PAC: Unacceptably high backlog in local government audit system may get worse before improving

- Delays in publication of audited accounts hinder accountability for £100 billion in local government spending

- Governance and financial issues risk being identified too late with knock-on impacts for central government and NHS

The unacceptably high backlog of audit opinions for local government bodies may get worse before it gets better. A Public Accounts Committee report today says that delays to publishing audited accounts for local government bodies increases the risk of governance or financial issues being identified too late, and hinders accountability for £100 billion in local government spending, with knock-on impacts for central government and the NHS.

Only 12% of local government bodies received audit opinions on their finances in time to publish accounts for 2021-22 within the already extended deadline for local authority accounts publication. Over 400 local government bodies missed this deadline, with the cumulative backlog of unpublished opinions rising to 632 for 2021-22. The scale of the issue suggests the position for 2022-23 may deteriorate, with the Government and Financial Reporting Council (FRC), worryingly, unable to say when these issues will be addressed.

The risk of significant financial or governance issues being detected too late increases significantly where audits are delayed and with the same pool of auditors working across other sectors, audits of other areas of public spending including the NHS and central government risk being delayed.

The PAC’s report calls for the Audit, Reporting and Governance Authority (ARGA), Government’s preferred choice as system leader, to be established. While PAC stressed this point in a 2021 report, there are still few signs of it happening. ‘Shadow’ arrangements with the FRC taking on responsibility to lead local audit have also not yet formally started, meaning the system remains fragmented with deep-rooted challenges remaining unaddressed. The Committee also urges the Government and FRC to set out how it will tackle the long-standing challenges in building capacity, capability and leadership in local audit, while expressing disappointment that there has been little progress despite warnings in the past.

Dame Meg Hillier MP, Chair of the Committee, said: “Our Committee warned in 2021 that the system of local government audit was close to breaking point. Disappointingly, since then the situation has only gotten worse. The cases of Croydon, Slough, Thurrock and Woking councils all should serve as flashing red signals for the Government, and our report finds that the rot risks spreading to central government finance and the NHS.

“There needs to be more resilience in the local audit market if the situation is to improve. Our inquiry heard there are fewer than 100 key audit partners registered to perform local audit, a worryingly low number. The Government must get its hands round this problem as a matter of urgency. It’s local taxpayers and service users who lose out when serious financial issues arise. The lack of timely accounts leaves council tax payers in the dark.”

Sir Geoffrey Clifton-Brown MP, Deputy Chair of the Committee, said: “The cumulative delay of auditing 632 Local Authority 2021-2022 accounts is a really serious matter, hindering accountability of £100 billion of local government spending. 

“How many more horror stories such as Croydon, Slough, Thurrock, and more recently the shocking case of Woking council are there remaining undetected, which ultimately always have to be bailed out at huge costs to the taxpayer? The fragility of the number of qualified people and firms tending to carry out these important audits means that the system will only get worse before it gets better.

“Our report makes a number of important recommendations, such as the role of the Financial Reporting Council (FRC) to strengthen Local Government Authority, and importantly when its successor the Audit, Reporting and Governance Authority (ARGA) will be set up.”

PAC report conclusions and recommendations 

The backlog of audit opinions for local government bodies remains unacceptably high, and the Department still does not have a plan to reduce it. Only 12% of local government bodies received their audit opinions in time to publish accounts for 2021-22 within the already extended local authority accounts publication deadline. Over 400 local government bodies missed this deadline for publishing their 2021-22 accounts, meaning the cumulative backlog of unpublished opinions rose to 632. The Department and FRC are unable to say when the backlog will be addressed, but the scale of the increasing backlog suggests that the position for 2022-23 may get worse before it gets better. The Department wrote to local government and local audit providers in March 2023 to urge joint action on tackling barriers to timely delivery but could not provide us with clear expectations in terms of dates by which performance will have improved. We have asked for such a timetable twice before. The Department is confident that its recent actions will unblock some of the backlog, while the contractual obligations of audit providers will ensure remaining audits are delivered. However, the Department’s anticipated return to a May 2023 deadline for the production of 2022-23 draft accounts by local authorities could be a step too far for both local government finance teams and their auditors, and risks worsening the backlog. 

Recommendation 1: The Department should, as part of its Treasury Minute response, update the Committee on:

1. a) What actions it and FRC are taking to increase the proportion of audit opinions for local government bodies that are delivered by the publication deadline for 2022-23;
2. b) What actions it and FRC are taking to clear the backlog of audits from 2021-22 and earlier, and in what timeframe they expect it to clear; and
3. c) What metrics and milestones it and FRC will use to measure progress in improving timeliness of local audit and hold stakeholders to account.

Delays to the publication of audited accounts for local government bodies increases the risk of governance or financial issues being identified too late and hinders accountability for £100 billion of local government spending. There are ways in which auditors can sound the alarm on risks before their audits are completed, such as issuing a Public Interest Report as was issued in October 2020 for the London Borough of Croydon. However, the risk of significant financial or governance issues being detected too late certainly increases significantly where audits are delayed. With the same pool of auditors working across other sectors, including the NHS, the delays in local audit also risk spreading to other areas of public spending. Some central government departments and their arms-length bodies are continuing to experience knock-on impacts on accountability; for example, when there are delays to the assurances local auditors give on Local Government Pension Scheme accounts and figures supporting Whole of Government Accounts (WGA). As a result, the Department is open to exploring options that allow these central government audits to be concluded without relying on local auditor assurances. The FRC has committed to look at the wider local audit system to make sure actions to address the timeliness of auditing in one area do not affect another.

Recommendation 2: The Department should, as part of its Treasury Minute response, explain what it is doing across the local audit sector to mitigate the impact of delays to the audited accounts of local government bodies on:

• Accountability for public money spent by these organisations;
• The accounts and audit of central government departments; and
• Significant local audit issues being identified or reported late in the day.

Long-term market and workforce development are essential if the Department is to resolve the current problems with local auditor reporting and create a more resilient system for the future. Much of the focus to date has been around short-term fixes intended to reduce pressure on the local audit system, such as changes to deadlines, deferrals to new financial reporting requirements and temporary changes to audit guidance. Longer-term progress will depend on effective market and workforce development. While PSAA’s recent procurement process secured the audit capability required to deliver local government audits for the period covering 2023-24 to 2027-28, it fell short initially and needed a supplementary bidding round. There are still too few key audit partners and other experienced staff working in the local audit market. The Department’s plans for a new qualification to support experienced audit staff to move from other sectors into the local audit sector are welcome, but we are not convinced that it will provide the numbers of skilled staff needed or quickly enough. The FRC is beginning work on a workforce plan and will be looking at routes into local audit starting with championing public sector audit among university and college leavers. The Department meanwhile is confident the new PSAA contracts should offer the certainty and commercial terms needed to enable providers to invest in staff development. It will be critical that the workforce plan also considers the development of local authority finance staff, who are crucial to the production of accounts on time.

Recommendation 3: The Department should, alongside its Treasury Minute response, write to us to set out how it and FRC will ensure the market and workforce for local audit develops as needed to address existing issues, and the metrics and milestones that they will use to measure progress and hold stakeholders to account.

Delays to establishing the Audit, Reporting and Governance Authority (ARGA) and handing over responsibilities for leading local audit to the FRC, risk performance deteriorating further. The Department rejected the Redmond Review’s proposal to create an Office of Local Audit and Regulation to oversee local audit, partly due to the time it would take for a new body to establish itself. It instead opted to establish ARGA to replace the FRC and oversee and regulate the local audit sector. Despite the pressing need for leadership within local public audit and recognition of the importance to set up ARGA as soon as possible, ARGA will not be set up until 2024 at the earliest. Neither FRC nor the Department could confirm whether the legislation required to establish ARGA would be introduced in the current Parliament. While the Department and FRC have agreed what roles and responsibilities the FRC will take on as part of its shadow system leadership role until ARGA is formally in place, these arrangements are yet to be formally handed over. We welcome the National Audit Office’s offer to reissue the 2020 Code of Audit Practice to provide some continuity and certainty over local auditors’ responsibilities in the meantime.

Recommendation 4: The Department should, as part of its Treasury Minute response, set out its contingency plans should the legislative programme not allow for ARGA’s establishment during this Parliament.

There are no consequences for local government bodies or local auditors failing to deliver audited accounts on time. Audit contracts cannot specify the delivery of opinions by a certain date. The FRC and the Department say that they want to develop a deeper understanding of the issues affecting timeliness before considering possible sanctions as there is no shared view on where responsibility for delays lies. But the problems with the timeliness of local auditor reporting are not new. The FRC’s new responsibilities for leading local audit present an opportunity to develop a better response to issues across the local audit system. Yet the FRC will need to: ensure that the local audit system works compatibly with the timing and content required for other central government accounts and the WGA; manage the tension between its own local audit and quality monitoring roles; and clarify accountabilities, recognising that at present the only consequences in the local audit system are borne by the audit firms and relate to poor audit quality rather than late delivery.

Recommendation 5: The Department should write to us by October 2023 setting out how it will address the lack of incentives or sanctions around timeliness of auditor reporting, based on its more detailed review of the causes of delays and where lessons can be learned.

Government, local bodies and standard setters still lack a shared view of how to ensure that local public accounts, and the audit of them, are fit for purpose. Local government accounts have become increasingly complex. They have to meet financial reporting standards while also reflecting how local government finance works, a challenge that increases with the more complex activities that authorities undertake. Local government accounts are too often inaccessible to most users and few in the sector think they work as well as they ought. Some temporary simplifications have been made to financial reporting requirements to help reduce the burdens for preparers and auditors. But both producers and auditors of accounts consider many areas of accounting and auditing requirements as overly complex and resource intensive; particularly around valuations of operational assets such as roads and coastal defences which cannot readily be sold, and valuations of pension assets and liabilities. In these instances, some accounting practitioners and auditors believe more often than not the numbers in the accounts have little to no impact on day-to-day decision making.

Recommendation 6: The Department should set out as a matter of urgency, alongside its Treasury Minute response if not before, how it will work with HM Treasury, the FRC and others to agree permanent and proportionate measures to address the most complex parts of local bodies’ accounts and the subsequent audit of them.