A series of proposed backstop dates with a provision for disclaimed opinions have been announced by minister of state for local government Jim McMahon in a bid to “facilitate a return to timely, purposeful audits of local body accounts”.
McMahon has made a statement to Parliament today (30 July) outlining the “immediate actions the government – together with the Financial Reporting Council (FRC), the National Audit Office (NAO), and organisations in the wider system – is taking” to address the local audit backlog and achieve “a sustainable footing”.
The “core elements” of the approach to clearing the backlog previously outlined, which McMahon said were supported by all system partners when the previous government launched a consultation on the issue in February, form the basis of the proposals.
McMahon said he intended to lay secondary legislation “when parliamentary time allows”, with aspects that are “uncomfortable”. Additionally, “at the point at which the Comptroller and Auditor General requests” McMahon will lay a new Code of Audit Practice. The secondary legislation would amend the Accounts and Audit Regulations (2015) to set a series of backstop dates.
An update on the government’s longer-term plans to fix local audit will be delivered in the autumn, he said.
The first backstop date of 13 December 2024 is intended to clear the backlog of unaudited accounts up to and including financial year 2022/23, McMahon said, but given the size of the audit backlog, “it is unlikely that all outstanding audits will be completed in full ahead of this date”.
Therefore, where auditors have been unable to complete audits, they will issue a ‘disclaimed’ or ‘modified’ audit opinion, he said. McMahon noted that auditors are “likely to issue hundreds of disclaimed audit opinions and disclaimed opinions will likely continue for some bodies for a number of years”.
Auditors will be expected to provide clear reasons for the issuing of such opinions “to mitigate the potential reputational risk that local bodies may face”, McMahon said.
The proposed legislation will include five further backstop dates up to and including financial year 2027/28 “to allow full assurance to be rebuilt over several audit cycles”, McMahon added.
The minister stated his ambition for local audit to “recover as early in this five-year period as possible”, so “disclaimed opinions driven by backstop dates should, in most cases, be limited to the next two years (up to and including the 2024/25 backstop date of 27 February 2026), with only a small number of exceptional cases, due to specific individual circumstances, continuing thereafter”.
The proposed backstop dates are:
- FY up-to-and-including 2022/23: 13 December 2024
- FY2023/24: 28 February 2025
- FY2024/25: 27 February 2026
- FY2025/26: 31 January 2027
- FY2026/27: 30 November 2027
- FY2027/28: 30 November 2028
McMahon said auditors’ other statutory duties, including to report on Value for Money (VfM) arrangements, to make statutory recommendations and issue Public Interest Reports, remain a “high priority”.
The minister also noted that for financial years 2024/25 to 2027/28, the date by which Category 1 bodies should publish ‘draft’ (unaudited) accounts will change from 31 May to 30 June following the financial year to which they relate. “This will give those preparing accounts more time to ensure they are high-quality accounts [and] in turn will benefit auditors while still ensuring publication shortly after financial year end,” McMahon said.
The proposed legislation will include some scenarios in which bodies may be exempt, including where auditors are considering a material objection; where recourse to the court could be required; or from 2023/24, where the auditor is not yet satisfied with the body’s Value for Money arrangements.
Bodies that are non-exempt but have failed to comply with a backstop date will be required to publish an explanation, with the secretary of state holding powers of scrutiny. The government also intends to publish a list of bodies and auditors that do not meet the proposed backstop dates, which will make clear where draft, unaudited accounts have also not been published.
“I intend to keep this under close review and may explore further mechanisms to take appropriate action, should reasons given be inadequate,” McMahon said.
As previously committed to, the FRC and the Institute of Chartered Accountants in England and Wales (ICAEW) will not carry out routine inspections of local audits for financial years up to and including 2022/23, “unless there is a clear case in the public interest to do so”.
Guidance for auditors would be published by the Comptroller and Auditor General and endorsed by the FRC, confirming that there are no contradictions to the requirements or the objectives of International Auditing Standards (UK).
McMahon said a “proportionate approach” is required and confirmed that all system partners “are aware that this is the government’s objective”. The FRC’s and ICAEW’s regulatory activity would consider auditors’ adherence to the Code and whether proper regard has been given to the statutory guidance.
Issuing a disclaimed or modified audit opinion and a subsequent return to being able to fully complete audits will require differing levels of work by auditors, McMahon added.
McMahon said Public Sector Audit Appointments Ltd (PSAA) “will set scale fees and determine fee variations where the auditor undertakes substantially more or less work than assumed by the scale fee and will consult with bodies where appropriate”. On the issue of audit fees, McMahon’s written ministerial statement mirrors the position set out in the February 2024 statement.
A ‘difficult but necessary solution’
PSAA welcomed the Ministry of Housing, Communities & Local Government announcement on the action it is proposing to take to address the “deeply concerning” level of delayed local government audit opinions. The organisation offered its “strong support” for the commitment to ‘overhaul the local audit system to enable taxpayers to get better value for money’.
However, PSAA said the need to clear the backlog solution with the widespread issuing of disclaimed audit opinions “is a painful reminder of the consequences of the broken local audit system in England”.
“The work across the system to reform both the accounting and auditing frameworks needs to continue in order to reduce the volume of work needed to deliver a Code of Audit Practice compliant audit, a key aspect of ensuring that the backlog is not simply replaced with continuing disclaimed opinions,” PSAA said. “We are also acutely aware of the fundamental need for a fully functioning supply market that will provide alternative audit appointments when needed and competition for contracts.”
PSAA chair Bill Butler commented: “Today’s statement by MHCLG illustrates the stark challenge facing local government audit, and the drastic nature of the steps needed to address it. This difficult but necessary solution has unprecedented consequences for the sector and the bodies affected, and recovery from it will be challenging for all parties.
“We look forward to the longer-term plans in the autumn, and to playing our part in the welcome overhaul of the local audit system to enable bodies and the public to benefit from audits that add value, delivered by an enthusiastic and vibrant market. There is much to do.”
Shared goals
The Financial Reporting Council (FRC), the shadow system leader for local audit, praised the “decisive action” in tackling the backlog and gave its support for the proposed secondary legislation to set backstop dates for clearing the audit backlog.
“This is an essential measure to reset the system,” the FRC said. “Reaching this point has been a collaborative effort across the entire local audit system. The FRC has worked closely with system partners including the Government and the National Audit Office in developing these proposals which received feedback from local bodies and audit firms. This joint approach has been crucial in crafting a solution that addresses the complex challenges facing local audit.”
Echoing McMahon’s sentiments on the potential short-term implications of the measures, and the “unprecedented circumstances” facing the local audit sector, the FRC said there was a need for “uncomfortable decisions to be taken and we will work diligently to ensure these are clearly communicated and understood in context. It is our firm aim that local bodies are not unfairly judged based on disclaimed or modified opinions resulting from the introduction of these backstop dates.”
The FRC said it was coordinating with the NAO on guidance for auditors to support them with implementing the proposals set out in the minister’s statement. Further details regarding publication will be provided in due course.
Sarah Rapson, executive director of supervision at the Financial Reporting Council, said: “The measures announced today represent a necessary and bold first step towards resolving the crisis in local audit. The FRC recognises the exceptional nature of these actions and agrees that they are crucial for restoring transparency and accountability in local government finance. We will continue working with the Government and other system partners on longer-term reforms to ensure there are proportionate financial reporting as well as audit frameworks.
“These measures may present challenges in the short term, but they are essential for rebuilding a robust and sustainable local audit system. The FRC is dedicated to supporting all stakeholders through this process and working towards our shared goal of timely, high-quality financial reporting and auditing in local government.”
Restoring ‘credibility’
The Chartered Institute for Public Finance and Accountancy (CIPFA) and ICAEW also welcomed what they said were “the first steps taken by the new government to give a clear timeline for improving the system and need for timely and effective public sector audit”.
The two organisations said the timeline of backstop dates outlined “provides the framework for tackling the backlog of accounts and ensuring accountability and good governance for all stakeholders and our communities in the future via our audited public sector accounts”.
Owen Mapley, CIPFA chief executive, said: “This is an important step to address the backlog and re-establish timely financial reporting and audit in England. CIPFA remains committed to supporting work taking place across the local audit system and calls on all public finance professionals to continue the work they are doing to provide transparency and accountability through their accounts to the communities they serve.”
Alan Vallance, ICAEW chief executive, commented: “Restoring timely reporting is critical to restoring financial accountability to the local government sector in England. The current delays in publishing financial statements have led to unacceptably low levels of accountability of some local authorities. By setting backstop dates there is a reset of the audits of financial statements, which is an important step to restoring credibility and preventing backlogs recurring in the future.”
Pete Marland, chair of the Local Government Association’s Economy and Resources Board, said the government’s “pragmatic” solution was “positive”, with the organisation pleased the government “has acted on our calls for backstop dates to avoid pre-election periods”.
Marland added: “It is also positive that the government has acknowledged that the proposals should not lead to reputational damage for councils as a result of a problem that is not of their making, and that they would like to work with partners to make sure this does not happen.
“We are pleased that the government has committed to overhauling local audit in the longer term. There is an urgent need to restore confidence in the local audit arrangements, restore timely audits permanently, and improve financial reporting. This needs to be progressed, with strong involvement from the local government sector.”
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