Recommendations & Conclusions
13 items
2
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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, …
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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.
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Government response AI summary
The government agrees and states the recommendation is implemented. It explains that Minister Rowley has updated the Levelling-Up Committee on urgent work to clear the audit backlog, and the department has written to local authority Chief Executives emphasizing their role and monitoring financial health.
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HM Treasury
3
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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, …
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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.
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Government response AI summary
The government agrees and states the recommendation is implemented. The Permanent Secretary has written to the Committee setting out the FRC’s plans for the Local Audit Workforce Strategy and will provide a further update before the end of 2023 detailing actions across the local audit …
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HM Treasury
4
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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.
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Government response AI summary
The government agrees and states the recommendation is implemented. Its contingency plan for legislative delays to ARGA's establishment involves establishing "shadow system leader arrangements" at the FRC, which includes appointing a director and publishing an MOU, with full arrangements anticipated to start later in 2023.
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HM Treasury
6
Recommendation
Sixtieth Report - Timeliness of local a…
Accepted
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, …
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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
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Government response AI summary
The government agrees and states the recommendation is implemented. It references Minister Rowley's evidence and letter updating on early work to review complex areas of local authority accounting, and the Permanent Secretary has written to summarise this work, with a further update expected after the …
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HM Treasury
1
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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.
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Government response AI summary
The government agrees, stating the Minister has outlined work by DLUHC and FRC to clear the audit backlog. The NAO and department are proposing final deadlines for auditors and local bodies to complete outstanding audits, with implementation anticipated by year-end, measuring progress by audits completed.
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HM Treasury
8
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees with the committee and has set a target implementation date of December 2023. DLUHC and FRC are leading work to clear the backlog of delayed audits by proposing new final deadlines for auditors and local bodies, with a period of engagement over …
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HM Treasury
9
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees with the committee's observation and is undertaking cross-system work to address the backlog of local audit opinions. It also reminded local authority chief executives of their role in timely financial reporting and emphasized that auditors must continue to use existing statutory powers …
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HM Treasury
21
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees that the recommendation is implemented, stating the Permanent Secretary has written to the Committee outlining the FRC's plans for a Local Audit Workforce Strategy and will provide further details on determined actions before the end of 2023.
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HM Treasury
22
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees and states the recommendation is implemented, detailing the establishment of shadow system leader arrangements at the FRC, including the appointment of a director and a published MOU, and commits to legislating for ARGA when parliamentary time allows.
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HM Treasury
23
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees and states the recommendation is implemented, detailing the establishment of shadow system leader arrangements at the FRC with a memorandum of understanding published in March 2023, anticipated to be fully operational later in 2023 as a contingency for ARGA's legislative delay.
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HM Treasury
24
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees with the committee's observation and has initiated a review of the most complex areas of local authority accounting, focusing on non-investment assets, pensions, and associated auditing requirements, with a further update expected after the summer.
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HM Treasury
25
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government agrees with the committee's observation and has initiated a review of the most complex areas of local authority accounting, specifically focusing on the valuation of non-investment assets and pensions, with further updates expected after the summer.
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HM Treasury
27
Conclusion
Sixtieth Report - Timeliness of local a…
Accepted
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 …
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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
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Government response AI summary
The government states it has agreed with the committee's observation. It has begun early work on reforms, including a review of the most complex areas of local authority accounting, particularly non-investment assets and pensions, with further updates expected after the summer.
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HM Treasury