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Third of local government audits need improvement

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Audits of borough and metropolitan councils are getting better, but there is still a lot of work to do to make the process of scrutinising local authority spending timely, transparent, and of more value to the public, experts believe.

4th Nov 2021
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About a third of local government audits need improvement, the Financial Reporting Council (FRC) has found.

The regulator reviewed 20 major local audits by six of the largest audit firms and said six were below par. However, it said this is an improvement on last year’s inspection results, where 60% of audits were in need of improvements.

According to the 2021 local authority audit findings, none required significant improvements.

Although the FRC is satisfied it conducted a proper study, the regulator couldn’t review half of its original targets for inspection due to delays in signing off the paperwork.

The FRC said that it was “encouraging” that auditors had raised standards following last year’s criticisms, but it was concerned over the late filings.

“While it is encouraging to note the firms’ response to previous year’s findings, it is clear significant progress is still required to ensure high quality audit is being delivered on a consistent basis,” said the FRC’s executive director of supervision, Sarah Rapson. “We expect the firms to build on this progress and swiftly address any deficiencies identified.” 

Challenging assumptions

Of the 20 audits reviewed in the year across the six firms, four were health bodies

and 16 were local government bodies. This included five pension funds, five county councils, three metropolitan borough councils, two city councils and one London borough.

In addition, the regulator reviewed two foundation trust audits for which NHS Improvement has responsibility, but the results of the inspections will be reported separately.

Of the firms involved, the work of Grant Thornton UK was scrutinised the most, at nine inspections, as it has the largest share of local authority audits, accounting for 40% of the market. Four Mazars and EY audits were probed, with one each from KPMG, BDO and Deloitte.

Key areas requiring action include strengthening the audit testing of expenditure, and improving the evaluation and challenge of assumptions used in concluding over investment property valuations. The FRC also wants to see improvements in the evaluation of assumptions used in property, plant and equipment valuations. It also found room for improvement in providing stronger rationale when supporting a modified audit opinion.

One audit by BDO was flagged as in need of improvement, as the investigators found gaps in evidence relating to the audit team’s assessment of whether the credit risk on certain financial instruments held at amortised cost had increased significantly since initial recognition.

BDO said it was “very disappointed” with the results as improvements in audit quality had been a major focus of the firm this year.

“We acknowledge the need to ensure consistently high quality across all audits within the sector and are in the process of performing root cause analysis on the reviews noted in this report not only to identify the root causes of any issues but also to enable us to emulate the good practice identified,” BDO said.

Wobbling local audit market

Earlier this year, a study from Public Sector Audit Appointments Ltd (PSAA) revealed that only 9% of local authority audits were completed before the statutory deadline of 30 September 2021.

In July, the Public Accounts Committee (PAC) warned “without urgent action” the local audit system “may soon reach breaking point”.

The government at one time mulled the creation of a dedicated regulator for local government authority audits. A review in September 2020 found the local audit market was “very fragile” and that without prompt action there was “a significant risk that audit firms would withdraw from the market”.

Rather than create an entirely new body, the government is satisfied the incoming Audit, Reporting and Governance Authority (ARGA) will instead take the mandate of ensuring local government audits are of standard, more transparent, and provide improved market stability.

ICAEW’s response to a recent government consultation on the local audit framework argued that audit delays indicate wider issues in the local authority audit and reporting system. The ICAEW is lobbying the government to strengthen capacity in the local audit market and simplify financial reporting.

Local authorities do not have to formally file accounts as public and private companies do. There is no legal sanction for local councils if they miss the deadline, which the ICAEW has said contributes towards slow filing. It also triggers delays in central government audits as the National Audit Office requires assurance from local auditors over local government pension scheme balances held in central government accounts and over the returns provided by local authorities to HM Treasury for the Whole of Government Accounts (WGA).

With no incentive to publish on time, delays to the completion of audits have a knock-on effect of reducing the reliability of audited figures on which to calculate future budgets. The public is also denied timely assurance that public money is being spent appropriately by the delays, the ICAEW said.

The ICAEW noted that Slough Council’s Section 151 Officer (Chief Finance Officer) was forced to issue a Section 114 “bankruptcy” notice after auditors discovered that draft accounts had misstated its financial position and further investigations found it had negative reserves and was unable to set a balanced budget. Slough Council has not had its audit signed off since 2017-18.

Covid-19 delays were a factor in the disruption, but the pandemic only worsened an already problematic situation, the ICAEW said. The percentage of audits completed before the deadline fell from 97% in 2015-16 to just 57% in 2018-19.

“We are pleased to see that the majority of audit reports and all value for money reports required no more than limited improvements,” said Alison Ring, director for public sector at ICAEW. 

“However, half of the local government audits originally selected for review could not be considered because they were not finalised. Delayed audit reporting for local government is a symptom of a market in crisis. We’d like to see steps taken to strengthen the local government financial reporting ecosystem, promoting improvements in the quality and understandability of local authority financial reporting to encourage greater readership.”

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By Hugo Fair
04th Nov 2021 13:58

Personally I'd have made "only 9% of local authority audits were completed before the statutory deadline of 30 September 2021" the headline.

The PAC said that “without urgent action” the local audit system “may soon reach breaking point”.

This seems to me (and no doubt the council taxpayers of Croydon for example) of somewhat greater relevance than some debatable measurements of performance ... especially as FRC couldn’t review half of its original targets for inspection due to delays in signing off the paperwork.
I somehow doubt these were all the best performing ones!

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