The House of Commons’ Public Accounts Committee (PAC) has published a report on the Local Government Finance System: Overview and Challenges. The PAC reaches seven key conclusions:
- Local authorities are facing a wide range of financial risks after a sustained period of funding reductions.
- The Department for Levelling Up, Housing and Communities (DLUHC) has been too slow to react to financial sustainability issues.
- DLUHC did not “act with sufficient urgency” to address the crisis in local audit.
- DLUHC is improving oversight of the sector.
- DLUHC is “worryingly complacent” that the £4.8bn provided to local authorities in the Spending Review will ensure sustainable delivery of local services.
- The sector is facing significant uncertainty until the government decides on and implements longer-term reforms.
- It is still unclear how the government plans to rationalise local authority funding.
The PAC report describes “severe and pressing problems” in the local audit market, highlighting that only 9% of local authority 2020-21 audited accounts were published by the 30 September 2021 statutory deadline and warning that the delays have “hampered” DLUHC’s oversight of local authorities.
The PAC welcomes the measures that DLUHC has set out to address audit delays but notes that these will take time to implement. It raises concerns DLUHC has still not set out a detailed plan or timetable to address the crisis and that its response to the recommendations in the PAC report on local auditor reporting “lacked detail”.
The PAC’s conclusion that DLUHC has lacked urgency comes as the department has still not published its response to the technical consultation on the local audit framework, which closed in September 2021. The Financial Reporting Council (FRC) has also not yet announced the appointment of an individual to lead the new local audit system leadership function. This is despite the opening of the procurement round next week by Public Sector Audit Appointments Ltd (PSAA) for the appointment of auditors to local public bodies that have opted into the shared procurement scheme for the five years from 1 April 2023.
The delays to the government publishing a detailed response to the technical consultation create a significant risk that their proposals will not increase capacity as intended. For example, proposed revisions to Key Audit Partner eligibility criteria and the level of technical support available to auditors are likely to be material factors in whether audit firms decide to put in bids or not. As this procurement round will determine who will serve as external auditors for the majority of local authorities for five years from 1 April 2023, this could limit the opportunities for audit firms to enter the market until 2028.
If the government does not set out its plans for the future of local audit before the deadline of 18 March 2022 for audit firms to submit their selection questionnaire, there is a risk firms will be unable to make good decisions over whether to bid and how to price their bids in the absence of the information they require.
The PAC report follows an evidence session held on 29 November 2021, where ICAEW’s evidence was quoted three times as MPs questioned senior officials at DLUHC and HM Treasury. PAC’s conclusion that the government “has been frustratingly slow to act” echoes ICAEW’s view that the government response so far “has not recognised the urgency of the situation” in local audit.
The PAC also agrees with ICAEW’s call for greater investment in local authority governance. They point to a 34% real terms cut in governance spending by local authorities between 2010/11 and 2017/18. The AC echoes ICAEW’s position that the government should legislate for local authority audit committees to have at least one independent member, while also stating that DLUHC’s approach of relying principally on strengthened CIPFA guidance suggests the government is “still over-optimistic about the ability of such ‘soft’ changes to address risks”.
Alison Ring, Director for Public Sector and Taxation at ICAEW, commented: “We agree with the Public Accounts Committee’s conclusion that the government has not acted with ‘sufficient urgency’ to address the crisis in local audit. The government must publish detailed plans to fix this crisis as soon as possible, to give confidence to firms bidding for future audits and to ensure that measures to boost market capacity can be successful.
“For local authorities to be an effective delivery partner for key government priorities including levelling up and achieving net zero, as well as to continue to deliver essential services, it’s vital that the government addresses the issues with local authority governance, reporting and audit, and ends the financial uncertainty that has been facing the sector for many years.”
More details about the Public Sector Audit Appointments Ltd (PSAA) procurement for the next appointing period from April 2023 are contained on the PSAA website here. ICAEW has offered to share contact details between firms interested in working together ahead of the procurement.