ICAEW has responded to a recent consultation on changes to statutory guidance for local audit in England by welcoming the Financial Reporting Council (FRC) bringing forward overdue reforms to Key Audit Partner eligibility.

ICAEW says that measures of this nature, designed to alleviate pressure on market capacity, are an “essential part of the whole system response” needed to fix the crisis in local audit.

As the sole Recognised Supervisory Body (RSB) for local audit in England, ICAEW is required to implement the statutory guidance when approving Key Audit Partners, the individuals permitted to conduct audits of local government or NHS bodies under the terms of the Local Audit and Accountability Act 2014.

The response outlines ICAEW’s view that the current burdensome requirements for a minimum of two years experience in local audit or similar audit work within the past six years are a significant contributor to capacity issues in the local audit market. It is almost impossible for auditors working within potential market entrants to obtain the required experience – a significant issue given that there are only eight firms currently engaged to undertake local audits.

The FRC has recognised that the current requirements are unnecessarily restrictive and are considering changes to the statutory guidance that would see the creation of three additional routes to obtaining Key Audit Partner status:

• Route one: obtaining relevant experience from at least 10 engagements in the past two years, mirroring the requirements for Responsible Individuals under the regime for corporate auditors.

• Route two: attaining pre-approved local audit training for experienced Responsible Individuals.

• Route three: a new category of NHS Key Audit Partners with less burdensome requirements.

ICAEW’s response supports the first two of these new routes as it believes that they will result in no reduction in audit quality, while making it easier for auditors to obtain Key Audit Partner status. ICAEW supports the creation of route two in particular as, when combined with the proposed central training announced by the government, it could act as an important entry route into the local audit market for audit firms.

However, ICAEW’s response warns against creating “unnecessarily burdensome requirements in local audit where there are no equivalent requirements in corporate audit”. For example, ICAEW does not support a rigid definition of what constitutes an experienced Responsible Individual, nor does it support placing a requirement on the RSB to mandate hot file reviews in addition to existing requirements to comply with quality management standards.

The response goes on to express concern that changes to the guidance will be sufficient on their own to fully implement the Redmond Review recommendation that “statute be revised so that audit firms with the requisite capacity, skills and experience are not excluded from bidding for local audit work”.

ICAEW calls for several amendments to statute including allowing those with equivalent overseas qualifications to be able to become Key Audit Partners and for local audit work to count towards the statutory audit work required to achieve Key Audit Partner status. ICAEW also recommends the alignment of the audit eligibility requirements of NHS Trusts and Clinical Commissioning Groups, NHS Trust audits with those of NHS Foundation Trusts, instead of the creation of a separate category of NHS Key Audit Partner.

Noting that “the capacity crisis in local audit demands radical solutions”, ICAEW also calls for the new system leader at the FRC to explore whether it is necessary for local audit to have specific burdensome eligibility criteria for partners to sign off local audits. The response highlights how local audit is the only audit sector with its own unique eligibility criteria and that the sector could benefit from the experience of corporate auditors, especially in areas of increasing relevance such as financial instrument valuation.

Oliver Simms, Manager, Public Sector Audit and Assurance, at ICAEW comments:

“The proposed changes to Key Audit Partner eligibility criteria proposed by the FRC are an important step in the right direction. They should help to improve the attractiveness of local audit by reducing some of the obstacles facing audit firms wanting to enter the local audit market – although as we comment in our response, statutory changes are required to extend eligibility still further, for example to auditors with equivalent overseas qualifications.

“Despite welcoming the proposals, we believe that there is a case for more radical change given the scale of the capacity crisis in the local audit market. The new local audit system leader at the FRC should consider whether it is really necessary for local audit to be the only specialist sector with specific and restrictive eligibility criteria.”

You can read ICAEW’s response to the Key Audit Partner consultation here.