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ICAEW worried local audit reform may not get the focus it needs

Author: ICAEW Insights

Published: 22 Sep 2021

ICAEW’s submission to government on the next stages of local audit reform highlights the importance of improving local authority financial reporting and getting the right regulatory arrangements in place.

Plans to establish a system leader for local audit as part of the new Audit, Risk and Governance Authority (ARGA) should go some way to mending the broken local audit and reporting system, but elements of the current design need to be addressed, ICAEW has said in its response to a technical consultation on the local audit framework published this week.

ICAEW says it is vital the local audit system leader has sufficient expertise and appropriate governance structures to champion local audit so it can urgently tackle the significant challenges the sector faces. “The system leader needs to be a forward-looking regulator that supports local authorities and audit firms to improve the quality of local audit and reporting,” ICAEW’s submission says.

ICAEW warns that more must be done to improve the quality of local authority financial reporting to make it more accessible. It criticised the reform proposals for focusing almost exclusively on audit and audit committees when high-quality audit relies heavily on high-quality financial reporting. 

Last year’s Redmond Review concluded that local authority financial statements are “impenetrable” but, in ICAEW’s view, insufficient action has been taken to address the need to make annual reports and accounts understandable.

ICAEW says it is vital the system leader unit within ARGA has adequate powers and resources to require improvements by preparers and not just auditors. The system leader should promote improvements in the quality and understandability of local authority financial reporting to encourage greater readership, including carrying out periodic reviews of individual reports and financial statements.

ICAEW has also expressed concerns about the capacity of ARGA to provide the urgent system leadership the sector needs. It stated there was a risk that the substantial audit and corporate governance reforms proposed for an expanded number of public interest entities (PIEs) in the corporate sector could overwhelm ARGA’s ability to be an effective system leader for local authority and health audits.

Remove barriers to encourage new entrants

Meanwhile, ICAEW’s response says more substantial action is needed to improve the attractiveness of the local audit market and to encourage new entrants. It says the government should remove barriers to entry for new firms and make it easier for staff to switch between private sector and local authority audit. At the same time, ICAEW’s submission urges the government to provide more support for local authorities to allow them to pay properly priced audit fees for a quality audit. 

Although ICAEW does not support the idea of a new public sector-specific audit qualification, arguing that key audit skills are common to all audits, it is putting its weight behind the idea of additional training for auditors on sector-specific knowledge. It supports proposals for training to act as an alternative route for auditors to achieve Key Audit Partner (KAP) status and thereby be able to sign off local authority audits. It also calls for a more thorough review of the audit qualifications required to be approved as a KAP.

The government should avoid placing additional requirements on auditors to compensate for weaknesses in local authority governance, ICAEW warns. “We do not see the purpose of ’strengthening’ already clear audit committee guidance when several pieces of existing local authority finance guidance are not currently being followed.” ICAEW is suggesting new legally binding rules on the form and composition of audit committees, including the inclusion of at least one suitably qualified independent member, as a means to beef up governance.

Local audit matters

ICAEW said it welcomed the opportunity to respond to the consultation by the Ministry of Housing, Communities and Local Government’s (MHCLG), this week renamed the Department for Levelling Up, Housing and Communities (DLUHC), which it said provided the opportunity to put in place tangible and constructive building blocks for improving accountability for billions of pounds of taxpayers’ money.

Oliver Simms, Manager for Public Sector Audit & Assurance at ICAEW, commented: “Local audit matters. It should play a vital role in improving the financial management of councils and in democratic accountability, giving confidence to residents and taxpayers that the billions of pounds spent on local services is spent effectively and efficiently. 

“The consultation provides the opportunity to ensure that local audit plays this vital role in providing assurance to us all. We welcome many of the proposals in the consultation including the establishment of a single system leader and additional training for local authority auditors, but more needs to be done to make the local audit market attractive and to improve the quality of local authority accounts.”

Alison Ring, Director for Public Sector at ICAEW, commented: “Recent issues with the timeliness of audit opinions are a symptom of a broken audit and financial reporting system. While we support many of the proposals in the consultation, it is vital the government and the new system leader recognise they need to address issues in local authority financial reporting and financial management & governance in addition to external audit so as to achieve effective accountability for local government.

“The government should legislate on the form and composition of audit committees, task the system leader with driving up the quality and accessibility of local authority financial statements, and reinforce the message to local authorities that audits really matter.”

Read ICAEW’s response - Representation 89/21 Local Audit Framework

Read the consultation - Local audit framework: technical consultation

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