Government acknowledges need for urgent action to tackle backlog in local government audits

The backlog in local authority audits has grown so large that urgent action is needed, the Department for Levelling Up, Housing & Communities (DLUHC) has admitted.

It said local audit completion for the financial year 2021-22 had reached only 27% and there was an outstanding total dating back to 2015-16 of nearly 520 cases.

A letter from DLUHC Permanent Secretary Sarah Healey to Dame Meg Hillier, chair of the Public Accounts Committee, said: “This is clearly unacceptable. There is consensus across the system that there is now no alternative but to take collective action to resolve the backlog.

“Restoring timely audit and financial reporting will improve local accountability, strengthen the government’s ability to identify warning signs of potential failure in local bodies and provide assurance to local residents about financial management and governance.”

Sorting out the problem could though lead to an increase in qualified opinions on accounts as auditors struggled with the workload.

The National Audit Office (NAO) and DLUHC will set a series of statutory deadlines for accounts preparers and auditors to clear the backlog from 2015-16 to date. Auditors would be required “to provide as much assurance as possible for these outstanding years”, reporting as normal any significant concerns and where necessary limit their opinion and “make clear to the users of the accounts those aspects or sections of a set of accounts which are not supported by sufficient, appropriate evidence, and which the auditor is unable to provide assurance over”.

Healey said: “In essence, the department and the National Audit Office will be working together to set a series of final deadlines for local authorities and auditors to close down the outstanding accounts, in order to clear the backlog as quickly as possible and move on to auditing the most up to date financial information.

“This will involve some difficult decisions for auditors and local authorities; it is likely that qualified opinions and, in some cases, disclaimers will be necessary to allow the system to reset effectively.

“While this is an uncomfortable trade off, a consensus has developed across the system that that urgent action is required.”

As part of this the Chartered Institute of Public Finance and Accountancy would explore changes to its Code of Practice on Local Authority Accounting to allow “a more proportionate approach to the accounting requirements for local authority non-investment assets and pension valuations”.

The Comptroller & Auditor General will use powers under the 2014 Local Audit and Accountability Act to consider changes to the Code of Audit Practice relating to “the audit of certain balances in the accounts”.

In addition, the Financial Reporting Council (FRC) would look at whether any changes around the application of materiality by local auditors should be considered.

The FRC will also try to fill gaps in the local audit workforce including by a new local audit qualification, which would be used by experienced auditors moving across to local audit.

It would also seek practical actions to improve the attractiveness of the profession and increase resilience, capacity and capability in the supply of local auditors, Ms Healey said.

Mark Smulian