Government should implement Redmond recommendations in light of worsening audit crisis, NAO says

The National Audit Office's (NAO) head has said the crisis in local government audit has made Sir Tony Redmond's recommendations "even more compelling".

In a letter sent to the Levelling Up, Housing and Communities Committee in April but published this month (14 May), the NAO's Comptroller and Auditor General Gareth Davies said the Government should aim to recover the local government audit backlog within two years. 

The public spending watchdog's head warned that the consequences of allowing the issue to "slip" are "potentially extremely serious".

He said that the conclusions of Sir Tony Redmond's 2020 review on local government audit "remains relevant, although in most respects the position has worsened since".

Illustrating the worsening situation, Davies pointed to the slew of section 114 notices in the years since Sir Tony's review, as well as figures that show only five audits of local authority 2022-23 accounts were completed by the November 2023 deadline, about 1% of the total.  

In addition, he warned that the market supply of external audit is "extremely fragile" and noted that the prices required to secure the necessary audit capacity are thought to have shot up by 150% compared with 2022-23.

Davies said the circumstances make Sir Tony's recommendations "even more compelling," particularly the recommendation for a single regulator to oversee local government audit. 

He added: "Despite the commitment and best efforts of all involved, coordinating the activity and risk appetites of at least four organisations, all but one of which have other priorities in addition to local audit, is an inherently ineffective and inefficient approach."

However, Davies did welcome the proposals to simplify the system by creating a 'system leader' responsible for the local government audit system. 

The Government currently plans to make the Financial Reporting Council (FRC) systems leader, but it is unclear when this will happen as legislation to implement the plan was not mentioned in the King's Speech. 

Just last month (15 April), the chief executive of CIPFA called on the Government to make Oflog systems leader instead of the FRC, noting that efforts to crown the FRC as system lead were "stuck". 

Davies said: "I recognise that the system leader arrangements proposed by the Government (and still subject to legislation) will go some way to streamlining complex set of responsibilities currently in place.

"It would of course be possible to wait to assess the impact of those changes once they have been fully implemented before deciding whether to simplify further in the way I have indicated above."

Davies also raised questions about how suitable the current scrutiny arrangements are in light of an increased amount of devolution in England. 

He wrote: "Large and increasing amounts of public money are now routed through a range of relatively new devolution arrangements."

He later added: "It is open to question whether the current scrutiny and audit arrangements anchored in the Local Audit and Accountability Act 2014 will be adequate as these arrangements develop. 

"In particular, the audit support for scrutiny of sub-regional and combined authority spending is in my opinion not commensurate with the demands of local accountability."

Davies called for a review of how independent audit could best support accountability and scrutiny of regional and sub-regional public spending arrangements in light of the changes. 

Davies also called for a review of the purpose of local authority accounts and the form they should take, within the UK's wider public sector accounting framework.

On this point, he said: "It is vital that local authorities regard their annual report and accounts as a key element in their accountability to local people, and that the governance arrangements in each authority support this effectively. 

"This requires the financial reporting standard setter (CIPFA LASAAC) to work with the sector and other stakeholders to ensure that the financial statements are fit for purpose and meet the needs of users."

He said that, in turn, this will help ensure that audit effort is directed to areas of genuine interest to users of the accounts and where the risk and consequences of misstatement are significant.

Adam Carey