Crisis in local audit unlikely to be solved by coming reforms

Photo by Tyler Franta on Unsplash

Local authority audit is changing but, Stephen Sheen argues, 100% private sector provision is unlikely to be “viable” while the underlying problem is difficulty recruiting for “soul destroying” work.

At the end of July, MHCLG opened a consultation on technical aspects of the local audit framework, setting out its proposals for meeting some of the recommendations of the Redmond Review. The consultation will close very precisely at 11:45pm on 22 September.

The key features are:

• Confirmation of the intention for the FRC’s successor body, ARGA (Audit Reporting and Governance Authority) to be the system leader for local audit. As ARGA will not be operational until 2023, the FRC is planning to establish interim arrangements from April 2022, including the appointment of a lead local audit executive, the formation of a shadow local audit department, and the establishment of forums for engaging directly with local bodies and local audit firms.
• An objective to strengthen audit committees. Consideration is being given to whether it should be a statutory requirement for local authorities to have audit committees (ACs). Alternatively, CIPFA’s  Audit Committees: Practical Guidance for Local Authorities and Police could be given the status of statutory guidance. There is particular interest in making sure audit committees have an effective position in the overall committee structure including: an ability to be heard by full council; a duty to report significant issues and knowledge, as well as provide expertise and training for members; the use of enhanced input from independent members; and facilities for auditors to meet privately with audit committees or council.
• Amendment of the accounts and audit regulations so that auditors will be required to present their annual audit findings to full council, accompanied by an audit committee report with responses to those findings. This would take place at the first meeting of full council after the committee has considered the findings.
• Addressing capacity issues by facilitating an increase in key audit partners (KAPs) and considering options for additional training and specialist support.

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Private sector

Putting to one side the irony that a primary reason system leader is needed is for someone to guide the FRC in the ways of local audit (see previous columns ad nauseam), the key point to note from the proposals is that the proposals are absolutely dedicated to a model of 100% private sector provision.

But there is little evidence that such a model is viable. Suggestions for tinkering with the rules on KAPs is a strong indication that there is little prospect of the current firms being willing, or able, to maintain the pool through internal succession.

Although the Audit Commission slowed its recruitment once it knew of its abolition, the firms were gifted largely functioning audit teams when the organisation was broken up. They have been unable to sustain these teams, let alone nurture them.

The root of this problem is at the lowest level. There just isn’t the supply of people with the necessary public sector ethos who would either contemplate working for a firm in the first place or be able to survive the soul destroying life of a junior local auditor. And there is no longer an Audit Commission from which to poach part-qualified and qualified staff.

Wider brief

Part of the issue is the tight focus of the work on the audit of financial statements, the outcome of which (for good reasons—also see previous columns) nobody is particularly interested in.

Think how much more interesting the job would be if auditors were also concerned with confirming the adequacy of an authority’s financial systems to support its operations (rather than just their sufficiency to support the financial statements), confirming financial standing, reviewing arrangements for preventing fraud and corruption and ensuring the legality of transactions, agreeing the effectiveness of governance arrangements and investigating matters brought to their attention by the public? Then think that this is probably what the public would want auditors to be doing (if it hadn’t already presumed that this is what they do). But then realise that the firms have worked solidly over the years to avoid such responsibilities.

It’s a wider brief for local audit that would be of much greater value to the public, more rewarding work for auditors and includes tasks that could be undertaken throughout the year and reported on while issues are still fresh. Good value at twice the price.

I still don’t think this would be enough to make a 100% private sector solution sustainable. Thoughts must be given to how we again establish a public sector local audit capability to sustain a sufficient mass of skilled auditors.

Sway

In the meantime, can authorities do anything constructive? Not a lot. The price of having your auditors appointed by PSAA (Public Sector Audit Appointments) was ceding any sway over the carrying out of their work. Auditors have secured comprehensive independence, rather than just in the required area of influence over the audit opinion. This is why it could be worthwhile considering the opportunities for self-appointment discussed in Conrad Hall’s recent article.

MHCLG and PSAA have both warned authorities to be careful what they wish for if they were to step outside the PSAA arrangements. You might find the market even barer if you test it for yourself.

However, with the prize of being able to secure contractual commitments over the timing and staffing of audits and control over fees, there is good reason to investigate the possibilities. Particularly if you can join with other authorities to offer a substantial offering around which a smaller firm could build a local presence.

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 audit at PricewaterhouseCoopers.

Photo by Tyler Franta on Unsplash

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