Local Audit (Amendment of Definition of Smaller Authority) Regulations 2025

Lord Jamieson Excerpts

Wednesday 3rd September 2025 Grand Committee

[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.

--- Later in debate ---

[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.