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PAC: Pressing need to establish local audit system leader

Author: ICAEW Insights

Published: 23 Jun 2023

The House of Commons’ Public Accounts Committee warns that delays in establishing the Audit, Reporting and Governance Authority risks further deterioration in the timeliness of local authority-audited financial statements.

“Sticking plaster approaches” by central government have had little impact in addressing the issues in the “close to breaking point” local government audit system, a report published today by the House of Commons’ Public Accounts Committee (PAC) has warned. 

Almost nine out of 10 (88%) local government bodies in England did not publish 2021/22 audited accounts by the 30 November 2022 deadline, bringing the cumulative backlog of accounts at that date to 632, described by MPs as an “unacceptably high” number.

The PAC says it is “disappointing” that, despite repeated warnings and the causes of local audit delays being well known, there has been little progress in addressing the crisis in local government audit and finance. The Committee criticises the Department for Levelling Up, Housing and Communities (DLUHC) for not treating the consequences of late audits as seriously as they should.

The report warns that the delays to the completion of audits increase the risk of significant governance issues being identified too late, a point raised by ICAEW in its evidence submission to the inquiry. The PAC recommends that DLUHC explains what it is doing to mitigate the impact of delays to the publication of audited accounts on governance in local authorities and the accountability of public money, as well as knock-on impacts on the completion of the accounts and audits of central government departments.

Dame Meg Hillier MP, PAC chair, said: “Our Committee warned in 2021 that the system of local government audit was close to breaking point. Disappointingly, since then the situation has only got worse. The cases of Croydon, Slough, Thurrock and Woking councils should all serve as flashing red signals for the government, and our report finds that the rot risks spreading to central government finance and the NHS.”

The report identifies a “pressing need for leadership within local public audit”. The government intends for the Financial Reporting Council (FRC) to act as shadow system leader until the local audit system leader role is put on a statutory basis as part of the Audit, Reporting and Governance Authority (ARGA). Despite agreeing roles and responsibilities, the PAC notes that the shadow role is yet to be formally handed over to the FRC, and that legislation to establish ARGA has yet to be introduced to Parliament.

Echoing ICAEW’s submission, the PAC calls for ARGA to be set up as local audit system leader as soon as possible, raising concerns that ARGA might not be established until 2024 at the earliest. The Committee also flags the uncertainty of whether the Department for Business and Trade (DBT) will introduce the legislation this Parliament, and recommends that DLUHC set out “contingency plans”.

The PAC calls on the government to tackle “long-standing challenges” to address the crisis in a sustainable manner. The report welcomes government plans to develop a qualification to enable experienced auditors to move to local audit from other sectors but raises concerns over whether this will provide sufficient skilled staff. 

ICAEW’s evidence warns that burdensome requirements meant that changes to the FRC’s Key Audit Partner (KAP) eligibility guidance introduced in July 2022 were a “missed opportunity” for this qualification to enable a wider pool of experienced auditors to sign off local audit opinions.

The PAC also notes that it will be “critical” that the FRC’s workforce strategy covers local authority finance staff, after receiving several evidence submissions highlighting the important role they play in the local audit system. ICAEW’s submission notes that strong finance teams are a “vital prerequisite for a timely and efficient audit process” and calls on the government to consider more support and reduce unnecessary burdens.

Other recommendations in the PAC report include asking DLUHC to set out what milestones it and the FRC will use to measure progress in addressing the timeliness of local audit and in holding stakeholders to account; how it will work with other stakeholders to agree permanent and proportionate measures to address the complexity of local authority accounting and audit; and how it will address the “lack of incentives or sanctions” around audit and accounts timeliness.

Alison Ring, ICAEW’s Director of Public Sector and Taxation, said: “The Public Accounts Committee’s inquiry into the crisis in local financial reporting and audit highlights just how much still needs to be done to resolve the delays and clear the backlog, as well as to address more fundamental issues such as the need for local authority accounts to be useful, relevant and understandable.

“We hope that this report by the Public Accounts Committee will provide a new impetus to the government to address outstanding recommendations from the Redmond Review in 2020, as well as in implementing as soon as possible the actions it has already agreed to, including legislating to introduce ARGA.”

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