Local government external audit has been beset by delays, regulatory reforms, capacity issues and increased complexity. PSAA chair Steve Freer offers suggestions for how these challenges could be confronted.
The recent procurement of local audit services by Public Sector Audit Appointments (PSAA) has been a tense and testing experience. From the outset we faced a huge challenge to secure sufficient capacity for all the bodies that have opted into our scheme.
Our eventual success in doing so, after a protracted process, comes with a sobering price tag – a forecast 150% increase in audit fees. We realise how painful such an increase will be for bodies already grappling with severe financial problems and with understandable fears about the forthcoming Autumn Statement.
The next major procurement is due in 2027, so there is now a critical window to develop and strengthen the local audit system. Early action to address some of the serious risks and threats may allow greater confidence and optimism as we approach the next procurement. Conversely, if action is delayed, expect even greater difficulties ahead.
So, what are the big challenges and risks to be confronted?
Delayed audit opinions
Arguably the most immediate challenge, delayed audit opinions, is about to grow significantly. The publishing date for 2020/21 audits was 30 September 2021. Twelve months on from that milestone, 168 of those audits are still incomplete. Meantime it is already clear that the vast majority of 2021/22 opinions, due for delivery by the extended target of 30 November, will also be delayed, not least because of the complications affecting infrastructure assets. Realistically, by December the aggregate number of delayed opinions may breach 600.
The system needs a plan to ensure that an unmanageable backlog does not become a permanent feature of local audit. Auditors are obvious key players in tackling this issue. But chief finance officers and audit committees have important roles to play too in ensuring that good quality draft accounts and working papers are available and that the auditor’s queries are prioritised.
We know that CIPFA, the Department for Levelling Up, Housing and Communities (DLUHC) and others have been working hard to find a way forward on infrastructure assets, with at least a temporary solution. The engagement of the Financial Reporting Council (FRC) is also vital since regulatory risk is a dominant factor in determining when opinions can be signed. Significantly, the regulator has recently acknowledged that “Audited bodies, local auditors and those with regulatory responsibilities must continue to work together to restore timely financial reporting and audit”.
A well-coordinated collective effort cannot come too soon.
The system needs a plan to ensure that an unmanageable backlog does not become a permanent feature of local audit.
Audit reform
Since 2018 the government has commissioned and consulted upon the recommendations of several independent reviews of audit. Firms now need certainty about the reforms to be implemented and the legislative timetable. The new regulator, the Audit, Reporting and Governance Authority (ARGA), is a critical component of the proposals. It will host the local audit system leader function that the FRC is currently establishing in shadow form.
Continued uncertainty will fuel speculation about the government’s commitment to reform and may cause firms to delay key strategic decisions affecting the growth of additional capacity to deliver local audits. Clarity about government plans is needed as soon as possible.
Growing the market
The local audit market must grow to increase available capacity and to restore vital competition. Additional firms need to be encouraged to develop the capability to undertake local audits, with their sector-specific features including the Value for Money arrangements commentary and quasi-judicial functions, such as determining electors’ objections.
Auditors must also bring a good understanding of the distinctive governance and management models of local bodies, their statutory powers and responsibilities and the limitations on their activities.
In addition, auditors must understand the distinctive and complex requirements of the CIPFA/LASAAC Code of Practice on Local Authority Accounting. The last hurdle will be more manageable if the code itself can be simplified.
All of these challenges must be negotiated and supported with relevant investment before firms can compete for local audit contracts and hopefully unlock new revenues.
The system should also consider the option of establishing a public sector-owned supplier. This is not a panacea – it would face many of the same problems as a firm entering the market, plus the additional challenges of a new start-up. But it should nevertheless be carefully evaluated to help manage fluctuations in capacity and protect against insufficient supply in future procurements.
Recruiting local audit staff is a significant problem for all suppliers. Experienced senior staff are in particularly short supply, while the profession is not the attractive career option for school leavers and graduates that it once was. DLUHC has committed to work with firms and Neil Harris, the FRC’s new director of local audit, to develop a workforce strategy for local audit.
Hopefully, this may lead to a significant coordinated recruitment campaign, emphasising the positive outcomes that effective local audit supports and influences, such as strong local accountability, good governance and better management and stewardship of public money.
The system should also consider the option of establishing a public sector-owned supplier. This is not a panacea. But it should be carefully evaluated to help manage fluctuations in capacity and protect against insufficient supply in future procurements.
Room151’s Monthly Online Treasury Briefing
November 25 2022
Online
Public sector delegates – register here
A proportionate audit
Local audits have become more complex and demanding in recent years as the regulatory bar has been raised. Every audit now requires more work before a sound professional opinion can be given.
Asset valuations are a contentious hotspot. The infrastructure assets problems follow on from significant regulatory pressure for auditors to increase their challenge of management’s valuations of other asset classes. This is not contested for commercial investment assets, but is controversial for service delivery assets held for the long term. This argument invites discussion of how the interests and needs of taxpayers compare with those of company shareholders, and opens up the bigger exam question, “What is local audit for?”
The Treasury is reviewing the basis of valuation of non-investment assets. This may lead to an easing of requirements and provide the first tangible steps towards the more proportionate audit that DLUHC itself has called for.
This [infrastructure assets] argument invites discussion of how the interests and needs of taxpayers compare with those of company shareholders, and opens up the bigger exam question, “What is local audit for?”
Next steps
These are not the only risks and threats that local audit faces. However, they illustrate the significant scale and complexity of the problems that need to be addressed, and the tentative and partial nature of some of the possible solutions in play.
There is a long way to go before something approaching a complete whole-system solution is crafted which, ultimately, must involve more local auditors and/or less audit work – preferably both. PSAA is ready to do everything we can as part of a collective systemwide effort to deliver the critical changes required.
Steve Freer is PSAA chair.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Room151 LinkedIn Community
Join here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
