Host
Philippa Lamb
Guests
- Meg Hillier MP, Chair, Public Accounts Committee
- James Jamieson, Chair, Local Government Association
- Alison Ring, Director, Public Sector and Taxation, ICAEW
Philippa Lamb: Hello and welcome to the Insights In Focus podcast. I’m Philippa Lamb. Today we’re exploring the effectiveness of local authority audit and assurance. Many local authorities are facing a difficult financial situation right now. There’s pressure from central government to deliver services at a time of very stretched resources, and on top of that, questions are being raised about the effectiveness of local authorities’ audited accounts, and whether councillors truly understand what the numbers are telling them. To discuss those questions, investigate where responsibility lies and suggest solutions, I’m joined by Dame Meg Hillier MP, Chair of the Public Accounts Committee at Westminster, James Jamieson, Chair of the Local Government Association and a former leader of central Bedfordshire Council, and Alison Ring, ICAEW’s own Director of Public Sector and Taxation. Hello, everyone. Shall we start by laying out the current situation and the reasons behind it? Because as I said, James, local authorities, they face a lot of challenges right now.
James Jamieson: Yes, they do. And accounting and audit is on top of the many challenges we have with a lack of money in local government. So, we have an issue that our accounts are just not getting audited in time. If we look at the 2020/2021 accounts, only 9% were audited within the original deadline of 30 September 2021, and even when that was extended to November, it was only 12%. And actually, being able to count on the numbers is vitally important if you’re making decisions, and without audited accounts, we can’t do that.
PL: I should say we’re talking about England here. But some of these delays are very long indeed, aren’t they?
JJ: Yes, and there are a number of councils who still haven’t had their, say, 2019 accounts signed off. And that’s despite the fact that they’ve published their draft accounts – the process is just taking too long, the accounts are too complex, and the resources available are just not enough.
PL: Can I just ask how your own council performs in this area, James?
JJ: Well, in this area, we have had our accounts signed off every year on time.
PL: Impressive. Meg, as James says, these accounts are important. They demonstrate value for money in the work of the local authorities, but also about democratic accountability. What’s behind these delays?
Meg Hillier: It stems back from when the Audit Commission was abolished. The abolition itself is not necessarily the issue, though we could have a whole debate about that, but then the private sector companies came in to take over public sector audit. And it’s not as lucrative as private sector audit, so as a committee we’re concerned that maybe that’s one of the reasons there’s not so much keenness, but we also saw fees being driven down massively. So local authorities obviously didn’t want to pay as much, but overall the fees got so low that we’ve lost major players in the market. It was very precarious in the last round of bids to have people do this work.
PL: And firms don’t want to invest?
MH: No, and that’s the concern, they didn’t want to invest. The fees have gone up in the last round, and that sort of stabilised just about, but as James says, we’ve got some councils with three years of accounts not audited. You’ve got, therefore, councillors and officers flying blind as they make decisions. And the other thing about this is, it’s actually a big thing for a public auditor to call out local authorities. It’s different to the private sector. We really need a good cohort of skilled public auditors, and the worry is that that’s a diminishing group. And unless there’s an investment now – in fact, we’re probably a bit late – we need to be growing the public auditors of tomorrow, who hold local government to account on behalf of taxpayers. And it’s pretty much at crisis point.
PL: So, Alison, resourcing for audit and finance teams is, crucially, not always adequate.
Alison Ring: Absolutely, and I think it’s really important that there is no one single solution to the problem, and all stakeholders must really work together. But there was a report by the Local Government Association just last month looking into the resourcing of the finance teams across councils. And one of the things that they did say was there is a growing risk of financial failure across councils as a result of capacity and capability issues within local authorities. And if you think about the audit profession as well, people move around between the audit profession and the finance teams in local government, and you need that spread of people and investment in both sets of teams.
PL: But just in terms of shortages of people, do we know how acute the staffing problems are?
AR: I don’t know what the numbers are but having spoken to a Bedford deputy section one-by-one, I think she said that she had four vacancies in her team. That didn’t sound very good.
MH: And local government has, of course, been cut, so nearly every senior officer is doing more than they were a few years ago. And it can be very tempting just to see an extra person the finance team as baggage to carry. But actually, I think we would all agree that they’re pretty vital to getting this work done.
PL: What about finance software?
MH: I think James would probably have something to say on this, but it’s a very expensive thing to upgrade your software, and when you’re facing cuts – in my own borough up to 45% cuts over the last decade – it’s going to be not always top of everyone’s list to start investing in long-term IT reform. It is expensive to do, but I’m sure James has a perspective from his point of view.
PL: What is your take on that, James?
JJ: I think two or three things here. Yes, we can make comments about lack of auditors and resources for that, but we’ve also got to look at how the world has moved on since the abolition of the Audit Commission. We’ve had the imposition of International Accounting Standards, which we seriously need to look at – are they the right accounting standards for local government and the public sector? And in some cases, they are actually at odds with, say, the CIPFA and other guidance. And secondly, the fact that the auditing profession, because of one or two scandals in the private sector, is now under much greater pressure to scrutinise it in more depth. One of the things that I think is very frustrating for local government is the desire to really scrutinise the value of capital assets. Well, frankly, if the capital asset is the A6 going through Bedfordshire, that is going to carry on existing, it doesn’t really matter, and in many ways, I consider roads a liability, because you have to spend money repairing them. Whether we value it at £1 or £1m or £10m really makes no difference, and yet, we’re being asked to provide detailed information for valuing of these assets. And I think we need to focus more on things that matter – and I’m sure it will be a subject later in this conversation – but investments by councils, now I can understand why you would really want to investigate that thoroughly. Some areas we really shouldn’t be, but FRS International Accounting Standards are obliging auditors to do that. So I think that’s a big issue. I think where accountants have been sued is encouraging them to be super cautious, and I really hope that we’re able to review this and have a proportionate audit across the board.
PL: James, before we dig into that a bit further, can I just loop you back to the consequences of the situation we described at the top of this conversation? From your perspective, looking across the country, what are the consequences of the delays in these accounts being audited and published?
JJ: One is obviously we don’t have audited accounts. Every organisation would like to sign off and ensure that their accounts are correct and up to date. We don’t know what we don’t know, so if they’re not audited, would the audit have picked something up or not? So that is always a concern. But also, the fact that something is not completed and not audited, actually is taking resources from councils, because they’re having to continually work with their auditors and carry on doing the audit process and so forth, rather than focusing on the day job. And I’m not trying to in any way reduce the importance of audit, but things haven’t been going on for three years. So, you’re reviewing the audit of three years ago, and of two years ago, and of last year’s, that’s quite a burden for a financial team, and we really need to clean this up, so we can get on with running the council. And yes, we are short of accountants and so forth in councils, as are many other businesses, and as we are short of staff in many other areas, whether it be social workers, or IT specialists or planners, and that’s a whole separate issue, discussing local government workforce.
PL: Well, let’s get on to possible solutions, and indeed, how people can be encouraged to use audited accounts, and as you’ve alluded to how they can be made more understandable. Meg, they’re meant to provide trust over the numbers. They’re meant to demonstrate the accounts have been reviewed. Is it fair to say that they’re often not presented in a very user-friendly way?
MH: Oh, yes. With the Redmond review, Sir Tony Redmond was asked by the government to look into local audit, and one of the things he suggested – a very simple thing – was that there is a presentation by the auditor every year to full council. That will make sure that elected members absolutely have to understand what the auditor is saying, and it’s from the auditor directly, not filtered in any way. But yes, lies, damned lies and statistics, how you present these things can be critical, but the consequence of these delays is that risky decisions could be being made with no auditor calling them out because they hadn’t audited them yet. There are some recent examples where there have been auditors beginning to call things out, but we’ve more often actually seen total failure, financial failure of a number of local authorities because these decisions were being made, and the audit process wasn’t as robust as it needed to be.
PL: James mentioned Alison, he feels accounts don’t need to be everything for everyone. He mentioned some instances of things he doesn’t feel need to be included in them. But what’s your own feeling about that? What areas should auditors focus hardest on?
AR: I think I would agree with James in that the accounts have tried to be everything to everyone and then actually resulted in becoming nothing for nobody. And actually, I really welcome – and I’m sure James will as well – the inquiry into the purpose and uses of local authority accounts, which was just announced, which has a deadline of 17 April. So please write in about that. But there is a disconnect between what the preparer and what the auditor and what the regulator and other stakeholders believe should be the focus of the accounts, and that needs to be addressed, hopefully, as part of that inquiry.
PL: Meg, what’s your feeling about that?
MH: When I talked earlier about skilled public auditors, they have to be able to look at local government accounts. They’re different company accounts, but it’s still a big call to call out a local authority. We’ve seen some interesting shifts in the system. In Bournemouth, a letter from the auditor has led to some political upheaval, because they were just saying ‘you need to think about this decision, this could be potentially very risky’. And that’s exactly what a good audit arrangement should be, that it should hopefully be getting in there at the right point. Of course, there are delays, as we’ve highlighted repeatedly, those decisions, those audit opinions are not being made in any real time. But we’ve seen too many councils fail. There are lots of reasons they fail, not just because of audit, but audit should be the early warning sign of something, unless it’s gone very badly wrong in one particular financial year. Usually, it takes more than one financial year for failure to really crystallise, and so that’s where the audited accounts on time really matter. It’s just a big problem. One of the things that we’ve looked at on the committee is how this is bleeding into the health sector, because public audit also deals with NHS Trusts and others, and this problem is going to be their problem very soon.
PL: As you say, it’s about clarity, it’s about accountability, and an audited accounts should add value, shouldn’t they?
MH: Yes. And also, they need to be exactly as James says, focusing on the right thing. We were quite heartened in our session last week with the Department for Levelling Up, Housing and Communities that on this issue, some of these new accounting standards – like how you value leases on properties – they were trying to really give out the very clear message that there would be some delays in introducing some of those new measures, because it’s more important to get it back on track. But I think then you’ve got rules that you’re not following, and so which ones you pick and choose from? From ICAEW’s point of view, that must be quite frightening. And for us, I think it’s quite a worrying thing, that we haven’t managed to get a system that can just do what it’s supposed to do in the timeframe it’s supposed to do it, and that they’re struggling with any new measures, which is a sign really of how much the system’s got broken on the public side.
PL: So there needs to be more standardisation?
AR: I think it is possible to be proportionate, focus on the right things in terms of holding the council to account within the existing International Financial Reporting Standards and within the existing International Auditing Standards. You can have those robust frameworks, but you can operate proportionately within them. And I think we ought to do that, to have that consistency, because obviously, central government has accounts they account for under those same frameworks, private sector, I think it’s a bit more important to have that consistency. Because they are complex organisations, local authorities, with complex transactions, such as maybe leases. If we constantly have carve-outs or defer these accounting standards, I think we’re only storing up problems in the long term. And actually, we can just try and get on with it. Maybe it won’t be perfect IFRS 16 disclosure, but actually, it’s better that we move towards that rather than away from it.
MH: And I think Alison’s right there, there’s the comparability issues. So, if you’re a local authority leader and you really want to look at your account, you want your opinion to matter, you want to know that they’re looking at the same thing as a comparable local authority. And at the departmental and Whitehall level, or the Public Accounts Committee level, we want to see that there is some understanding of the risks out there so that if one auditor is discovering a risk in another local authority, that really needs to be something that others are also focusing on. Of course you’ll do the whole thing, but it’s where you put that focus. Risk in the public sector is quite different to bits of the private sector. For example, the risk in hospitals will be different to the risks in local authorities, and different sized local authorities will face different risks as well. So an auditor needs to say, ‘Why am I looking at this? And what is the important thing?’ You can always count numbers and find a maths error somewhere. That’s perhaps not the main issue. It’s the risk that you’re looking at really.
PL: James, apart from actually assessing risk, there’s also the question, do councillors actually understand what they’re looking at? Because we see these audit accounts being taken at face value, because perhaps, quite understandably, councillors don’t actually understand what they’re being asked to look at.
JJ: I’ll answer that in a second, but I just wanted to come back on this issue of carve-outs and so forth. In principle, I don’t like carve-outs, but I do think we need to have a very serious conversation to say, are the IFRS standards appropriate for the public sector, and which ones are they? And if you then look at the statutory framework for local government finance, which differs to the IFRS, and the whole issue of proportionality, one of the issues we have – and the cause of delays with audits is that a proportionate view was taken in the past – is courtesy of various private companies going bust, like Carillion, auditors have been much more cautious on some things that in the past they were quite happy to have a very light touch on. So, I do think even if it’s not a carve-out, we need some very clear guidance about which areas a light touch or more formulaic approach could be taken to and which areas you say, ‘No, this this really matters’ in local government, or in hospitals, or something else.
PL: Before we move on to your response to the initial question, James, let me just give Alison a chance to respond to that.
AR: Well, I don’t disagree with James, but I think he needs to be careful about if you don’t have IFRS, what do you have in its place? And you don’t want something completely different? Again, it comes back to comparability, moving people around the profession as well, because actually, if you’ve got the same skills for IFRS, and IAS, then you can move around the different the different professions, whether it be the finance team or the audit profession.
PL: So, James, that question that we’ve touched on earlier about how much councillors understand about what they’re being asked to assess and act upon, do you feel most councillors are equipped to critique the accounts that are presented to them?
JJ: I think the point of an audited account, its principal purpose, is to say an accountant has looked through the numbers and has verified that they are happy that they are a true representation of the financial position of the council. Now, the second and related point that is to say, does every councillor and every shareholder or every manager in a business really need to know and understand note 365 on page 38 of the accounts or whatever? Or do they need to be able to understand the core numbers? And that the auditor has basically said, yes, these are trustworthy numbers? So, I do think it’s important that councillors understand the core numbers.
PL: And do you think they do?
JJ: I wouldn’t say every councillor does, but I would say a good proportion of councillors do understand the core numbers. We can always improve on that. But the number of councillors who would really understand in depth, and really get into the weeds is quite limited. But that’s why you have an audit committee, that’s why you have an auditor. I wouldn’t want a summary of the accounts, because that’s potentially a lot of work, but I do think we need to think about things like pulling out the key numbers. If I go and look at a company’s accounts, there’s the PnL, there’s the balance sheet, there’s the cash flow statement, there are some core numbers that I can get a feel for very quickly. There is a whole raft of notes and detail behind it, which it is appropriate for some people to really understand, but it doesn’t mean everybody has to.
PL: Let me ask Meg what she thinks about this, because, as I understand it you need training as a councillor sits on a planning committee, but not an audit committee.
MH: That’s right, and I think it’s interesting when I was first elected as a councillor many years ago, I was 25, and I said, ‘I don’t really understand all this local government finance.’ So I arranged myself have lessons, the Ladybird-book approach to local government finance, which has actually stood me in good stead many, many times since. And I think we’ve got to make sure that there is proper training and support. But I do agree with James that not everybody will understand it to the same level, but I do think it’d be quite a good idea if the major parties said before you can even be elected, you have to have had an understanding broadly of the quasi-judicial roles and the funding side of things, because nothing can be done without the funding behind it. So that’s a fundamental thing for councillors. But I think the Redmond approach to having a proper presentation at full council is a good start. And I think that also each councillor needs to understand enough about what they’re doing in their area of responsibility. One of the other things that James might have views on, the turnover of councillors can have an impact. You do sometimes have councils which have a whole sweep of change for the party politically, or just a different generation within the same party. And then you’ll get a whole new generation coming in that may just not have the same depth of understanding. That can be good for lots of reasons, but on the money side, we need to be watching for that and make sure that there is a proper discussion. But again, it also goes back to the staff on a council. If you’ve got a great finance team – and a shout-out to the finance director at Hackney who’s fantastic, if I asked him a simple question now, he could explain it in three simple sentences very often, really to the point – if any councillor’s got a question they know they’ve got someone they can go to there. But if you haven’t got enough people to do that, and you haven’t got the confidence between officers and members to ask those questions and get help, I think that can be an issue. We need to make sure we’re breaking down those barriers between officers and members when it comes to these sorts of questions.
AR: I think on the financial literacy side, it’s really important that all councillors have a basic understanding. And one of the things we’re looking at with the LGA and with CIPFA is whether one can do bitesize learning, five minutes on YouTube or something: what’s revenue, what’s capital.
PL: Something Meg did when she started.
AR: Yeah, the real basics, and as James said, not every councillor needs to be a fully IFRS-proficient understander of accounts. But the other thing you need to have, which was one of the recommendations from the Redmond review, is having an independent member on the audit committee. And if you’ve got an independent member with financial and audit expertise, they can ask the right questions and support the councillors in asking the right questions.
PL: This is something you challenge the profession to get involved in, isn’t it Meg?
MH: Absolutely, because I think it can be very challenging. I remember when we were looking at the Audit Commission’s dissolution back in 2011/12, once a committee in Parliament, I think at the time Oxfordshire couldn’t find independent members for its audit committee. Now if Oxfordshire can’t find two people qualified, then you’re going to have problems. So, I think we do need to say to people listening, step up and get involved, because it gets you involved in your local community as well. But on the Public Accounts Committee we’re privileged to have currently two qualified accountants as members, until recently we had three, but most of us are not financially qualified. We know, on certain areas of questioning we’ll really throw to our professionally qualified colleagues. Although they’re wearing an MP hat it is helpful to have that mix. It doesn’t mean that we’re in financially illiterate, we just don’t have that professional background in it.
PL: So, Alison, how are we going to persuade the profession to jump in and offer their services?
AR: Well, again, raising the profile of this really important role and encouraging them to get involved in their local area. There was a vacancy recently in a Wiltshire council, and I did actually send it out to the local members to say please get involved. It’s such an important part of being part of your community. And, again, it also goes back to raising the profile of the accounts and the audit, saying ‘this matters’. You almost need some sort of ceremonial thing around it saying, ‘Yeah, this is a really important thing’. And that will increase the attractiveness of the profession generally, because if you’re doing something that matters and is valued, you’re going to get people in the finance teams, and you’re going to get people in the audit teams because they are adding value as well.
MH: On the Public Accounts Committee, we see what I call the cuts of Whitehall spilled before us. It’s fascinating, and it’s sometimes alarming, too. So actually, it’s very interesting, you can see exactly how your local council’s spending and where that what the priorities are. It’s a really interesting thing in its own right. I would really recommend it.
PL: So, to wrap this up, can I just ask all of you individually for your brief summary of what you feel needs to be done in this area right now? Alison, I’m going to put you on the spot first.
AR: As I said at the beginning, it’s across all stakeholders, there is not one solvable solution that will make everything great again.
PL: So, a whole system approach?
AR: A whole system approach, and we mustn’t blame each other as well. That’s really, really important, because we all want the system to work. So, what can we do pragmatically but within the principles to actually make the system work collaboratively?
PL: James?
JJ: Again, I agree, it isn’t one thing that will make this work. And I think we need – and certainly something that I will be pushing – is across the sector, so that’s with accountants, with the Financial Reporting Council, with local government, we need to sit down and go through all the issues one by one, and try and find better solutions, because it is going to be a series of incremental steps. There isn’t a silver bullet to this, and I think that’s really important. And I do think having better trained, more knowledgeable councillors is a great thing. The issue is how do we get more people with more time to become councillors? That’s certainly a big issue that that we face, and I think that’s a broader question, not one for today, that we do face.
PL: Meg?
MH: Well, I think we need to make sure that we’re giving every power possible to the system lead at FRC. There is no one solution, as everyone said, but that’s really critical. There’s a really good person there now getting to grips with it. It’s not formally transferred the powers and that needs to really motor now, and there needs to be trust from all parties to get that going. The other thing is that we just need to be saying to audit companies, bringing new companies in, they need to be encouraged to join the sector. Encourage and start the pipeline for training new public auditors now, explaining why that is exciting and interesting, because if we don’t start now, this problem is not going to go away anytime soon.
PL: And I’m guessing you’re keen to see people respond to the Levelling Up Committee’s inquiry?
MH: Absolutely. We’ve been looking at this as a public accounts committee and we work very closely with our sister committee. Clive Betts is one of the most experienced people in local government, former leader of Sheffield, so he’s a really good person to be leading that committee at the moment with a good team behind him. So please put in and we all need to put our heads together to sort this out. We cannot allow it to get any worse, it’s pretty critical for public spending and the future of our local government.
PL: And the deadline for people to respond to that?
MH: That’s 17 April. But I think that’s the official deadline. Put in by then please, but if as they’re doing their inquiry things crop up, never feel afraid or alarmed about contacting a committee of Parliament, because MPs and committees want to always know what’s going on, and they’re always welcome the input. We can only do our job with the support of experts like those ICAEW, so please chip in.
PL: Well, you can’t ask for a clearer invitation than that. Thank you, everyone. We got through a lot there and we’ll doubtless come back to this. Meg, James. Alison, thank you very much for taking the time to be with us. The next Insights podcast will be with you in early April. We’ll be speaking to experts from across ICAEW to learn about the latest developments affecting the work of chartered accountants. Join us for that. I’ll end with my usual requests for you to please rate, review and share this episode in the meantime, and subscribe to the series so you never miss an episode. Thanks for listening.