The final report from the Financial Reporting Council’s (FRC) market study into the NHS audit market has warned that a failure to address audit market issues could affect the future resilience of NHS bodies in England.

The FRC’s analysis of the audit market for NHS providers and Integrated Care Boards found that while the audit market for NHS bodies in England is in a better shape and working more effectively than the audit market for local authorities, three key issues prevail: 

• While audit firms active in the market have capacity to supply audit services to their current NHS audit clients, they face barriers to expanding their capacity.
• Audit firms report problems with the audit tender processes and a lack of pre-bidding engagement between NHS bodies and audit firms.
• NHS bodies and audit firms potentially have different priorities with audits, with the former often prioritising meeting audit deadlines and achieving financial targets over ensuring good-quality accounts and audits.

This final FRC report sets out a range of potential remedies to address these issues as part of the government’s wider reform programme for the local audit system.

Single national procurement framework

In the short term, it suggests creating a single national procurement framework for use by NHS bodies to independently appoint auditors and tailored specifically for NHS external audit. It also calls for more transparency of NHS audit engagement information and more monitoring of market health by NHS England, the Department of Health and Social Care or the Ministry of Housing, Communities and Local Government. 

Other short-term remedies include encouraging NHS bodies to engage more with audit firms during the audit procurement process, including pre-bidding engagement. The FRC also says better coordination of the procurement of audit and non-audit services within Integrated Care Systems would help to avoid audit firm conflicts of interest. 

In the medium to long-term, the government may want to consider national block procurement for NHS audits and could engage with the market first to gather views, the FRC suggests. The idea of centralising procurements was one of the more radical suggestions made by ICAEW in February in its response to the NHS audit market study emerging findings.

Better alignment

Other longer-term recommendations include better alignment between the timetable for NHS financial statements close-down and audit with the following year’s financial planning processes and in-year funding allocations. The FRC also says that reviewing NHS annual report requirements could highlight opportunities for streamlining and considering which elements should be subject to audit. 

In addition to dedicated training coordinated at a national level for auditors specifically for NHS audits, the FRC says additional training workshops to NHS bodies’ finance directors and finance teams about the purpose and value of audit could also be helpful.

“Such training should subsequently cover the procurement process, the importance of following NHSE procurement guidance, and the importance of allowing subsequent time for audit firms to consider tenders as ways to improve the overall audit process,” ICAEW said in its response.

NHS financial reporting reviews could be used as a proportionate mechanism to drive up reporting quality, the FRC suggests. At the same time, thought needs to be given to how the different powers and duties, accreditation requirements and inspection regimes across various NHS bodies may be affecting the market.

Addressing issues vital to NHS resilience

In a statement, Sarah Rapson, FRC Executive Director of Supervision, said: “While we have not seen the same challenges as have been experienced with local authority financial reporting and audit, it is vital to address the issues in the audit market for NHS bodies to maintain their resilience.

“These findings and their potential remedies will help support the government’s wider reform programme for the local audit system, work which the FRC is also contributing to in our regulatory capacity.”

The market study was launched in July 2024 as part of the FRC’s previous system leadership role for local audit in response to growing concerns about the challenges NHS bodies face in appointing and retaining auditors. 

Market capacity – biggest issue

In its response to the emerging findings of the FRC’s Audit Market Study in February, ICAEW said it believed a lack of market capacity remained the biggest issue. However, procurement difficulties, tight and conflicting deadlines, and a lack of recognition of the value of the audit process, were also of concern. 

ICAEW warned that reform must increase the number of auditors, simplify procurement processes and reduce the burdens on accounts preparers and auditors alike. However, another more radical solution could be to allow NHS audit opinions to be signed by Responsible Individuals as well as Key Audit Partners. 

Emma Knowles, Director of Policy and Communications at the Healthcare Financial Management Association (HFMA), said: “The HFMA has supported the FRC’s engagement with NHS bodies and welcomes the proposals in the final report. However, changing the audit market will take time, so it is important that NHS bodies and audit firms understand each other’s roles and concerns and continue to work together as well as they can given the current constraints.”

Further information

Read the NHS market study report.

Read ICAEW’s response to the FRC NHS Audit Market Study