Source · Select Committees · Housing, Communities and Local Government Committee
First Report - Financial Reporting and Audit in Local Authorities
Housing, Communities and Local Government Committee
HC 59
Published 24 November 2023
Recommendations
8
Deferred
Para 47
Ensure local authority account purposes are clearly set out and accessible to stakeholders.
Recommendation
The Government must ensure that the purposes of local authority accounts are clearly set out in government policy and accessible to all relevant stakeholders. This should be done before the next accounts production cycle for the year ended 31 March …
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Government Response Summary
The government agrees there is merit in issuing a policy statement to clearly set out the purposes of local authority accounts. However, this will be done as part of a longer process with CIPFA and FRC, with an update provided ahead of the 2025-26 financial year, missing the recommended 31 March 2024 deadline.
Ministry of Housing, Communities and Local Government
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9
Accepted in Part
Para 48
Coordinate with stakeholders to align local authority accounts with their agreed purposes.
Recommendation
The Government must also coordinate with key stakeholders in the sector, including the Chartered Institute for Public Finance and Accountancy and the local audit system leader, to ensure that the production, content and format of local authority accounts are aligned …
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Government Response Summary
The government commits to working with CIPFA and FRC to align the Accounting Code's requirements with the agreed purposes of local authority accounts. They will report back to the Committee on this progress ahead of the 2025-26 financial year consultation process, though not annually as recommended.
Ministry of Housing, Communities and Local Government
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11
Rejected
Para 57
Make the Accounting Code freely available to all local authority account users.
Recommendation
Through coordination with the Chartered Institute of Public Finance and Accountancy, the Department for Levelling Up, Housing and Communities must make the Accounting Code freely available to all possible users of local authority accounts before the next accounts production cycle …
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Government Response Summary
The government states the Accounting Code is produced by an independent body (CIPFA) and local bodies receive funding for compliance. It does not commit to making the Code freely available by the recommended deadline of March 2024, but will consider what else can be done to encourage its use.
Ministry of Housing, Communities and Local Government
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15
Deferred
Para 74
Quickly implement proposed actions to clear audit backlog and provide regular progress updates.
Recommendation
The Department must move quickly to clear the audit backlog and implement its proposed actions by the end of the calendar year 2023. Until the actions have been fully implemented, the Department should provide us with updates on its progress …
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Government Response Summary
The government is working to clear the backlog with a consultation beginning in February, but does not commit to the 2023 deadline. It will provide updates at key junctures, and while auditors already provide reasons for modified opinions, the government is considering how to ensure consistent messaging regarding fault and will keep the recommendation for specific fault identification under review.
Ministry of Housing, Communities and Local Government
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17
Accepted in Part
Para 80
Introduce annual backstop dates for audited local authority accounts, requiring explanations for delays.
Recommendation
The Department must introduce backstop dates for publishing audited local authority accounts on an annual basis going forwards. The Department must also ensure that, if an authority and its auditors do not collectively produce audited accounts by the backstop date …
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Government Response Summary
The government will introduce statutory backstop dates for outstanding historic years and the next five years, and will consider their permanent inclusion. It agrees Section 151 Officers should update their councils on audit issues but does not accept the requirement for direct notification to the Secretary of State or the Committee.
Ministry of Housing, Communities and Local Government
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19
Accepted in Part
Para 91
The establishment of the local audit system leader will require primary legislation.
Recommendation
The establishment of the local audit system leader will require primary legislation. The legislation required to establish ARGA has been significantly delayed and there appears to be little or no forward momentum or urgency in the Government to introduce it. …
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Government Response Summary
The government views a new arm's length body for local audit as unnecessary and has instead appointed the FRC as a shadow system leader, which is now staffed and working. Full establishment of ARGA through primary legislation is subject to parliamentary time.
Ministry of Housing, Communities and Local Government
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20
Rejected
Para 92
The Government must reconsider its plan to combine the local audit system leader with the...
Recommendation
The Government must reconsider its plan to combine the local audit system leader with the new audit regulator, ARGA. Specifically, the Government must, in coordination with the FRC, which currently has shadow system leader responsibility, introduce legislation to create a …
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Government Response Summary
The government rejects the recommendation to create a new, separate body for local audit, stating a new arm's length body is not necessary and that ARGA's full establishment is dependent on parliamentary time, while a shadow system leader function is already active within the FRC.
Ministry of Housing, Communities and Local Government
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21
Rejected
The Department must ensure that the local audit system leader is the primary point of...
Recommendation
The Department must ensure that the local audit system leader is the primary point of contact to which local auditors can escalate matters of concern that they find during an audit of a local authority. Additionally, the local audit system …
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Government Response Summary
The government states it is not envisaged that the local audit system leader will be the primary point of contact for auditors' escalations or coordinate responses to systemic issues. It notes existing reporting mechanisms to the Secretary of State and DLUHC, and that the FRC as shadow system leader already reports annually on overall trends and patterns.
Ministry of Housing, Communities and Local Government
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23
Deferred
Para 110
The Department for Levelling Up, Housing and Communities must immediately initiate a review into existing...
Recommendation
The Department for Levelling Up, Housing and Communities must immediately initiate a review into existing legislation that places requirements on the contents and format of local authority accounts. The review should refer to the intended purposes and users of the …
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Government Response Summary
The government commits to reviewing existing legislation on local authority accounts to reduce complexity and ensure usefulness, but states this will not be an immediate priority due to the audit backlog and will instead form part of long-term reform work.
Ministry of Housing, Communities and Local Government
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24
Accepted
Para 111
The Department should coordinate with the Chartered Institute of Public Finance and Accountancy and the...
Recommendation
The Department should coordinate with the Chartered Institute of Public Finance and Accountancy and the CIPFA/LASAAC Local Authority Code Board to ensure that the Accounting Code does not interpret existing legislation as placing requirements on local authority accounts disclosures that …
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Government Response Summary
The government agrees on the importance of the Accounting Code aligning with legislation and will work with CIPFA to review legislative disclosure requirements and their necessity. Any changes will be implemented through CIPFA LASAAC's annual review process.
Ministry of Housing, Communities and Local Government
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26
Deferred
Para 117
The Department, in consultation with the Chartered Institute of Public Finance and Accountancy, must resume...
Recommendation
The Department, in consultation with the Chartered Institute of Public Finance and Accountancy, must resume the introduction of a standardised statement of service information and costs for local authority accounts as soon as actions to address the audit backlog have …
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Government Response Summary
The government remains committed to a standardised statement but defers its introduction until the audit backlog is cleared, citing concerns about adding new requirements at this time. CIPFA will first focus on developing better performance reporting, which could be a precursor to the statement.
Ministry of Housing, Communities and Local Government
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27
Deferred
Para 120
Introduce legislation to decouple local authority accounts from Pension Fund statements
Recommendation
Local authority accounts are currently required by legislation to include Pension Fund statements, but this has made the accounts longer, more complicated, and less useful to users. The Government should introduce legislation to decouple local authority accounts from these Pension …
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Government Response Summary
The government commits to considering the recommendation to decouple local authority accounts from pension fund statements as part of a broader review of legislation it has already committed to undertake.
Ministry of Housing, Communities and Local Government
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29
Rejected
Para 129
Ensure local auditors' value for money opinions include actual assessment of value achieved
Recommendation
The Department should work with the organisation that prepares the Audit Code (currently the National Audit Office, eventually the system leader) to ensure that local auditors’ opinions over value for money include an actual assessment of value for money achieved, …
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Government Response Summary
The government rejects the recommendation, arguing that ensuring value for money is the responsibility of local leaders, that auditors lack the resources and expertise for such specific assessments, and that it would hinder efforts to clear the audit backlog. They highlight the role of the Office for Local Government (Oflog) in providing performance information.
Ministry of Housing, Communities and Local Government
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30
Accepted
Para 131
Assess potential benefits of decoupling value for money from financial audit work
Recommendation
The Department should work with the organisation that prepares the Audit Code (currently the National Audit Office, eventually the system leader) to assess the potential benefits (for example, to timescales and resourcing) of decoupling value for money work from financial …
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Government Response Summary
The government agrees with the recommendation, committing to consult on decoupling value for money work from financial audit work, continue collaboration with the NAO and FRC, and report the assessment findings to the Committee before the end of this Parliament.
Ministry of Housing, Communities and Local Government
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31
Acknowledged
Introduce new guidance for local authority auditors to proactively flag potential issues earlier
Recommendation
The Department should work with the organisation that prepares the Audit Code (which is currently the National Audit Office but will be the system leader) to introduce new guidance for the auditors of local authorities in order to encourage them …
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Government Response Summary
The government agrees with the importance of auditors using their powers and will work with the NAO and FRC to consider the merits of introducing new guidance. However, it does not commit to introducing the guidance or assessing its effect.
Ministry of Housing, Communities and Local Government
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Conclusions (16)
1
Conclusion
Deferred
Para 21
The publication of local authority accounts and local authority audit have a vital role to play in supporting local democracy and accountability. However, their capability to fulfil this vital role is limited because stakeholders who might want to use the information in the accounts encounter significant challenges in finding and …
Government Response Summary
The government agrees it would be beneficial to clearly set out the purposes of local authority accounts and finds the committee's proposals a helpful starting point. It accepts the merit of issuing a policy statement but defers this until after clearing the audit backlog and alignment with CIPFA's Accounting Code, committing to provide an update by the 2025-26 financial year.
2
Conclusion
Deferred
Para 26
There is currently no shared view of the purposes of local authority accounts and who should be using them. This has made it difficult to decide what the format and contents of the accounts, and their accompanying audit outputs, should be so that accounts fulfil their role in supporting local …
Government Response Summary
The government agrees it would be beneficial to clearly set out the purposes of local authority accounts and finds the committee's proposals a helpful starting point. It accepts the merit of issuing a policy statement but defers this until after clearing the audit backlog and alignment with CIPFA's Accounting Code, committing to provide an update by the 2025-26 financial year.
3
Conclusion
Deferred
Para 30
We believe that the first purpose of local authority accounts is: To provide a credible public financial record that can be relied upon, and which can be used as a point of comparison for other financial information to assess its credibility and accuracy.
Government Response Summary
The government agrees it would be beneficial to clearly set out the purposes of local authority accounts and considers the committee's proposed purpose a helpful starting point. It defers issuing a policy statement and formal adoption into the Accounting Code until after clearing the audit backlog and aligning with CIPFA and FRC, providing an update by the 2025-26 financial year.
4
Conclusion
Deferred
Para 34
We believe that the second purpose of local authority accounts is: To enable council taxpayers, businesses, central government, and other sources of funding to understand what money the local authority has received (including council tax, government grants and borrowing) and how the authority has used its resources, so they can …
Government Response Summary
The government agrees it would be beneficial to clearly set out the purposes of local authority accounts and considers the committee's proposed purpose a helpful starting point. It defers issuing a policy statement and formal adoption into the Accounting Code until after clearing the audit backlog and aligning with CIPFA and FRC, providing an update by the 2025-26 financial year.
5
Conclusion
Deferred
Para 39
We believe that the third purpose of local authority accounts is: To enable residents, service users, and councillors to understand the value for money offered by the authority’s spending, so that they can scrutinise the economy, efficiency, effectiveness, and equity of services or programmes.
Government Response Summary
The government agrees it would be beneficial to clearly set out the purposes of local authority accounts and considers the committee's proposed purpose a helpful starting point. It defers issuing a policy statement and formal adoption into the Accounting Code until after clearing the audit backlog and aligning with CIPFA and FRC, providing an update by the 2025-26 financial year.
6
Conclusion
Deferred
We believe that the fourth purpose of local authority accounts is: To enable councillors and officers inside the authority to understand the financial activity, financial position, financial sustainability, and resilience of the authority, so that they can make informed decisions and run that authority efficiently and effectively. (Paragraph 42) Financial …
Government Response Summary
The government agrees to clearly set out the purposes of local authority accounts in a single place, using the Committee's proposals as a starting point. They will work with CIPFA and FRC to align the Accounting Code and issue a policy statement, with an update provided ahead of the 2025-26 financial year.
7
Conclusion
Deferred
Para 45
We believe that the fifth purpose of local authority accounts is: To enable the public, oversight bodies and central government to understand the financial situation and any actual or potential financial issues affecting the authority, so that they can make informed decisions about what actions to take.
Government Response Summary
The government agrees to clearly set out the purposes of local authority accounts in a single place, using the Committee's proposals as a starting point. They will work with CIPFA and FRC to align the Accounting Code and issue a policy statement, with an update provided ahead of the 2025-26 financial year.
10
Conclusion
Acknowledged
Para 56
The Code of Practice on Local Authority Accounting (the Accounting Code) is a statutorily recommended guidance document for preparing and understanding local authority accounts, but it is too expensive to be accessed by all possible users of the accounts. If made accessible, it could also serve to keep the agreed …
Government Response Summary
The government acknowledges it may be beneficial to consider how to encourage the use of the Accounting Code and will consider this alongside CIPFA as they reform financial reporting, but does not commit to making the Code freely available.
12
Conclusion
Rejected
Within the broader rationale for the local authority accounting and audit systems, the purposes of local audit specifically are: • to establish the credibility of the local authority accounts, so that they can fulfil their purposes in supporting local accountability; and • to supplement the local authority accounts with relevant …
Government Response Summary
The government explicitly rejects the Committee's stated purposes for local audit, arguing that auditors are not equipped to comment on value for money and that such an expectation would hinder efforts to clear the audit backlog. It points to Oflog's role in informing citizens about local authority performance.
13
Conclusion
Acknowledged
The local audit system is currently in an unacceptable crisis which requires significant and urgent attention. The most significant symptom of the crisis is an extensive backlog of incomplete audits and unaudited accounts, some of them many years out of date. This has led to a deleterious cycle in which …
Government Response Summary
The government acknowledges the unprecedented audit backlog, stating that a consultation on proposals to clear it will begin in early February. They are working with system partners on a solution and will provide updates on progress.
14
Conclusion
Acknowledged
Para 73
The Department has proposed a series of actions to clear the audit backlog, which include resetting the system through a limited series of statutory deadlines for the delivery of outstanding audits from previous financial years. These proposals represent a necessary first step towards overcoming the audit crisis. However, more work …
Government Response Summary
The government acknowledges the need for action to clear the audit backlog and states that a consultation on their proposals will begin in early February, emphasizing that this has involved detailed and complex work with system partners.
16
Conclusion
Accepted in Part
Para 79
We welcome the commitment of the then-Parliamentary Under-Secretary of State for Local Government and Building Safety to address the causes of delays in the local audit system. While the lack of an annual statutory deadline is not itself a cause of delays, the lack of any consequences for local authorities …
Government Response Summary
The government will consult on proposals including statutory backstop dates for outstanding and future audits and will consider making backstop dates a permanent feature. They also commit to developing an escalated reporting framework, publishing lists of authorities with delayed audits, and keeping options for introducing incentives and sanctions under review.
18
Conclusion
Acknowledged
Para 90
The Redmond and Kingman Reviews stated that a local audit system leader should be a new standalone organisation, but the Government has decided to combine it with the separate audit regulator which is currently the Financial Reporting Council (FRC) but will eventually be the Audit Reporting and Governance Authority (ARGA).
Government Response Summary
The government acknowledges the conclusion, confirming their decision to appoint a system leader from within the current system (FRC, transitioning to ARGA) rather than creating a new standalone body, explaining that this policy was subject to public consultation.
22
Conclusion
Deferred
Para 109
Statutory overrides, namely requirements introduced by legislation that override standard accounting practice, are not aligned with the intended purposes of local authority accounts. Some statutory overrides can be beneficial by reducing the complexity of the accounts, but many add new requirements to the disclosures in the accounts. Additional requirements in …
Government Response Summary
The government recognises that statutory overrides can add complexity to accounts and commits to reviewing existing overrides and relevant legislation to ensure their value outweighs complexity. However, this review will be deferred until after the audit backlog is cleared.
25
Conclusion
Deferred
Para 116
The Government previously accepted the Redmond Review’s recommendations to introduce a standardised statement of service information and costs for local authority accounts. Implementing these recommendations would constitute an important step to improving the clarity and content of local authority accounts. 38 Financial Reporting and Audit in Local Authorities However, the …
Government Response Summary
The government remains committed to introducing a standardised statement but explains that implementation is delayed until the audit backlog is cleared to avoid additional burdens on auditors, while CIPFA develops interim performance reporting.
28
Conclusion
Rejected
Para 128
Local auditors are good at establishing the credibility of the accounts under audit. However, while recent changes to the Audit Code have made improvements to the commentary around value for money, many stakeholders want an opinion from the auditors over whether their local authority has achieved value for money for …
Government Response Summary
The government rejects the idea of auditors providing a value for money opinion on services, stating this responsibility lies with democratically elected leaders, and such a requirement would place significant, unequipped demands on the current audit system.