Only 9% of local government bodies were able to publish audited 2020-21 accounts by the deadline set by Parliament of 30 September. While there are many factors that have contributed to this situation, including under-resourced finance teams, local government bodies increasingly engaging in complex commercial transactions and greater regulatory requirements, all stakeholders agree that the capacity of local auditors is a significant factor.

Only six firms currently perform local government audits and the requirements to be met by new firms entering the market, or senior individuals switching from corporate audit to local audit, are rigorous. Firms can only register with ICAEW to perform local audits once they have at least one Key Audit Partner (KAP) and existing suppliers report that many current KAPs are approaching retirement and there is a limited pipeline of future KAPs.

ICAEW has called for the government to take action to reduce barriers to entry and to increase the attractiveness of local audit in its response to a recent Department for Levelling Up, Housing and Communities consultation on the local audit framework. In addition, we have supported a review of the KAP eligibility criteria and proposals to provide additional training for local auditors. 

ICAEW, as the Recognised Supervisory Body, is responsible for approving KAP applications and registering firms, and we operate under requirements set out in legislation and guidance provided by FRC.

The current review of the KAP eligibility criteria is seeking to make local audit more inclusive without undermining audit quality. It is possible that the proposals under consideration may not enable many new firms to obtain KAPs and register in time for the next Public Sector Audit Appointments Limited (PSAA) procurement round.

PSAA has a statutory obligation to appoint an auditor to every local government body that opts into their scheme (currently 98% of bodies opt-in) for 5 years starting in April 2023. PSAA will require firms to have submitted their application for registration to ICAEW by 18 March 2022 and successful bidders will need to be registered by 13 September 2022.

Some experienced audit firms have expressed a willingness to support new suppliers entering the market, as well as to help alleviate their own capacity pressures. Several potential entrants have expressed to ICAEW or PSAA a desire to work with an experienced supplier to help them enter the market. 

PSAA have confirmed they will permit bids involving secondment arrangements or from other forms of joint working arrangements. Bids from joint working arrangements count as a separate supplier from the firms involved for the purpose of PSAA’s capacity limits.

In order to facilitate discussions between firms, ICAEW is happy to share contact details between firms that give us this permission. In order to provide contact details, please email localaudit@icaew.com.

If you are an existing supplier that wants the details of new entrants who want support to enter the market or if you are a new entrant looking for the details of an experienced supplier, please do get in touch.

Firms considering such arrangements should be aware of the following:

• Due to our regulatory role, ICAEW cannot recommend or endorse particular firms or particular methods of working together.

• Firms will need to conduct their own due diligence of any firm they are considering working with before agreeing to the arrangement. 

• The experienced supplier has a responsibility to assess the competence of KAPs, qualified local audit staff and other local audit staff undertaking local audit work.

• The experienced supplier will need to consider what CPD has been undertaken to date by the staff of potential new entrants and how it will monitor the CPD of these staff annually. 

• We are not aware of any regulatory barriers to these arrangements but all firms involved should familiarise themselves with the Local Audit Regulations and make this assessment for themselves.

• ICAEW’s Local Audit Regulations 3.12 requires that if local audit work is carried out by another firm, all audit working papers need to be returned to the lead firm or the partner must allow access to the lead firm for at least six years.

• ICAEW’s Local Audit Regulations 4.03 prevents subcontractors or consultants acting as KAPs.

• Firms need to agree the details and scope of any arrangements between themselves and ICAEW cannot be involved in these discussions. We cannot guarantee that firms that get in contact with us will identify a suitable partner.

• New entrants should satisfy themselves that the arrangement provides their senior staff with adequate practical experience to become KAPs in the future if this is their desired outcome from the arrangement.

• The KAP retains the same responsibility for ensuring the quality of the audit. As a result, the experienced supplier will need to ensure that it has suitable controls to assess and review the quality of the work conducted by the partner firm. This should be clearly articulated in tender documents and documented on audit files.

• Firms need to consider the data protection and professional indemnity insurance implications. These should be clearly established in any arrangements.

If firms have any questions about joint working or the requirements for becoming a local auditor, please contact localaudit@icaew.com.

Alison Ring, Director for Public Sector and Taxation at ICAEW, commented: “Urgent action is required to strengthen capacity in the local audit market and ensure that the upcoming local audit procurement is successful. ICAEW is keen to do what it can to support the profession providing accountability for billions of pounds of public spending.”

Mark Babington, Executive Director for Regulatory Standards at the Financial Reporting Council, commented: “Having an effective local audit market is of fundamental importance to ensure confidence in local authority accounts. The FRC is working closely with DLUHC and a wide range of stakeholders to support greater resilience and diversity in the local audit market, as well as more timely delivery of reports, ahead of ARGA becoming the local audit systems leader. The FRC welcomes initiatives to support new market entrants which would build capacity and resilience across the local audit market.”