Local audit: where do we go from here?

In his monthly viewpoint, Room151’s editorial director Mike Thatcher looks at the crisis in local audit and the importance of a system leader for the sector.

Photo: Shutterstock

On Thursday 3 March, the exceptional consultation closes on CIPFA/LASAAC’s proposals to amend the code of practice that governs local authority accounting in the UK. The aim is to address the local audit delays that have beset the sector in England in the past few years.

The problem is a serious one – only 9% of English local bodies met the deadline of 30 September 2021 for publication of their audited 2020/21 accounts. By the end of December 2021, the figure had risen to 40%, but there are clearly fundamental flaws in the system.

However, as Conrad Hall, chair of the CIPFA/LASAAC Code Board, wrote on Room151 this month “there is considerable disagreement as to the causes and possible solutions”.

The proposed amendments to the Code of Practice on Local Authority Accounting attempt to address some of the problems with the current approach, specifically capacity issues in both council finance functions and external audit firms, and the focus on property valuations.

To address these issues, the exceptional consultation suggests:

• Allowing local authorities to pause professional valuations for operational property, plant and equipment for two years
• Deferring implementation of IFRS 16, the new leases standard, for a further year

But, as Hall confirmed in his Room151 article, the above changes are seen as “time-limited” and the intention is that, if implemented, they will be reversed after one or two years. So, sceptics could claim this is simply kicking the can down the road.

Section 151 officers have long complained that the emphasis on property valuations in local government audit is not appropriate. Rebecca Keene, the deputy s151 at Broxbourne Council, made this point forcefully in a Room151 article last year.

This issue is something that the Treasury is currently examining as part of a review of operational property in public sector accounts. Let’s hope that sense prevails.

Together, Grant Thornton and EY currently have 70% of the local government audit market, so they need to be listened to.

Meanwhile, there are other issues that are not addressed by the consultation. From the point of view of the audit firms in the sector, there has been an over-emphasis on reducing audit fees. Speaking at Room151’s Monthly Online Treasury Briefing on 25 February, Paul Dossett suggested that external audit fees were now about half what they were ten years ago.

Dossett, head of local government at Grant Thornton, the largest provider in the sector, said: “I don’t think there are many other parts of local government where costs are half what they were ten years ago.”

It’s a fair point. As is the critique of the lack of investment in council finance skills made in the briefing both by Dossett and his counterpart at EY, Janet Dawson. Together, Grant Thornton and EY currently have 70% of the local government audit market, so they need to be listened to.

According to Dawson, who is EY’s UK government and public services assurance leader: “Local government has not invested in its own financial management and reporting skills. That impacts audit providers and our ability to be able to do a really good and efficient job getting access to the information we need.”

The relationship with the audit firms is a critical one – especially as we are in the middle of the latest procurement exercise for local government audits in England. This procurement is overseen by Public Sector Audit Appointments (PSAA), with eligible public sector bodies given until 11 March to confirm if they want to opt in to the scheme.

Despite PSAA commencing the procurement, the Department for Levelling Up, Housing and Communities (DLUHC) has still not published its feedback response to last year’s technical consultation on the local audit framework. There are a number of unanswered questions here, not least about the relationship with the National Audit Office.

Concern is such that Alison Ring, the ICAEW’s director for public sector and taxation, wrote a letter to Kemi Badenoch, the minister for Levelling Up Communities, on 7 February.

The stakes are high. It’s no coincidence that the only part of the UK with severe audit delays – England – is the only part of the UK without a system leader for local audit.

System leader for local audit

In an article for Room151 earlier this month, Dossett highlighted the importance of a “system leader” for local government audits – something that has been lacking since the abolition of the Audit Commission. PSAA was not set up to perform this role, and there is little chance of the commission rising from the ashes.

A lot rests then on the new local audit unit to be established within the Audit, Reporting and Governance Authority (Arga). Arga will replace the Financial Reporting Council next year, and its local audit unit is expected to be the system leader. But Arga will report into the Department for Business, Energy and Industrial Strategy rather than DLHUC, so will it have a strong enough voice to represent local government?

The stakes are high. It’s no coincidence that the only part of the UK with severe audit delays – England – is the only part of the UK without a system leader for local audit. Audit Scotland, Audit Wales and the Northern Ireland Audit Office all have a much better track record.

With the “Great Resignation” affecting both council finance departments and audit firms, there are concerns about where the new unit will find appropriately qualified and experienced staff.

As Dossett pointed out at the Room151 briefing: “How do you get people with the right sort of knowledge into that type of organisation, when we are all scrambling around within the ‘doing side’ of the external audit role for the right skills and resources?”

The answer to that question will become apparent over the next year or two.

Let’s hope progress can be made and the system leader can emulate the relative success of Scotland, Wales and Northern Ireland. If not, we could find ourselves having this conversation on an annual basis.

Mike Thatcher is Room151’s editorial director.

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