The Financial Reporting Council (FRC) has been “severely restricted” in its ability to inspect higher profile and higher risk local government audits for its annual report because of the current backlog in local government audit.
The independent body responsible for monitoring the quality of major local audits performed by six firms called the current backlog of local government audits “completely unacceptable”.
There were more than 900 incomplete local government audits in England at the end of September 2023, with the FRC inspecting just four audits in local government this year, and 10 in total, compared to its usual 20.
The body said it had no choice but to significantly reduce inspections to allow audit firms to focus resources on clearing the backlog.
While the audits available for the FRC to inspect currently were found to be ‘good’ or required ‘limited improvements, the organisation warned its assessment of audit quality may reduce when it is able to inspect the audits of higher profile and higher risk local government bodies.
The FRC, as incoming shadow system leader, said a key priority has been supporting the Department for Levelling Up, Housing and Communities (DLUHC) to develop their package of measures to clear the backlog and restore timely completion of audits.
To support the measures being developed to clear the backlog, the FRC announced its plans to perform no routine inspections of local government audits for financial years up to 2022/23, unless clear public interest demands it. This would allow audit firms to focus on completing as much outstanding work as possible, it said.
The FRC said it would resume inspections once the system has been reset, which “hopefully will follow the implementation of the package of measures currently being developed by government”.
In a foreword to the FRC’s annual report on the quality of major local audits, Sarah Rapson, executive director of supervision, said: “We expect these measures to be consulted on by [DLUHC]. We encourage all stakeholders to have their say on these crucial proposals.
“Alongside our role as incoming shadow system leader, the FRC has a regulatory responsibility to monitor the quality of auditors’ work on major local audits. We are very disappointed that our ability to inspect higher profile and higher risk audits has been so severely restricted by the backlog. Most audits are incomplete, in some cases for several years. Successful implementation of the government’s proposed measures should remove this restriction.”
Assessing the causes of the audit backlog in local government, the FRC said in its annual report that firms had “informed us of many reasons for [the] failings in timeliness, including their own resourcing constraints among local audit specialists; the increasing complexity of financial statements; delays caused by management; and accounting issues, such as those related to infrastructure assets”.
Increasingly, local authorities “are involved in some complex areas of activity, including in financial services, which can introduce complex reporting requirements”, the body added.
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