The Financial Reporting Council (FRC) has recently published its Audit Quality Review (AQR) covering 2019-20 major local audits performed by seven firms. Of the 20 audits reviewed, four were NHS bodies, five were local authority pension funds and 11 were of local authorities.
Delays in the completion of some audits meant that the FRC could not conduct all of the reviews it had originally intended. As a consequence, the FRC’s conclusions may not present a full picture of audit quality in 2019-20.
The FRC rated 14 of the 20 audits they inspected as good or requiring limited improvements, while six were rated as requiring improvements. No audits reviewed were considered to require significant improvements. This is much better than the 2018-19 AQR when the FRC rated two of the 15 audits it reviewed as requiring significant improvements and a further seven as requiring improvements.
The FRC highlighted good practice in a number of areas, including the audit response to the presumed risk of fraud in revenue recognition, and the use of auditors’ experts to value highly specialised property. They also observed “tangible actions taken by firms to respond to the previous quality issues that the FRC has identified”.
Good practice was seen in senior partner involvement in the value for money (VFM) conclusion, a unique part of local audit where the auditor is required to provide a conclusion on the economy, efficiency and effectiveness of the entity’s use of resources. For the second year in a row, the FRC rated the work performed on all 15 VFM arrangement conclusions reviewed as good or requiring only limited improvements.
Despite the apparent improvements, the FRC highlighted the need for local auditors to improve audit procedures over expenditure, the evaluation of assumptions in the valuation of investment property, and in documenting the reasoning to support a modified opinion.
The FRC found significant issues in the valuation of property, plant and equipment (PP&E) in 2018-19 audits and the 2019-20 AQR reports that three financial statements required prior period adjustments for material errors in this area. They instructed firms to review arrangements for evaluating the underlying cause of prior period adjustments and assess whether there is a need to increase challenge of audited bodies in areas where they occur.
The FRC found that audit firms had strengthened procedures over the valuation of PP&E in 2019-20 audits but still identified four audits where limited improvements were required in this area. CIPFA argued in their response to the recent consultation on the local audit framework that “local audit resources are disproportionately directed towards matters such as property, plant and equipment valuation”.
AQRs cover 299 local public bodies with total income or expenditure over £500m, or pension schemes with over 20,000 members or gross assets of more than a billion. The remaining 531 bodies are in the scope of reviews performed by ICAEW’s Quality Assurance Department (QAD), which has also reported on its inspections of 2019-20 audits.
ICAEW’s QAD also found the audit work they reviewed was of a good standard, rating 15 of the 17 audits it reviewed as satisfactory or generally acceptable, and one audit as requiring improvement. One audit required significant improvement, including addressing weaknesses in the audit of a local authority’s financial instruments. With the expansion in commercial investment by local authorities, this area is likely to become an area of greater focus for both the FRC and QAD.
Despite the general picture of the reviews appearing to show improvement, the FRC caution against “identifying this improvement as a trend”. Significantly, they report that half of the audits selected in the sample had to be replaced because the audit concerned was not finalised. It is, therefore, unclear whether the sample finally selected was representative.
The extension of the sample selection for inspection reflects the fact that 55% of local authorities were unable to publish 2019-20 audited accounts before the statutory deadline. This was despite the deadline being delayed to 30 November because of the pandemic. The FRC’s report identifies “delaying issuing the auditor’s report until all required information was received” as an example of good practice and the improved reviews suggest audit firms are prioritising quality over timeliness.
However, many in the sector are concerned by the delays. A National Audit Office report on timeliness of local audit reporting highlights that late reporting hinders the ability of local government finance teams to plan budgets with certainty, reduces the assurance available to central government departments that use local authority accounts for monitoring, and has a knock-on impact on the timing of the audit of central government departments and the Whole of Government Accounts.
ICAEW’s response to a recent government consultation on the local audit framework argued that audit delays are symptomatic of significant wider issues in the local authority audit and reporting system. The response highlighted the need for the government to introduce reforms to strengthen capacity in the local audit market and to simplify financial reporting.
Next year’s round of inspections could also be affected given that 91% of 2020-21 local audits have missed the statutory deadline of 30 September 2021. The FRC may again need to extend their sample selection depending on how quickly overdue audits can be completed.
Alison Ring, Director for Public Sector at ICAEW, commented: “We are pleased to see that the majority of audit reports and all value for money reports required no more than limited improvements.”
“However, half of the local government audits originally selected for review could not be considered because they were not finalised. Delayed audit reporting for local government is a symptom of a market in crisis. We’d like to see steps taken to strengthen the local government financial reporting ecosystem, promoting improvements in the quality and understandability of local authority financial reporting to encourage greater readership.”
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