In a report published today the Commons Public Accounts Committee
says Government’s oversight of local government audit has become
“increasingly complacent” with less than half of local authority
audits meeting the deadline for completion in 2019-20, and half
of audits examined by the Financial Reporting Council (FRC)
needing “more than limited” improvement. The local audit market
is “now entirely reliant upon only eight firms, two of which are
responsible for up to 70% of local authority audits.”
The Committee says “if local authorities are to effectively
recover from the pandemic, it is critical that citizens have the
necessary assurances that their finances are in order and being
managed in the correct manner.” “Delays and quality issues
undermine the value and purpose of audit, reducing the assurance
to taxpayers and elected representatives.”
The Committee questions whether the “pressing” need for new
system leadership in local public audit, identified in last
year’s Redmond Review, is met by Government’s proposal for a
future Auditing, Reporting and Governance Authority (ARGA) which
will not be set up until 2023 at the earliest. It’s unclear
whether it will then be able to fully address the current
failings in the market for auditing local authorities, and in the
meantime MHCLG has not given enough “credible detail on
addressing the urgent problems that cannot wait for ARGA”.
, Chair of the Public Accounts Committee,
said: “Our citizens expect public authorities to account
for the taxpayers’ money that they spend. As public spending and
demand on local services have exploded with the pandemic, the
accelerating decline in the timeliness and quality of audit of
local government spending undermines that accountability, and
undermines effective spending decisions.
“Even before Covid the local government audit market was
strained. If the market cannot deliver that accountability and
clarity about the costs and risks in local government the
Government should be more concerned than its slowness to act
suggests. The Redmond Review of local government audit is a
thorough and sensible piece of work but some of its measures
won’t be implemented until 2023 – more than four years since it
was commissioned. And public audit is added as an afterthought to
a body which oversees the very different field of company
auditing.
“As we embark on the long road to recovery from Covid19 and
transition to a net zero carbon economy, clear, accessible and
transparent audit reports will be more important not less. The
delays in delivering audits are the tip of an iceberg of issues
facing public audit which need real commitment to resolve.”
PAC report conclusions and recommendations
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The marked decline in the timeliness of external audit
undermines accountability and hampers effective
decision-making. Only 45% of local authorities
published audited accounts on time for 2019-20, despite the
Department having extended the deadline from 31 July 2020 to 30
November 2020, due to the COVID-19 pandemic. This compares with
57% of local authorities which published their audited accounts
on time for 2018-19 and 87% in 2017-18. The Department says it
will set an extended deadline of end September for the next two
years. Late audit completion can delay timely management action
to address financial or performance issues identified; affect a
local authority’s annual budget setting and decision-making
processes; and impact on the production and audit of other
public sector accounts, such as departmental accounts and the
Whole of Government Accounts. The audits of local authorities
are not of consistently good quality; more than half the audits
the FRC examined in 2020 needed more than limited improvement.
Delays and quality issues undermine the value and purpose of
audit, reducing the assurance to taxpayers and elected
representatives.
Recommendation: As a matter of urgency, the Department
should write to us by September 2021 with a detailed plan and
timetable for getting local audit timeliness back on track.
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There is a pressing risk of market collapse due to an
over reliance on a small number of audit firms and significant
barriers to entry. Only eight audit firms have the
specialist knowledge and accreditation needed to audit local
authorities. Currently, the market is dominated by just two
firms, which carry out around 70% of local authority audits.
The current contracts for auditing local authorities cover the
period up to the 2022-23 financial year but PSAA says it can
unilaterally extend these contracts for two years, if needed.
Existing audit firms have little financial incentive to stay in
the market and there are serious and pervasive challenges to
increasing audit capacity further. Audit firms that have left
the market no longer have the necessary specialist teams in
place. New audit firms face considerable barriers in the time
and costs involved in gaining entry to the market, such as
developing a sufficient sized team of staff with the specialist
skills, led by key audit partners, as part of gaining
accreditation. The Department and PSAA are considering how to
overcome these barriers, for example, through small packages of
audit work, and through consortia where an accredited firm
works with an unaccredited firm to enable future entry to the
market. In the meantime, any one firm deciding to exit from the
market would create a fundamental capacity gap and harm
accountability.
Recommendation: The Department should write to us by
September 2021 explaining what contingencies it has in place
should any more audit firms leave the market at the end of their
contracts in 2023.
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The commercial attractiveness to audit firms of
auditing local authorities has declined. Audit firms
bid for the current contracts to audit local authorities in
2017, but the work involved has increased significantly in
response to well-publicised problems in the corporate sector.
Fees now bear little relation to the costs audit firms incur to
carry out the work. Audit firms point to the increased work
required to audit pension and property valuations, and to meet
increased regulatory expectations for local audit. Local
authorities say the focus on these areas means less attention
is paid to more meaningful areas for their themselves and their
residents, such as their financial resilience, outturn against
their budget, and performance outcomes. The Department is
consulting on changes to the regulations that set the fees, to
enable fees to be set closer to when the audit work is carried
out, and so that fees can reflect any increase in audit work
required. In the meantime, the Department is consulting on how
to allocate an additional £15 million to help audit firms
respond to the pressures in the current year.
Recommendation: The Department should ensure that PSAA’s
next procurement exercise, due to begin in 2021, supports a new
fee regime for local government audit, which is appropriately
funded, and which brings fees into line with the costs of the
work.
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The rapidly diminishing pool of suitably qualified and
experienced staff increases the risks to the timely completion
of quality audits. There are serious shortfalls in the
number of specialists which audit firms rely on to carry out
audits of local authorities. To maintain accreditation, audit
firms’ key audit partners must have at least three years’
oversight experience of auditing local authorities. Worryingly,
most key audit partners are over 50 years old and audit firms
are likely to find it difficult to replace experienced staff
when they retire. The audit firms consider there is a missing
generation of auditors with specialist experience of auditing
local authorities. A lack of career prospects is a further
challenge which audit firms face in recruiting trainees and
ensuring they have a sufficient future supply of experienced
staff to carry out audits of local authorities. This is not
solely a problem for the audit firms and the Department is
working with the accountancy institutes and the FRC on
encouraging people into the sector, making the key audit
partner accreditation process smoother, and improving skills
development, but this will all take time.
Recommendation: The Department should work with the FRC
and the accountancy institutions to implement accelerated
training and accreditation to increase the supply of qualified
auditors quickly, and to build attractive career paths in local
audit.
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We are not convinced that the recently announced new
local audit arrangements will meet the pressing need for
effective system leadership now. In May 2021, the
Department announced that the system leader for local
government audit will be the new Audit, Reporting and
Governance Authority (ARGA), the new regulator replacing the
FRC. However, ARGA will not be set up until 2023, at the
earliest, and doing so will require legislation. Contrary to
the Redmond review recommendations, ARGA will not be
responsible for procurement, which will remain with PSAA, due
to the Department’s concerns about potential conflicts of
interest. The Department will have Accounting Officer
responsibilities for just the local audit element of ARGA,
while BEIS will be the sponsor department overall. There is a
crisis in local government audit and a need for urgent action
to tackle the increasing delays, audit quality and market
fragility. The Department recognises the importance of stronger
system leadership during the transition to ARGA, but we are not
reassured that its proposed liaison committee, bringing
together all the responsible bodies, will be enough to meet the
pressing need for system leadership now. It remains to be seen
whether ARGA will then be able to meet fully the ongoing
priorities for effective system leadership.
Recommendation: The Department should write to us by
September 2021 and outline:
- how it will address the need for strong system leadership
now, while ARGA is being set up and established; and
- how it will work with BEIS to set up ARGA, the accountability
and governance arrangements, and how its performance will be
monitored and evaluated.
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Unless local authority accounts are useful, relevant
and understandable they will not aid accountability.
Changes in auditing standards, such as on auditing pensions and
grant distribution, have required considerable extra audit
time. Some local authorities also have increasingly complex
financial arrangements. The more property investments a local
authority holds, the more specialist resources the auditor
needs to gain accurate estimates of their values. We are
concerned that some of the additional audit work now being
carried out is disproportionate to the risk to the overall
financial stability of the local authority. The accountability
of local authorities to stakeholders, such as residents and
service users, through audited accounts is a priority. Yet, the
accounts of local authorities are impenetrable to many
stakeholders. There could be much greater transparency in the
financial reporting of local authorities, such as through the
inclusion of a simple standard statement, focused on the key
issues of most use and relevance to stakeholders, presented in
a readily understandable way. The Department is working with
others to look at simplifying aspects of the accounts of local
authorities. It intends that the new system leader will also
look into reducing accounting and audit requirements for areas
of less risk to local authorities.
Recommendation: The Department should write to us by
September 2021 with its detailed plans for agreeing with
stakeholders ways to focus local authority accounts and audits on
areas of greatest risk and concern to citizens. / ENDS
- Full inquiry info including evidence received: https://committees.parliament.uk/work/1138/timeliness-of-local-auditor-reporting-on-local-government-in-england/
