Watchdog criticises shortcomings in local government audits

Three prominent local authority audit firms have been criticised by the Financial Reporting Council (FRC) over “unacceptable” shortcomings in audits.

The FRC found in its inspection findings for England 70% of financial statements audits for the 2021-22 inspection cycle required no more than limited improvements, which it said was significantly better than the 46% average over the preceding three years.

But among 20 major audits inspected, four spread across BDO, Deloitte and Grant Thornton were assessed as requiring significant improvements. The FRC said: “This is unacceptable.”

Failings found included material errors in two sets of audited financial statements, one of which included cash deposits in the primary statements being overstated by £1.7bn.

In another case, changes were made to a value for money audit file provided to FRC inspectors after the firm concerned was notified of the inspection.

The FRC said though that 93% of auditors’ work on value for money required no more than limited improvements.

It was concerned though that 91% of local government audits were not completed by the target date of 30 September 2021.

Executive director of supervision Sarah Rapson said: “While it is encouraging that some improvements observed last year have been maintained, the number of audits requiring significant improvement is unacceptable and urgent action is required by the firms to address any shortfalls in audit quality.  

“The persistent timeliness issues with audited accounts remains a significant concern for the FRC…and concerted action is needed from all parts of the system for local government financial reporting and audit to urgently improve matters.” 

In all Grant Thornton carried out 125 audits, followed by Ernst & Young (72), Mazars (55), KPMG (24), BDO (21) and Deloitte (17).

The FRC said it was imperative that all firms consider what improvements they needed to make in response to its findings, even at those not found responsible for any lapses.

Examining individual firms, the FRC said five of the seven audits inspected at Grant Thornton were assessed as either good or with only limited improvements required but it was “unacceptable that one financial statement audit we inspected was found to require significant improvements and another required improvements.

“Urgent and robust action is required to address these findings and to ensure that they do not recur.”

It issued similar advice to Ernst & Young, Deloitte and BDO, which each had two financial statement audits rated as requiring improvements from the samples inspected.

Mazars and KPMG were though was found to have no failings in their audits.

Fiona Baldwin, head of audit at Grant Thornton UK, said: “We are pleased to see that the investments we have made in the quality of our audit work has been recognised by the FRC, with an overall improvement in our assessment.

“Whilst not all of our files reviewed  achieved the highest standards, we will continue to strengthen our procedures and training to limit the risk of this reoccurring. We recognise the importance of continuous improvement and have taken prompt action to embed the learnings from file reviews.” 

A Deloitte spokesperson said: “Audit quality is and will remain our number one priority. We are proud of our people’s commitment to delivering high quality audits and we continue to have an uncompromising focus on audit quality.

“We are therefore extremely disappointed that one of our audits fell short of the standards expected. We have since taken steps to identify and address the matters raised.

“We are committed to continuing to transform our technology, processes, governance and controls in order to ensure we consistently deliver the highest quality audits.”

Other firms criticised have been contacted for comment.

Mark Smulian