Lack of experienced auditors poses threat to sustainability of local audit market: report

A lack of experienced local authority auditors is the main threat to the future sustainability of the local audit market, a report commissioned by Public Sector Audit Appointments (PSAA) has warned.

A not-for-profit company established by the Local Government Association following the closure of the Audit Commission,  PSAA is the ‘appointing person’ for the national scheme for the appointment of external auditors to principal local authorities in England.

The report prepared by management consultants Touchstone Renard found that there were only 97 ‘key audit partners’ (KAPs) who are authorised to act as engagement leads for local audits. There was also a shortage of audit managers and audit seniors with experience of these audits.

“It is not clear how the future supply chain of auditors will compensate for the retirement of the current cohort of partners, directors and senior managers,” it said, adding that “external auditing is seen as an increasingly unattractive career option, and local auditing is seen as unattractive relative to corporate auditing.”

The report also said that:

• It would be difficult to bring non-approved firms into the market due to: a lack of enthusiasm on their part for getting involved with the market in its current state; barriers to entry; and a lack of belief that they could succeed in winning tenders against the established firms.
• A third of the KAPs were at approved firms which did not have current contracts.
• Almost all of the approved firms had reservations about remaining in the market. Their reasons included: the unprecedented scrutiny of the whole external auditing profession; regulation and scrutiny had become more onerous; audit risk had increased as a result of the impact of austerity, including local authorities cutting back on finance staff and in some cases undertaking more risky commercial ventures.

The report noted that some of the issues impacting on future sustainability were outside PSAA’s control, including the fragmentation of the market for procurement of public sector audits (including different distinctive arrangements in local government, health and central government). It said PSAA could, however, lobby for change.

Touchstone Renard noted that the audit firms would like to see the balance between price and quality in PSAA’s tender evaluation arrangements shifted further in favour of quality. They would also like tenders to be subjected to close scrutiny on clearly defined and differentiated aspects of quality.

The report set out some options for PSAA to help attract new entrants to the market, and warned that the establishment of a not-for-profit audit supplier would be “difficult to achieve particularly if the timetable for publication of audited accounts remain unchanged”.

PSAA said it hoped that its work would be helpful to the review of local authority audit in England which Sir Tony Redmond is currently conducting.

Steve Freer, Chair of PSAA, said the Touchstone Renard report would inform PSAA’s forward planning, especially in relation to future procurement processes.

“Their independent review has captured the views of firms at a point in time at which the audit industry is subject to extreme pressures. It highlights some of the difficulties which potentially arise downstream if action is not taken to address current uncertainty and instability,” he said.

“The position will inevitably change as future developments occur. The Government’s response to the Kingman, Competition and Markets Authority and Brydon Reviews will hopefully bring welcome certainty for the industry in due course. And the Redmond Review, looking specifically at local audit and accounting, will conclude later in the year and, hopefully, make positive recommendations for the future of local audit.

“PSAA’s current contracts provide medium term assurance for the audit of relevant local bodies. The Touchstone Renard report will help us to work with other local audit stakeholders to address the challenge of long-term sustainability.”