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Audit: 2019 was a bust, let’s hope it gets better

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  • by Stephen Sheen
  • in Blogs · Stephen Sheen
  • — 20 Dec, 2019

Local government audit failed to reach optimum performance levels this year: Deadlines were missed and key staff lost. Things will need to improve in 2020, says Stephen Sheen

Well, that went well.

The headline news of the first year of the new audit contracts awarded by Public Sector Audit Appointments (PSAA) was that 40% of authorities did not have their statement of accounts signed off by the statutory date of 31 July.

But behind the headlines, the issues for authorities were not just about timeliness but with the quality of audit work and the experience and expertise of those that carry it out.

Not all of the problems have been the fault of the audit firms. The 31 July date has collapsed audit work into an unfeasibly short period, making team building and continuity of team members very difficult. The time has effectively been halved over which junior auditors can gain experience of local government final audit, leading to the under-development of those who have traditionally been relied upon to understand how accounting works.

Security

The firms might seek to lay some blame at the feet of PSAA. The contract award process can result in firms losing all their audit appointments at the flick of a switch (as happened to KPMG this summer). The absence of any security gives no incentive for firms to invest for the long term in staff and other capabilities.

PSAA has also given the public perception of being devoted, primarily, to reducing the cost of audit. 2018-19 fees were set at a 23% discount on those for 2017-18. But remember these fees were set after a competitive tender which the firms participated in voluntarily. Many authorities have been surprised this year to have been approached by their auditors with an Oliver Twisty plea for “more”.

This surprise was exacerbated by the real decline in quality that authorities have noted in their audit teams.

Whether by accident or design, the firms have lost a significant number of the staff that were transferred to them when the Audit Commission was dissolved. The decline in fees is matched by a perceived decline in the service they receive.

McCloud

This is also evident in the approach to technical matters. I have written previously about the willingness of the firms to be driven by the FRC’s views of what constitutes a standards-compliant audit, making no allowances for the big differences between the commercial and municipal worlds. This is likely to get worse with the FRC’s request that at least one of the firms becomes more sceptical in its work, particularly in relation to valuations.

There have been many examples this audit round of valuers having their professionalism challenged by auditors, with no understanding that possible imprecisions in valuations have less importance for readers and that there are not the incentives in local government to inflate valuations that there might be in the commercial world.

The firms also seem less capable of dealing with issues that arise. The model appears to be to agree a position (hopefully with all the other firms) and then seek to impose this position on authorities. Audit teams appear to have no discretion to see what their authorities have done and decide whether this was reasonable.

The McCloud judgement was an excellent case in point. It was clear from half an hour’s study of the situation that the best that an individual authority could do was to report a contingent liability. The Supreme Court case confirmed age discrimination in pension payments in circumstances that were paralleled in the local government scheme. Individuals in the scheme will therefore be entitled to redress.

However, it was far from clear whether, and to what extent, this would result in authorities having liabilities. Under threat of qualification, authorities were told to recognise these unrecognisable liabilities and then asked to pay auditors for the costs incurred in the telling.

A similar situation arose in relation to the wholly uncontentious area of negative earmarked reserves for Dedicated Schools Grant, but there is not enough space here to chase that particular fox.

Getting better

Are things going to get better after the dip in 2018-19? In theory, the auditors are locked into their PSAA contracts for the next four years, but work on the local audit regime is underway that might make those contracts unsustainable.

The NAO is rewriting its Code of Audit Practice, but this will not be effective until 2020-21. The proposals include a commitment for auditors to ensure that teams have the necessary skills and knowledge of the local authority financial reporting and regulatory frameworks to enable them to deliver their audit work.

There will be a clear expectation that auditors will complete their work in time to allow authorities to meet the 31 July target for publication of the audited statement of accounts.

Firms will also need open and transparent arrangements for engaging with the public effectively and to ensure that their reporting to audited bodies is as effective and transparent as possible and promotes improvement.

It might be imagined that all of these would be good practice without having to be stated in the Code. The Code is also not being amended to introduce any amendments or extensions to auditing standards, so that there should be little impact on the audit of the financial statements.

However, a new approach to value for money auditing is proposed. Auditors will be required to make judgements in three areas:

  • Financial sustainability
  • Governance
  • Improving economy, efficiency and effectiveness.

Procedures will be specified for work in each of these areas, and auditors will be required to give a commentary on their findings, not just express a “did or did not” opinion.

My own particular bugbear is also given a reassuring hug: The non-existent/inconsistent application of auditors’ statutory powers, such as public interest reports and advisory notices. If exercised effectively and equitably, these powers can boost the good that audit does, in comparison with their current perception as apocalyptically bad news.

There is therefore intended to be an increased burden of audit in 2020-21, even before any changes consequent on the Redmond Review. The Review is currently at the stage of calling for evidence. The material currently made available therefore only gives a hint of what might be to come.

It will, though, consider the recommendations of the Kingman Review of the Financial Reporting Council: a single regulatory body dedicated to securing local audit quality, setting standards, inspecting work the quality of relevant audit work and oversee the relevant professional bodies. It should also have responsibility for appointing auditors and agreeing fees. Perhaps it could be called the Commission for Audit.

My view, though, having worked almost 20 years in local government audit for the private sector, is that the bigger loss for local government was not the Audit Commission but the District Audit Service. Can we have that back, please? Santa?

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.

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