Presented to Parliament on 10 July, the English Devolution and Community Empowerment Bill includes details of the responsibilities and role of the Local Audit Office (LAO). As a critical part of government plans to foster a sweeping system recovery, the LAO will oversee the local audit system and equip it for future fitness.

Initially proposed in a consultation late last year, the LAO was framed as a cornerstone of measures to overhaul the “broken” local audit system and “get the house in order”. The consultation stressed: “This is not a return to a bloated Audit Commission. Lessons will be learnt, and the LAO will be proportionate and operate within its strategic objectives.”

Under the proposals, the LAO will coordinate the entire system – championing auditors’ statutory reporting powers, commissioning and appointing auditors to local government bodies and issuing statutory guidance to auditors under a Code of Practice that it will set. The LAO will also create a public provision of local auditors.

ICAEW Director, Public Sector and Taxation, Alison Ring welcomes the Bill’s introduction. She notes that a huge backlog of overdue audited accounts with significant numbers of disclaimed audit opinions has compounded the local audit crisis. This means that councillors are “unable to have confidence in the numbers they rely on to hold their local authorities to account” and make decisions on spending priorities. Meanwhile, local voters are unable to properly understand how their taxes are being spent on local public services.

“We support the proposals in the Bill to create a Local Audit Office to lead the reform of the local audit system in England, to mandate an independent member on local authority audit committees, and for reforms to expand the local audit market,” she says. “These are essential steps along the way to reforming local authority financial reporting and external audit so that local authorities can be properly accountable to local residents and their elected representatives.”

Rebuilding assurance

The LAO’s launch came just days after the Ministry of Housing, Communities and Local Government issued its latest figures for local audit noncompliance.

According to the Ministry’s 7 July statement, by the backstop date of 28 February this year, 87% of eligible local government bodies had published their audited accounts for 31 March 2024. By 20 May, that figure had risen to 92%.

The Ministry confirmed that the government is continuing to engage with those bodies that had not published audited accounts “to ensure that outstanding audited accounts are published as soon as practicable”.

The following day, the Financial Reporting Council (FRC) announced that it had conducted its routine, annual quality inspection of major local audits (MLAs) but this inspection was limited to a sample of six NHS bodies. Audits examined were mainly for the year ended 31 March 2024.

This year, the regulator has chosen not to publish a full report of its MLA inspection work, on the grounds that it "would not be proportionate to its findings or the scope of its monitoring activities". However, the watchdog said that it had assessed all relevant inspections of financial statements, audits and value-for-money arrangements as good, or requiring limited improvements. It had also identified examples of good practice.

Looking ahead, the FRC confirmed that for the financial year ended 31 March 2024, it would undertake no routine inspections of local government MLAs, unless there is a clear, public-interest case to do so. That will provide staff and partners at audit firms with breathing room to focus on rebuilding assurance by completing as much outstanding work as possible.

The FRC also plans to discuss potential thematic work with stakeholders – including audit firms – on topics that would support the local audit system’s recovery.

“Radical review”

Quality was also a prominent theme of an event this week hosted by ICAEW and Chartered Institute of Public Finance and Accountancy (CIPFA), which explored current challenges facing local government accounting.

Held at Chartered Accountants’ Hall on 7 July, "Maximising the Use of Local Government Accounts" featured a wide array of experts, including:

• Dr Laurence Ferry, Durham University Business School Professor in Accounting for Democracy;
• Dr James Brackley, Lecturer in Accounting; 
• Sir Tony Redmond, author of the 2020 Redmond Review; and
• Rachael Sanders, Section 151 Officer at Herefordshire Council and Chair of CIPFA’s Better Reporting Group.

Chaired by Durham University honorary professor and former National Audit Office Local Government Value for Money Director Aileen Murphie, the discussion heard calls for a “radical review” of local government accounts. Experts underlined the importance of ensuring that end users can trust local bodies’ finances and are able to clearly compare outcomes against initial promises.

It was argued that preparers should also produce thorough reporting in areas such as sustainability, financial instruments, group accounts and remove many statutory overrides, with an eye on improving understandability and accountability.

In addition to the value of enhancing preparation, some speakers highlighted workload challenges. One local government accounts preparer said that they are required to make 42 different returns of financial information – a task that had pulled valuable resources away from the preparation of accounts.

While acknowledging the need to look critically at the content of accounts, the speaker asked whether the number of returns could be reduced – or whether the information in returns could be somehow repurposed for use in the financial accounts.