Recommendation 2

There is a pressing risk of market collapse due to an over reliance on a small number of audit firms and significant barriers to entry. Only eight audit firms have the specialist knowledge and accreditation needed to audit local authorities. Currently, the market is dominated by just two firms, which carry out around 70% of local authority audits. The current contracts for auditing local authorities cover the period up to the 2022–23 financial year but PSAA says it can unilaterally extend these contracts for two years, if needed. Existing audit firms have little financial incentive to stay in the market and there are serious and pervasive challenges to increasing audit capacity further. Audit firms that have left the market no longer have the necessary specialist teams in place. New audit firms face considerable barriers in the time and costs involved in gaining entry to the market, such as developing a sufficient sized team of staff with the specialist skills, led by key audit partners, as part of gaining accreditation. The Department and PSAA are considering how to overcome these barriers, for example, through small packages of audit work, and through consortia where an accredited firm works with an unaccredited firm to enable future entry to the market. In the meantime, any one firm deciding to exit from the market would create a fundamental capacity gap and harm accountability. Recommendation: The Department should write to us by September 2021 explaining what contingencies it has in place should any more audit firms leave the market at the end of their contracts in 2023.