Source · Select Committees · Public Accounts Committee
Recommendation 23
23
Accepted
FRC assumes 'shadow' local audit leadership, facing capacity building and dual-role risks.
Conclusion
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
Government Response 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.
Government Response
Accepted
HM Government
Accepted
4.1 The government agrees with the Committee’s recommendation. Recommendation implemented 4.2 The government response to the Local audit framework technical consultation in May 2022 set out that, before the Audit, Reporting and Governance Authority (ARGA) is established, shadow system leader arrangements would also be established at the FRC. Shadow arrangements will cover all the planned system leader responsibilities ARGA will have except setting the Code of Audit Practice (the Code), as primary legislation is needed to transfer the Code from the NAO to a different organisation. As such, shadow arrangements constitute the government’s contingency plan for legislative delay. 4.3 The FRC appointed the first director of local audit in September 2022. A memorandum of understanding (MOU) setting out shadow system leader responsibilities was published in March 2023. 4.4 Full shadow arrangements are anticipated to start later in 2023 once the department and the FRC complete overall readiness assurance. During the shadow period the NAO will continue to set the Code, working closely with the FRC to plan a seamless transfer once a legislative timetable for ARGA establishment is determined. Planned statutory governance and accountability mechanisms (e.g., issuing of a remit letter) will be adhered to during the shadow period. 4.5 ARGA will clearly deliver benefits across the wider audit system as a new regulator; ahead of its establishment, shadow system leader arrangements at the FRC will provide an effective contingency for the local audit system, enabling a seamless transfer once legislation can be brought forward. The government is committed to legislating on the establishment of ARGA when Parliamentary time allows.