PublicSector
How can we fix local audit?
With just 1% of local government audits completed on time, Vivienne Russell looks at why the situation has got so bad, the knock-on effects for councils and what action is being taken.
Look up the definition of a perfect storm in the Cambridge dictionary, and the lexicographers are pretty blunt: “an extremely bad situation in which many bad things happen at the same time”.
It’s an apt metaphor for the chronic problems that have plagued external audit in local public sector bodies, like councils, police and fire bodies in England. A virtual collapse in the system meant just 1% of local audits were completed by the recommended publishing date.
As of the end of 2023, 771 sets of local accounts were still awaiting sign off from auditors. That’s an improvement on the more than 900 that were outstanding last autumn, but given there are only 467 local bodies in England, in some cases the backlog stretches to several years.
Flying blind
Without a timely audit, local authorities do not have the assurance they need to set a budget with confidence and are “flying blind”, says Grant Thornton audit partner Paul Dossett.
“You’re effectively setting a budget on a false premise,” he explains.
“And that’s why it’s so important that, if you look at nothing other than that budget-setting process for next year, all the audits do need to be done before then so that the section 151 officer [local authority finance director] is really clear they’ve got a set of audited accounts and can set the budget based on a solid set of numbers. At the moment, too few local authorities have got that.”
The story of how we got here involves understanding both some macro trends affecting the wider audit profession and the specifics affecting local government.
Thanks to a number of high-profile corporate governance failures, including Carillion, BHS and Patisserie Valerie, external audit across the board has been under pressure to do better. In the wake of these scandals, regulations got tougher and there was more work for auditors to do. At the same time, there have been problems attracting adequate numbers of people into the profession. More work and fewer people to do it creates delays and backlogs.
Add in the local government policy changes of the last decade, and the problems mount. In particular, the closure of the Audit Commission and the impact of austerity have put councils under severe financial pressure.
LOCAL AUDIT STATS
local bodies opted in to PSAA appointment regime
of 2022/23 audits complete by Febraury 2024
local audits outstanding as of 31 December 2023
increase in fees for for 2023/24
A disjointed system
The Audit Commission was a national public body responsible for the delivery and quality of local audit, the majority of which it carried out directed, with around 30% contracted out to firms. What has replaced it is a fragile and fragmented system in which private firms carry out all audits with supervisory activities split across a range of players.
Tony Crawley is chief executive of Public Sector Audit Appointments Ltd (PSAA), the body that assigns audit firms to local authorities to ensure the independence of the process.
“You’ve got a situation where auditors have needed to prioritise quality over timeliness in order to meet the stricter requirements that have sought to increase the quality of audit. That’s just spiralled,” he says.
Dossett says the old Audit Commission regime worked effectively, scoping work clearly and flagging issues in a timely manner. He describes a very different situation now.
“If you look at Grant Thornton as a case study, we’ve had delays with audits. We’ve increased our [local audit practice] staffing by over 100 people in the last three to four years, which is 25% up.
“You’d think if you’ve done that, you’ll just race through this backlog, but it’s the volume of work and the ability of some councils to respond that means we’re stuck in this position.”
The myriad problems with local audit have been acknowledged by government and steps are being taken to find a way forward, including appointing Financial Reporting Council as the shadow systems leader to draw all the parts of the system together.
WHAT'S NEXT
The outlook
Local audit backlogs have become so acute that ministers plan to legislate for a backstop. This is expected to be introduced by the end of September this year and will require all outstanding audits to be signed off. Where auditors can’t sign off in time, they will have to issue qualified opinions or include a disclaimer.
Iain Murray, director of public financial management at CIPFA, says the next step will be a period of recovery where accounts preparers and auditors work to get to a situation where unqualified opinions are the norm.
“The risk is that, having taken a really drastic step of clearing a backlog, we very quickly start accumulating another,” he adds
Crawley agrees. “It’s trying to deliver IFRS-compliant audits for the purposes of whole of government accounts, and because that’s what the statutory requirements are; it’s trying to deliver an audit which gives assurance to local people and others about the way the body is being run and its financial state; and it’s signing off the statements that give the section 151 officer assurance when proposing their budget.”
While whittling down those competing demands is some way off, the backstop is “a blunt weapon that starts the process,” says Grant Thornton’s Paul Dossett.
