register of firms qualified to conduct local audits. Amendment 244 probes why a register is proposed while the office is also able to designate another organisation as an external registration body responsible for holding such a register. How many more bodies do we need in this landscape? At the same time, it may have operational functions. How will a clear separation between those regulating and operational roles be maintained? What safeguards will prevent conflicts of interest if both bodies regulate and potentially participate in the market?
That concern lies behind Amendment 246, which is explicitly a probing amendment. It seeks to clarify why the local audit office should be given the powers to acquire interest in audit firms or to provide assistance to them. What is the rationale for allowing the regulator to act as a market participant? Under what circumstances would it exercise those powers? Would it provide financial support to prevent market exit? What principles would guide such decisions?
Amendment 247 seeks assurance that the local audit office undertakes local authority audits itself and that its works will be subject to the same standard, scrutiny and independent oversight as private firms. Therefore, will the local audit office be subject to equivalent inspections and ethical standards when acting as an auditor? We would quite like a yes or no on that point.
Finally, Amendment 248 probes how rotations of key audit partners will work in practice and how independence will be safeguarded. If the local audit office undertakes audits directly, what arrangements will ensure appropriate rotation of the individuals acting as the key audit partner? What rotation period is envisaged? What process will govern handover and continuity? What safeguards will be put in place to prevent overfamiliarity and to protect professional scepticism? Just as importantly, where will these requirements sit? Will they be set out in the legislation, in regulation or through reference to an external ethical or professional standard? If an existing framework will apply, which one, and how will compliance be ensured in practice? The principle of rotation matters for independence but requirements that are too rigid risk worsening capacity in an already stretched system. How will the Government therefore balance independence with operational resilience?
These are not wrecking amendments. They are intended to provide clarity to the Committee. I look forward to the Minister’s response.