Select committee inquiry
Timeliness of local auditor reporting
Closed
What the inquiry looked at
“In 2021 the Committee reported that the system of local government audit in England was close to breaking point , reinforcing concerns about councils’ ability to budget effectively. Subsequently, in October 2022, the Committee reported that the pandemic had exacerbated existing failures in the local audit market , with a minority of Local Government audits in England and Wales completed by the target dates in 2019-20 and 2020-21. The Committee will question senior officials at the Department for Levelling Up, Housing and Communities (DLUHC), the Department for Business, Energy and Industrial Strategy (BEIS) and the Financial Reporting Council on the latest picture in local public audit, and progress implementing the findings of the 2019 Redmond Review. If you have evidence on local auditor reporting please submit it here by 6pm on Monday 6 March 2023. Please have a look at the requirements for written evidence submissions and note the Committee cannot accept material as evidence that has been published elsewhere.”
The committee's words, from the inquiry page on parliament.uk ↗.
What it found
In the committee's words, from the summary of Sixtieth Report - Timeliness of local auditor reporting ↗
The system of local government audit is close to breaking point. Since we last reported in July 2021, performance has deteriorated further. Just 12% of local audit opinions were received in time for the already extended deadline for publishing the 2021–22 accounts for local government bodies. By the end of November 2022 over 630 accounts, some dating as far back as 2015–16, had yet to be signed off by auditors. The timeliness of local auditor reporting is crucial for making decisions about budgets for local government bodies in England. But, worryingly, the Department for Levelling Up, Housing & Communities (the Department) cannot say yet whether this will get worse, or how and when it will improve.
The broader causes of the delays are well-known and not new, so it is disappointing that despite repeated warnings there has been so little progress. Many of the issues have been years in the making and yet the consequences of late audits are not treated as seriously as they should be by the Department.
The Department and the Financial Reporting Council (FRC) do not yet have the detailed understanding they claim they need in order to address the issues prevalent in the system. While the Department has made some interventions intended to help improve timeliness, these sticking plaster approaches have so far had little effect in a system which has no incentives, levers, or sanctions for those who fail to deliver on time. It is essential that the Department and FRC tackle the long-standing challenges in securing sufficient capacity and capability among the local authority finance staff who prepare accounts, and the local audit providers who audit them. Yet the number of key audit partners across the provider market is worryingly low, and it remains to be seen whether the Department’s new qualification for auditors, and the FRC’s workforce strategy, will provide a much-needed long-term solution.
Delays to local audit reduce transparency over approximately £100 billion of local government spending for local taxpayers and their elected representatives, and impact on other areas of government spending, such as the NHS and central government.
Delays also increases the risk of significant issues going un-detected and un-reported until too late. There is a pressing need for leadership within local public audit, and for the Audit, Reporting and Governance Authority (ARGA), government’s preferred choice as system leader, to be established. We stressed this point in our July 2021 report on the subject, yet there are still few signs of it happening, and no guarantee that the necessary legislation will be in place during this Parliament. In the meantime, ‘shadow’
arrangements with the FRC taking on responsibility to lead local audit have not yet formally started, meaning that for now the system remains fragmented and deep-rooted local audit challenges remain unaddressed.
What the government said
The government responded on 24 September 2023. The deadline was 23 August 2023.
Summary written by Accountability Index from the government's response.
The government states that it agrees with the Committee's recommendation on each of the six conclusions addressed, and describes several as "implemented" while setting out further work and deadlines on others.
- On the audit backlog, the government agrees and says the NAO and the department are "proposing to set a series of final deadlines" for auditors and local bodies, with implementation anticipated "in train by year end", following engagement over the summer.
- On ARGA, the government says shadow arrangements at the FRC "constitute the government's contingency plan for legislative delay", and is "committed to legislating on the establishment of ARGA when Parliamentary time allows".
- On incentives and sanctions, the government agrees and will write to the Committee in October 2023 with its approach, but says any work in this area "would require very careful consideration".
- The government says it is currently prioritising clearing the backlog, and has "committed to explore" how greater transparency around audit delays could influence behaviour. It describes the wider system of consequences as a longer-term consideration.
Read the government's response ↗ Read the report ↗ Report an error
How the inquiry ran
Each dot is a dated item listed on this page, from the inquiry's opening on 20 January 2023 to its close on 24 September 2023. The dashed mark is the deadline Parliament records for the government's response.
- Oral evidence 16 Mar 2023
- Report 23 Jun 2023
- Government response 24 Sep 2023
What it recommended 1 recommendation · 27 conclusions
2Explain actions to mitigate local audit delays impacting accountability and central government department accounts.
Concluded (the committee's words)
Delays to the publication of audited accounts for local government bodies increases the risk of governance or financial issues being identified too late and hinders accountability for £100 billion of local government spending. There are ways in which auditors can sound the alarm on risks before their audits are completed, such as issuing a Public Interest Report as was issued in October 2020 for the London Borough of Croydon. However, the risk of significant financial or governance issues being detected too late certainly increases significantly where audits are delayed. With the same pool of auditors working across other sectors, including the NHS, the delays in local audit also risk spreading to other areas of public spending. Some central government departments and their arms-length bodies are continuing to experience knock-on impacts on accountability; for example, when there are delays to the assurances local auditors give on Local Government Pension Scheme accounts and figures supporting Whole of Government Accounts (WGA). As a result, the Department is open to exploring options that allow these central government audits to be concluded without relying on local auditor assurances. The FRC has committed to look at the wider local audit system to make sure actions to address the timeliness of auditing in one area do not affect another. 6 Timeliness of local auditor reporting Recommendation 2: The Department should, as part of its Treasury Minute response, explain what it is doing across the local audit sector to mitigate the impact of delays to the audited accounts of local government bodies on: • Accountability for public money spent by these organisations; • The accounts and audit of central government departments; and • Significant local audit issues being identified or reported late in the day.
3Develop the market and workforce for local audit, outlining plans, metrics, and milestones.
Concluded (the committee's words)
Long-term market and workforce development are essential if the Department is to resolve the current problems with local auditor reporting and create a more resilient system for the future. Much of the focus to date has been around short- term fixes intended to reduce pressure on the local audit system, such as changes to deadlines, deferrals to new financial reporting requirements and temporary changes to audit guidance. Longer-term progress will depend on effective market and workforce development. While PSAA’s recent procurement process secured the audit capability required to deliver local government audits for the period covering 2023–24 to 2027–28, it fell short initially and needed a supplementary bidding round. There are still too few key audit partners and other experienced staff working in the local audit market. The Department’s plans for a new qualification to support experienced audit staff to move from other sectors into the local audit sector are welcome, but we are not convinced that it will provide the numbers of skilled staff needed or quickly enough. The FRC is beginning work on a workforce plan and will be looking at routes into local audit starting with championing public sector audit among university and college leavers. The Department meanwhile is confident the new PSAA contracts should offer the certainty and commercial terms needed to enable providers to invest in staff development. It will be critical that the workforce plan also considers the development of local authority finance staff, who are crucial to the production of accounts on time. Recommendation 3: The Department should, alongside its Treasury Minute response, write to us to set out how it and FRC will ensure the market and workforce for local audit develops as needed to address existing issues, and the metrics and milestones that they will use to measure progress and hold stakeholders to account.
4Set out contingency plans for delayed establishment of ARGA if legislation is not passed.
Concluded (the committee's words)
Delays to establishing the Audit, Reporting and Governance Authority (ARGA) and handing over responsibilities for leading local audit to the FRC, risk performance deteriorating further. The Department rejected the Redmond Review’s proposal to create an Office of Local Audit and Regulation to oversee local audit, partly due to the time it would take for a new body to establish itself. It instead opted to establish ARGA to replace the FRC and oversee and regulate the local audit sector. Despite the pressing need for leadership within local public audit and recognition of the importance to set up ARGA as soon as possible, ARGA will not be set up until 2024 at the earliest. Neither FRC nor the Department could confirm whether the legislation required to establish ARGA would be introduced in the current Parliament. While the Department and FRC have agreed what roles and responsibilities the FRC will take on as part of its shadow system leadership role until ARGA is formally in place, these arrangements are yet to be formally Timeliness of local auditor reporting 7 handed over. We welcome the National Audit Office’s offer to reissue the 2020 Code of Audit Practice to provide some continuity and certainty over local auditors’ responsibilities in the meantime. Recommendation 4: The Department should, as part of its Treasury Minute response, set out its contingency plans should the legislative programme not allow for ARGA’s establishment during this Parliament.
5Address the lack of incentives and sanctions for timely local auditor reporting by October 2023.
Concluded (the committee's words)
There are no consequences for local government bodies or local auditors failing to deliver audited accounts on time. Audit contracts cannot specify the delivery of opinions by a certain date. The FRC and the Department say that they want to develop a deeper understanding of the issues affecting timeliness before considering possible sanctions as there is no shared view on where responsibility for delays lies. But the problems with the timeliness of local auditor reporting are not new. The FRC’s new responsibilities for leading local audit present an opportunity to develop a better response to issues across the local audit system. Yet the FRC will need to: ensure that the local audit system works compatibly with the timing and content required for other central government accounts and the WGA; manage the tension between its own local audit and quality monitoring roles; and clarify accountabilities, recognising that at present the only consequences in the local audit system are borne by the audit firms and relate to poor audit quality rather than late delivery. Recommendation 5: The Department should write to us by October 2023 setting out how it will address the lack of incentives or sanctions around timeliness of auditor reporting, based on its more detailed review of the causes of delays and where lessons can be learned.
6Require the Department to urgently agree permanent measures for complex local accounts and their audit.
Recommended (the committee's words)
Government, local bodies and standard setters still lack a shared view of how to ensure that local public accounts, and the audit of them, are fit for purpose. Local government accounts have become increasingly complex. They have to meet financial reporting standards while also reflecting how local government finance works, a challenge that increases with the more complex activities that authorities undertake. Local government accounts are too often inaccessible to most users and few in the sector think they work as well as they ought. Some temporary simplifications have been made to financial reporting requirements to help reduce the burdens for preparers and auditors. But both producers and auditors of accounts consider many areas of accounting and auditing requirements as overly complex and resource intensive; particularly around valuations of operational assets such as roads and coastal defences which cannot readily be sold, and valuations of pension assets and liabilities. In these instances, some accounting practitioners and auditors believe more often than not the numbers in the accounts have little to no impact on day-to-day decision making. Recommendation 6: The Department should set out as a matter of urgency, alongside its Treasury Minute response if not before, how it will work with HM Treasury, the FRC and others to agree permanent and proportionate measures to address the most complex parts of local bodies’ accounts and the subsequent audit of them. 8 Timeliness of local auditor reporting 1 The audit backlog and its impact Introduction
1Government progress on improving timeliness of local government audit opinions reviewed.
Concluded (the committee's words)
On the basis of a report by the Comptroller and Auditor General (C&AG) we took evidence from the Department for Levelling Up, Housing and Communities (the Department), the Financial Reporting Council (FRC), and Public Sector Audit Appointments Ltd (PSAA) about progress government has made improving the timeliness of audit opinions issued on local government bodies in England.1 We also received written evidence from a number of individuals and organisations.
7Department confident in audit timeliness improvement despite auditor market exit concerns.
Concluded (the committee's words)
We asked the Department why it was confident that performance on audit timeliness would improve and what signs of improvement it would be looking for. The Department described its particular focus on valuation issues which it told us has been of increasing concern to auditors and councils. In December 2022 it amended accounting regulations to allow short-term flexibility around the valuation of infrastructure assets (for example, roads, street lighting and flood or coastal defences), and expects to see this used to 10 C&AG’s Report, Para 1.3, Figure 2 11 C&AG’s Report, Paras 2.5 and 2.8 12 C&AG’s Report, Para 2.15 13 C&AG’s Report, Para 2.9 14 Qq 2, 3 15 Q 18 16 Qq 16, 41 17 Q 11 10 Timeliness of local auditor reporting unblock delays in lots of cases.18 The Department later expressed its confidence that the contractual obligations of audit providers remain a key incentive in ensuring outstanding audits would be delivered, although the Society of County Treasurers cautions that its members are already reporting reducing levels of engagement from auditors who are leaving the market.19
8Early accounts deadline risks exacerbating local audit backlogs and pressures.
Concluded (the committee's words)
We challenged the Department on whether its plans to bring the accounts publication deadline forward for 2022–23 would present a risk to progress. The Department told us it would keep this under review.20 However, local audit providers and local authorities shared with us their concerns that the anticipated return to a May deadline for the production of draft accounts, despite auditors being clear they are unlikely to be ready to start work at that point, will create increased pressure on authorities.21 Ominously the FRC highlighted wider system risks of auditors having to clear local audit backlogs at the same time as delivering their NHS audit work, making it ‘far from certain’ that audit timeliness would be back on track within a reasonable period.22 Impacts of local audit delays
9Late local audits hinder financial assurance and risk identification for councils.
Concluded (the committee's words)
The audit process provides a key element of assurance for financial planning, budgeting and management in local government bodies and accountability for £100 billion of spend, but this only works effectively when audit work is timely. We pressed the Department on the danger that late audits pose to highlighting risks in local authorities. The Department agreed these risks were real but highlighted other ways for auditors to sound the alarm sooner where the accounts are not closed.23 Examples include making a statutory recommendation to the audited body requiring a public response or issuing a Public Interest Report, as was the case at the London Borough of Croydon in October 2020.24
10Local audit delays cause knock-on problems for Whole of Government Accounts and central departments.
Concluded (the committee's words)
Local government audit delays are also creating problems in other parts of government. For example, delays to the completion of 2020–21 local audits are adding to uncertainty around progress with the Whole of Government Accounts, which will be published more than 24 months after the financial year end.25 We note the Department’s and HM Treasury’s action to raise the financial threshold above which authorities are required to provide audited WGA returns.26 We have also seen delays to assurance on Local Government Pension Scheme accounts contribute to delays of four to five months on certifying central government department accounts, including the Ministry of Justice and the Department for Digital, Culture, Media & Sport.27 The Department told us it was keen to explore options available to close the audit of central government accounts sooner where the issue holding up finalisation is the absence of local auditor assurances on the pension valuations feeding into them. The C&AG agreed that a limited audit opinion 18 Qq 8, 11, 16 ; C&AG’s Report, Para 3.20 19 Q 22; TAR0008 p.2 20 Q 69 21 TAR0014 para 7.3, TAR0008, p.2 22 Q 40 23 Q 65 24 Qq 19, 20 25 Committee of Public Accounts, Whole of Government Accounts 2019–20, Twentieth Report of Session 2022–23, HC 31, October 2022 26 C&AG’s Report, para 2.15 27 C&AG’s Report, para 2.11 Timeliness of local auditor reporting 11 could help avoid unnecessary delays and we said we would not be concerned with such accounts qualifications if they were agreed in conjunction with the NAO and remained exceptional rather than routine.28
11Local audit delays threaten NHS accounts due to shared auditor pools and sector changes.
Concluded (the committee's words)
We also asked the FRC about the risks local audit delays cause to NHS accounts. The FRC emphasised the challenges the health sector faces due to structural changes in the last year.29 This will be reflected in the NHS requiring audits of the three months Clinical Commissioning Groups were in place up to June 2022, and of the nine months of the Integrated Care Boards that replaced them for the rest of 2022–23.30 The FRC emphasised the interdependencies where the same pool of auditors works across both the health and local government sectors, a coordination risk also highlighted by local audit providers themselves.31 The FRC told us it plans to undertake a wider review of the local audit system, including the NHS, as an immediate priority.32 It argued that a more granular understanding will enable it to assess the best course of action to address issues affecting timeliness, without having a detrimental effect on other sectors.33 Incentives for timely audit
12Local audit delays caused by authorities, auditors, and regulatory pressures on complex valuations.
Concluded (the committee's words)
The Department described the local audit system to us as having no ‘single version of the truth’ for what is holding up individual audits, in some cases issues being with the authority preparing the accounts and in other cases the problem being with auditors.34 Auditors and local authorities both report the pressures of regulation being a contributing factor to delays. The FRC used its sanction powers for the first time in 2022, issuing a fine of £250,000 for quality failings it identified in one local audit.35 Grant Thornton told us that while the FRC’s focus has improved the quality of both financial reporting and local audit, firms will defer audit reports where work cannot be completed to the FRC’s standards by expected target dates. They describe firms increasingly exercising caution when dealing with complex audit issues, particularly around asset valuations.36
13Absence of audit contract deadlines for opinions challenges the independence-timeliness balance.
Concluded (the committee's words)
The Society of London Treasurers told us there also needed to be consequences for late sign-off of accounts, suggesting auditors should report on the causes of delay to audit committees. The Society also queried whether better contract management might help the delivery of audits, suggesting a simpler procurement process might better enable management of auditors locally rather than by PSAA.37 We asked PSAA about the contractual obligations of audit providers and they confirmed that its audit contracts cannot specify that auditors issue their opinions by a certain date. PSAA emphasised that this was deliberate to preserve auditor independence, though accepted this causes a challenge for the system.38
14Insufficient oversight and sanctions for local authorities missing draft account deadlines.
Concluded (the committee's words)
Compared to the level of scrutiny over the quality of their audits, local audit providers highlighted a contrasting lack of oversight or sanction over the quality and timeliness of 28 Qq 97–99 29 Q 40 30 TAR0011 31 Q 40, TAR0014 32 Q 16 33 Qq 41, 52 34 Qq 11, 18 35 C&AG’s Report, para 1.7 36 TAR0001 37 TAR0013 38 Qq 72, 74 12 Timeliness of local auditor reporting draft account production by local authorities.39 As the local authority is at the beginning of the audit chain, this has knock-on effects on auditors. When we challenged the Department on this, it accepted there was ‘no specific sanction’ for missing the statutory deadline but emphasised that local authorities remain accountable for delivery and that it had written to authorities in March 2023 to underline their responsibilities.40 The Department described the situation to us as ‘a system properly under strain from both sides’.41
15Department fails to explore Scottish approaches to address English local audit delays.
Concluded (the committee's words)
The Department told us that, while Scotland was a very different market to that operating in England, its information was that there are not the same timing issues as it was facing in the English context. When we asked whether the Department had explored whether there were potential lessons or solutions from parts of the United Kingdom less affected by delays, the Department told us there were no plans to move back to the approach currently operating in Scotland.42 39 TAR0012, TAR0017 40 Q 66 41 Q 69 42 Qq 60–61 Timeliness of local auditor reporting 13 2 Long-term reform Market and workforce development
16New local audit contracts significantly increase fees, improving financial viability for providers.
Concluded (the committee's words)
We recommended in 2021 that the Department ensured PSAA’s procurement exercise for the next round of audit contracts covering 2023–24 to 2027–28 financial years bring fees into line with the costs of work and be appropriately funded. The procurement completed in October 2022, and the Department told us that the new contracts made involvement in local audit ‘much more financially viable’ than it had previously been.43 PSAA’s procurement strategy for the next round prioritised quality over price, and on announcing the outcome of the process told local government to expect fee increases of 150% in the first year of the new contracts.44 Local audit provider Grant Thornton described the more sustainable fee levels as a cause for optimism, while Ernst and Young saw it as a ‘starting point’ for additional recruitment and specialist training.45
17Local audit market faces persistent capacity challenges despite recent procurement efforts.
Concluded (the committee's words)
When we asked PSAA about its confidence in the future of the market, it cautioned that the procurement had been very tough, having only secured 90% of the capacity PSAA needed in the initial round. PSAA described this outcome as ‘not ideal’ as it was not able to make a choice from the offers received and had to return to the market to ask for more.46 Following this supplementary process PSAA secured 99.5% of the capacity tendered, a level it judged sufficient following recent local government reorganisations.47 Only seven firms took part in the procurement, of which six won contracts.48 Two previous providers left the market, one large provider returned along with two new market entrants.49 Deloitte, one of the firms who left the market, told us it chose not to participate in the procurement. Its reasons included the terms of the contract prohibiting an auditor’s ability to resign – a power they have in other markets; regulatory imbalances around the quality expectations on the local authorities producing accounts and the firms auditing them; and challenges attracting, developing and retaining the staff required to perform local audit work.50 PSAA warned that without changes to the market, the next five-year procurement will be equally difficult.51
18Critically low number of ageing key audit partners threatens local audit resilience.
Concluded (the committee's words)
There are less than 100 key audit partners registered to perform local audits.52 We asked PSAA whether it felt there were enough audit partners in the market. PSAA described the number of key audit partners on the register as ‘worryingly low.’53 Audit providers themselves continue to warn of a ‘constrained and ageing pool of talent’ and we have reported before that most key audit partners are over 50 years old.’54 PSAA also 43 Q 22 44 C&AG’s Report, Paras 3.3, 3.4 45 TAR0001 para 1, TAR0012 para 4 46 Q 42 47 C&AG’s Report, Para 3.8 48 TAR0006 para 30; C&AG’s Report, Figure 5 49 C&AG’s Report, Para 3.8 and Figure 5 50 TAR0017 51 Q 43 52 C&AG’s Report, para 3.10 53 Q 78 54 TAR0012 para 4 ; PAC 2021 Report, para 28 14 Timeliness of local auditor reporting told us the market needed to build the resilience to manage the ‘inevitable’ movement of auditors between firms, avoiding risks like the recent case of Bournemouth, Christchurch and Poole where the departure of a single team member delayed the audit.55
19New local audit qualification launch delayed, hindering efforts to boost auditor supply.
Concluded (the committee's words)
In 2021 we recommended the Department accelerate training to increase the supply of auditors quickly. The Department told us that it has worked with the Chartered Institute of Public Finance Accountancy (CIPFA) in developing a new qualification it now expects to launch in summer 2023.56 The training aims to support senior audit staff with experience in other sectors to develop the knowledge needed to switch to local audit practice. The Department told us it sees the qualification as a stopgap to bring in extra capacity quickly while firms develop increasing numbers of local audit specialists for the longer term.57 Similarly the Department also described work it had done to enable the recruitment of overseas auditors to fill gaps in the near term.58 The Department conceded that the launch of the training had been delayed as it was taking time to get the design of it right.59
20New local audit qualification's attractiveness and efficacy for private sector auditors questioned.
Concluded (the committee's words)
We challenged the Department on whether the qualification would equip staff to make judgements that are quite different to those in private audits. The Department accepted that difficult judgements require experience and joint working with council leadership teams. We pressed the Department and the FRC on whether the new qualification would be sufficiently attractive to people working in private sector auditing. The FRC felt it would be attractive, while the Department also emphasised the changes the FRC had made to audit practitioner guidance intended to make it easier for people to switch to local audit.60 PSAA told us it knew people in audit firms were waiting to use this qualification to get into the local audit market.61 Audit provider Mazars however described the challenges its own training programmes faced keeping pace with the loss of qualified staff to other roles.62
21FRC develops long-term local audit workforce strategy, expected for autumn 2023 publication.
Concluded (the committee's words)
The FRC is beginning work on a comprehensive workforce strategy. The FRC told us this will represent a long-term plan including routes into local audit starting with championing public sector audit among people at university and college. When we challenged the FRC on how long it might take for people to emerge as senior auditors the FRC conceded it was a long-term plan.63 The Department is confident that the new audit contracts will offer firms the certainty to start planning their own pipelines to bring these new staff through the system.64 We also received evidence highlighting the importance of workforce planning for local government finance staff. Local authority representative groups described concerns with the recruitment and retention of skilled finance staff.65 Local audit providers also emphasised the need for a pipeline to develop future finance staff.66 The FRC expects to publish its workforce strategy in autumn 2023.67 55 Qq 80–81 56 C&AG’s Report, Paras 3.9, 3.10; Q17 57 Q 17 58 Q 24 59 Q 17 60 Qq 82–83 61 Q 42 62 TAR0014 63 Qq 82, 83 64 Q 27 65 TAR0007, TAR0008, TAR0013 66 TAR0001 67 Q 28 Timeliness of local auditor reporting 15 System leadership
22Establishment of ARGA, the local audit system leader, further delayed until 2024.
Concluded (the committee's words)
In 2020 the Department rejected the Redmond Review’s proposal to create an Office of Local Audit and Regulation (OLAR) to oversee local audit, partly due to the time it would take for a new body to establish itself.68 It chose instead to place system leadership with the Audit, Reporting and Governance Authority (ARGA), which was already being established as the replacement for the FRC. In our 2021 report we expressed concern that ARGA would not be set up until 2023. This date has since slipped to 2024 at the earliest.69 We challenged the Department on whether getting the required legislation in place to establish ARGA was being prioritised, given the urgent challenges the sector faces. The Department responded that responsibility for the legislation was with the Department for Business and Trade (which replaced the Department for Business, Energy & Industrial Strategy in February 2023). The Department conceded that progress depends on government securing the legislative time in Parliament. When we expressed our concern that the involvement of an entirely new department added to risk of delay, the Department was confident that it would not.70
23FRC assumes 'shadow' local audit leadership, facing capacity building and dual-role risks.
Concluded (the committee's words)
The FRC said that from its point of view ‘ARGA cannot come in quickly enough.’ In March 2023 it agreed a memorandum of understanding with the Department setting out the ‘shadow’ system leadership responsibilities it will take on in the meantime. The FRC told us it saw this as a convening role, ‘co-ordinating what has been and still is to an extent a fragmented system.’71 It described its initial priorities as understanding the granularity of issues causing audit delays, addressing the backlog and taking forward work on a comprehensive workforce strategy.72 When we pressed on the risks it faces in this new role, the FRC highlighted the need to build capacity for the role, and manage the risks of operating as both system leader and regulator, where regulatory actions might have a detrimental effect on the local audit market.73 The FRC also highlighted the risk that it is seen as being solely responsible for fixing problems in the system. It described the need for ‘a dedicated and concerted effort from absolutely everybody.’74 We challenged the FRC on whether it would have the strength to influence Departments and other bodies when needed. The FRC’s director of local audit assured us that he would.75 The Department clarified that these ‘shadow’ responsibilities have not yet been handed over, but a further process is underway to assure readiness, following which the Department will formally hand over responsibilities through a remit letter.76 While the legislation to establish ARGA remains pending, the National Audit Office has offered to reissue the 2020 Code of Audit Practice to provide some certainty to the system over local auditors’ responsibilities through to 2027–28.77 68 Department for Levelling Up, Housing and Communities, Local authority financial reporting and external audit: government response to the independent review, December 2020 para 69 69 C&AG’s Report, paras 3.12 and 3.17 70 Qq 84–85 71 Qq 12–13 72 Q 16 73 Q 39 74 Qq 54–55 75 Q 57 76 Q 55 77 Q 87 16
24Local government accounts remain complex and impenetrable, hindering public accountability and understanding.
Concluded (the committee's words)
We have previously expressed our concern that local government accounts have become impenetrable to many and that unless local authority accounts are useful, relevant and understandable they will not aid accountability.78 CIPFA, one of the bodies responsible for setting the code of practice on local authority accounting, recognised in its evidence to us that local government accounts make it ‘difficult for council taxpayers and service users to understand how resources have been used.’79 Local audit provider Grant Thornton highlighted the particular complexities caused by the adjustments or ‘statutory overrides’ government applies to local government accounts to protect council taxpayers from the potential impact of accounting entries which are required under international accounting standards, but which do not have immediate day-to-day implications for how authorities need to manage their funds.80 Local auditor Mazars told us the number of these accounting adjustments continues to increase.81 CIPFA however told us the driver of complexity was the increasingly commercial nature of local government operations rather than the accounting standards themselves.82
25Complexity of property valuation arrangements creates disproportionate audit work for local authorities.
Concluded (the committee's words)
In 2021 we reported our particular concern that the complexity of valuation arrangements around property in particular generated levels of audit work disproportionate to the risks faced by authorities. Mazars described how these accounting values had limited importance to local authorities themselves, but highlighted the ‘consistent message’ from the FRC that auditors must nevertheless strengthen their work on challenging the valuation of property assets.83 The Department said that it had put in place arrangements in December 2022 allowing auditors more flexibility around work on these valuations.84 The Department also highlighted how CIPFA had deferred the implementation of a new accounting standard on the treatment of leases to support sector capacity in the short term, but it was bound by international accounting standards to introduce it at some point.85
26Pursuit of optimal accounting standards obstructs understandable local audit and financial reporting.
Concluded (the committee's words)
We asked whether the desirable pursuit of the best possible accounting standards was preventing accounts being understandable. The FRC recognised the issue, yet despite the consensus it described around the need to reset the purpose of local audit and financial reporting it also noted that any such reform would take a long time to implement.86
27Alternative accounting frameworks risk inconsistency; simplifying standards proves difficult for bodies.
Concluded (the committee's words)
CIPFA’s evidence to us highlights its view that no alternative accounting frameworks are without their disadvantages, and that departures from the existing regime may risk reducing consistency with the rest of the public sector and require adjustments to feed in to the Whole of Government Accounts.87 The Department highlighted the difficulty CIPFA, HM Treasury and other bodies have had making collective progress on simplifying standards.88 78 Public Accounts Committee, Eleventh Report of Session 2021–22, Local auditor reporting on local government in England, HC 171, para 12 79 TAR0015, para 1.3 80 TAR0001 81 TAR0014 82 TAR0015 83 TAR0014 4.2, 4.3 84 Qq 8–9 85 Qq 91–93 86 Q 91 87 TAR0015, para 10.8 88 Q 35 Timeliness of local auditor reporting 17
28Simplified statements for local government accounts delayed amidst severe audit timeliness pressures.
Concluded (the committee's words)
We have previously stated our support for the Redmond Review’s shorter-term proposal for local authorities to publish a standardised statement alongside their accounts to improve transparency to the public.89 The Department told us that work was underway to develop simplified statements for publication alongside local government accounts, but in December 2021 the Department announced it would delay the implementation of these statements while pressures on audit timeliness remained so severe.90 89 Public Accounts Committee, Eleventh Report of Session 2021–22, Local auditor reporting on local government in England, HC 171, para 12 90 C&AG’s Report, para 3.19 18 Timeliness of local auditor reporting
Evidence
Oral evidence sessions 1
- 16 Mar 2023Timeliness of local auditor reporting5 witnesses, listed belowparliament.uk ↗
Who gave evidence 5 witnesses
- Catherine FrancesDirector General, Local Government, Strategy and Analysis, Department for Levelling Up, Housing and Communities
- Jeremy Pocklington CBPermanent Secretary, Ministry of Defence
- Neil HarrisDirector of Local Audit, Financial Reporting Council
- Sarah HealeyPermanent Secretary, Department for Digital, Culture, Media and Sport
- Tony CrawleyChief Executive, Public Sector Audit Appointments Ltd