Public Accounts Committee demands urgent action to improve system of local government audit in England

Without urgent action from government, the audit system for local authorities in England may soon reach breaking point, an influential committee of MPs has warned.

In a report, Local auditor reporting on local government in England, the Public Accounts Committee accused the Ministry of Housing, Communities & Local Government of becoming “increasingly complacent in its oversight of a local audit market now entirely reliant upon only eight firms, two of which are responsible for up to 70% of local authority audits”.

The PAC report said the situation had not been helped by the growing complexity of local authority accounts, with audit firms now asked to carry out more work in each audit, comply with new regulatory demands and adapt to the new multifaceted landscape in which local authorities operate, while also struggling to hire and retain experienced auditors.

Such problems had been evident since 2018, the PAC said, but the COVID-19 pandemic had heightened them with less than half of local authorities completing their audits on time in 2019–20, while more than half of the audits examined by the Financial Reporting Council (FRC) needed improvement.

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“If local authorities are to effectively recover from the pandemic, it is critical that citizens have the necessary assurances that their finances are in order and being managed in the correct manner,” the report argued.

The PAC described the need for system leadership for local public audit, identified by the Redmond Review, as “pressing”.

However, the government’s announced option that the future Auditing, Reporting and Governance Authority (ARGA) would become the new system leader, would take time to establish. The Authority will not be set up until 2023, at the earliest, and will require legislation.

“Until then, it remains unknown whether this option will be able to fully address the current failings in the market for auditing local authorities,” the PAC said.

“In the meantime, the Department has much more to do to provide credible details on the practical and concrete steps it intends to take to address the urgent problems that cannot wait for ARGA. We will track progress closely for assurance that when the new system leader arrangements are operating, the local audit market will still be in place.”

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “Our citizens expect public authorities to account for the taxpayers’ money that they spend. As public spending and demand on local services have exploded with the pandemic, the accelerating decline in the timeliness and quality of audit of local government spending undermines that accountability, and undermines effective spending decisions.

“Even before Covid the local government audit market was strained. If the market cannot deliver that accountability and clarity about the costs and risks in local government the Government should be more concerned than its slowness to act suggests. The Redmond Review of local government audit is a thorough and sensible piece of work but some of its measures won’t be implemented until 2023 – more than four years since it was commissioned. And public audit is added as an afterthought to a body which oversees the very different field of company auditing.

“As we embark on the long road to recovery from Covid-19 and transition to a net zero carbon economy, clear, accessible and transparent audit reports will be more important not less. The delays in delivering audits are the tip of an iceberg of issues facing public audit which need real commitment to resolve.”

Responding to the report, Cllr Sharon Taylor, Chair of the Local Government Association’s Resources Board, said: “Councils continue to face ongoing problems around the late delivery of audit opinions and with the fragility of the local audit market and its long-term viability. There is also a need for clarity over how the Audit, Reporting and Governance Authority (ARGA) will act as system leader for local audit alongside a higher profile to be given to the specific problems faced by local government audit and for proposals for a way forward.

“We are pleased that these issues, which we have raised with the Committee and government, have been amplified in this report, which makes some positive calls for improvements to be made to the current local audit arrangements.

“Effective external audit and clear and transparent financial reporting are vital, and councils take them extremely seriously. We look forward to continuing to work with MHCLG on suitable proposals for future local audit arrangements.”

The PAC’s main conclusions and recommendations

1. The marked decline in the timeliness of external audit undermines accountability and hampers effective decision-making. 

Recommendation: As a matter of urgency, the Department should write to the Committee by September 2021 with a detailed plan and timetable for getting local audit timeliness back on track.

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. 

Recommendation: The Department should write to the Committee 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.

3. The commercial attractiveness to audit firms of auditing local authorities has declined. 

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.

4. The rapidly diminishing pool of suitably qualified and experienced staff increases the risks to the timely completion of quality audits.

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.

5. The Committee is not convinced that the recently announced new local audit arrangements will meet the pressing need for effective system leadership now. 

Recommendation: The Department should write to the PAC 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.

6. Unless local authority accounts are useful, relevant and understandable they will not aid accountability.

Recommendation: The Department should write to the Committee 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.

Source: Local auditor reporting on local government in England

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