§ 5.30 p.m.
§ Lord McIntosh of Haringey
My Lords, with the leave of the House, I shall now repeat a Statement made in another place by the Chief Secretary to the Treasury on audit and accountability in central government: government response to the Sharman report Holding to Account. The Statement is as follows:
"With permission, Mr Speaker, I should like to make a Statement on the Government's response to Lord Sharman's report Holding to Account which made recommendations about audit and accountability in central government. Copies of the Government's response, Audit and Accountability in central Government are available in the Vote Office [the Printed Paper Office].
"The structure of audit and accountability, springing from the Gladstonian reforms, is an important matter. This House, and the country, have benefited enormously from the work of the Comptroller and Auditor General and the National 866 Audit Office, which—while accountable to this House—have a remit that is independent of both Government and Parliament.
"Over the years, Members of this House—and particularly the Committee of Public Accounts—have expressed concern that the remit of the Comptroller and Auditor General had become artificially restricted.
"It has been the general practice of this Government to appoint the Comptroller and Auditor General to audit each non-departmental public body set up since 1997 under our control.
"But despite this commitment to openness, there are still significant areas of central government where the Comptroller and Auditor General is not the auditor—including around 50 non-departmental public bodies that had been established previously with auditors appointed by individual Secretaries of State. And in a number of areas, he is also dependent on negotiated administrative access.
"In debates on the Government Resources and Accounts Bill the subject of the Comptroller and Auditor General's remit was raised and I undertook to review the position.
"Accordingly, I set up an independent review of audit and accountability in central government to look at all areas of the accountability framework, and to take evidence from a wide range of interested parties.
"I am grateful to the noble Lord, Lord Sharman, for leading that review, and to all members of the steering committee, including the right honourable Member for Haltemprice and Howden (David Davis), the right honourable Member for Swansea West (Alan Williams) and the honourable Member for Newbury (David Rendel).
"The noble Lord, Lord Sharman, reached independent conclusions and made recommendations that were addressed to the Government, the Comptroller and Auditor General, the Committee of Public Accounts and the Public Accounts Commission. The response I am publishing today sets out the Government's position in relation to Lord Sharman's report.
"In considering Lord Sharman's recommendations and how to carry them forward I have been very mindful that reforms need to command confidence on all sides of this House. They also need to be workable. I am very grateful for the constructive discussions that have taken place with the Comptroller and Auditor General and his staff which are reflected in the response.
"I am pleased to inform the House that the Government have accepted the main recommendations that the noble Lord, Lord Sharman, directed to the Government and that we support those addressed to others.
"There are five central recommendations: first, the Government agree that the Comptroller and Auditor General should audit all non departmental 867 public bodies. This will make him the auditor of bodies such as the Environment Agency, English Partnerships, English Heritage and the Housing Corporation.
"Secondly, subject to legislation, this extension to non-departmental public bodies will include those that are established as companies; for example, the Student Loans Company, the Film Council, the National Consumer Council and the National Forestry Company.
"Thirdly, the Government agree that the Comptroller and Auditor General should have statutory access to the documents needed for his audit work in place of the current non-statutory arrangements. We welcome arrangements proposed by the Comptroller and Auditor General to ensure that this right of access is exercised so as to minimise any additional burdens on either public or private sector bodies.
"His access to documents in completing value for money studies will be extended by right, for example, to registered social landlords, train operating companies and contractors, including those in PFI contracts.
"Fourthly, the Government's response makes clear our commitment to ensuring the information that underpins the reporting of progress against PSA targets is reliable, and accepts that there should be an extension of external validation of departmental data systems that relate to these targets. The Government intend to invite the Comptroller and Auditor General to take responsibility under his existing powers for the validation of such data systems, usually on the basis of a three-yearly review.
"Finally, the Government welcome Lord Sharman's acknowledgement of the steps being taken to promote strong management and innovation across government in the delivery of public service.
"Before implementing these proposals, the Government will consult bodies affected by the changes.
"I am confident that the proposals we are setting out today will strengthen audit and accountability and improve transparency, in the interests of this House and all those we represent.
"I commend these new arrangements to the House".
My Lords, that concludes the Statement.
§ 5.37 p.m.
§ Lord Saatchi
My Lords, I am grateful to the Minister for letting me have an earlyish copy of the Statement this morning.
It is a splendid aim, shared on all sides of the House, to give the public sector a proper balance sheet and proper accounts, based on clear, simple and rigorously defined rules. We all owe a debt of gratitude to the noble Lord, Lord Sharman—I am sorry to see that he 868 is not in his place—for leading the way with his report last year which has stimulated this belated response from the Government today.
There is much need for improvement in the compilation and presentation of government accounts; for better rules which show us what the taxpayer owns; how it is being used; and what it is being spent on. We are agreed that we need better information on that. Therefore, we welcome the Government's acceptance of the attempts of the noble Lord, Lord Sharman, and the Public Accounts Select Committee in another place by including in the remit of the Comptroller and Auditor General the over 1,000 non-departmental public bodies which currently employ 30,000 people and spend £25 billion of taxpayers' money a year.
I wish that I could stop there because if ever there was an issue that deserves to be dealt with on a cross-party consensus basis, that must surely be it. But I am afraid that the current situation, even after the worthy attempt with the Government Resources and Accounts Bill and this response today, is that unfettered discretion still resides in the Treasury so far as concerns the compilation of accounts; there are no clear principles for the accounting of income or expenditure, and we still permit the Treasury to continue to omit large public assets and liabilities from the national balance sheet.
There are at least three areas of major concern which the Government did not address in their response today. First, the accounting treatment of billions of pounds a year of tax credits is not in conformity with generally accepted accounting principles. By breaching OECD guidelines the present accounting treatment allows the Treasury to paint a more flattering picture of a key issue, which is government spending, by excluding their amount—now heading with the new Tax Credits Bill to perhaps £15 billion of public expenditure a year—from the total.
Secondly, let us consider the question of liability, which is not mentioned in the response. We are desperately lacking in that regard. We have no proper account of the great and growing liabilities of the public sector in relation to, for example, pensions. The public state pension represents an enormous and ballooning liability not just in this country but in many others. We need clarity in regard to the scope and scale of that liability. We have just seen the impact on private company accounts of the new FRS 17 accounting rule, but we have no idea what would be the impact on the public accounts of applying that accounting treatment to final salary schemes in the public sector.
Thirdly—we discussed this matter at Question Time today—we need to understand far better than we do at present what are the real liabilities that arise each time a project is implemented in the public/private sector under PPP, where the public sector establishes a contract that effectively enforces on it a series of payments over a long period of time that currently do not appear in the public accounts at all. We have seen with Enron the dangerous practice of allowing a buildup of debt to be hidden off the balance sheet. Despite 869 what the Minister said at Question Time, there is widespread concern that that is what is happening with public/private partnerships.
It was concerns such as those that led the noble Lord, Lord Sharman, to press for new measures to create greater scrutiny of audit and accountability in government organisations. We shared many of the views that he expressed. We both suggested a wider role for the NAO and the C&AG. For example, during the passage of the Government Resources and Accounts Bill we both asked for the statutory right of the NAO and C&AG to be extended to all non-departmental public bodies, including the BBC.
As the Minister will well remember, during the passage of the Financial Services and Markets Act 2000 we, together with the Liberal Democrats, moved amendments to provide for the NAO to audit the Financial Services Authority, but they were refused by the Government. I am therefore deeply disappointed that today's Statement continues to exclude two of the most important public bodies in the land—the BBC and the Financial Services Authority—from NAO scrutiny. Perhaps the Minister will explain why that vital exclusion continues.
We need a clear, complete and comprehensive set of accounts. They must be composed under standards of accounting practice so that people have at least a chance of doing the detective work to find out what is really happening. That is democratically proper and a matter of common sense; we do not have that after this Statement.
§ 5.41 p.m.
§ Lord Razzall
My Lords, in rising to respond to the Minister's Statement, perhaps I may say on behalf of my noble friend Lord Sharman how sorry he is that he cannot be in his place today. Having spoken to him in the light of the Government's response, I know that I speak for him when I say that he very much welcomes their response to his report. Indeed, those of your Lordships who have had the chance rapidly to digest the 55 pages of the Government's response in the available time will be aware that 98.5 per cent of my noble friend's recommendations have been adopted by the Government. Obviously, we welcome that.
I cannot comment on the criticisms made by the noble Lord, Lord Saatchi, which appeared to have little to do with the Statement. Had he given me advance notice of the extra items that he proposed to raise, I should have said whether I agreed with them. I had the advantage of an hour's notice of the Government Statement, but not of the noble Lord's separate statement on another topic.
Having broadly welcomed the fact that 98.5 per cent of my noble friend's recommendations have been adopted, I shall cavil with two of the Government's responses and then finish with a general comment. Recommendation 2 states:All departments should have a formally constituted audit committee. Some basic principles for audit committees include that they should".870 There follow seven or eight requirements that recognise that the bodies to be subject to audit committees are not corporate bodies, but that several of the requirements of audit committees of corporate bodies should be adopted.
I am concerned by the Government response in paragraph 2.5 on page 12 of the report, which states:However, central government is a wide and diverse field, and central government bodies are not identical to companies. In particular, unlike companies, government departments do not have a corporate board structure from which informed non-executives with statutory responsibilities … can be appointed to the audit committee".The report continues:Existing Treasury guidance will continue to be developed in the light of the above considerations, Lord Sharman's recommendations, and other factors as appropriate".Well, if ever I have heard the Civil Service preparing itself for not doing very much with a recommendation, that is it. I am concerned that the recommendation will be lost in the realm of Whitehall and that the principles for audit committees developed in the private sector will not be satisfactorily adopted as my noble friend recommends.
My second cavil, which I share with the noble Lord, Lord Saatchi, is with regard to the BBC. In recommendation 7, my noble friend's committee said clearly that the BBC should be brought within the ambit of the Comptroller and Auditor General. His report points out that the 1999 Davies review of the BBC recommended the same thing. I am not persuaded by paragraph 2.33 of the Government's response that the BBC should be excluded. No satisfactory reason is given why the Government reject that recommendation.
Those are two points of substantial detail. In concluding my remarks, I should tell the Minister and the noble Lord, Lord Saatchi, that I well remember that in the private sector—probably following the Maxwell affair—an enormous industry was created with regard to audit and audit control. The private sector now recognises that in many cases the baby was thrown out with the bath water—to use an unfortunate pun. I refer noble Lords to recommendation 17 of the Sharman report, which the Government should bear continuously in mind. It states:Accountability mechanisms are perceived by some in government as a discouragement to innovate and change, but this appears to be only one of a number of complex factors … Whilst acknowledging this, it is important that auditors recognise the dangers of being perceived as discouraging well managed risk taking, and ensure that their work lives up to the spirit of statements made on attitudes to innovation".If every audit committee and every auditor in both the private sector and the public sector lived up to that, the world would be a better place.
§ 5.47 p.m.
§ Lord McIntosh of Haringey
My Lords, I am grateful to both noble Lords for their response to the Statement—rather more grateful to the noble Lord, Lord Razzall, because he addressed both the Sharman report and the Government's response to it, whereas 871 the noble Lord, Lord Saatchi, referred to them only towards the end of a, shall I say, wide-ranging speech. The issues raised by the noble Lord, Lord Saatchi—his accusation about the unfettered discretion of the Treasury, for example—need to be examined. I should be happy to have an opportunity to respond to them. Issues about tax credits, long-term pension liabilities and liabilities under public-private partnerships all deserve to be debated—perhaps it would be appropriate for that to be in Conservative time—but not today.
The Sharman committee was set up to,consider suitable arrangements for the audit and accountability of central government in the 21st century on behalf of Parliament".It was especially concerned with the role and power of the Comptroller and Auditor General. That is what the noble Lord, Lord Sharman, did and I congratulate him on an excellent job.
In so far as the noble Lord, Lord Saatchi, referred to the report and our response to it, he made valid points. It is true that we did not accept the recommendation of either the noble Lord, Lord Sharman, or, earlier, Gavyn Davies, for the BBC. In view of Gavyn Davies' subsequent appointment as chairman of the BBC, we seriously considered his recommendation again. But the important point is that we want to avoid not only the reality but also the appearance of any interference with the editorial independence of the BBC. It was on that basis that we decided not to take action or to agree with the recommendation.
The BBC is, after all, set up by Royal Charter. The Royal Charter requires that it should be audited by a company regulated by private audit standards and with membership of the appropriate professional body. It would require an amendment to the Royal Charter of the BBC to change the audit arrangements and bring them under the National Audit Office. Although the National Audit Office is, of course, independent, we are reluctant to run any risk that the internal finances of the BBC could become issues for political debate. That is why, after much consideration, we rejected that amendment.
The noble Lord, Lord Saatchi, referred to the Financial Services Authority. He knows that the noble Lord, Lord Sharman, made no recommendations about the FSA. He said that the arrangements should be left alone. The FSA is a company limited by guarantee; we would need primary legislation to have it audited by the National Audit Office. There is some reassurance in the fact that the Treasury can commission value for money inquiries within the work of the Financial Services Authority, and there is no reason why those should not be carried out by the National Audit Office.
The noble Lord, Lord Razzall, spoke about audit committees. The difficulty with the public sector and particularly with central government is that we do not have non-executive directors responsible to departments in the way in which companies do: 872 perhaps we should. It is a legitimate point. But, having said that, we think that the points made by the noble Lord, Lord Sharman, in recommendation 2 are valid.
I can confirm, as the noble Lord, Lord Razzall, said, that the response to virtually all of the report is positive. I repeat my thanks to the noble Lord, Lord Sharman, and all his colleagues for the report.
§ 5.52 p.m.
§ Lord Sheldon
My Lords, I congratulate my noble friend the Minister. The report is a valuable contribution to the work of the Public Accounts Committee and the National Audit Office. For years, the Public Accounts Committee and the National Audit Office wanted to be able to audit all non-departmental public bodies. What we got was an agreement that all the new ones would be audited, and that practice was maintained. It is good to know that all the others will now be given that treatment.
The Housing Corporation was a particularly difficult case; we were given it only on sufferance. It was a concession to the National Audit Office to allow it to investigate the billions of pounds that was spent. That was an outrage. My noble friend has spoken about the valuable agreement that he was able to obtain on that issue.
With regard to the value for money aspects, I was pleased to hear that the issue of social landlords would be dealt with. I shall also say a word about the BBC. The BBC, of course, has a Royal Charter, as my noble friend said. However, we discussed the World Service, and we took evidence from John Tusa, who came before the Public Accounts Committee. We were able to get those accounts audited.
All in all, it has been a good job. I congratulate my noble friend.
§ Lord McIntosh of Haringey
My Lords, I have little to say about that, as it is entirely congratulatory, except to thank my noble friend.
The difference between the World Service and the rest of the BBC is that the World Service is, of course, funded by the Foreign and Commonwealth Office, whereas the rest of the BBC is funded by grant under the licence fee.
§ Lord Higgins
My Lords, the noble Lord, Lord Sharman, is certainly to be congratulated on his report, and the Government's acceptance of a number of his recommendations is welcome. However, as the Minister knows, the issues were debated in connection with the Government Resources and Accounts Bill. After a considerable time lag, we are now doing what we originally debated, which the Government should have accepted in that Bill. The problem with all such matters is that it takes an enormous number of years for government time to be found for legislation. Now that we are making some progress, apparently, can the Minister say whether we are likely to need further legislation? Will there be a further Bill?
873 My second point is that no amount of improved arrangements for government scrutiny will help if the accounts themselves are defective. With great respect, I say to the Minister that he cannot suggest that that is a separate issue. There is a huge register of government assets and a totally deficient attempt to estimate the Government's liabilities and create a proper balance sheet, particularly with regard to departments and the whole of government accounts. That must be done right, particularly with regard to the long-term liabilities relating to national insurance pensions. In many ways, we are going through a pensions crisis, and we need to know what the situation is relating to intergenerational transfers. We can do that only if the Government make the effort to provide us with a proper balance sheet. Only if that is done and the accounts are generally improved will the kind of improvement that the noble Lord, Lord Sharman, proposes and which the Government have accepted operate efficiently in practice.
§ Lord McIntosh of Haringey
My Lords, I accept that it is legitimate to ask why it took a year to respond to the noble Lord, Lord Sharman. There may be an element of administrative delay; I do not know, and I do not think so.
I can give two answers that, I hope, will be helpful. The first is that the response is a full response. It covers all the matters. We could have dealt only with the easy ones and said that we would deal with the others later. We could have responded in a couple of months and got some cheap plaudits for that, but we would not really have been any further forward.
The second answer is that the issue of audit following the money where it has gone is a difficult one, as the noble Lord, Lord Higgins, remembers from the Government Resources and Accounts Act 2000. There are issues relating not only to the effectiveness of audit but to intrusion on private companies and individuals who may be in receipt of government money. In some cases —for example, those relating to value for money in the expenditure of government money—it may be legitimate to pursue audit; in other cases—for example, if people are receiving money as pensioners—it may not be.
Much of the time between the publication of the report and the response has been used in the preparation of protocols between the Comptroller and Auditor General and the Government on access to contractors, companies receiving government money, grant recipients and so on. Those protocols have been prepared. There is still a necessity for consultation, so the process is not complete, but that is a significant reason for the delay. I hope that the noble Lord, Lord Higgins, will agree that it is a legitimate reason.
The noble Lord also asked me to say when we are likely to bring forward legislation following the review of company law. The document was produced last summer, and it was almost too heavy to lift. As I have said in the House, drafting is going on, but there will have to be some form of consultation, either on a draft Bill or on draft clauses. It is well known that I cannot 874 commit the Government to legislation in a particular Session, but I can assure the noble Lord that the matter is, for obvious reasons, not being neglected.
The noble Lord made a third point about defective accounts. I would be happy to listen to and respond to the arguments in due course. I am as interested when he makes the point about long-term pensions liability as I am when the noble Lord, Lord Saatchi, makes it. But it is not an issue covered by the Sharman report. It is a matter of enormous concern, not only to this Government but to all governments and it is a matter which deserves debate in Parliament.
Lord Bruce of Donington
My Lords, as one who had the honour of being a Member of the Public Accounts Committee in another place during my brief sojourn there, I should like to thank the noble lord for his presentation this afternoon and the Government for making some progress towards a reorganisation of the accountancy profession to give greater public accountability.
This problem of organisation is a good step to have taken but it begs the whole question: accountability means what it says. It means that people are informed exactly what is happening. These measures do not advance accountability at all. I am an old-fashioned accountant. I have been connected with the Institute of Chartered Accountants since 1930 and have, played an active part in it. I can remember the time when the purpose of an audit was to arrive at a true and fair view. All that has gone out of the window.
We now have a situation which will he endlessly enlarged upon in the course of the Enron investigations, to find out whether vie know anything about our accounting standards at all and whether accounting standards meet the requirements of democracy for accountability. My respectful suggestion is that they do not.
Moreover, although there are many ways in which the Government are responding to a desire for greater responsibility, regrettably it is a fact that when the Government try to answer Members of Parliament and your Lordships, they are already reluctant to come forward with facts in their possession. They will make it more difficult for questioners to put down Questions than they have done for a number of years.
Accountability and accounting standards require our urgent attention if democracy is to survive in its parliamentary form in the United Kingdom. I am quite sure that events will justify the prophecy that I have just ventured to make.
§ Lord McIntosh of Haringey
My Lords, there are two points that I need to make in response to my noble friend.
First, the report and the response are about audit and accountability in central government. Broadly speaking, what the report and the response say is that we have in the National Audit Office and the Public Accounts Committee a system for achieving independence and accountability which has stood the test of many years and is no longer an issue of party debate.
875 The independence of the National Audit Office from government, the fact that it reports to Parliament rather than to government and is still, to a large extent, independent of Parliament, is something which has been confirmed and recognised by both the report and the government response.
On the second point about audit standards, again it is nothing strictly to do with the Sharman report, but my noble friend will know that my noble friend Lord Brennan has a Motion down for debate next Wednesday in Labour Party time, precisely on these issues. I shall have the privilege of responding to that debate and shall look forward to the points raised from all parts of the House.
§ Lord Maclennan of Rogart
My Lords, the Minister may know, that having served on the Public Accounts Committee for 18 years, the bulk of them under the distinguished chairmanship of the noble Lord, Lord Sheldon. I welcome the Government's Statement today which goes far to implement recommendations made over many years.
I hope that in his reply to the noble Lord, Lord Higgins, the Minister was not cutting down on the principle that used to be expressed so eloquently by the noble Lord, Lord Sheldon, that it was the proper responsibility of the National Audit Office to follow public money wherever it went.
The Minister appeared to be erecting a countervailing principle of the right to some commercial confidentiality in certain circumstances which could be invoked in defeasance of that broader public principle. I hope the Minister will be clearer about that. The Government's rejection of the recommendation of the Sharman report, and indeed of the Davies report with respect to the BBC, seems to fly in the face of that broad principle of following public funds.
In admitting that the Public Accounts Committee has investigated the spending on a report of the NAO on the World Service, he does not seem to have recognised that it is perfectly possible to do that without threatening the editorial independence of the BBC in respect of the World Service. The same is true of its domestic broadcasting function.
In view of the fact that the matter is still under discussion in the context of the BBC's future and the future of broadcasting, I hope that the Government will reconsider this and listen to the first opinion of Mr Gavyn Davies. That was clearly expressed and carried great weight with all of those who were concerned about the responsibilities of that public service broadcaster.
§ Lord McIntosh of Haringey
My Lords, I should like to make two points. The first relates to following the money wherever it goes. Perhaps I did not make myself clear to the noble Lord, Lord Higgins. The important point I wished to make was that the Government's response goes further than Sharman asked. Sharman said that we should follow the money for PFI 876 contractors. The Government believe we should follow the money for all contractors. The distinction I made was not about commercial confidentiality—I do not think I used that phrase—but applies where government money has to be returned to government or to the people of this country. In that case, we do need to follow the money. However, it would be an intrusion to follow and audit money where it goes as a right—a pension, for example. That is the basis on which the protocols between the Government and the Comptroller and Auditor General are being made up. Those who are interested both in accounting efficiency and in civil liberties will respect those differences.
I hear what the noble Lord, Lord Maclennan, says about the BBC. From time to time there is a review of the BBC Charter and no doubt representations can be made on that matter then. The view that we have taken is that the editorial independence of the BBC is of primary importance and we do not wish to put that at risk.
§ Lord Campbell-Savours
My Lords, as someone who spent 12 years on the Public Accounts Committee and who participated in the debates on the Bill three years ago when it went through the other place, I should like to congratulate the Government. They have actually provided more than we vigorously argued for on the Floor of the House of Commons. May I ask my noble friend about the accounting arrangements to the Public Accounts Committee in the other place? Under the present arrangements, the permanent secretaries effectively give evidence to the Public Accounts Committee. The Government's response refers to access orders on documents held by the bodies listed in the Sharman report. Can we presume from that that accounting officers, for want of a better term, or people who would be held responsible for accounts within those organisations—which include the train operating companies. the PFI contractors and bodies with undertakings in receipt of grant—may well find themselves giving evidence to the Public Accounts Committee in future, following the access orders to be introduced under these arrangements?
§ Lord McIntosh of Haringey
My Lords, I do not think that I know the answer to that question. As far as I know, the issue was not covered by Sharman. It is a matter for the relationships between the National Audit Office and the Public Accounts Committee. No doubt there are people in the House of Commons who are much better informed than I am who could answer that point. I do not think that it is intrinsic to the issues raised by Sharman, although I acknowledge its importance.
§ Lord Hodgson of Astley Abbotts
My Lords, will the Minister clarify the position on PFI contracts? We seem to be entering a new and different relationship for those contracts, which will play an increasingly important part in government funding. I think that the Minister will agree that the key to the PFI contract is a transfer of risk to the contractor. Some of the contractors will do well, some will do badly, some will 877 do very well and some will do very badly. That is the nature of the market risk that the contractor is undertaking. While there is clearly a public interest in a degree of transparency, the contractor who is taking the risk is entitled to a degree of commercial confidentiality. If he has a successful contract and he is to be the subject of adverse comment at all times, as is the nature of these things, surely that will have the effect of shutting off contractors prepared to undertake PFI projects, who have freely entered into a commercial risk and accepted to take the rough with the smooth. The way that the Minister has explained the situation makes it seem as though the contractors may have to take the rough with the rough.
§ Lord McIntosh of Haringey
My Lords, the noble Lord raises further important matters that are not covered by Sharman. The report recommended that PFI contractors should be subject to audit by the National Audit Office and to value for money studies. The Government accepted that view. Clearly, those who undertake contracts in public/private partnerships will take that risk. The principle that the Government have a responsibility to continue their investigations on where the money goes has been expounded all round the House this afternoon. That was the broad consensus expressed by the Sharman report, by the response to the report and by this House this afternoon.