Auditors issue threats of qualification based on dogmatic demands but often their objections can be managed with a little push-back.
Since I stopped being an external auditor five years ago, most of my working time has been spent supporting a network of local authorities with technical accounting advice. Plenty of this time is taken up with addressing points of disagreement with the auditors. A debit wrongly placed. A provision miscalculated. An asset not brought on to the balance sheet.
It is a curious fact that there has yet to be a single occasion over these five years where I have been able to respond to one of these issues with a simple: “Yes, your auditors are correct; you must do what they tell you”. There has always been some scope for reasonable alternative interpretation of statutory or accounting requirements.
What I find equally curious, though, is the number of accountants who are surprised that this is not always the answer and the number of auditors who are taken aback to find that it is not.
Public Sector Audit Appointment’s Statement of Responsibilities of Auditors and Audited Bodies makes clear that authorities are responsible for preparing financial statements that give a true and fair view of the financial position of the body and its expenditure and income. The auditor is responsible for giving an opinion as to whether the required standards of truth and fairness have been met. The auditor should therefore be considering the policies that the authority has adopted and the judgements it has made assessing whether they have been reasonably arrived at. Not whether the statement of accounts matches the ideal that the auditor has imagined.
Lines in the sand
However, over the last couple of years I perceive a growing number of instances of auditors coming to authorities with lines already drawn in the sand: which school assets are under the control of the authority; how frequently property needs to be valued; when group accounts are required.
In all of the instances I have dealt with, there have been at least two reasonable positions that could be taken, one of which involves less disruption to the draft accounts than proposed by the auditor. In such circumstances, you would expect the auditors to be finding themselves a comfortable seat on the fence, from where to take in the admirable views available on both sides. Not standing on one side throwing stones.
Matters have come to a particular head this summer with the introduction of the expenditure and funding analysis (EFA). This is a new note to the accounts, designed to provide a bridge between the way in which an authority has managed its financial performance during the year (the budget outturn) and the way it is required to report it under proper accounting practice (the Comprehensive Income and Expenditure Statement). A crucial part of this is that information is analysed across the authority’s own services/directorates/portfolios/etc, rather than according to a standard service classification.
Accountants have been wrestling with the practicalities of implementing the new requirements. How to present fairly the financial performance of individual services, particularly where they have been transacting with each other, for example, or how to give the EFA the due prominence required by the accounting code.
However, on a number of occasions, auditors have been proposing qualified audit opinions if an authority does not comply with their expectations as to the placement of the EFA in the financial statements, the treatment of income from other services and the detail of the changes made since 2015/16. Expectations that would weaken the intended bridging objective and risk actually making the accounts less accessible for users.
Threats of audit qualification are usually fairly empty. They rely on the auditor being able to summarise their case against the authority succinctly, definitively and with quantification in the audit report and on the matter in hand being truly material (ie, that it might influence a decision to be taken by a user of the accounts). Most of the firms will also require qualified audit reports to be approved by a senior technical panel, so they are not at the discretion of the individual auditor.
Many accountants will at this point settle for what they judge the easier option and make the changes demanded. But there can be greater advantage in pushing back, asking the auditors to:
- explain why your approach is not acceptable, rather than just different from theirs
- provide comprehensive technical support for any counterarguments they put
- be clear that the issue might have a properly material impact.
Sometimes the view of the auditor will need to be accommodated. But on many occasions issues are resolved simply by persuading the auditor to appreciate the authority’s approach to an area where there is room for differences of opinion.
So, two key messages. Auditors: retain your independence by avoiding dogmatic demands and engaging directly with what the authority has done. Accountants: don’t believe that an argument is necessarily stronger because it comes with the promise of a clean audit opinion.