The Redmond Review of local authority audit will consider whether councils are being effectively held to account following changes to business models including greater commercialisation and property investment.
Sir Tony Redmond this week launched a call for views on his review, which was announced by former communities secretary James Brokenshire earlier this year.
The 44-page document includes a detailed list of the issues that the review team will consider, including the move to commercialisation encouraged by a reduction in central government grants.
The document said: “Commercialisation provides a challenge for the financial audit partly due to…materiality considerations…and partly due to the auditor’s need to consider and understand appropriate laws and regulations.
“It poses a challenge for the value for money (VFM) audit opinion partly because the auditor will need to check whether an authority has appropriate systems in place to manage this activity and partly because of the risk of diverting management attention.”
In addition, it said that it would consider the impact on audit of the creation of wholly-owned subsidiaries, allowed by the general power of competence introduced in the 2011 Localism Act.
“Thinking about the impact general power of competence companies have on the financial and VFM audit opinions poses a challenge for auditors, as irrespective of whether they are material enough to require group accounts, they can expose local authorities to financial and reputational risk or divert management attention away from core service delivery.”
The growing trend of local authorities to borrow to invest in commercial property will also come under the spotlight, Redmond said.
“In some cases local authorities have designed commercial property strategies purely to generate a return.
“However, many of these strategies will also be focused on regeneration and increasing local economic activity.”
The document calls for views on the question: “Is more guidance needed to help auditors assess the impact of significant changes to common business models?
“If so is this guidance needed to support the financial audit, the VFM audit or both?”
The review will also consider whether the current audit framework, introduced following the abolition of the Audit Commission, is working properly.
Redmond said: “Whilst some have argued that it is too early to assess the effectiveness of the current framework, others have raised concerns that the fragmented nature of responsibilities for assuring quality means that no-one has oversight of the state of audit in the sector, there has been a loss of sector specific knowledge and it is too easy for those with responsibility to claim that a particular area of concern is outside their remit.”
Respondents will be asked whether they agree with a recommendation made in Sir John Kingman’s review of the Financial Reporting Council (FRC) which in December recommended a single body to oversee local audit.
The review will also consider whether the quality of local audit has dropped under the new regime.
The document said: “Whilst the FRC does not publish local government specific audit quality data, it has indicated in audit delivery board meetings that the quality of those audits tends to be lower than private sector audits conducted by the same firms.
“There is also a widely expressed concern that the reduction in fees has led to a change in the mix of staff undertaking local authority audits – i.e. teams are less experienced and have less sector specific knowledge, which has a detrimental impact on quality.”
Another area which will be examined is the length of time it currently takes before auditors issue qualified VFM opinions.
The document said: “Often modified opinions are delivered well after the event that led to a qualification, in extreme cases some years later.
“For example, during 2016-17 Spelthorne Borough Council, which had net service expenditure of about £10m per annum, purchased the BP Campus for £385m.
“The auditors issued an adverse VFM opinion in March 2019, by which time Spelthorne had substantially revised its approach to commercial property acquisitions and had built its portfolio through about £600m of additional purchases.”
In addition, the review will look at whether the governance framework for responding to audit findings and qualified audit reports incentivises LAs to take recommendations seriously.
Redmond said: “The best value inspection of Northamptonshire County Council noted that the auditors recorded an adverse VFM opinion in both 2015-16 and 2016-17, but that ‘neither of these reports seemed to trouble NCC’ and that ‘there is no evidence that the second adverse best value judgement … was escalated to full council.’”
The review will also ask for views on whether local authority accounts allow the user to understand an authority’s financial performance and its financial resilience, and how improvements might be made.
The deadline for comments on the review document is November.
