The Public Accounts Committee (PAC) warned in July that “without urgent action” the local audit system “may soon reach breaking point”. Many would argue that breaking point has now been reached. A study from Public Sector Audit Appointments Ltd (PSAA) found that only 9% of local authority audits were completed before the statutory deadline of 30 September 2021.
Local authorities are not required to formally file accounts in the same way companies must file with Companies House or central government departments to lay their accounts before Parliament. Therefore, there is no direct legal or financial consequence for local authorities if their audit is not completed by the deadline.
However, delays to the completion of local authority audits can create significant issues. These delays mean that local authority finance teams lack reliable, audited figures on which to base their forthcoming budgets. For example, Slough Council’s sSection 151 Officer (Chief Finance Officer) was forced to issue a Section 114 “bankruptcy” notice after auditors found that draft accounts had misstated its financial position and further investigations found it had negative reserves and was unable to set a balanced budget. Slough Council has not had its audit signed off since 2017-18.
Delays to local audits mean that central government departments with oversight responsibilities and local residents are denied timely assurance that public money is being spent appropriately. It also creates delays in central government audits as the National Audit Office relies on assurance from local auditors over local government pension scheme balances held in central government accounts and over the returns provided by local authorities to HM Treasury for the Whole of Government Accounts (WGA).
The figure of 9% is by far the lowest percentage of audits completed by the statutory deadline since the introduction of the Local Audit and Accountability Act 2014, which saw the abolition of the Audit Commission and the transfer of all local authority audit work to private sector audit firms. It compares to 45% of 2019-20 audits completed by the deadline, which was extended to 30 November in 2020. As at 30 September 2021, 60 local authority 2019-20 audits had still not been completed.
While the delays in the past two years can partly be attributed to the disruption and additional audit risk caused by the COVID-19 pandemic, the pandemic has only exacerbated an existing issue. The percentage of audits completed before the deadline dropped from 97% in 2015-16 to only 57% in 2018-19. There are only eight firms registered to perform local audits and two firms currently conduct over 70% of the audits.
Concern about the state of the audit market was one of the principal factors that led the then Ministry of Housing, Communities and Local Government (MHCLG) in 2019 to commission Sir Tony Redmond’s independent review into the oversight of local audit and transparency of local authority financial reporting. Sir Tony Redmond concluded that the market was “very fragile” and recommended the creation of a new body, the Office for Local Audit Regulation (OLAR), to act as a system leader for local audit.
The government rejected the creation of a new body but instead proposes to create a separate local audit system leader unit within the proposed new Audit, Reporting and Governance Authority (ARGA), which the government intends to replace the Financial Reporting Council as part of wider reforms to audit and corporate governance. MHCLG recently consulted on its plans for the system leader as well as other proposals to address issues in local audit.
In its response to the consultation, ICAEW argued that recent timeliness issues are symptomatic of wider problems in local authority financial reporting and audit – issues such as “impenetrable” financial statements, and an unattractive market for local auditors. It welcomed the creation of a system leader but called for the removal of barriers to enter the market and for the system leader to be tasked with improving the quality and accessibility of financial reporting. It suggested the system leader maintain a central register of published local authority audited accounts that the system leader and other stakeholders could use to monitor and address delays to audits.
Oliver Simms, Manager for Public Sector Audit & Assurance at ICAEW, commented: “That 91% of local authority audits have missed the statutory deadline shows the extent of the crisis in local audit. The timeliness issues are a symptom of wider problems in the system from variable governance challenges to financial reporting complexity.”
“As we said in our response, the government must use the opportunity of the recent consultation to ensure the local audit system operates effectively and provides essential accountability for billions of pounds of taxpayers’ money.”
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