Underlying weaknesses of the local audit system

Last four paragraphs from National Audit Office report summary: “Timeliness of local auditor reporting on local government in England, 2020”, under the heading “Underlying weaknesses of the local audit system”:

The COVID-19 pandemic has exacerbated problems which already existed within the local audit landscape. Our previous reports and consultation with the sector identified several long-standing problems within local audit. There is insufficient staff with the relevant qualifications, skills and experience in both local finance teams and firms serving the local audit sector, and a net loss of qualified staff from both. The requirements of International Financial Reporting Standards, along with the increased expectations from the Financial Reporting Council (FRC) following the high-profile corporate failures such as Carillion, have combined to produce a significant increase in audit work, such as on asset and pensions valuations, which local authorities found less useful. The relative lack of attractiveness of the audit of local public bodies, compared with alternative audit opportunities available to staff, has contributed to a high staff turnover level. Competing workload pressures, both within the finance function and elsewhere in local authorities, diverted staff resources from completing working papers and preparing accounts within the time available for submission to the external auditors which made the preparation of accounts increasingly challenging (paragraphs 2.15 to 2.22). 

The Committee of Public Accounts has continued to express concern about the system of local audit. The Department recognised these concerns and in July 2019 commissioned the Redmond Review to review the local audit landscape. The committee recommended that the review should ensure that concerns over current fee levels and the contribution of external audit to governance are examined fully and rigorously. The committee also recommended that the review should assess if external audit was providing an effective service and meeting the needs of local authorities (paragraph 1.13).

The Redmond Review reported in September 2020 and recommended major changes in the organisation and regulation of local audit in England. The Secretary of State for Housing, Communities and Local Government stated, on publication of the Redmond Review, that he would consider the findings and recommendations carefully and remained committed to strengthening the local audit system, so that it worked more effectively for taxpayers and councils. The Department’s response accepted some of the recommendations of the review and recognised the findings regarding the fragility of the local audit market, agreeing that urgent action is required. The Department set out actions to support market stability, to alleviate some of the immediate funding and timing pressures facing audit firms and local authorities, but decided to consider further the central recommendation to establish a new independent regulator for local audit (paragraphs 1.14 to 1.17). 

Concerns over the quality of local audit have been raised by the FRC in its report on local audits in October 2020. The FRC inspected 15 financial statement audits in 2019-20 across seven local audit firms. It described the overall results as concerning, with only 40% of audits judged good or requiring no more than limited improvement, down from 64% in 2018-19. The FRC said that urgent action was required from some of the firms, to take appropriate action to respond to the findings and ensure improvements were made in audit quality, given the deterioration in quality in the year (paragraphs 2.25 to 2.29).

Conclusion 

Given the increasing financial challenge and service pressures on local authorities since 2010, local councils need strong arrangements to manage finances and secure value for money. External auditors have a key role in providing independent assurance on whether these arrangements are strong enough and recommending any action. The late delivery of 2019-20 audit opinions is concerning, given the important part that external audit plays in assurance over taxpayers’ money both centrally and locally.