The Financial Reporting Council (FRC) has extended its pause on routine local audit inspections to cover audits for the financial year ended 31 March 2024. Confirmation of the move appears in the regulator’s latest audit quality inspection review, published on 19 November.

In a change of format from previous years, the FRC uses a large part of the report to explain the unusual regulatory approach it is taking, amid ongoing efforts to reset the beleaguered local audit system.

Last December, the regulator committed to performing no further routine inspections of major local audits (MLAs) for financial years up to and including the year ended 31 March 2023 – unless there were clear public interest reasons to do so. In the FRC’s view, that would enable local authority finance staff and their audit firm partners to focus on completing as much outstanding work as possible, with the aim of clearing backlogs.

For those same reasons, the regulator has now decided to extend the pause to cover audits for FY2023/24. As the report points out, the 28 February 2025 backstop date for resetting FY2023/24 audits is very close to the 13 December 2024 backstop for financial years up to and including FY2022/23.

Gradual phasing

Given the workloads that local authorities and audit firms are facing, the report notes, the FRC will reintroduce routine MLA inspections in stages.

For the time being, it will perform a total of six, NHS-focused audit inspections per year – consistent with the number of NHS reviews performed in previous cycles. “There is no backlog in this sector significant enough to impact our approach,” the report says.

The regulator will then gradually build back up to routine local government inspections, from a level of zero for the year ended 31 March 2024 to an eventual 14. The phasing of that process will be based on the rate at which the overall local audit system recovers. As a result, the FRC would finally be performing 20 inspections per year across local government and the NHS, returning to the ‘business as usual’ pattern of previous cycles.

“This presumes the local audit system will gradually recover,” the report says. “If it does not, or it only partially recovers, we will reconsider our approach and perform fewer routine inspections than indicated.”

Appropriate challenge

In keeping with the pause, the FRC’s review of the 2023/24 reporting period selected six NHS audits, plus two straggler audits from local government inspections that the regulator had either completed, or committed to, before bringing in its constraints. Those eight audits ranged across six different audit firms.

Of the chosen audits, three-quarters required only limited improvements. Technical areas that the FRC highlighted for improvement were the audit of group accounting, the evaluation of uncorrected misstatements and substantive analytical procedures.

More broadly, though, the FRC found evidence throughout the sample of good practice in professional scepticism and challenge, valuation of investment properties and component auditor oversight. In three cases, it found the auditor’s annual report to be comprehensive and well structured.

As with previous years, ICAEW’s Quality Assurance Department provided monitoring input on audits completed by two of the UK’s biggest firms. This year, EY and Grant Thornton were in the hot seat. No key findings emerged and ICAEW welcomed evidence of well-designed and documented audit work on fixed-asset valuations, “which clearly showed appropriate challenge of valuer assumptions”.

Unprecedented circumstances

In her foreword to the report, FRC Executive Director of Supervision Sarah Rapson stresses that a robust, well-functioning local audit system is vital. An effective system, she notes, assures residents, elected representatives and other interested parties that they can trust public bodies’ financial statements and their claims to be seeking value for money.

In addition, she points out, local auditors help to protect the public purse by identifying issues such as serious failures of leadership, governance or culture and recommending improvements.

Addressing the FRC’s unusual restrictions, Rapson states that the regulator understands their potential, short-term implications – including the likelihood of many disclaimed or modified audit opinions going forward.

However, she writes: “The unprecedented circumstances facing the local audit sector required action to be taken. Reaching this point has been a collaborative effort across the entire local audit system. The FRC has worked closely with system partners, including the government and the National Audit Office, to develop these measures, which received positive feedback from local bodies and audit firms.”