Just 1% of local government bodies – that’s five out of 467 – had received audit opinions on their 2022/23 accounts, according to Public Sector Audit Appointments (PSAA). The backlog of pending opinions joins 456 outstanding from previous years to form a grand total of 918, prompting calls for urgent action to address the crisis in local financial reporting in audit.

PSAA is the Local Government Association (LGA) subsidiary responsible for appointing almost all local authority auditors in England. Chair Steve Freer says the scale of the backlog is becoming more and more serious. “It is now very clear that an extraordinary intervention of some sort is urgently required to put the system back on track,” he says.

According to a report published earlier this month, accountability for £100bn of public spending is at stake – with 10 public bodies not having had their financial statements audited for the past five years. 

House of Commons Public Accounts Committee Chair Meg Hillier MP says: “This lack of scrutiny of councils’ finances removes any early warning system for local authorities in financial difficulty. The implications for public services do not bear thinking about.”

These warnings have been echoed by the House of Commons Levelling Up, Housing and Communities Committee (LUHCC) in its landmark report. It says the local audit crisis is undermining public trust and that the most urgent problem is “a large and growing” backlog of accounts whose audits have not been completed, some of them up to seven years old. 

In addition to focusing on fundamental changes that are needed to improve the quality and understandability of local authority financial statements, the LUHCC report finds the crisis in audit is hampering efforts to ensure that the billions of pounds per year spent by councils is properly accounted for and local authorities are held accountable for their spending decisions. 

Stalemate

Alison Ring OBE, ICAEW Director of Public Sector and Taxation, says the implications for the stakeholders involved are equally daunting. Ring points out that just before the summer recess, Lee Rowley MP – then minister for local government and building safety – wrote to LUHCC Chair Clive Betts MP to signal that a bold intervention was on the way.

“That hasn’t happened yet,” Ring says. “And because the audit firms and councils are aware that something is likely to happen, but are uncertain exactly what, a stalemate has developed. In some ways, that is even worse than the initial situation.”

That stalemate is toxic for councils and audit firms alike – and scrutiny and independent, third-party assurance of local authority finances is being deferred.

“Not only is there a lack of assurance over hundreds of billions of public spending, but as long as the crisis continues, the fundamental basics of accountability and governance of how local authorities function are not able to be properly undertaken by councillors and council scrutiny and audit committees,” Ring says.

“The good news is that all the participants in the local audit market in England – local authorities, audit firms, standard-setters, regulators and central government – have expressed a willingness to do their part to help fix the local audit crisis. The bad news is that progress towards reaching agreement on what can be done is extremely slow, risking the possibility that the crisis will only get worse before it gets better,” Ring adds.

Material errors

Sarah Sheen, a Director at local government accounting advisers Ichabod’s Industries, and former Head of Standard Setting and Technical Manager at the Chartered Institute of Public Finance and Accountancy, believes the current scenario is untenable.

“There must be a detailed plan to address this backlog while prioritising the needs of the account users, to build on the cross-system statement that the government issued in July. Priorities must be decided and the whole system will need to support future actions,” Sheen says.

As dealing with the backlog will also be a task for preparers, councils will have to consider how to divert resources away from dealing with the financial impacts of key policy challenges and pressures stemming from issues such as the cost-of-living crisis. 

“For most authorities, the audit should largely confirm to council taxpayers that resources have been expended and continue to be used effectively. The concern is that for the minority of authorities the audits may uncover material errors,” Sheen says.

“As it forms such a crucial part of the accountability process, the assurance function must be effective so that accounts users and other stakeholders will have full confidence in the information produced – thereby closing the accountability circle.”

Reset and recover

Sheen stresses that once the backlog has been dealt with – which will take some time – the local audit system must guarantee that the accounting and audit frameworks can proportionately support the needs of accounts users.

“Local authority accounts users are different from those in the private sector, where the needs of investors are paramount. Local authority accounts should focus on ensuring that resources are able to support both services and effective stewardship,” Sheen says.

She adds: “Such huge backlogs will require stakeholders to bring significant resources into the system to provide both the capacity and skills to deliver that proportionate framework. The future of local authority accounting must ensure that decision-useful data is available to account users in a timely manner – and that every audit system is able to support that.”

In a statement to ICAEW Insights, the Financial Reporting Council (FRC) said: “As the incoming shadow systems leader for local audit, the FRC continues to work closely with stakeholders across the system to bring the timeliness of local authority financial reporting and audit back to the standards that taxpayers expect and deserve.

“The FRC will also continue to support the Department for Levelling Up, Housing and Communities as it looks to bring forward legislative proposals that will reset and recover the local audit system. To tackle the complex and multifaceted issues facing the local audit system, it will require all participants to play their part – operating collaboratively and coherently in response to the scale of this challenge.”

Read more

• MPs call for action on local audit
• LUHCC: Financial Reporting and Audit in Local Government
• Spotlight on local audit also shines on the accounts