The Financial Reporting Council (FRC) has recently published revised guidance for Recognised Supervisory Bodies (RSBs) on the approval of Key Audit Partners (KAPs) for local audit. An auditor must be registered as a Key Audit Partner to sign the audit opinions of an English NHS trust (apart from NHS foundation trusts), local authority or other local government body within the scope of the Local Audit and Accountability Act 2014. ICAEW is currently the only RSB for local audit in England.
The FRC states that the revised guidance is designed to address the recommendation in Sir Tony Redmond’s independent review into the oversight of local audit and the transparency of local authority financial reporting (the “Redmond Review”) that “statute (should) be revised so that audit firms with the requisite capacity, skills and experience are not excluded from bidding for local audit work”.
Redmond was concerned about the capacity of the local audit market as only 57% of 2018/19 local authority audited accounts were published by the statutory deadline of 31 July 2019. Since Redmond made his recommendation, the situation has severely worsened with only 9% of 2020/21 local authority audited accounts published by the extended statutory deadline of 30 September 2021. The Department for Levelling Up, Housing and Communities (DLUHC) plans to legislate to extend the deadline to 30 November 2022 for 2021/22 accounts.
The FRC consulted on the revised guidance in March 2022, stating that a key consideration was there must be a “balance between setting rigorous requirements and requirements that are practicable, not overly complex or restrictive of access to the market for local audit”.
ICAEW’s response to the consultation welcomed the proposals but called for the FRC to go further to reduce the KAP eligibility criteria where it acted as an unnecessary barrier to entry. The response supported the proposal for training to act as an alternative route to local audit experience to obtain KAP status. The previous guidance meant that the only routes for a new firm to enter the market were to partner with one of the eight existing market participants or to hire individuals with local audit experience from one of those firms.
However, the revised guidance issued by the FRC includes an additional requirement, not present in the consultation proposals, that mandatory hot file reviews for KAPs following the training route must be carried out by existing KAPs. This means that potential new entrants, without existing KAPs, will be forced to commission hot file reviews from firms currently performing local audit work. ICAEW’s response warned that this would be impractical given the capacity issues in existing firms and the regulatory risks involved.
The FRC has also decided to press ahead with its proposal that those seeking to follow the training route to obtain KAP status must have been a Responsible Individual (RI) for at least five years. The FRC has, however, introduced a minor change that allows those with one year’s local audit experience to become a KAP through the training route if they have been an RI for at least three years.
The FRC’s decision is out of line with the views of the respondents to the consultation. The feedback statement published by FRC states that eight out of the 11 respondents, including ICAEW, opposed the guidance setting a minimum time period for an RI. There is no equivalent minimum time requirement for the audits of any other sector, including large multinational public interest entities.
The FRC has not followed ICAEW’s recommendation that the requirements for local auditors should not be more burdensome than those for other sectors for those seeking to use the training route to become a KAP. The revised guidance requires ICAEW as RSB to ‘pre-approve’ the local audit training and mandate EQCRs for their first audit. The FRC has not provided any guidance over how the RSB should assess the local audit training and there is not an equivalent requirement to pre-approve specific training courses for any other audited sector in the UK.
The FRC have also disagreed with ICAEW’s view that the government should follow the recommendation in the Redmond Review to revise statute to allow a wider pool of auditors.The feedback statement states that the FRC does not see the case for allowing local audit to count towards the audit qualification nor for permitting those with equivalent overseas qualifications, and relevant local audit experience, to become KAPs.
Oliver Simms, Manager, Public Sector Audit and Assurance at ICAEW, comments: “ICAEW strongly welcomed the proposals to allow local audit training to act as an alternative route to achieving KAP status, but the revised guidance, instead of opening up the market, has placed significant unnecessary barriers such that this route is likely to be unworkable for staff in firms that do not currently carry out local audits.
“Unfortunately, this is a missed opportunity to enable new entrants to increase capacity in the local audit market and provide the additional resources to help tackle recent delays. As ICAEW stated in its response to the consultation, not addressing these issues poses a far greater risk to audit quality than reducing the burdensome nature of the KAP eligibility requirements.”
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