The pressure has been on external auditors this Summer. The first year of the new Public Sector Audit Appointments (PSAA) contracts, with fees cut by 23%, reshuffled appointments, and firms starting work in regions where they previously had no presence. The second year of an over-tightly compressed audit season. The hot breath of regulators on the necks of those firms whose commercial colleagues have been involved in recent headline audit failings.
It has therefore been expected for some time that in August we would be talking about failures to meet the target date for the publication of the audited statement of accounts. But the news that 40% of local government audits were not completed by 31 July is still something of a shock.
It is important to confirm that an authority missing the 31 July target date has not broken any laws. Regulation 10 of the 2015 Accounts and Audit Regulations says that where an audit has not been concluded before 31 July, an authority must proceed to:
- publish on its website a notice stating that it has not been able to issue the audited statement of accounts, and the reasons for this
- when the auditor’s final findings from the audit have been received, follow the procedures for publication that would have applied before 31 July.
In both cases, the actions are required to be carried out as soon as reasonably practicable, so there is no need to rush to convene an emergency meeting for member approval of the finalised accounts. If key members and officers have booked holiday or there is difficulty fitting a committee meeting into the council calendar, then reasonable time can be taken to sort everything out.
There is no sanction for missing the target date. The worst that will happen is that an authority will become part of the statistics in PSAA’s annual report on the results of auditors’ work (but unlikely to be named and shamed unless the accounts are still not published by 30 September, if the approach in the 2017/18 report is followed for 2018/19).
There is also a risk of local reputational damage, but this can be limited if delay is not the authority’s fault by a precisely worded notice explaining why publication has not taken place.
But timeliness has not been the only audit issue in 2018/19. Our experience in providing technical accounting support to a number of authorities of all sizes across the country (and involving all the firms with PSAA appointments) has been that the burden of audit has increased in three areas:
- the firms are becoming increasingly dogmatic about the technical treatments that they will accept
- there is an increasing burden for authorities in training auditors in local government accounting
- more work is being carried out to meet the demands of regulators rather than because it is necessary for an audit compliant with the Code of Audit Practice.
The common approach over the summer has been for auditors to inform authorities of the position they take on a technical issue and to expect authorities to comply with it, often under the threat of a qualified audit opinion if they don’t.
The problem here is not just that this is an inversion of the expected order of things – it is an authority’s responsibility to prepare the statement of accounts, making the judgements that it considers it needs to in meeting statutory requirements; the auditor’s role should then be to consider the reasonableness of what the authority has done. Where there is an issue that permits a plurality of possible viewpoints, the auditor’s job is to see whether they can construct a fence robust enough to be sat on so that they can admire the view on all sides.
The impact of the McCloud judgement is a good example. An insistence by auditors that the potential cost should be accrued in the financial statements. Reasonable arguments that the extent to which authorities might be required to fund remedies necessitated by government discrimination is too uncertain to allow any reliable estimates to be made being dismissed with a reiteration of the auditor’s expectations. Repeat of Step 2 with more reasonable arguments. Authorities agreeing to end the debate by amending the accounts, with little conviction that it is the right thing to do.
In addition to this paradoxical weakening of the force of auditors’ views but strengthening of the conviction with which they are held, we have also noticed a significant increase in the extent to which authorities are expected to train junior auditors. Substantial time is taken explaining how local government finance and accounting work to people who do not have the experience or training necessary for the tasks they have been asked to carry out.
Finally, instances are increasing of auditors extending their work to meet the anticipated expectations of regulators (particularly the Financial Reporting Council). This is a serious issue because the oversight of the FRC is intended to confirm compliance with auditing standards and the Code of Audit Practice. However, it has been the case that the inspectors do not flex the agenda they apply for commercial audits sufficiently for the needs of local government, leading to unjustifiably high expectations of the scepticism to be applied in such areas as valuation, IAS 19 pensions figures, going concern and related parties.
If an auditor is suggesting that it has carried out additional work as a result of the FRC’s regulation, then it will be in one of two situations:
- the auditors are carrying out extra work because their work programme for previous years was insufficient to meet the requirements of auditing standards – in which case the work needs to be done as a matter of course
or
- the auditors are carrying out extra work to meet the unsupported expectations of the FRC – in which case the appropriate course of action would be for the auditors to correct any misunderstandings of the FRC that their commercial agenda applies to local government and not to have carried out the work.
The ironic sting in the tail of all of this … auditors seeking to ease their burdens by raising additional fees.
Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing a technical accounting support service to local authorities. He was previously the senior technical manager for local government at PricewaterhouseCoopers.
