Another “Big 4” external auditor under investigation

EY = formerly known as Earnst Young. Who CAN you trust to give a true picture of an organisation’s finances these days?

“Britain’s accounting watchdog has begun an investigation into EY’s audit of Thomas Cook’s accounts, just over a week after the world’s oldest travel firm collapsed.

The Financial Reporting Council said its enforcement division was investigating EY’s audit of the financial statements of Thomas Cook for the year to 30 September 2018.

“The FRC will keep under close review both the scope of this investigation and the question of whether to open any other investigation in relation to Thomas Cook, liaising with other relevant regulators to the fullest extent permissible,” it said.

EY took over from PwC as Thomas Cook’s auditors in 2017. Both are among the UK’s big four accountancy firms. …”

https://www.theguardian.com/business/2019/oct/01/thomas-cook-auditors-frc-ey-collapse?CMP=Share_iOSApp_Other

“Councils ignoring public right to audit accounts”

“Local authorities are refusing to let the public access key information on how their money is being spent, research by the Bureau of Investigative Journalism has found.

Authorities are:

redacting documents to “protect commercial interests”;
setting up council-owned companies that are removed from scrutiny;

failing to respond to members of the public who try to exercise their right to inspect council finances

The Local Audit and Accountability Act 2014 (LAAA) gives citizens and journalists the right to inspect the accounts and related documents of councils, police, fire and other local authorities, and to object to them if they believe something is amiss. It is an especially important right at a time when public bodies are under unprecedented financial pressure.

However, when Bureau journalists and volunteers attempted to exercise that right, some authorities withheld or heavily redacted the information. There was often little evidence that the public interest had been considered and no way of challenging the decision short of a costly court battle.

In one case, the Bureau was prevented from reading a contract because a council officer believed the company involved would sue. Another council refused access to the accounts of a company it had set up to manage a large property portfolio, raising concerns about transparency and accountability.

Duncan Hames, director of policy at Transparency International UK, said: “It’s critical that the public and press are allowed access to key documents about the finances of local authorities to ensure there is no place to hide for the misuse of public money.

“The law is clear that this financial information should be out in the open, so it is imperative that those failing to comply do not continue to withhold it from public scrutiny.”

Commercial interest over public interest

To test the law, Bureau Local volunteers submitted requests to nearly 50 local authorities asking to inspect documents — such as contracts and invoices — relating to the use of private consultants during multimillion-pound property deals, a subject the Bureau is investigating.

Some authorities gave only restricted access to the information, or refused altogether, often on grounds that releasing the information could cause financial damage to the councils and their business partners. …”

https://www.thebureauinvestigates.com/stories/2019-09-11/councils-ignoring-public-right-to-audit-accounts

“Government turns blind eye as council sells “family silver” to pay bills”

“Publicly owned buildings and land could be at greater risk of being sold off by cash-strapped councils after a government ruling, a leading expert has warned.

Peterborough council appeared to breach one of the government’s “golden rules” between 2015 and 2019 when it balanced its books by using £24 million raised from selling assets.

However, after an inquiry into this practice — prompted by the Bureau — the Ministry of Housing, Communities and Local Government (MHCLG) has decided to take no action against the council, potentially leaving the door open for other councils to do the same. The decision seems to be a U-turn, as government officials had previously told the council they disagreed with its position in correspondence seen by the Bureau.

Professor Tony Travers, of the London School of Economics, told the Bureau more local authorities may now take the opportunity to sell the “family silver” to make ends meet.

The ministry declined to comment when asked whether Peterborough’s spending was legal and if other councils are allowed to make use of the policy.

Local authorities are supposedly barred from selling their assets to plug gaps in their finances unless the money is used to fund cost-cutting measures. The regulations are designed to prevent councils becoming reliant on selling off land and buildings to pay running costs.

This is exactly the situation Peterborough finds itself in, leaving it with little of value left. It used money from selling off assets, called capital receipts, to pay what is known as the Minimum Revenue Provision charge, which is a proportion of its annual budget that has to be set aside to repay loans borrowed to fund things such as building schools.

An investigation by the Bureau found that, since 2015, Peterborough had used capital receipts totalling £23 million to meet the cost of MRP, despite guidelines which say the charge must be met from councils’ day-to-day budgets. The council’s latest accounts, released since our story was published, bring that figure up to £24 million.

This reduced the pressure on the Conservative-led council’s finances but also made it dependent on selling assets to break even – an unsustainable position in the long term, as Peterborough itself admits.

In total, Peterborough sold about 50 assets — including pubs, petrol stations, a former community college and farmland — between 2014 and July 2018. In February a further 27 sites were earmarked for sale over the next two years, including a bowling green, allotments, a library and a car park. A Labour councillor called it a “fire sale”.

After the Bureau asked the government about the situation in Peterborough, an investigation was launched. In response, the council insisted it had not broken the law, adding that its spending had been approved by auditors and other external advisers.

Speaking at a council meeting a day later, David Seaton, Peterborough’s cabinet member for resources, dismissed the story as “fake news” and said the council had sought the advice of a leading financial QC who had “given us the opinion that he cannot see Peterborough council acted illegally in any way”.

Councillors then passed this year’s budget, which includes a further £10.6 million in capital receipts to pay the MRP charge.

In the months that followed the council was asked by the government to explain its position. The Bureau obtained copies of correspondence between the council and MHCLG under freedom of information laws. In the most recent letter obtained by the Bureau, dated May 16, a government official made clear to the local authority that the way it spent capital receipts did not fall within the legislation. …”

https://www.thebureauinvestigates.com/stories/2019-09-09/government-allows-peterborough-council-to-sell-family-silver-to-pay-bills

“40% of local government audits were not completed by 31 July”

“The pressure has been on external auditors this Summer. The first year of the new Public Sector Audit Appointments (PSAA) contracts, with fees cut by 23%, reshuffled appointments, and firms starting work in regions where they previously had no presence. The second year of an over-tightly compressed audit season. The hot breath of regulators on the necks of those firms whose commercial colleagues have been involved in recent headline audit failings.

It has therefore been expected for some time that in August we would be talking about failures to meet the target date for the publication of the audited statement of accounts. But the news that 40% of local government audits were not completed by 31 July is still something of a shock.

It is important to confirm that an authority missing the 31 July target date has not broken any laws. Regulation 10 of the 2015 Accounts and Audit Regulations says that where an audit has not been concluded before 31 July, an authority must proceed to:

publish on its website a notice stating that it has not been able to issue the audited statement of accounts, and the reasons for this

when the auditor’s final findings from the audit have been received, follow the procedures for publication that would have applied before 31 July.

In both cases, the actions are required to be carried out as soon as reasonably practicable, so there is no need to rush to convene an emergency meeting for member approval of the finalised accounts. If key members and officers have booked holiday or there is difficulty fitting a committee meeting into the council calendar, then reasonable time can be taken to sort everything out.

There is no sanction for missing the target date. The worst that will happen is that an authority will become part of the statistics in PSAA’s annual report on the results of auditors’ work (but unlikely to be named and shamed unless the accounts are still not published by 30 September, if the approach in the 2017/18 report is followed for 2018/19).

There is also a risk of local reputational damage, but this can be limited if delay is not the authority’s fault by a precisely worded notice explaining why publication has not taken place.

But timeliness has not been the only audit issue in 2018/19. Our experience in providing technical accounting support to a number of authorities of all sizes across the country (and involving all the firms with PSAA appointments) has been that the burden of audit has increased in three areas:

the firms are becoming increasingly dogmatic about the technical treatments that they will accept

there is an increasing burden for authorities in training auditors in local government accounting

more work is being carried out to meet the demands of regulators rather than because it is necessary for an audit compliant with the Code of Audit Practice.

The common approach over the summer has been for auditors to inform authorities of the position they take on a technical issue and to expect authorities to comply with it, often under the threat of a qualified audit opinion if they don’t.

The problem here is not just that this is an inversion of the expected order of things – it is an authority’s responsibility to prepare the statement of accounts, making the judgements that it considers it needs to in meeting statutory requirements; the auditor’s role should then be to consider the reasonableness of what the authority has done. Where there is an issue that permits a plurality of possible viewpoints, the auditor’s job is to see whether they can construct a fence robust enough to be sat on so that they can admire the view on all sides.

The impact of the McCloud judgement is a good example. An insistence by auditors that the potential cost should be accrued in the financial statements. Reasonable arguments that the extent to which authorities might be required to fund remedies necessitated by government discrimination is too uncertain to allow any reliable estimates to be made being dismissed with a reiteration of the auditor’s expectations. Repeat of Step 2 with more reasonable arguments. Authorities agreeing to end the debate by amending the accounts, with little conviction that it is the right thing to do.”

Stephen Sheen: The state of local government audit

External auditors blamed for delays to local government accounts

“Auditors scrutinising local authority accounts and the body responsible for appointing them have come under fire after new figures showed 40% of audit opinions missed the target date of 31 July.

Public Sector Audit Appointments (PSAA), the body responsible for appointing auditors, this week revealed that 210 out of 486 audit opinions on local government bodies for 2018/19 were not delivered on time.

The figure has jumped sharply from last year, when only 13% of opinions missed the deadline.

Graham Liddell, managing director at financial reporting consultancy LPFG and former senior technical manager at the Audit Commission, said: “This is a failure of the audit firms and of PSAA who appointed them.

“Of course, local authorities can make improvements, but by and large local authorities delivered the accounts, and by and large auditors failed to audit them.

“All the audit firms have enough staff to deliver their portfolio of local authority audits, it is just that they have chosen to maintain their margins and prioritise other sectors.

“I have immense sympathy for public sector audit teams who have been a handed an impossible job by their employers, but none for the firms themselves.”

He said that PSAA has presided over a process which has seen audit fees driven down to unsustainable levels.

“The big question is what does it do next? For a start, PSAA needs to stop defending auditors and blaming local authorities.

“It then needs to think carefully about audit fee rebates and how loudly it is going to name and shame the culprits.”

In a statement, the PSAA said a number of factors had driven the deterioration in performance, including, in some cases, a shortage of appropriately skilled and experienced auditors.

It said that, in other cases, the standard and timeliness of draft accounts, or working papers, has been lacking.

Other delayed opinions arose from difficulties in obtaining responses to and resolving audit queries, and unresolved technical issues including matters arising within group accounts, it said. …”

Auditors and PSAA slammed after jump in accounts deadline failures

“Council to appoint investigator to examine award of £15k additional duties payment to chief executive”

“A borough council is to appoint an independent investigator to examine the procedure followed when an additional duties allowance of £15,000 per annum was awarded to its chief executive.

The allowance, which was backdated to October 2016, was approved by a previous Leader of Surrey Heath Borough Council to recognise the additional work and responsibilities undertaken by the chief executive.

The council said it had received a number of enquires on the matter.

In a statement Surrey Heath said: “At the request of the Chief Executive, the Performance & Finance Scrutiny Committee will be asked to consider the appointment of an independent investigator to examine the procedure followed to award the additional duties allowance. The Chief Executive’s basic salary for 2018/19 was £120,687 plus the additional duties allowance of £15,000.”

Cllr Richard Brooks, Leader of Surrey Heath, said: “The council is committed to openness and transparency. All councillors and officers will cooperate fully in the independent review with any recommendations taken to full council.

“In the meantime I would like to thank the Chief Executive Karen Whelan for her continued dedication and hard work on behalf of the council. …”

https://www.localgovernmentlawyer.co.uk/employment/395-employment-news/41212-council-to-appoint-investigator-to-examine-award-of-15k-additional-duties-payment-to-chief-executive

Dramatic rise in delayed local government audit opinions

“Urgent improvement” is needed after a sharp rise in delayed audit opinions in local government, said the organisation that appoints auditors to 98% of council, police and fire authorities.

More than 40% of audit opinions (210 out of 486) on 2018-19 statements of accounts missed the target date of 31 July, figures released today from Public Sector Audit Appointments showed. Last year, just 13% were not available by the target date.

Tony Crawley, Public Sector Audit Appointments’ chief executive, suggested the rise was because of a lack of skills and poorly filled out paperwork.

“The challenge for all of the parties engaged in the accounts and audit process is to address the need for improvement urgently,” he said.

Accounts and working papers needed to be “prepared to the right standard”, Crawley explained, and auditors should have “sufficient appropriately trained and skilled staff”.

He added PSAA “looks forward” to working with the government on its review of the local audit system, which is expected to include the timeliness of audit opinions within its scope.

Crawley added: “There is also a need to address the more strategic challenges which arise from the current debates about auditing following various widely reported financial failures in the private sector.”

Although the deadline date for audit opinions is not statutory, auditors and audited organisations strive to meet it when possible, and bodies that do not do so must issue a statement explaining why they were unable to. …”

https://www.publicfinance.co.uk/news/2019/08/psaa-records-dramatic-rise-delayed-audit-opinions