Stephen Sheen: Who’s doing your audit?

Stephen Sheen is the managing partner of Ichabod’s Industries, a consultancy providing technical support to local government.

Those due to take over the responsibilities of the Audit Commission are stirring.  The Financial Reporting Council is setting minimum qualification standards for local auditors. The National Audit Office has drafted a new Audit Code of Practice.   The Cabinet Office will take responsibility for the National Fraud Initiative, supported by counter-fraud work from CIPFA.  And the Local Government Association has set up a company (Public Sector Audit Appointments) to oversee current audit contracts.

Existing audit contracts are due to expire after the 2016/17 financial year, though they might be extended through 2019/20.  When the contracts come to an end, authorities will be able to take on responsibility for appointing their own auditors.

Should authorities be doing anything to prepare for this?  Probably not while much remains uncertain. The Local Audit and Accountability Act 2014 set in train the abolition of the Audit Commission on 31 March 2015, but its detail awaits commencement orders or supporting regulations to have effect.

Is a 2016/17 start date feasible?  The current level of audit fees is so low that there will be pressure to hold the firms to these contracts for as long as possible.  There is though a risk that mounting cost pressures will eat into audit quality.

It is also uncertain what competitive options will be available to an authority selecting its own auditors.  The way in which the Audit Commission has outsourced its own work, and retendered private sector contracts, has reduced the number of active firms and created regional duopolies, such that the choice of experienced local auditors will be very limited.  The opportunity to opt in to having auditors assigned by an Appointing Person (a commission for audit, if you will) looks tempting.

“Wait and see” is probably all that can be done until wider conceptual and market issues become better focused in the run-up to the commission’s abolition.

What should we be concerned about in the meantime?

If you are interested in value, it is difficult to see how audit fees could fall any lower than current levels.  The comparison is far from exact, but Capita plc (operating expenditure of £3.3bn in 2013) was charged an audit fee of £2.3m, whereas Birmingham City Council (gross expenditure £3.8bn in 2013/14) paid £0.5m.  Could this difference between private and public audit fees be attributable to a lesser quality of audit inputs? With that in mind more cost savings will probably have to be a lesser priority in the short term than protecting the quality of audit.

Protection is perhaps best focused on staffing.  An effective audit team will have sufficient technical skills, and experience of the authority and its working environment.  All things that will be challenging to provide at current fee levels.

Problems are exacerbated as the working practices of the big firms come to prevail.  Three effects in particular should be watched for:

• the “up or out” principle, where staff not progressing through the grades are encouraged to leave – auditors do not often perform the same job two years running because they have either been eased out or promoted
• the tendency to determine the lowest grade at which a task can be reasonably performed and assigning it to someone at the next grade down – this tactic can succeed spectacularly but the risk of failure is considerable
• reliance on your officers to provide on-the-job training in local government accounting to junior auditors

Odds are that you may struggle to secure effective staff or, if you do, that they are unlikely to come back next year.

The advice then is to take a keen interest in how your audit is to be staffed in the coming year.  Push for continuity and a commitment to a particular team you can be confident in.

And if you have concerns about the practical implications of the proposal to bring the accounts completion deadline forward to 31 May in 2017/18, double those for the worries the auditors will have about shifting the publication date to 31 July.

Photo (cropped): “Audit” by Simon Cunningham is licensed under CC BY 2.0