Local Audit (Amendment of Definition of Smaller Authority) Regulations 2025
(2 days, 22 hours ago)
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Baroness Taylor of Stevenage
That the Grand Committee do consider the Local Audit (Amendment of Definition of Smaller Authority) Regulations 2025.
The Parliamentary Under-Secretary of State, Ministry of Housing, Communities and Local Government (Baroness Taylor of Stevenage) (Lab)
My Lords, these regulations were laid before the House on 16 June 2025.
Effective local audit is vital for local accountability and transparency. The Government are committed to reforming the local audit system, including by addressing long-standing concerns around proportionality and capacity. Smaller authorities include parish and town councils, internal drainage boards, port authorities and parish meetings. They provide valued local services, from running community halls and allotments to managing small ports and drainage systems, but they do not require the same extensive audit arrangements as larger public bodies.
Much of our reform programme is focused on fixing the principal authority regime, which we know faces serious challenges; I have spoken about this many times, both in my shadow role and in the ministerial role that I hold now. It is important that the audit system for smaller authorities remains sustainable and works well. These regulations, along with other measures, will help ensure that the system as a whole remains proportionate and responsive to feedback.
We are certainly not removing scrutiny or accountability for smaller authorities. That will continue to be provided through the annual governance and accountability return. We have also committed to reviewing the AGAR so that it continues to be effective by enhancing transparency while keeping administrative burdens proportionate.
Increasing the threshold for small authorities is designed to prevent smaller bodies being drawn into the principal audit regime in future. This would be wholly disproportionate, given their size and responsibilities. Raising the threshold to £15 million is not about reducing oversight; it is about ensuring that the regulatory framework remains fair, proportionate and suitable for purpose. This change will allow smaller authorities to focus their time and resources on delivering essential services rather than navigating financial reporting, assurance and audit requirements that are out of step with their scale and responsibilities.
The threshold for smaller authorities has not changed since it was introduced in 2014. More than a decade on, it no longer reflects today’s financial environment. What was once a sensible level is now outdated, creating unnecessary pressures for smaller authorities whose financial activity has grown over time. These smaller authorities do not have the same breadth of services, assets or liabilities as even the smallest district council, yet, under the current arrangements, they risk being subject to a full financial audit at a level that brings significant cost and resource implications and draws on scarce audit capacity that should be focused on principal authorities.
Our local audit reform strategy recognises the need for a more proportionate approach to audit arrangements that reflects an organisation’s functions and complexity rather than simply its size. Subject to parliamentary approval of the audit measures set out in the English Devolution and Community Empowerment Bill, the local audit office will work closely with the department to take that forward.
This instrument raises the audit threshold for smaller authorities to £15 million, applying from the 2025-26 financial year. This is a proportionate reform that reduces unnecessary audit requirements, helps to free up capacity in the principal audit market and ensures that auditors can concentrate on those areas where assurance is most needed. The regulations, if approved by Parliament, will be made under the enabling provision in the Local Audit and Accountability Act 2014 and will take effect the day after they are made.
I am sure that our discussion today will show that we share a common goal to ensure that audit arrangements remain proportionate to allow local authorities and other local bodies to focus on delivering for their communities. I look forward to answering any questions that noble Lords might have and to participating in our discussion on this instrument today. I therefore commend the draft regulations to the Committee. I hope that noble Lords will join me in supporting them.
Lord Sikka (Lab)
My Lords, the local authority audit system was wrecked by the previous Government. Electoral Commission data shows that in the period leading to the 2010 general election big accounting firms handed millions of pounds in cash and non-cash donations to the Conservative Party and got their wish, which was the abolition of the Audit Commission. The commission used to make considerable use of the district auditor service, as has been mentioned, and was reluctant to award auditor appointments to big accounting firms as they were not really considered to be fit for the purpose. The commission was a watchdog and a guide dog as it focused on efficiency and effectiveness and guaranteed auditor independence. Since then, we have had several local authority scandals, but big accounting firms have continued to collect millions of pounds in audit fees. I look forward to the English Devolution and Community Empowerment Bill when it comes, but meanwhile I have a number of concerns about local authority audit matters.
The Government’s 9 April 2025 paper Local Audit Reform: A Strategy for Overhauling the Local Audit System in England stated:
“Audited accounts are a vital and independent source of evidence of the sector’s financial health and value for money for residents, local bodies and elected members”.
It adds that audit provides,
“the only independent check on whether local bodies’ financial statements are true and fair. This is vital not only for good decision-making but for transparency and to enable local communities to hold their councils and other local bodies to account”.
However the statutory instrument in front of us actually dilutes the audit requirements for smaller authorities. Can the Minister explain how the Government’s claims of an “independent check” and “transparency” will be delivered in the absence of independent scrutiny, which the Minister just praised?
Lord Fuller (Con)
My Lords, I declare an interest as I have, in the past few days, stepped down as the vice-chairman of the local government resources panel, which has oversight of audit and accountancy within the Local Government Association. In that guise, I have been very well acquainted with the difficulties in local government audit.
If there is a villain of the piece—I use that word advisedly—the noble Lord, Lord Porter, when he was chairman of the Local Government Association struck a wonderful deal that established the PSAA, referred to by the noble Lord, Lord Sikka. He drove down those costs and council tax payers benefited from low-cost audit for many years. With the benefit of hindsight, however, perhaps he did too good a job, because it came to pass that it was very difficult for audit practitioners to recruit the right staff at the right level, and they got behind.
We ended up in regrettable circumstances—through no fault of the noble Lord, Lord Porter, I stress—aggravated by Covid, in which a number of local authorities had failed to sign off their accounts. I cannot remember the precise details but some were four or five years old—so old, in fact, that the authorities concerned no longer existed because they had been reorganised away. I am very pleased that the previous Government, belatedly perhaps, took a grip. A line was drawn in the sand and some transitional arrangements made, and now things are much better.
However, I am very concerned that we now see the increase in the threshold. I appreciate that we need to increase the threshold value, but going from £6.5 million to £15 million is a huge increase—of 230% in one bite. That will mean that some of the smaller authorities, which hitherto have been contained within the audit regulations—I will give some examples presently—no longer will be.
I am seeking reassurance because we are establishing the definition of a smaller authority. I cannot be blind to the notion—the Minister referred to it in the earlier debate—that we have a local government devolution and reorganisation Bill in the other place; it passed Second Reading yesterday. In that circumstance, we will see a large number of smaller principal authorities, which are subject to the full audit regime, fall into the third tier of local government—that is, they will not be subject to the 5% or £5 council tax increase cap, if I may use that word.
I want to highlight the example of Salisbury City Council. It used to be a district council and a principal authority but, since the reorganisations in Wiltshire, that is no longer the case. In the past four years, it has jacked up its council tax by 44%. I note that its total precept for this year is only £6.065 million, marginally below the threshold limit to which it is subject. Its gross income is £8.64 million. Currently, it is part of the arrangement to have a full audit. Having jacked up council tax by 44% over the past four years, I think it should be. If it is increased to £15 million, however, what assurance can the local people—the long-suffering residents of Salisbury—have that the council has their best interests at heart? By contrast, the Wiltshire unitary authority, which has assumed responsibility for most of the expensive services, put its council tax up by only 4.5% last year.
I am concerned that this definition will, in due course—not today, because I am conscious that we are concerned solely with audit—be used, as we go through local government reorganisation, to give a free pass to some of the smaller city councils and larger town councils, which will inevitably will fall out of the LGR process and let them let rip. Of course, it is not just the district councils, it is the internal drainage boards. I am concerned about the case of Great Yarmouth Borough Council, which had an increase in the internal drainage board levy of 91% last year, which the council was mandated to pass on to local taxpayers. Over the past few years, it has gone up by 117%. That means that because the district council in Great Yarmouth is a principal authority, it could put its council tax up by only £5, but 91% of that was as a result of the unavoidable increase from the internal drainage board that lies within it. That meant that only 9%, just £26,000 of the increase in council tax in that historic borough—I declare an interest because my business is in that borough, but I do not pay council tax there—could be devoted to the provision and improvement of local services. We shall see a whole class of authority that would currently be within the £6.5 million but will no longer be caught if the threshold rises to £15 million.
I want to highlight the example of the Broads Authority, which is well known for its governance failings. It is well known to be a dysfunctional organisation and, in the interests of transparency, I have in the past made complaints to that body through the mishandling of certain planning matters. Its gross budget is £9.7 million. If ever an organisation needed the close scrutiny of a full audit, it is the Broads Authority and now it will be given a free pass. It will be let off from public scrutiny. This is the unintended consequence of this legislation.
Finally, I want to get the definition of “smaller authority” on the record in the context of local government reorganisation, and ask the Minister what the Government’s intentions are. If it is contemplated that this definition of “smaller authority”—the £15 million threshold—will be used post local government reorganisation, when some of these smaller cities, such as Salisbury, or larger towns such as Scarborough or Shrewsbury, which are certainly covered by the audit now but would not be in future, is it proposed that this definition will cap them at £5 or 5%? There will have to be some reckoning. We cannot have a situation whereby only the large unitary authorities that will be formed after LGR have their council tax capped at £5 or 5%. What is the Government’s view about capping, limiting and putting the local taxpayer first from some of these much larger authorities, which will take on other responsibilities—possibly for local culture, parks and dog bins—when their current responsibilities for social care, planning, housing and homelessness are removed? We cannot have a situation where a 230% increase in threshold allows a new class of large, small authority to let rip at the expense of local taxpayers.
Lord Shipley (LD)
My Lords, I am grateful to the Minister for explaining the statutory instrument. I share many of the perspectives of the noble Lords, Lord Sikka and Lord Fuller. I hope the Minister, in replying, will be able to meet some of the concerns expressed. The context, as we have heard, is the abolition of the Audit Commission 10 years ago. It was supposed to save £100 million a year but it did not do that. It was supposed to make local audit more efficient and it did not do that. It has not saved money. Costs have risen substantially since 2015. The private sector was supposed to take over from the Audit Commission but it has not worked like that, because there have been nowhere near enough trained auditors. There have been, as we have heard, huge delays in the audits of English local authorities. That is the background to this draft statutory instrument.
Lord Fuller (Con)
As the noble Lord, Lord Shipley, was speaking, I was looking at the RPI tables from the Office for National Statistics. Had the £6.5 million been increased by inflation, it would have been £10.3 million. So we are seeing a proposed threshold that is fully 50% greater than the increase in inflation over the same period. I just wonder whether that might help the noble Lord’s argument.
Lord Shipley (LD)
I thank the noble Lord for that intervention. It may be that RPI is the right way of doing it. I do not know why he took RPI there and not CPI. However, the issue is: why, in fact, are the Government not going to peg the £15 million to inflation? At what point will that figure then be adjusted because inflation continues to rise? We have to have a debate about that fact, but I thank the noble Lord, Lord Fuller, for explaining the RPI figures since 2014. Clearly, it may be that £15 million is the correct figure, but I would like to know what assessment the department has made of the implications of that figure on the number of local authorities that will be taken out of the full audit requirement?
Lord Jamieson (Con)
My Lords, again, I raise my interest as a councillor in central Bedfordshire, which, just being slightly boastful, is a council that for the 10 years I was leader had its accounts audited and signed off every year within the deadline and was one of the few councils to do so.
I am grateful to the Minister for introducing this statutory instrument. The instrument raises the threshold, as has been discussed, to £15 million in annual income or expenditure. Public bodies below this will no longer need to have the full audit and can follow the streamlined annual governance and accountability return—AGAR—process.
This reform is in response to the long-standing and well documented challenges that England’s local audit system faces. It is worth noting that this is not a new policy initiative. The foundations were laid under the previous Conservative Government, who published the consultation in December 2024, setting out proposals to overhaul the local audit framework. The consultation highlighted widespread concerns around audit capacity proportionality and long-term sustainability. A formal response was subsequently published on 9 April 2025. I ask the Minister to update the Committee on progress towards implementing the remaining elements of this broader strategy.
We believe that the instrument before us is a pragmatic and proportionate reform. It recognises that many smaller authorities do not carry the same level of financial risk as larger bodies and should not be burdened with audit requirements that are both costly and unnecessary where they are unnecessary.
The Government have suggested that this change will ease the financial and administrative burden on smaller authorities, reduce the pressure on the over- stretched audit market and allow scarce audit resources to be better focused on higher-risk councils where scrutiny is most urgently needed. We note that 55% of the consultation respondents supported raising the threshold, indicating that the proposal carries a degree of support from within the sector itself.
In closing, I would be grateful if the Minister could address a few further points. First, what safeguards are in place to ensure that smaller authorities, no longer subject to the full audit, continue to operate with high standards of financial transparency and sound governance, which I think addresses the point that the noble Lord, Lord Sikka, was raising? While £15 million is a sensible threshold, will other factors be taken into account, such as the debt levels of councils? A council that is heavily in debt, even if it is just below the £15 million threshold, is clearly at much higher risk than one that is just above it and has no debt.
Secondly, will the department be issuing updated guidance to support these authorities as they continue using the AGAR framework? As my noble friend Lord Fuller mentioned, are there other consequences that are not in this paper, and that are coming as a change to this definition, that we are not considering today and should be considered?
Finally, can the Minister provide an update on the progress of the wider local audit reform programme, as set out in December 2024? In particular, will she address the issues of proportionality, risk-based accounting and focusing that limited resource on higher-risk areas and not on low-risk, bureaucratic processes?
I have one other question; I apologise. Can the Minister update the Committee on how the Government are addressing the shortage of local government audit practitioners?
These are my last few sentences. We support this instrument in principle. It is a sensible step forward towards a more proportionate, risk-based local audit regime. However, I raise those various issues. We need to ensure that there is robust oversight, transparency and regular review, to ensure that public accountability is not diminished in the process.
Baroness Taylor of Stevenage (Lab)
My Lords, I thank all noble Lords who have contributed to this interesting debate. As noble Lords will know, I spent a lot of time on the same board that the noble Lord, Lord Fuller, sat on: the LGA Resources Board.
We have talked a lot about the history of the abolition of the Audit Commission. I do not think that any of us want to go back down that route. Although the steps that were taken were taken with good intent and might have driven down costs, the complexity of local government audit was, I think, underestimated. We ended up in a situation where we had a significant backlog of audits and where some of the smaller local authorities were subject to what the noble Lord, Lord Jamieson, referred to as unnecessary bureaucracy and financial reporting. That did not help anybody, which is why the Government are firmly committed to bringing forward reform of the local audit system more generally. Much of that is contained in the English Devolution and Community Empowerment Bill. I hope—indeed, I am sure—that we will have some more interesting discussions on the wider issues around audit during the passage of that Bill.
I will pick up some of the points that have been made here today. Nobody wants to see audit improve more than I do. The importance of reassuring local people that their councils are operating in a financially sound manner cannot be underestimated; that is vital, so we want to see it working well.
On my noble friend Lord Sikka’s comments, there is significant provision for this smaller authority audit regime to continue to provide transparency to the public, through the annual governance and accountability return, and for authorities under the £15 million threshold. We believe that this is both proportionate and sufficient. The regime still includes requirements for transparency, public inspection rights and the ability of local electors to raise concerns with external auditors. Local electors will retain the right to inspect accounts and raise their concerns; this will ensure that public oversight and accountability are still there even when those full audits are no longer required.
I think that my noble friend’s points about the oversight bodies will be more usefully discussed when we discuss the wider audit picture. I understand the points that he makes and I am sure that we will have those discussions in due course; I am grateful for his contribution.
The noble Lord, Lord Fuller, spoke about the audit failings with which anyone in local government is very familiar. I will start with his comments about proportionality; I will come on to the issues around authorities in a moment.
The way that this will work is that, if district or higher-tier councils fall below the new threshold, they will become a smaller authority for that year. In the following two years, even if it goes over the threshold in those two years, the department will work with any affected authorities to agree what the appropriate approach should be. By avoiding unnecessary financial reporting and audit costs, those smaller councils will be able to focus their money on where it matters most: supporting local communities and delivering essential services.
The noble Lord raised the important point about council tax capping in those small authorities. It is not intended that these regulations will be in any way related to the council tax capping regime. They are simply about determining financial reporting assurance and the audit regime requirements for local authorities. That is the intent.
The noble Lord raised the Broads Authority. I refer to my previous comments about public scrutiny. Obviously, the governance of the Broads Authority is for the electorate to determine, eventually.
The noble Lord asked whether the definition would cap smaller towns at a 5% council tax cap. I hope that what I have said makes it clear that this regime is not linked to the council tax capping regime, so there should not be an impact on that.
Lord Fuller (Con)
I am grateful to the Minister for that important clarification, which will give local taxpayers a great degree of reassurance that this is wholly separate from the LGR process.
Baroness Taylor of Stevenage (Lab)
I am grateful to the noble Lord for raising the issue and giving me the opportunity to clarify that.
The noble Lord, Lord Shipley, referred to the history of the abolition of the Audit Commission. He asked me about the 2014 threshold and there being no impact assessment. I cannot answer his specific question about how many authorities are taken out of this regime, but I will reply in writing to that question.
The way that this has been developed is that we have been very responsive to stakeholder feedback following the consultation that was initiated. The view of stakeholders is that £15 million will be the appropriate threshold ahead of the Secretary of State undertaking a wider review of audit regimes to make sure that they are all fit for purpose as we enter the new local audit office regime. I hope that answers the substantive question that he asked me.
Aligning audit thresholds with inflation in the future is an important issue. We need to make sure that we do not get ourselves into the same bind that we have before of audit regimes that get out of sync with what is happening in local authorities. Subject to parliamentary approval, the local audit office will work with the department to advance a more proportionate approach and remove the sorts of cliff edges that come from purely financial threshold-based approaches. Our intent is to work with the sector and the local audit office to change that approach.
The noble Lord, Lord Jamieson, asked about progress on implementation. This is a first step. Also picking up the points made by the noble Lord, Lord Fuller, about Salisbury City Council and Lindsey Marsh Drainage Board, our engagement with the sector demonstrates that uplifting the upper threshold should be prioritised ahead of the local audit office’s establishment, particularly given the issues with the authorities that noble Lords have mentioned, because they already exceed the upper threshold and they found it impossible to get auditors to do their audit. That is the reason why this has been done ahead of that, but progress on the local audit office is going through. We know that there was a Second Reading in the other place yesterday. I hope my response to the noble Lord, Lord Sikka, on local transparency helps to answer some of the questions from the noble Lord, Lord Jamieson.
Lord Sikka (Lab)
Can the Minister confirm that there is no cost-benefit analysis or impact statement in relation to this statutory instrument? I am particularly interested in what the cost of not doing the audits might be, whether financial or non-financial in terms of risks, impropriety, and so on. Can she confirm whether there is no analysis or whether the Government plan to do some? Either way, clarification would be helpful.
Baroness Taylor of Stevenage (Lab)
It is not usual to have an impact statement for an instrument such as this. There will be an impact statement for the Bill, of course, when it comes forward with the local audit office proposals. However, I can tell my noble friend that the assurance reviews to which smaller authorities are subject cost between £210 and £3,780.
On principal audits, anyone who has been part of a local authority knows that when the audit bill comes in every year, it is a significant cost to the local authority. It can range from £70,000 to more than £1 million. My local authority is a relatively small authority in Hertfordshire but, when I stepped down from it, the bill was already well over £130,000. That is an enormous cost on the taxpayer. If it is not proportionate and necessary, we should be taking that burden away from council tax payers and letting local authorities spend that money on the services that they need. I hope that partial response to my noble friend’s question helps.
The noble Lord, Lord Jamieson, asked whether debt levels will be taken into account. I feel fairly sure that the AGAR guidelines will include a way of determining whether the debt levels of an authority require additional attention to be drawn to that authority. I will come back to the noble Lord on that in writing because it is important. As we know, even relatively small authorities have seen significant debt levels in recent times, so that is an important issue, and I thank him for raising it.
The noble Lord asked about the publication of the AGAR guidelines. Again, I am pretty sure we will have guidelines on that, but I will respond more fully in writing, if that is okay.
I hope that I have picked up all noble Lords’ questions.
Lord Jamieson (Con)
There was one more, which was about addressing the shortage of local authority auditors.
Baroness Taylor of Stevenage (Lab)
The uncertainty around this in the past couple of years has not helped. Once the English Devolution and Community Empowerment Bill goes through, and it is very clear to everybody what the approach to local audit will be, we will work closely with the sector to ensure that we are developing the capacity in the workforce and the skills that we need to make sure that audit is carried out properly. I cannot emphasise enough my understanding of how important that is to reassure local people that their authorities are operating in a financially sound way, so I give the noble Lord my reassurance that I will be keeping a careful eye on that. I hope that the certainty that the Bill delivers on the local audit office proposals helps us to move that on.
In conclusion, these changes will support small authorities by ensuring appropriate governance and accountability without unnecessary burdens. They will help protect value for money and contribute to a more sustainable local audit system. The instrument delivers a clear benefit to smaller authorities by aligning audit requirements with the scale and risk of local authorities, ensuring that the local audit system is proportionate and efficient. I commend the regulations to the Committee.