The framework for reawakening a forgotten audit objective – giving a view about the ongoing reliability of an authority’s financial records – exists, and doing so would be beneficial to all, says Stephen Sheen, managing director of consultancy Ichabod’s Industries.
The Thurrock Best Value Inspection Report makes intriguing reading for those wondering ‘where were the auditors?’.
The council is given some excuse for thinking that its commercial investment strategy had a clean bill of health in the absence of any adverse comment by the auditors.
But the auditors are absolved from any responsibility to have given a clean bill of health, with a suggestion that they might have been following some standard practice in not digging deeper into the valuation of the investments.
The inspectors make a recommendation that a review be considered into the role that external audit plays in the assurance framework with a view to strengthening the quality of the service and the reporting requirements, particularly to support an early warning mechanism.
But, putting the specifics of Thurrock to one side, is this not what should generally already be happening? Should auditors not be providing assurance about the reliability of an authority’s financial information?
Section 20 of the Local Audit and Accountability Act 2014 sets out the general duties of the local auditor. The first of these duties is that the auditor must be satisfied that the accounts comply with the requirements of the enactments that apply to them.
Those with memories long enough to remember what an audit opinion looks like will be aware that it will include a view as to whether the statement of accounts has been prepared in accordance with the Accounting Code and the Accounts and Audit Regulations.
This, though, is not the focus of the statutory duty. Section 4(3) of the 2014 Act makes clear that the reference to ‘the accounts’ in section 20 is to both the authority’s accounting records and its statement of accounts.
A trawl through the 2014 Act and The Accounts and Audit Regulations 2015 shows that the auditor’s responsibility for the accounting records would relate to such things as:
- sufficiency to show and explain the authority’s transactions;
- sufficiency to disclose at any time, with reasonable accuracy, the financial position of the authority at that time; and,
- inclusion of a record of the authority’s assets and liabilities.
In these circumstances, an authority is entitled to expect its auditors to have a view about the ongoing reliability of its financial records. It would not then be unreasonable for absence of adverse comment about the real financial impact of an investment scheme to be taken as an expression of satisfaction.
The curious thing is that most auditors would probably claim not to be aware of this duty. It is easy to misunderstand if you are not aware of the statutory distinction between the accounts and the statement of accounts. It is not mentioned in the Code of Audit Practice and does not appear to be discussed in any of the National Audit Office’s (NAO) guidance. This is despite the fact that the duty provides the direct link into some of the auditor’s special powers, such as applications to the court that an item of account is contrary to law.
The duty appears to have got lost in the historical process of driving down cost and the minimisation of commercial risk for the firms. For instance, some years ago the Audit Commission removed from the Audit Code specific responsibilities for reporting on an authority’s financial standing and its arrangements for securing the legality of its transactions and for the prevention of fraud and corruption.
Instead, reliance was shifted onto the requirements of auditing standards relating to going concern, fraud and laws and regulations in the context of the audit of the financial statements. But there are three problems with this:
- any work carried out by the auditors will be limited to identifying material misstatements in the financial statements arising from these matters – it will not contribute to preventing them happening in the first place;
- any assurance will be delayed until/if the opinion is given on the statement of accounts; and,
- regulators will focus on compliance with the auditing standards and not satisfaction of the wider statutory duty.
This has clearly taken us too far from the statutory duty to be satisfied that the accounts comply with the requirements of the enactments that apply to them (and reduced the likelihood that auditor findings will have relevance for the public). And this means that a reawakened statutory duty has a tremendous potential to revitalise local audit.
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What is needed is a beefed up Audit Code that builds on the statutory duty to require auditors to keep under review the adequacy of arrangements to:
- safeguard financial standing;
- prevent fraud and corruption;
- secure the legality of transactions;
and then to exercise their special powers promptly as part of this responsibility. Auditors should report on their findings as soon as reasonably practicable after the year-end, in contrast to the unnecessarily extended wait that authorities currently have to hear about the adequacy of their VFM arrangements.
A reawakening of the forgotten audit objective would have three substantial benefits:
- it would bring the work of auditors closer into line with what the public thinks that they are there for;
- it would increase greatly the value that authorities get from the audit; and,
- it would introduce a new range of challenging but rewarding work for junior auditors and reestablish local audit as an attractive career option.
In summary, the foundations for an early warning system are already dug by the 2014 Act. Let’s put the effort in to build on those foundations for the benefit of all.
Stephen Sheen is the managing 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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