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

Lord Sikka Excerpts

Wednesday 3rd September 2025 Grand Committee

[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?

--- Later in debate ---

[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.