The government is now assessing feedback from a consultation on proposals to clear the backlog of local audits in England. Here, Stephen Sheen looks at some of the difficulties arising from the proposals and outlines priorities for the months ahead.
When I suggested in an article written as the local audit crisis started to unfold that a solution might be to skip a year and see if anyone noticed, the idea was intended to be light-hearted. But with the various proposals now before us, here we are.
A series of backstop dates will be established, by which authorities must publish a final version of the statement of accounts, with any audit opinion that the auditors are in a position to give based on the work performed (if any).
The main conclusion to be drawn from the consultation proposals is that the firms have an iron grip on the local audit process. There is no hint that the crisis could be resolved by enforcing the PSAA contracts or by taking sanctions against firms for non-delivery.
Instead, the basis of the proposals is for auditors to be given the five years of the new PSAA contract period to clear the backlog, with each year having the option to bring their work to a conclusion with a disclaimed opinion and roll on to the next. It seems that the firms will be allowed to prioritise this work at their own discretion.
On the other hand, local authorities have been given no concessions. They must prepare statements of accounts for each outstanding financial year that are fully compliant with the Accounting Code of Practice and which the section 151 officer can confirm are true and fair at the time of their publication as ‘audited’.
I was hopeful that authorities would benefit from a deeper consideration of the role of the statement of accounts, reflecting the unique contribution made in local government by the publication of unaudited financial statements. The experience is that this document is the focus of public attention. If decisions are taken by users, they will usually be taken against the unaudited figures. The role of the audited accounts is then to confirm that these decisions were valid, rather than to support new ones.
There should be a proper recognition of the relative importance of the unaudited and audited accounts and the fact that financial information loses value very quickly in the fast-moving world of local government. This would conclude that much of the content of statements of account for earlier years is effectively redundant.
My preference would be for a process by which an unaudited set of accounts collapses down to specified essential information once it is superseded by the unaudited accounts for the following year. This would then become the focus for the audit opinion, whether as true and fair or by agreed procedures, and with materiality properly reflecting the reduced range of uses to which the information will be put.
Without this, section 151 officers will have the difficult job of determining how much updating of the unaudited accounts will be necessary in order to confirm that the statement is true and fair at the publication date.
Many authorities have already been told that no further work will be done on their accounts for 2022/23 and earlier years and disclaimed opinions will be issued.
Under Auditing Standards, disclaimed opinions can be given in relation to elements of the financial statements or, more likely, the financial statements as a whole. In the latter case, auditors are unable to exclude any elements from the disclaimer (such as confirming that the General Fund Balance is not materially misstated) and will be careful to avoid being seen to give credibility to any aspect of the financial statements. Indeed, the auditors will not even assert that they have done an audit.
This means that a disclaimed opinion must leave open the possibility that there might be something terribly wrong with the statement of accounts.
We are promised that there will be clear communications from system partners explaining that modified or disclaimed opinions caused by the backstop date do not necessarily indicate significant financial reporting or financial management issues. But unless auditors are required to be open and honest in their opinions that they are disclaimed because they never got round to carrying out the necessary work, there will remain a suspicion that there are significant issues.
It is also important that auditors should be guided not to allow the backstop to trigger a disclaimer where the auditor has identified a risk that a modified opinion might be necessary for other reasons.
In the circumstances of a disclaimed opinion, it is uncertain how an authority would get any benefit from audit work that has been carried out (except to the extent that the evidence can be carried forward to assist the audit of the following year(s)). Auditors are unlikely to provide any assurance in their audit letters about the results of their testing that is not already reflected in the audit opinion.
Which brings us to the tricky question of money. PSAA is going to have the impossible job of determining how firms are going to be recompensed for work performed that has no practical value for an authority. There is also the problem that the recovery period straddles the period of a 150% increase in fees and whether auditors would be paid these higher fees for work that should have been done before the transition.
The biggest unanswered question following the proposals, though, is whether the firms will actually have the capacity to carry out the recovery period work. The backstops just give some breathing space to solve the fundamental problem of auditor capacity. Is there scope for the recruitment necessary, and will firms be able to retain the staff they have? Presumably some assurances have been given that the timetable is achievable, particularly as no steps appear to have been taken to build an urgently needed public audit capability.
This makes me think that there should be two priorities in the coming months that should be at the forefront of further developments:
- Guaranteeing the public interest – recognising that there will be a scarcity of audit resources, what will be done to ensure that these resources generate value for money? Will auditors at one authority be chasing the detail of historical operational property valuations whilst at others no work is done on the underlying financial position? The hopeful expectation would be that all authorities will receive a specified minimum level of assurance for the 2023/24 statement of accounts.
- Maintaining capacity – the work being done by accounts preparers and audit teams must be sufficiently purposeful and rewarding to ensure that during this period of turmoil there is no further depletion of the resources available to secure quality financial information and audits.
Each of these would be supported by the simplified accounts and audit process mentioned earlier, whereby everyone is able to concentrate on the essential information that will confirm an authority’s financial position and on which not a single second of audit work would be wasted.
Stephen Sheen is a director of Ichabod’s Industries, a consultancy providing a technical accounting support service to subscribing local authorities. He was previously the senior technical manager for local government audit at PricewaterhouseCoopers.
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