A range of proposals and actions to address the backlog of local audits in England has been set out by the Department for Levelling Up, Housing and Communities (DLUHC).
These include setting statutory deadlines and issuing qualifications and disclaimers of opinion in the short term.
The proposals have been agreed in principle with key partners across the local audit system, DLUHC said. The National Audit Office (NAO) is considering whether to develop a replacement Code of Audit Practice to give effect to the changes, the department added.
In addition, DLUHC is considering whether legislative change is needed to set new statutory deadlines for local bodies to publish accounts to mirror the proposed changes to the Code of Audit Practice.
Legislative change may also be needed to address any knock-on effects of the proposals which may impact the audit of opening balances within the accounts for future years, the department said.
Under these proposals, section 151 officers will be expected to work with Audit Committee members (or equivalent) to approve the final accounts by the statutory deadline in order for the audit opinion to be issued at the same time.
Longer term, DLUHC said it would work with organisations such as the Financial Reporting Council (FRC), the NAO, the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Government Association (LGA) to “devise an escalated reporting framework for audit firms and local bodies to resolve issues ahead of statutory deadlines”. The department will also look to publish a list of local bodies and audit firms which meet statutory deadlines and those which do not.
Other underlying challenges will also continue to be addressed, such as workforce capacity. “The FRC is already leading work across the system to improve competition, capability and supply within the audit market,” DLUHC said. “The FRC, supported by DLUHC, is committed to producing a workforce strategy by the end of the 2023 calendar year, which will identify gaps and barriers across the local audit system that are hindering the development of future capacity and agree actions and solutions to unblock these with stakeholders.”
Audit inquiry
Lee Rowley, parliamentary under-secretary of state for local government and building safety, outlined the proposals in a letter to Clive Betts, chair of the Levelling Up, Housing and Communities (LUHC) Committee inquiry into financial reporting and audit in local authorities.
He said the proposals would be subject to further work and engagement across the system over the summer, but that they constituted “significant further progress”. “The intention is that, subject to the conclusion of the appropriate details, agreed changes will be implemented by the end of this year,” Rowley added.
Rowley gave evidence to the LUHC Committee inquiry yesterday (17 July), in which he discussed the proposals.
“We have to make sure that the capacity [in the audit system] is addressing the most appropriate element of audit so that, if there are [financial issues], they are more likely to be identified,” he told the committee. “We need the capacity that we have to be focused on the more recent time available, hence the proposal to cap off some of the work on historical audit.”
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Rowley said that while this diversion of capacity to more recent accounts might mean some qualifications and disclaimers are required in earlier accounts “that haven’t been signed off and where it is difficult to sign them off”, there would “probably not [be] very much” impact. This is “because if you have got a very historical audit that just has not been signed off because of one technicality or whatever it is, that is probably not going to be a particularly substantive issue in the round. And what is more substantive for that council is whether they are doing the right or wrong thing, not eight years ago over one remaining issue, but last year or the year before.”
In the letter, Rowley said there might be “unintended consequences” of implementing the proposals. When questioned by the committee, he explained: “Ultimately everything has consequence and ultimately everything has trade-off. So there will be some consequences but we think they are manageable. And the trade-off you get is that you get the system reset, looking again at the more recent elements of what they need to look at, and so long as you can accompany that with some changes, in terms of making sure that the day you get rid of a backlog you don’t start building it up again, because there is no point in doing that – if you can make some changes on a unit basis, per audit, hopefully you won’t get into the same problem again in a few years’ time.”
Audit, Reporting and Governance Authority
Betts asked Rowley whether the fact there were “so many organisations with some sort of stake in this [audit] process” it was “no wonder” the system did not always work.
“It is definitely a complex process,” Rowley responded. “One of the reasons why the systems leadership was proposed out of the Redmond review a couple of years ago was to try to acknowledge the complexity of the process. We are in the process of giving the FRC that systems leadership – it has shadow systems leadership at the moment – so I hope that would help. But yes, it is a complicated process, but what I think this is demonstrating – not wanting to count our chickens and all the rest of it – is that everybody is working together very constructively in a way that we do not always see everywhere in government, if I am honest. But there is a real desire to try to improve this.”
Rowley also confirmed to the committee that proposed audit regulator, the Audit, Reporting and Governance Authority (ARGA), would then replace the FRC as system leader in “due course”.
The committee noted that this meant it would be the Department for Business and Trade, with responsibility for setting up ARGA, that would be putting in place a system of audit leadership that looks at local government, but that responsibility for local government remained with DLUHC. “That suggests there will be some blurring of lines, to put it mildly,” said committee member Bob Blackman.
“It should be conceptually possible for two departments to work together,” Rowley said. On ARGA eventually replacing the FRC as systems leader, he added: “ARGA will come at the point when parliamentary time allows. In the interim, we are working in DLUHC to ensure that we are building what the FRC is doing in a staged way.” He expects that the FRC “eventually will become ARGA, or a derivation of it will move into ARGA”.
Rowley accepted that “there is always a risk” in moving to a different system that a greater backlog could form. “I would welcome the committee’s views, in your report, as to whether you think there are particular risks we should manage. In aggregate it is better to have an overview of audit in general from a body – both public and private, given that it is ultimately the same companies underneath that are doing it and they have very similar rules and global standards – and that that is less risky than keeping the two things separate.”
Betts noted that both the Redmond and Kingman reports recommended that local authority audit and the oversight of it should be kept separate, and that the latest proposals would “ignore” that. Rowley responded: “People can do two things at once. I don’t think conceptually it is impossible for them to do both a good job in the oversight of the private sector audit and public sector audit, even though they have different requirements, responsibilities, people and objectives. I do not think it is impossible. We think it is possible to do both and to still have very high-quality oversight of public sector audit.”
Oflog’s role
Rowley was also questioned about the impact of the recently-established Office for Local Government (Oflog), which aims to increase “transparency” within the sector and identify councils “at risk of potential failure”.
Rowley stated: “Oflog will be an iterative process, and we will welcome the committee’s view on it in time, if you are minded to look at it. We hope that initially Oflog will build up the dataset – we have started putting it out into the public domain – and then start looking at how it can fill the gap between the group of councils that are just getting on with things without many issues, and those that fall into stewardship or challenge.
“There has to be a bit in the middle where councils can come to Oflog and say, ‘we may have issues, can you help us before they are quite serious?’. Alternatively, because of indicators from the data that has been put into the public domain, Oflog may want to say, “are you sure everything is all right?”. That is what is going to [be] build up over the coming months.
“We have to avoid duplication in terms of the department’s stewardship function when councils have problems. We also have to avoid duplication of what an auditor does.”
Oflog is intended to complement the system of local council audits, not replace them, Rowley added. “Obviously, we are looking at trying to change elements of individual processes, but auditors will continue to need to do that entirely independently of Oflog. Through the work that [Oflog chairman Lord Morse] and Josh Goodman, the interim chief executive, have started, Oflog will need to work out how they complement.
“It is important that they complement, first, because auditors have statutory functions that they need to carry out anyway, and clear guidance, so we do not want duplication; secondly, we want to make sure that Oflog works for local authorities and does not create undue burdens.”
The first oral evidence session of the Levelling Up, Housing and Communities (LUHC) Committee’s inquiry took place on 15 May. You can read Room151’s report on the first panel of that session here, and its report on the second panel here.
The second session took place on 5 June: Room151’s report can be read here.
The third session, on 26 June, featured s151 officers Michael Hudson, of Cambridgeshire County Council; Alison Scott, of Three Rivers District Council; and Gerald Almeroth, of Westminster City Council. A report can be read here.
In the first session parliamentary questions were raised over the accountability of s151 officers in financial reporting, and former chief executive of the London boroughs of Richmond and Hammersmith & Fulham Richard Harbord responded to the question in a blog post on Room151, which you can read here.
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