Local audit market just isn't sustainable

11 June 2020: A recent ICAEW webinar, led by consultants Touchstone Renard, highlighted the major challenges confronting the local public sector audit market at a time when greater scrutiny is more important than ever.

On 2 June ICAEW hosted a webinar looking at the sustainability of the local audit market, based on the February 2020 Touchstone Renard report ‘Future Procurement and Market Supply Options Review’. In the webinar consultants Phil Austin, Harry Machin and Andrew Herbert discussed the key findings of the review and answered questions. The webinar was chaired by Alison Ring, director for public sector at ICAEW, with, including other key stakeholders, Sir Jon Thompson, chief executive of the Financial Reporting Council, listening in.

The report concluded that the market is not sustainable in its current form; the main threat to sustainability is an increasing shortage of experienced local auditors and Key Audit Partners; and the firms perceive the local audit market, as it is currently structured and remunerated, as being unattractive compared to other activities.

The first question posed was around the inevitability of the conclusions of the review – as responses given by firms might be self-serving as it would suit them to see fees increase. This was discussed and dismissed as being incorrect. Fees are perceived as being too low relative to other types of audit work and to the risks that are now involved in local authority auditing, detracting from the sustainability of the market. What is needed are fair fees for the risks and complexities involved in local audit. Audit fees have decreased in real terms while the expectations and risks have increased, so it seems logical that fees will need to increase. Firms are looking at the opportunity costs and do not have to do this type of work.

Questions were asked about local authority finance teams and whether they are less resourced or experienced than previously. Touchstone Renard stressed that this view is commonly held by the firms interviewed, and is supported by their own dealings with local authority finance teams from other assignments. In addition, over the past 10 years, dedicated in-house internal audit teams have been reduced in size, with a consequent decline in opportunities for auditors in terms of building careers and gaining comprehensive experience in local government. This lack of experience and resource will lead to more time having to be spent on audits.

So just how could the market supply be expanded? Trying to maximise the opportunities for all the approved firms to remain in the market would at least help to stabilise the flow of auditors away from this market.

Bringing in new firms was seen as a possible benefit in the longer term but not as a solution to the main issues that the market currently faces.

Could there be a scheme created where audit staff from firms are seconded to local authority finance teams or vice-versa to gain experience? Extending the time available to complete audits would not increase the number of auditors but it would expand audit capacity by enabling experienced auditors to work for a longer time period and might increase the appeal of local audits in terms of there being less stress.

Reducing the barriers to entry, making the career path for local auditors more attractive, and providing new small firms with an advantage through secondments to local authority finance teams were all discussed as potential options.

It was recognised that the solutions are not straightforward with any potential changes made impacting on other aspects of local audit. For example, if the deadline for audit were extended what impact might that have on local authorities who might be busy preparing next year’s budget at the time of audit, or even on the Treasury who collate the local authority numbers to include in the whole of government accounts presented to Parliament.
Nonetheless, it was equally recognised that without some movement on the various challenges the audit market was on the verge of collapse with very little appetite for continuing in the same way.

The Redmond Review recommendations on local audit were due to be published in June 2020 but inevitably the current circumstances have led to a delay in the publication of the recommendations until September.

Alison Ring, director for public sector at ICAEW, commented: “Fundamental to resolving this crisis is for all stakeholders, including government, regulators, preparers and professional bodies, to work together to reach solutions that are workable and recognise the different perspectives that exist.

“The importance of the quality and value of local government finance and audit in the current circumstances is higher than ever before and we should all work together to provide strong and transparent public finances that are understandable by all.”