Stephen Sheen: Squeezing benefits out of auditors

Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing technical accounting support to local government. The article below will be published in the forthcoming issue of Room151 Quarterly. To receive a copy (subject to availability) please complete this form. 

It may seem that we are inching our way towards local audit, albeit at some indeterminate point in 2017 or 2020. But some giant strides have already been taken whose muddy footprints may mark the audit landscape for years to come. The headlines have been dominated by cost. The abolition of the Audit Commission projected savings of £250m across local government up to 2017. The re-tendering of private sector appointments promised at least another £30m.
There are questions to be asked about whether audits can be carried out effectively at the contracted prices on a sustainable basis. Two of the Big Four accountancy firms have been priced out of the market, and there is a deficiency of evidence that the remaining firms are investing substantially to fill the deficit in
technical resources left by the running down of the Commission and the exclusion of its regional experts from outsourcing staff transfers.
To a large extent, this is the auditors’ problem. They are contracted to deliver an opinion on the financial statements in compliance with auditing standards and the Commission’s Code of Practice, at the agreed fee.
In doing this, auditors are assisted by an attitudinal shift away from audit as a public good towards it being a service for the authority. The scope of local authority audit has been reduced to exclude specific responsibilities for opinions on financial standing, legality of transactions and fraud. Powers to intervene remain available. But in the last two years only two public interest reports have been issued for principal authorities across the whole of England. Other powers have lain unused.
The opportunity was offered during the legislative process for the Local Audit and Accountability Act 2013 to reinvigorate expectations that the role of auditor is to hold authorities to account. But the Act confirms that their duties are restricted to giving an opinion on the financial statements and a high-level view on the adequacy of arrangements for securing value for money: a signature to support your view of your business. However, the perception still seems to hold in local government that auditors work to their own
purposes, as an imposition. What benefits could authorities accrue from dealing with their auditors as service providers in similar ways to other service providers?
There are three main areas where immediate benefits could be secured: 1) ensuring the auditors are working to a relevant agenda 2) confirming proper resources are allocated to the authority, in terms of both competence and experience of staff 3) making reporting effective by being above all constructive.
Many of the difficulties that arise between authorities and the auditors can be traced to the auditor bringing their own issues to the assignment, rather than gaining an understanding of your business and what might be material to users of your accounts. This can be particularly problematic where the agenda is a firm-wide one based on what is significant for the audit of commercial organisations.
For instance, some authorities have been required to spend considerable time demonstrating why they are a going concern or confirming that members are not substantial related parties. Big issues in the private sector, where investors need to be assured that assets are not about to lose all their value and business has not been affected by non-commercial relationships with the families of directors. But not for local government, where continuity of services is generally assured and favoured relationships are prohibited.
Of immediate concern is a skewed focus on property valuations, and an inconsequential change to the relevant provisions in the 2013/14 Accounting Code. Property would be a prime area for pumping up the balance sheet with inflated values…if there were anyone in local government who might be impressed. But where the value of property is sufficiently accurately stated to impress taxpayers with the scale of the
authority’s stewardship (and is comfortably in excess of borrowings), there is little more to be gained from the pursuit of accuracy.
Your wish, more likely, is that if auditors are going to devote resources to auditing property, this is with the objective of providing assurance that the authority’s dealings have complied with statutory requirements. So take the first steps now to ensuring that the auditors are providing a service for you, by balancing the agenda in your interests. If auditors are going to trample all over your accounts, at least make sure that they do it with clean boots.