How do you solve a problem like local audit?
28 August: The Redmond review on local government audit is expected to report on 8 September, but who are the interested parties and what are their concerns?
Alison Ring, director for public sector at ICAEW, previews the long-awaited Redmond review into local government audit in England and what it means for a relatively small – but critical – part of the audit market.
An independent review, led by Sir Tony Redmond, has been considering responses to a consultation conducted last year that asked for views on the transparency and quality of local authority financial reporting and external audit in England. It also conducted its own interviews and analysis on whether the requirements of the Local Audit and Accountability Act 2014 are being fulfilled.
While many of the recommendations will be of most interest to audit firms and local authority finance teams, there is a wide range of interested stakeholders who all have a very different perspective about the problems with local authority financial reporting and local audits. Reconciling these different interests will be challenging, as one stakeholder’s potential solution may be another stakeholder’s potential headache.
In the run-up to recommendations being published on 8 September, we thought it might be helpful to explain who the main stakeholders are and their primary interests in the Redmond review.
In theory, the ‘primary stakeholders’ are the local residents and taxpayers on whose behalf local authorities exist, but in practice there is a host of other interested parties, all with different responsibilities:
- regulators such as the Financial Reporting Council (FRC), the National Audit Office (NAO), Recognised Supervisory Bodies – including ICAEW and CIPFA – and the Public Sector Audit and Appointments Authority;
- central government, principally the Ministry for Housing, Communities & Local Government (MHCLG), HM Treasury, the Department for Health & Social Care and the Department for Business, Energy & Industrial Strategy (BEIS);
- audit firms, including authorised partners and audit teams; and,
- local authorities, including council officers and finance teams, together with elected councillors – collectively represented by the Local Government Association (LGA).
For England, the FRC is responsible for inspecting the quality of audits of the largest local public bodies and for overseeing the regulation of relevant audit firms and auditors by Recognised Supervisory Bodies; and for applying statutory requirements to auditors. As the primary audit regulator, it owns the Key Audit Partner (KAP) eligibility guidance – KAP being the local audit terminology for an authorised partner signing the audit opinion on a set of local authority financial statements. The FRC is primarily concerned with audit quality (just as it is for the private sector) and hence with the eligibility and performance of the auditors who sign off on audit reports.
The NAO is responsible for applying the Local Audit and Accountability Act 2014, which gives its head, the Comptroller and Auditor General, responsibility for the preparation, publication and maintenance of the Code of Audit Practice. The Act also enables the NAO to examine the economy, efficiency and effectiveness with which local authorities and other local public bodies use their resources.
We at ICAEW are also a key stakeholder, as a Recognised Supervisory Body with responsibility for approving Key Audit Partners in line with statute and guidance, as well as wider regulatory and professional responsibilities for regulating auditors and chartered accountants across the private and public sectors. The ICAEW is keen to see a broadening out of the local audit market and increased audit quality in the public sector, similar to our agenda for ongoing improvements to private sector audit.
As an accounting body which provides many members of the financial teams in local authorities, CIPFA has a keen interest in what is going on in the local audit area. CIPFA also has a key role given its responsibility for preparing, maintaining, developing and issuing the Code of Practice on Local Authority Accounting. Any potential changes to local authority financial reporting will have to be reflected in the Code of Practice. Last year CIPFA issued a consultation on the complexity of local authority financial statements – but has yet to issue any recommendations from findings as a result of that consultation.
The Public Sector Audit and Appointments Authority has an interest in the procurement of audit services for most local authorities in England, working with them to determine which audit firms are appointed to which local authorities, as well as in agreeing the level of fees. One of the concerns being considered by the Redmond review is whether these fees are appropriate, with some suggestions that low fees are contributing to a reduction in the number of Key Audit Partners, potentially affecting the viability of local audit work within some audit firms.
Quite surprisingly there are at least four central government departments which have an interest in the financial reporting and audit of local authorities, led by MHCLG, which has the primary responsibility for local government within England. MHCLG commissioned the Redmond review and will be responsible for deciding whether to implement its recommendations, including any changes that might be needed to the Local Audit and Accountability Act 2014.
Any proposed changes to deadlines for reporting and auditing will have an impact on HM Treasury, which prepares the Whole of Government Accounts (WGA) that incorporate local government financial information. Treasury ‘owns’ the FReM – the UK Government Financial Reporting Manual which could be affected by the review, especially where it pertains to the perceived complexity of local authority financial reporting.
What about the Department of Health and Social Care? It has oversight over local health trusts and other health bodies and so will be interested in any recommendations that affect financial reporting as well as external audit arrangements.
BEIS is responsible for the Companies Act, on which the Local Audit and Accountability Act 2014 is based. There may be an impact from potential legislative changes that may be recommended, for example to allow greater fluidity of movement between the local audit profession and the private sector audit profession. BEIS is also the department leading on the reform of the FRC and its replacement with the Audit, Reporting & Governance Authority.
The firms are an extremely important party in this whole debate. One of the purposes of the legislation six years ago was to increase the number of firms auditing in this sector, however, many firms are indicating that it is an unattractive sector to participate in, with rumours that some firms are considering withdrawing completely.
Talking to the auditors you hear great passion from them about wanting to be doing something that truly matters, but equally you hear anxiousness about increasing risks of local audit and pressures on staff plus concerns that audit fees must compensate for those increasing risks. The auditors must also reconcile the expectation gap between what regulators want to see in terms of improvements and what local authorities want in terms of both cost and added value.
The LGA is a membership organisation which is a national voice for local government, with the exception of four councils that are not members. With most local authorities facing significant funding challenges the LGA is concerned about the cost of local audit, while at the same time elected representatives want to be protected against audit failures.
Last but by no means least are the local authorities themselves. With constrained finances that make it difficult to invest in finance teams, there is also a perception that investing in financial reporting and audit is not a good use of local taxpayer resources. Higher audit fees will not be welcome, whether as a result of more strenuous requirements placed on local audit firms or as a result of less competition from fewer firms bidding for work. The recommendations made by Sir Tony Redmond may have a significant impact not only in terms of what local authority officers and finance teams need to do, but also in potential knock-on effects. For example, changes in financial reporting deadlines could have an impact on budgetary work, while changes in financial reporting requirements may require changes in systems or additional resourcing for finance teams.
One of the challenges for the Redmond review is in engaging with elected councillors, many of whom do not have financial expertise, while few local residents express an interest in local authority finances beyond the amount of their council tax bill – at least until something goes wrong.
What is fundamentally clear is that all these stakeholders need to work with each other and not against each other if local authority financial reporting and audit are to be resilient, relevant and reliable. With local authorities responsible for a substantial proportion of public spending (even before the pandemic), the quality of financial reporting, external audit and on the outcomes delivered for the money invested will be even more important as local authorities seek to ‘level up’.
In the headline, I asked the question: how do you solve a problem like local audit? (with apologies to lovers of the Sound of Music). It is certainly not like pinning down a cloud, but it sometimes feels like being under a cloud. We must all try and see the problem from a different perspective otherwise we won’t throw this whirling dervish out of whirl.
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