Spending watchdog warns on backlog of audit opinions in local government

There are 632 outstanding audit opinions in local government as the auditor market struggles to deal with the large number of complex accounts, a report by the National Audit Office (NAO) has said.

The NAO - Parliament’s spending watchdog - said problems in local government had a knock-on effects in the NHS and parts of central government either through lack of capacity among auditors or the absence of essential financial information.

Local authority audit was carried out until 2015 by the Audit Commission, which was abolished by then Community Secretary Eric Pickles, who left councils to appoint their own audit firms and looked forward to ‘armchair auditors’ - members of the public - holding councils to account.

The NAO said this had contributed to a situation in which only 9% of local government bodies received audit opinions in time to publish audited accounts for 2020-21 by the extended deadline of 30 September, and 12% by a further extended deadline of 30 November.

Public Sector Audit Appointments (PSAA) found 632 audit opinions outstanding for all years as at 30 November 2022.

The NAO said from 2018-19, local government bodies appointed private firms to undertake their audits, either directly or through a national scheme and since 2017-18 “there has been a significant decline in the number of local government body accounts including an audit opinion published by the deadlines set by government”.

When the NAO first reported on this in 2021, it found 45% of accounts for 2019-20 were published by the deadline, down from 97% in 2015-16.

Some 35% of local government bodies had not received opinions in time to publish audited accounts for 2020-21, one year after their original deadline

Disruption resulting from the Covid-19 pandemic had hindered progress but “the pandemic exacerbated problems which already existed in the local audit landscape, including shortages of experienced staff in both local authority finance teams and audit firms, a relative lack of attractiveness of local government audit as a career, and increasing levels of work for finance and audit staff due to increased focus on audit quality findings”, the NAO said.

Serious as the delays were for local authorities, the NAO also raised concerns about the impact on other public bodies.

It said there has been consequential delays to the certification of central government accounts with material pensions valuations.

Both the Ministry of Justice and the Department for Digital, Culture, Media & Sport have agencies or arm’s-length bodies with material Local Government Pension Scheme liabilities.

Local auditor assurances over these liabilities are required before the departmental accounts can be certified and “delays to these local auditor assurances contributed to MOJ and DCMS accounts for 2021-22 being certified between four and five months after the Parliamentary summer recess”, the NAO said.

Local audit delays were among factors affecting the 2019-20 Whole of Government Accounts, which were certified 26 months after the year end and five months later than the statutory deadline.

There had also been difficulties for NHS bodies which rely on the same audit market as local government and had “reported growing concerns about the capacity of their external auditors, resulting in the auditors carrying out fewer interim audits, which puts pressure on the audit of final accounts”.

PSAA carried out a fresh procurement exercise with an emphasis on quality rather than cost and warned councils to expect fee increases of 150% in 2022.

In 2021 two firms had shared 70% of the market by value, with the risk of a fundamental capacity gap should one exit the market, the NAO said.

The 2022 procurement increased the overall number of providers from five to six, as three firms entered the market and two left. At 36%, the market share of the largest provider “was higher than the intended maximum”, although the share represented by the top two firms reduced from 70% to 59%.

Responding to the NAO’s findings Pete Marland, chair of the Local Government Association’s Resources Board and leader of Milton Keynes Council, said: “Effective external audit and clear and transparent financial reporting are vital, and councils take them extremely seriously. However, as this report makes clear, local audit is in crisis, which is a serious concern for councils.”

Cllr Marland supported an NAO recommendation that the Government should set out a detailed timetable by which it expects to restore timely audited accounts.

He said most councils had finalised draft accounts by the published deadlines but would be under greater pressure to do this for their 2022-23 accounts if the deadline reverted to 31 May 2023 rather than again being extended.

Mark Smulian