Recommendations & Conclusions
11 items
5
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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.
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Government response AI summary
The government agrees but states that work on incentives and sanctions requires careful consideration and is a longer-term issue. It is prioritising clearing the audit backlog and commits only to exploring transparency and considering wider consequences once the backlog is resolved.
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HM Treasury
7
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation on audit timeliness, updating that early work to deliver reforms and review complex accounting areas, including asset valuation, is underway. A further update will be provided after the summer once this work has progressed.
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HM Treasury
12
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation and will provide its approach in October 2023. It will also explore how greater transparency around audit delays could influence behaviour and consider a wider system of consequences in the longer term after clearing the backlog.
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HM Treasury
13
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees and will write to the Committee in October 2023 with its approach, but states that exploring incentives and sanctions for late sign-off is a longer-term consideration requiring very careful thought, to be addressed after the current backlog of delayed local audits is …
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HM Treasury
14
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation and will write to the committee in October 2023 with its approach to addressing the lack of oversight. It commits to exploring how greater transparency around audit delays could influence behavior and will consider a wider system of …
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HM Treasury
16
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation on audit fees and market viability, confirming that the FRC plans to progress the Local Audit Workforce Strategy and will provide a further update on determined actions before the end of 2023.
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HM Treasury
17
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation on market challenges, stating that the FRC plans to progress the Local Audit Workforce Strategy and will provide a further update before the end of 2023 detailing necessary actions across the local audit system.
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HM Treasury
18
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation. The Permanent Secretary has written to the Committee outlining the FRC's plans for a Local Audit Workforce Strategy and will provide a further update by the end of 2023 detailing the determined actions across the local audit system.
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HM Treasury
19
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation on auditor supply, stating that the FRC plans to progress the Local Audit Workforce Strategy and will provide a further update before the end of 2023 detailing necessary actions to address the supply of auditors.
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HM Treasury
20
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government states it has agreed with the committee's observation. The Permanent Secretary has written to the committee about the FRC's plans to progress the Local Audit Workforce Strategy and will provide a further update by the end of 2023 setting out determined actions.
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HM Treasury
26
Conclusion
Sixtieth Report - Timeliness of local a…
Deferred
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 …
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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
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Government response AI summary
The government agrees with the committee's observation, stating that early work to deliver reforms and review complex accounting areas, particularly asset valuation and pensions, is underway. A further update will be provided after the summer once this work has progressed.
Read full response →
HM Treasury