Government must act now to fix crisis in local audit, say MPs

The local audit backlog is undermining public trust and is in "an unacceptable crisis" which requires urgent attention from the Government, the Levelling Up, Housing and Communities Committee has said.

In a report, Financial Reporting and Audit in Local Authorities, the committee raised alarms over an "extensive" backlog of incomplete audits and unaudited accounts, some of them being delayed by up to seven years.

"This has led to a deleterious cycle in which delays create further delays, and which can only be resolved by a potentially painful reset to the whole system," the report noted.

Only 9% of 2020/21 local authority account had audits published by the September 2021 deadline and only 12% of 2021/22 account were published by the extended November 2022 deadline, according to the National Audit Office.

The committee acknowledged the efforts from the Department for Levelling Up, Housing and Communities (DLUHC) to clear the backlog, which include plans to set deadlines for accounts preparers and auditors to clear the backlog.

But it said DLUHC "must move" quickly to clear the backlog and implement its proposed actions by the end of 2023.

It added: "In addition, the Department should ensure that, when auditors qualify or disclaim the audit opinions on delayed audits, the accompanying commentary should be clear whether the local authorities are at fault and whether the audit has given any indication of financial failings or distress at those authorities."

Part of its recommendations for fixing the backlog included a call for 'backstop dates' for publishing audited local authority accounts annually going forward.

It recommended the DLUHC ensure that if an authority and its auditors do not produce audited accounts by the backstop date, the Section 151 Officer of the authority (and other responsible individuals such as the auditor's Key Audit Partner) must write to the Secretary of State for Levelling Up, Housing and Communities, to the committee, and to the authority's council to explain why the audit could not be completed.

Elsewhere, the report found "fundamental weaknesses" in council accounts themselves, which are "hampering" efforts of the public and other stakeholders to hold local authorities to account.

To fix this, the committee said that local authority accounts should be a credible public record, allow funders to hold authorities to account for use of funds, allow stakeholders to make conclusions on authorities' value for money, allow officers and councillors to make informed decisions, and allow stakeholders outside the authorities to make informed decisions.

"These purposes will ultimately focus local authority accounts on their role as vital tools for upholding local democracy and accountability," the committee said.

The committee also called on the Department for Levelling Up, Housing and Communities to take action in the longer term to prevent backlogs and get local audit onto a "stable footing".

A key part of this will be the creation of a statutory body to be the 'system leader' for local audit, the committee said.

The Government intends to establish a new body, the Audit Reporting and Governance Authority (ARGA), as this system leader.

However, the report noted that it is "not clear" that the Government considers establishing the system leader as a priority, given that legislation required to achieve this has seen delays.

Clive Betts, Chair of the Levelling Up, Housing and Communities Committee, said: “Serious delays in local audits mean that many councils are not fully sighted to problems while they make major financial and service decisions, with audit delays also leaving local taxpayers in the dark.

"The growing backlog of audit opinions seriously undermines efforts to hold councils to account for their financial management. The Government now needs to set out urgently what it will do to clear the backlog, re-establish trust in local audit, and accelerate its efforts to establish a local audit system leader.”

He added: “The current format and content of accounts are so complicated that they are impenetrable to councillors and council officials, let alone the wider public.

“The Government should now lead on work with the audit sector to ensure audits and accounts support the oversight of public spending and strengthen local democracy and accountability."

Adam Carey