Eleventh Report - Local auditor reporting on local government in England

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.

The commercial attractiveness to audit firms of auditing local authorities has declined. Audit firms bid for the current contracts to audit local authorities in 2017, but the work involved has increased significantly in response to well-publicised problems in the corporate sector. Fees now bear little relation to the costs audit firms incur to carry out the work. Audit firms point to the increased work required to audit pension and property valuations, and to meet increased regulatory expectations for Local auditor reporting on local government in England 7 local audit. Local authorities say the focus on these areas means less attention is paid to more meaningful areas for their themselves and their residents, such as their financial resilience, outturn against their budget, and performance outcomes. The Department is consulting on changes to the regulations that set the fees, to enable fees to be set closer to when the audit work is carried out, and so that fees can reflect any increase in audit work required. In the meantime, the Department is consulting on how to allocate an additional £15 million to help audit firms respond to the pressures in the current year. Recommendation: The Department should ensure that PSAA’s next procurement exercise, due to begin in 2021, supports a new fee regime for local government audit, which is appropriately funded, and which brings fees into line with the costs of the work.

The rapidly diminishing pool of suitably qualified and experienced staff increases the risks to the timely completion of quality audits. There are serious shortfalls in the number of specialists which audit firms rely on to carry out audits of local authorities. To maintain accreditation, audit firms’ key audit partners must have at least three years’ oversight experience of auditing local authorities. Worryingly, most key audit partners are over 50 years old and audit firms are likely to find it difficult to replace experienced staff when they retire. The audit firms consider there is a missing generation of auditors with specialist experience of auditing local authorities. A lack of career prospects is a further challenge which audit firms face in recruiting trainees and ensuring they have a sufficient future supply of experienced staff to carry out audits of local authorities. This is not solely a problem for the audit firms and the Department is working with the accountancy institutes and the FRC on encouraging people into the sector, making the key audit partner accreditation process smoother, and improving skills development, but this will all take time. Recommendation: The Department should work with the FRC and the accountancy institutions to implement accelerated training and accreditation to increase the supply of qualified auditors quickly, and to build attractive career paths in local audit.

We are not convinced that the recently announced new local audit arrangements will meet the pressing need for effective system leadership now. In May 2021, the Department announced that the system leader for local government audit will be the new Audit, Reporting and Governance Authority (ARGA), the new regulator replacing the FRC. However, ARGA will not be set up until 2023, at the earliest, and doing so will require legislation. Contrary to the Redmond review recommendations, ARGA will not be responsible for procurement, which will remain with PSAA, due to the Department’s concerns about potential conflicts of interest. The Department will have Accounting Officer responsibilities for just the local audit element of ARGA, while BEIS will be the sponsor department overall. There is a crisis in local government audit and a need for urgent action to tackle the increasing delays, audit quality and market fragility. The Department recognises the importance of stronger system leadership during the transition to ARGA, but we are not reassured that its proposed liaison committee, bringing together all the responsible bodies, will be 8 Local auditor reporting on local government in England enough to meet the pressing need for system leadership now. It remains to be seen whether ARGA will then be able to meet fully the ongoing priorities for effective system leadership. Recommendation: The Department should write to us by September 2021 and outline: • how it will address the need for strong system leadership now, while ARGA is being set up and established; and • how it will work with BEIS to set up ARGA, the accountability and governance arrangements, and how its performance will be monitored and evaluated.

Unless local authority accounts are useful, relevant and understandable they will not aid accountability. Changes in auditing standards, such as on auditing pensions and grant distribution, have required considerable extra audit time. Some local authorities also have increasingly complex financial arrangements. The more property investments a local authority holds, the more specialist resources the auditor needs to gain accurate estimates of their values. We are concerned that some of the additional audit work now being carried out is disproportionate to the risk to the overall financial stability of the local authority. The accountability of local authorities to stakeholders, such as residents and service users, through audited accounts is a priority. Yet, the accounts of local authorities are impenetrable to many stakeholders. There could be much greater transparency in the financial reporting of local authorities, such as through the inclusion of a simple standard statement, focused on the key issues of most use and relevance to stakeholders, presented in a readily understandable way. The Department is working with others to look at simplifying aspects of the accounts of local authorities. It intends that the new system leader will also look into reducing accounting and audit requirements for areas of less risk to local authorities. Recommendation: The Department should write to us by September 2021 with its detailed plans for agreeing with stakeholders ways to focus local authority accounts and audits on areas of greatest risk and concern to citizens. Local auditor reporting on local government in England 9 1 Accountability, transparency and quality in local authority audits

On the basis of a report by the Comptroller and Auditor General,1 we took evidence from the Ministry of Housing, Communities & Local Government (the Department); Public Sector Audit Appointments Ltd (PSAA); audit firms EY and Grant Thornton; and from Sir Tony Redmond, author of Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial Reporting [the Redmond Review].2 We also received written evidence from a number of individuals and organisations.

We asked the Department to explain the causes of delays to audit firms’ audits of local authorities, given these had begun before the impact of COVID-19. The Department indicated that there was no single cause for the delays in completing audits of local authorities from 2018–19 onwards, and that a variety of factors had been responsible.13 Staff in the finance function of local authorities and audit staff had been required to perform additional work in response to increasing requirements from regulators. The Financial Reporting Council (FRC) had increased its expectations of audits following high profile corporate failures, such as Carillion. As a result, audit firms had faced a significant increase in work in completing local authority audits, such as on asset and 6 C&AG’s Report, Figure 2 and para 9 7 C&AG’s Report, Figure 3 8 Q 15 evidence session of 20 May 2021 9 C&AG’s report, para 2.9 10 Q 17 evidence session of 20 May 2021 11 London Borough of Hackney submission paras 5 and 6 12 Centre of Public Accountability, Durham University submission, page 1 13 Q 13 evidence session of 20 May 2021 Local auditor reporting on local government in England 11 pension valuations, and audit staff had also been reliant on receiving timely responses from valuers.14 The Department considered that these changes were factors in delaying audit completions.15

The deadline for local authorities to publish their accounts has changed over time, being 30 September up to 2017; 31 July for 2018 and 2019; and for 2020 the original 31 July deadline was extended to 30 November.16 Grant Thornton felt that the deadline of 31 July each year was no longer sustainable due to the complexity of local authority financial statements and the amount and nature of work that auditors were required to do. Grant Thornton considered that the earliest date each year to which auditors could complete audits of local authorities, to the right quality standards, was 30 September.17 The London Borough of Hackney also told us that earlier audit deadlines were not achievable, particularly for larger, complex, authorities.18

We pressed the Department on when we would see improvements in the timeliness of local authorities publishing their audited accounts. The Department felt that it would not be possible to bring timeliness back on track in one audit cycle in 2021, given the impact of Covid-19. It explained that it had adjusted the deadline for local authorities to publish their accounts to 30 September for 2021 and 2022. It would then review what the appropriate deadline should be. It expected to have better visibility of the completion of local authority audits by 2022, and that we would see progress in timeliness in the audit cycles for 2021 and 2022.19 The Local Government Association noted that the move of the audit deadline to 30 September for the next two years was a positive one.20

High-quality audits of local authority financial statements are important to assure taxpayers, stakeholders, and users of the accounts, that local authority accounts have been properly prepared, and to maintain trust in audited accounts.21 The FRC is the independent body responsible for monitoring the quality of major local authority audits. The Institute of Chartered Accountants in England & Wales (ICAEW) monitors the quality of other local audits.22 In October 2020, the FRC raised concerns over the quality of local audit. It found that just 40% of audits required no more than limited improvement, down from 64% in 2018–19.23

The Department said it considered itself to be the steward of the system for auditing local authorities and acknowledged that it was important to maintain the quality of audits of local authorities.24 Audit firm EY told us that it safeguarded quality before deadlines.25 It explained that it would not provide an opinion on its audit of local authority to an “arbitrary deadline” or without sufficient evidence, at the appropriate quality, to support it.26 Audit firm Grant Thornton felt it had come under pressure to complete its audits 14 C&AG’s Report, para 2.16 15 Q 13 evidence session of 20 May 2021 16 C&AG’s Report, Figure 2 17 Qq 4, 26 evidence session of 17 May 2021 18 London Borough of Hackney submission, para 4 19 Q 41 evidence session of 20 May 2021 20 Local Government Association submission, page 2 21 C&AG’s Report, para 1.2 22 C&AG’s Report, para 2.25 23 C&AG’s Report, para 2.28 24 Q8 evidence session of 20 May 2021 25 Q 14 evidence session of 17 May 2021 26 Qq 2, 7, 31 evidence session of 17 May 2021 12 Local auditor reporting on local government in England to time, but,as with EY, it emphasised it felt it was more important to deliver the audit opinion to the right quality and only issue the audit opinion when it was ready, than to meet deadlines. Grant Thornton believed that this was the right thing to do, as otherwise it would not be giving the right level of assurance to local authorities on their financial statements and on their financial sustainability.27 The Local Government Association also recognised that the extra work demands on auditors in auditing local authorities had led auditors to de-prioritise deadlines.28 The need for greater transparency in local authority accounts

Sir Tony Redmond emphasised the need for much greater transparency in the financial reporting of local authorities, to turn accounts that were impenetrable to the public into simpler information that the public wanted to know about. His review had recommended that the Chartered Institute of Public Finance and Accountancy (CIPFA) examine whether the accounts could be simplified, but he did not feel that this could be fully achieved within the framework of statutory accounts. Sir Tony considered that a simple standardised statement would help the public to understand a local authority’s financial position and how it had performed.29 He proposed a further way to bring greater transparency to the public would be for a local authority’s auditor to present a report to its council members each Autumn. He explained that the report to the council meeting would be in the public domain, and provide an opportunity to cover the issues of interest to the public.30 Sir Tony acknowledged that the desire for greater transparency had to be balanced against any sensitivity of the information, in deciding what could be disclosed.31

Durham University highlighted that local authority accounts were an important means of democratic accountability, and could cover issues of financial sustainability, financial and service resilience and equity, and that work was needed to resolve questions of what local electors should be getting from accounts and the functions that accounts should be performing. The University agreed with Sir Tony’s proposals for bringing performance and financial information together and the need to make the data accessible to users of the accounts.32 The ICAEW also pointed out that financial statements were critical to decision making and a key tool in ensuring local authorities were accountable to councillors and residents, but they were not understandable or sufficiently transparent.33

The audit firms EY and Grant Thornton told us that some local authorities had increasingly complex financial arrangements, for example in their borrowings, investments and financial instruments.34 EY explained that the more investment properties a local authority held, the more difficult it had become to arrive at valuations for the properties. EY added that the valuation of assets supporting pension funds and of investment properties required significant input from its specialist real-estate valuation teams to ensure that valuations were appropriately reported.35 The audit firms pointed out that, at the same 27 Q 9 evidence session of 17 May 2021 28 Local Government Association submission, page 1 29 Q 59 evidence session of 17 May 2021 30 Q 60 evidence session of 17 May 2021 31 Q 62 evidence session of 17 May 2021 32 Centre of Public Accountability, Durham University submission, page 3 33 Institute for Chartered Accountants in England and Wales submission, pages 1, 3, 4 34 Qq 3, 19 evidence session of 17 May 2021 35 Q 38 evidence session of 17 May 2021 Local auditor reporting on local government in England 13 time, the FRC had challenged auditors to improve the work they do in auditing these complex arrangements, and held the audit firms to account for the quality of their audit work.36

Sir Tony Redmond told us that local authorities considered that audits give too much attention to the valuations relating to pension funds and property. He added that local authorities believed the work that auditors had to carry out on valuations was excessive, as they argued that these valuations did not have an impact on their financial resilience and overall financial stability.37 Sir Tony confirmed that he agreed with local authorities. He considered that some areas of audits to which the auditors gave much attention were not proportionate to the risk to the overall financial stability and resilience of local authorities.38 The Local Government Association also pointed to the additional work that audit firms are required to do as a result of the requirements of the FRC, and that many believed this work was not a high priority in the governance of local authorities.39

The Department agreed with Sir Tony’s assessment that local authorities’ audited accounts were hard reading, and with his proposal for a summary statement in plain English. The Department had asked CIPFA to look at simplifying local authority accounts.40 This included examining the issues behind the growth in the length of statutory accounts and the scope to simplify the code of accounting practice. The Department also wanted the new system leader to look at whether it could reduce some of the accounting and audit requirements for local authorities, where they related to areas of less risk.41 The Department’s new arrangements for local government audits

In May 2021, the Department announced its updated response to recommendations in Sir Tony Redmond’s review, from September 2020. We challenged the Department on whether the new arrangements would have any real effect on the efficiency of local government auditing. In the response, the Department expressed its view that the Audit, Reporting and Governance Authority (ARGA), the new regulator being established to replace the FRC, would be best placed to take on the local audit system leader role.42 The system leader would be a single body aiming to resolve the fragmented structure of public sector audit, which is dispersed around different bodies, and with no one body looking for systemic problems, co-ordinating different parties, or monitoring and acting on emerging risks.43 The Department believed the proposals it had announced would tackle the weaknesses in the market for auditing local authorities and the fragmented nature of the different responsibilities of the bodies involved.44 We questioned whether ARGA would really have the degree of independence needed to look at the specifics of local 36 Qq 3, 8 evidence session of 17 May 2021 37 Q 46 evidence session of 17 May 2021 38 Q 47 evidence session of 17 May 2021 39 Local Government Association submission, page 1 40 Q 19 evidence session of 20 May 2021 41 Q 47 evidence session of 20 May 2021 42 Ministry of Housing, Communities and Local Government, Local authority financial reporting and external audit: Spring update, 19 May 2021 43 Sir Tony Redmond, Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial reporting, September 2020 44 Q 4 evidence session of 20 May 2021 14 Local auditor reporting on local government in England government audit. The Department indicated that ARGA would establish a unit with local government audit expertise, aimed at ensuring that the specific nature and circumstances of local government were not ignored.45

Given that ARGA is not going to be set up until 2023 at the earliest, we pressed the Department on what would happen in the interim. The Department acknowledged that it would take time to establish ARGA, and that doing so would require legislation.46 It accepted the importance of having stronger system leadership during the transition to establishing ARGA. The Department reported that, in the interim, it would chair a liaison committee to bring responsible bodies together. It recognised the need to take actions that would have the greatest impact quickly, and to tackle immediate issues, such as consultation on changes to regulations that set audit fees.47

The Department had asked PSAA to continue as the appointing body for procuring audit services, unlike the recommendation in Sir Tony’s review to create a new body as a system leader, an Office of Local Audit and Regulation, which would have had responsibility for procuring audit services.48 When we asked why the Department had taken a different approach, it explained that, in its view, including procurement within the system leader would have created a potential conflict of interest and it envisaged there would be a benefit from independence between the procurement process in PSAA, and the oversight of quality in ARGA.49

The Department confirmed that ARGA would be accountable to the Secretary of State for Business, Energy and Industrial Strategy.50 The Department explained that it would hold Accounting Officer responsibility for the local government role of ARGA and for all aspects of the local government audit and accountability system, including public interest reports which enable auditors to put into the public domain their concerns and recommendations for action on matters that come to their attention in their work.51 The Department added that it would need to work within the oversight arrangements for ARGA, to ensure that the interests of local government were properly reflected and represented.52 45 Qq 22, 23 evidence session of 20 May 2021 46 Q 6 evidence session of 20 May 2021, Ministry of Housing, Communities and Local Government, Local authority financial reporting and external audit: Spring update, 19 May 2021, paragraph 77 47 Qq 6, 40 evidence session of 20 May 2021 48 Q 21 evidence session of 20 May 2021 49 Q 22 evidence session of 20 May 2021 50 Q 70 evidence session of 20 May 2021 51 Qq 25–27 evidence session of 20 May 2021 52 Q 23 evidence session of 20 May 2021 Local auditor reporting on local government in England 15 2 Stabilising the local authority audit market The crisis in the local authority audit market

In September 2020, Sir Tony Redmond reported to the Secretary of State for Housing, Communities and Local Government, that it was clear from his independent review of the effectiveness of local audit and the transparency of local authority financial reporting, that the local audit market was very fragile.53 The London Borough of Hackney was also concerned that the additional pressure, due to the COVID-19 pandemic, had exposed an already fragile system which was no longer sustainable.54 The Ministry for Housing, Communities & Local Government (the Department), and Public Sector Audit Appointments Ltd (PSAA), accepted that there were serious and pervasive challenges in the local authority audit market and the Department recognised that it needed to take action to tackle the underlying weaknesses in the market.55

All parties agreed that the market was not currently competitive, and that one measure needed for the market to become effective was to have more audit firms in the market.56 Only eight audit firms are accredited to audit local authorities.57 Of these eight, EY and Grant Thornton together carry out around 70% of local authority audits.58 Grant Thornton considered that audit firm KPMG’s exit in the last contract round in 2017 left the remaining firms in the market with insufficient capacity to take on the additional audits.59 EY warned that audit firms that had left the market would no longer have the necessary specialist teams in place, if they ever considered re-entering the market.60

We pressed the Department on what it was doing to encourage a greater number of audit firms to carry out audits of local authorities. The Department agreed that maintaining capacity in the market for auditing local authorities was a serious matter.61 It reported that it kept a close watch on the audit firms supplying the market for auditing local authorities, to monitor the situation and ensure that audit firms provided the necessary capacity.62 It added that it was in regular dialogue and meetings with the audit firms.63 The Department felt that, in taking the actions which Sir Tony Redmond had recommended in his review, this would provide the confidence that the market needed, and to ensure that there was sufficient capacity.64

PSAA is the organisation responsible for appointing audit firms to audit those local authorities which have opted into its arrangements, for an initial five-year period to 31 53 Sir Tony Redmond, Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial reporting, September 2020 54 London Borough of Hackney submission, para 3 55 Qq 4, 12 evidence session of 20 May 2021 56 Qq 28, 51 evidence session of 17 May 2021, Qq 5, 42, 46 evidence session of 20 May 2021 57 Q 11 evidence session of 20 May 2021 58 Q 5 evidence session of 20 May 2021; Q 28 evidence session of 17 May 2021 59 Q 28 evidence session of 17 May 2021; C&AG’s report para 1.16 60 Q 28 evidence session of 17 May 2021 61 Q 61 evidence session of 20 May 2021 62 Q 58 evidence session of 20 May 2021 63 Q 60 evidence session of 20 May 2021 64 Qq 58–59 evidence session of 20 May 2021 16 Local auditor reporting on local government in England March 2023.65 It has a legal obligation to ensure that there is sufficient capacity in the market for auditing local authorities, and that local authorities have access to auditors.66 PSAA recognised that there were many problems in the market for auditing local authorities, and considered that it would take time to sort them out. PSAA wanted to make the market a more attractive one for existing audit firms to stay, and for new firms to enter.67 It also wanted to have long-term viable contracts with the audit firms. We asked if there would be a fundamental problem if one or more of the large audit firms did not bid in the next contract round, and we sought assurance on whether any contingency was in place if any firms dropped out. PSAA explained that if any audit firms were minded to leave the market after the end of the five-year period, it had a safety net in that it could extend the current contracts for two years, forcing the audit firms to keep auditing local authorities beyond 2023.68

PSAA recently commissioned research into the market for auditing local authorities which found challenges and barriers to audit firms looking to come into the market. New firms have to invest in their staff over time to build the specialist knowledge and accreditation needed to carry out audits. A member of staff who leads an audit must also gain individual accreditation to become a key audit partner.69 EY added that key audit partners must have at least three years’ experience of oversight of delivering audits within this market.70 The Institute for Chartered Accountants in England and Wales (ICAEW) also felt that the requirements on key audit partners acted as a barrier to new entrants, even where audit firms did have audit partners with the experience that would make them eligible to apply.71

For the next procurement round for audits of local authorities from 2023, PSAA is looking at measures to reduce the barriers to entry for new audit firms. One measure proposed is for firms to enter the market while carrying out relatively small packages of audit work. PSAA is also open to consortia, in which an accredited firm would work with an unaccredited firm, to enable it to learn the ropes and gain experience of the unusual aspects of auditing local authorities.72 PSAA told us that it had consulted audit firms to gain their views on gaining accreditation and entering the market to audit local authorities. This included the option of working in consortia with accredited firms. It was also in contact with firms which had left the market to take soundings from them on returning to the market.73 PSAA explained that its strategy was to convince audit firms that auditing local authorities was an attractive market in which to work; one which would be worth their while; and worth their investment in training their staff. However, PSAA accepted that audit firms had a choice of audit markets and that it faced a challenge in making the offer attractive enough to audit firms.74 The Local Government Association also told us that the attractiveness of auditing local authorities had declined for audit firms, as the 65 C&AG’s report, Figure 1; Sir Tony Redmond, Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial reporting, September 2020, para 3.2.1 66 Q 59 evidence session of 20 May 2021 67 Q 44 evidence session of 20 May 2021 68 Qq 63–66 evidence session of 20 May 2021 69 Q 11 evidence session of 20 May 2021 70 Q 28 evidence session of 17 May 2021 71 Institute for Chartered Accountants in England and Wales, page 5 72 Q 11 evidence session of 20 May 2021 73 Q 45 evidence session of 20 May 2021 74 Q 46 evidence session of 20 May 2021 Local auditor reporting on local government in England 17 demands of the audits had increased

We challenged the Department on the sustainability of firms auditing £100 billion a year of spending by local government while relying on only a few hundred auditors with the requisite skills. The Department and PSAA recognised the challenge which audit firms faced in having sufficient people to take on all the work required in auditing local authorities.77 The Department had heard directly from audit firms that a shortage in specialist skills was a factor in their delays to completing audits.78 PSAA had seen that, within the four largest audit firms, some key audit partners had moved away from auditing local authorities to internal audit consultancy. Such moves had put additional pressures on the numbers available to lead audits of local authorities.79

PSAA highlighted that the age profile of key audit partners was a factor likely to increase the challenge which audit firms faced, in having sufficient staff.80 EY confirmed that it was facing a retirement issue for its key audit partners, with most having been in careers in local audit for 30 years or so, and in Grant Thornton the vast majority were aged over 50. EY was aware that when this cohort retired, it faced a risk of too few people coming behind them to take on their roles, and it considered that there was a generation of key audit partners missing.81 The Local Government Association also told us that among the relatively few accredited audit firms in the market, there were too few key audit partners to ensure the resilience of the system.82

Sir Tony Redmond highlighted that his review found that the lack of career prospects and opportunities produced a real challenge for trainee accountants when considering whether to go into public sector accounting and auditing. He believed that audit firms needed to give more attention to career progression and training schemes for people to encourage them into public sector auditing.83 Sir Tony thought that the Department, accountancy institutes, and audit firms could be involved in developing a training scheme that encouraged people to pursue a career in public sector audit.84 ICAEW told us that the struggle that audit firms have in finding sufficient qualified and experienced individuals to deliver local authority audits could, in part, be due to low margins on the audits, which limited the ability to offer higher pay, and in part, be due to less attractive career paths. It added that pressure put on audit staff to work intensely over such a short period of time exacerbated staffing issues.85

The Department reported that it was working closely with the Financial Reporting Council (FRC), the Chartered Institute of Public Finance and Accountancy (CIPFA) and 75 Local Government Association submission, page 2 76 Institute for Chartered Accountants in England and Wales submission, pages 1, 4 77 Qq 12, 42, 46 evidence session of 20 May 2021 78 Q 43 evidence session of 20 May 2021 79 Q 46 evidence session of 20 May 2021 80 Q 12 evidence session of 20 May 2021 81 Qq 29, 30 evidence session of 17 May 2021 82 Local Government Association submission, page 2 83 Q 53 evidence session of 17 May 2021 84 Q 54 evidence session of 17 May 2021 85 Institute for Chartered Accountants in England and Wales submission, page 4 18 Local auditor reporting on local government in England others to ensure there were enough skilled auditors to meet the needs of the market.86 It noted that the FRC was leading a working group with stakeholders to look at factors affecting the supply of audit staff, such as entry criteria and skills development. The Department wanted to make the process for auditors to gain key audit partner status as slick as possible to encourage more people, but it also recognised that increasing the supply of people with the necessary skills would be a long-term issue.87

PSAA noted that the audit firms carried out extensive training programmes for their staff, but that it was important to ensure these programmes covered training on the specific aspects for audits of local authorities.88 Grant Thornton informed us that it was the largest trainer of students through CIPFA, but that it took a long time to train people from joining the firm to becoming public sector specialists. EY added that the ICAEW was looking urgently at the requirement for people to have at least three years’ experience of oversight of delivering audits of local bodies before they could gain accreditation as key audit partners.89 The declining commercial attractiveness of auditing local authorities

In 2019, the previous Committee reported on the reduction in fees for auditing local authorities.90 The Department accepted that audit fees had become insufficient to reflect the increased challenges in auditing local authorities.91 Sir Tony Redmond confirmed that audit fees in real terms had dropped significantly in recent years. He considered that the fall in fees had dissuaded a number of audit firms from bidding in 2017 for the current contracts to audit local authorities.92 The audit firm EY felt that the connection between the underlying cost of the audit and the fee had been lost, and that the fee regime was no longer fit for purpose.93

EY and Grant Thornton highlighted that the amount of work which firms were required to carry out in auditing local authorities looked nothing like that required in 2017, for example, in the additional work involved in valuing assets supporting pension funds and of investment properties.94 Grant Thornton referred to additional work required to reflect changes in auditing standards, in systems regulation, and in following the revised audit code of practice, and considered that these changes were introduced without recognition of the impacts on the costs to auditors. EY also noted that the contracts signed in early 2017 were different to the audits which auditors had to carry out when they started to deliver work against these contracts in 2019.95 The London Borough of Hackney said that the decline in audit fees had put pressure on audit firms, such as in trying to field a suitable number of experienced auditors, and that this mirrored a deterioration in audit performance over recent years.96 86 Q 42 evidence session of 20 May 2021 87 Qq 43–44 evidence session of 20 May 2021 88 Q 55 evidence session of 20 May 2021 89 Q 28 evidence session of 17 May 2021 90 Committee of Public Accounts, Local Government Governance and Accountability, Ninety-Seventh Report of Session 2017–19, HC 2077, May 2019, paragraph 20 91 Q 8 evidence session of 20 May 2021 92 Q 52 evidence session of 17 May 2021 93 Q 19 evidence session of 17 May 2021 94 Qq 19, 38 evidence session of 17 May 2021 95 Q 19 evidence session of 17 May 2021 96 London Borough of Hackney submission, para 7 Local auditor reporting on local government in England 19

We sought clarity from the Department on whether, if fees went up, it would look to reflect the increase in the settlement for local government. The Department responded that is had put in more money this year for affected bodies, rather than going directly to audit firms.97 The Department reported that it was taking action to address the decline in audit fees. It was consulting on changes to the regulations that set the fees for auditing local authorities to enable the fees to be set at a closer time to when the audit was done, and so that variations in fees can respond to changes in the audit work required. In the meantime, the Department was consulting on how to allocate an additional one-off £15 million towards the costs of 2021–22 audits.98 EY told us that the sector welcomed the announcement of the further £15 million, as this would go some way to address the imbalance between the cost of delivering the audits with the specialist skills required, and the fees earned. EY added that it was responding to the Department’s consultation with the view that £15 million be shared in an equitable way with the audit firms facing higher costs of auditing local authorities with increased complexity, rather than those auditing simpler bodies.99 97 Q 9 evidence session of 20 May 2021 98 Qq 6, 10 evidence session of 20 May 2021; C&AG’s report, para 1.16 99 Q 15 evidence session of 17 May 2021 20 Local auditor reporting on local government in England