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A new chapter for local public audit

Back in August 2010, Eric Pickles announced government’s intention to abolish the Audit Commission and give powers to local public bodies to appoint their own auditors.

 A number of policy proposals were outlined at the time, including:

  • Reducing audit fees; and
  • increasing the number of firms in the marketplace.

Since the announcement, ICAEW has been working actively with government to ensure that the regulatory and audit framework that replaces the current local public audit arrangements is workable.

Disbanding the Audit Commission

Although Eric Pickles’ aspiration was to abolish the Audit Commission by 1 April 2012, this was an ambitious target to set as the Audit Commission is a complex body. It had a complicated set-up and its work in relation to the appointment and monitoring of auditors, has proven to be difficult to unravel. But, bit by bit, the Audit Commission has been broken up, starting with the removal of its inspectorate functions in 2011.

July 2012 saw the publication of the draft bill for pre-legislative scrutiny, a process that has taken over 18 months. In November 2012 the audit practice arm of the Audit Commission was disbanded and audit teams were moved to the accountancy firms. Royal assent was finally given on 30 January 2014, over three years after the initial announcement, giving a final date for the Audit Commission’s existence, 31 March 2015.

The Department for Communities and Local Government

Although not quite there yet in the detail of how some of the areas of the new regime will work on an operational level, Department for Communities and Local Government (DCLG) has certainly come a long way in its thinking about the future framework. The next 15 months will see a raft of commencement orders and regulations to bring the Act into play.

It is probably fair to say that auditors of local public bodies will be more regulated and scrutinised than any other part of the public sector. Even the Ministry of Defence’s (MoD) auditors, (the MoD being a body that is probably the size of a FTSE 100 company), do not have the same regulatory requirements imposed upon them.

In a press release, the DCLG minister announced a saving of £1.2bn saving over the next 10 years. It is difficult to say how and on what basis this figure has been calculated, and indeed whether this will be achieved given the many uncertainties still in place about how the full regime will work.

It is also difficult to say whether the policy proposals outlined above ie, that of reducing audit fees and increasing the market, will be met. We think not, when you take into account the different regulatory bodies that will be involved in the regulatory regime, National Audit Office (NAO), Financial Reporting Council (FRC), Recognised Supervisory Bodies (RSBs), and what the requirements those audit firms will be asked to meet in order to carry out an audit in this market.

There has been a downward push in audit fees in recent years, but this really doesn’t take into account the amount of audit work that auditors need to do in this current cost-cutting environment within the public sector.

It is safe to assume that the risks in the public sector are likely to be higher and the amount of work required is likely to be more post Audit Commission, not less, so it would be wrong to assume that audit fees will reduce.

The future

ICAEW will, over the coming months, apply to the FRC to become an RSB to enable it to license, register and monitor audit firms, and individuals who will carry out this work. It will start to put processes into place in time for 1 April 2015 when the Audit Commission will officially cease to exist and it will also continue to work with the DCLG to ensure that the framework is as workable as possible within the constraints of legislation.

Sumita Shah, Regulatory Policy Manager, Professional Standards, ICAEW

Public Sector Group, February 2014