Host

Philippa Lamb

Guests

• Alison Ring, Director, Public Sector and Taxation, ICAEW
• Cecilie Booth, Executive Director of Resources, Peterborough City Council
• Paul Dossett, Head of Public Sector Assurance, London and South East, Grant Thornton UK

Producer

Natalie Chisholm

Transcript

Philippa Lamb: Hello and welcome to Behind the Numbers, I’m Philippa Lamb. Today we’re asking if the filing of local authority audited accounts will ever get back on track. Just 1% of local bodies published audited accounts on time for the 2022/23 financial year. Since then, the government introduced backstop dates, and the first one falls on December 13. But how many councils will meet that deadline, and will the backstops actually reset the system as hoped? If not, what’s to be done to fix this problem?

Alison Ring: It’s not just one thing that needs to be done. We have to look at it as the system that’s the problem. It’s a whole ecosystem that needs real consideration.

Paul Dossett: The backstop is realistically the only option that we’ve got on the table at the moment. Otherwise, we’ll be auditing sets of accounts for years and years.

PL: I’m joined in the studio by Alison Ring ICAEW Director of Public Sector and Taxation. Cecilie Booth, Executive Director of resources at Peterborough City Council and Paul Dossett, Grant Thornton UK’s Head of Public Sector Assurance for London and the South East, are both with us remotely. Good morning, everyone.

All: Morning. Good morning.

PL: Alison, we talked about this issue back in August, didn’t we? Do you want to quickly recap exactly where we’re at?

AR: So essentially the government has introduced legislation so that councils have to prepare published audited accounts by specific dates over the next few years. And as you said in the introduction, the first backstop date is 13th December, and that’s for all accounts up to the year ending 31st March 2023, and then the next backstop date actually comes along very, very quickly on the 28th February 2025 and that’s for the accounts for the year ended 31st March 2024.

PL: Do we have any sense of how many councils are likely to hit those deadlines?

AR: Everyone is encouraged, obviously, to hit those deadlines. But what will unfortunately happen is there’ll be a number of modified or disclaimed audit opinions in order to meet those deadlines.

PL: And it’s worth saying there aren’t any penalties, per se, for missing the dates, are there?

AR: No, it’s unlike the corporate sector. In the corporate sector, you have to file your accounts with Companies House, and if you don’t file them by certain dates, then you do start to get filing penalties. I mean, I have to say I’m not a great fan of penalties, particularly in this first era of backstop dates, but I think maybe if they’re not being met, that might be something that the government has to consider.

PL: Paul, how did we get here? What created this backlog?

PD: I think it’s a multifaceted problem. I think we can look at it from two sides: the local authority side and the auditor side. I think, you know, for the last decade or so, local authorities have had to deal with a huge range of financial challenges, and obviously, you know, that has led to prioritisation, in some cases, on other things. And having to deal with a whole series of complex issues themselves, accounts preparation, in some cases, has been difficult because there’s lack of capacity in some finance departments. It’s not all, but it’s some, and the accounts themselves have got a lot more complicated in the last decade or so. The previous Labour government introduced IFRS across the public sector, and IFRS is a complicated series of accounting standards, and that’s played out in the CIPFA code. Effectively, accounts have become more complicated to both prepare and to audit. So local authorities have also had to account for the move towards group accounts, the move towards investment, some complex investments, all of which have complicated accounts preparation.

So you’ve got the challenges on the local authority side, and then on the audit side, you have a position where, since the abolition of the Audit Commission, there’s been a very mixed sort of process of supervision of the audit regime. Under the Audit Commission regime, it was quite straightforward. The Audit Commission effectively supervised and managed and monitored auditors in every respect, and basically, from time to time, would ask them to prioritise particular issues. For example, when local authorities were investing in Icelandic banks, the Audit Commission asked all auditors to go away and look at that issue promptly and come back with reflections, and that’s the way the Audit Commission used to work.

PL: That ended in 2015, that’s right, isn’t it?

PD: That ended in 2015, so there’s been that lack of overall oversight of the regime. Then the actual audit work itself, there’s been new auditing standards. There’s been increased regulatory focus in the light of some of the challenges of the private sector that have, yeah, have caused an increase in regulatory focus, which means there’s both more work to do inherently because of auditing standards, and there’s more work to do because of the sort of regulatory feedback on the quality of audit work. Just to give you a really simple example of how that’s panned out at Grant Thornton, for the same volume of local authority bodies that we audit, we now employ 100 more staff than we did at the start of the pandemic, to do the same volume of work.

PL: Well, you’ve set out the challenges very well. Cecilie, I’m interested to know, from your point of view at Peterborough City Council, because, as Paul says, there’s been the pandemic, there’s been austerity, the whole process has become way more complicated. You’ve had difficulty recruiting and retaining staff. It’s a lot, isn’t it? Presumably, you’ve faced all those challenges at Peterborough.

Cecilie Booth: Yes, I think to a certain extent, we’re facing a perfect storm in that the council are getting more complicated. It’s very difficult to recruit and retain technical staff who have the experience and the patience, typically, to be honest, to prepare the accounts. They are very, very scarce, and…

PL: So you haven’t used interim, sorry to interrupt you, Cecilie, used interim staff?

CB: At times, we have used interims with mixed success. So personally, I’m quite reluctant to bring interims in because it takes a while before you realise they’re not necessarily up to the standard that we need to get the accounts closed. We also have three years on audited accounts. At the moment, the auditors are coming back with queries in prior years. The team are then pulled away to deal with queries in previous years, and then they’re not being able to meet the deadlines to close 23/24, in particular. We also tend to have a lot of disputes about things that, to me, are not that important. Valuations, for instance. We had an issue with technical valuation of our solar panels and it was a very small amount, it wasn’t material, but we spent two years trying to get an agreement with the auditors on the valuation that we had, the professional valuation we had obtained externally.

PL: Why did it take so long, Cecilie?

CB: That’s a very good question. I don’t know. At the time back in in 2019 we had an external professional valuation that the auditors didn’t agree with. And we kept providing the information; it wasn’t enough. Then the auditors went and got another valuation, and they wanted to speak to our valuers, who weren’t around any more, because this was three years later.

PL: I’m just going to ask Paul, do you see that sort of thing a lot?

PD: Yes, I see versions of that quite a lot. And I think the reason that it’s gone up the profile – probably 10 years ago, this would not have been an issue – but auditing standards require us to focus on the largest estimates, the most important estimates in the accounts. So asset valuation in general, because local authority asset values are very high because of all the property they own, and schools, etc, etc, therefore the auditing requirements for that work has gone up considerably in terms of the amount of time we spend on it. We spend an awful lot of time on asset valuations. And there is that challenge as to how valuable that is, because in local authority accounts, none of that, you know, depreciation and valuation movements hits the general fund. And the general fund, of course, is what matters to taxpayers, members, government, etc.

PL: So obviously, problems on both sides. Cecilie, where are you at now at Peterborough?

CB: So we have three years of unaudited accounts, and we have struggled to close down 23/24 because of the ongoing audit queries we’ve had. And I take Paul’s point about the valuation. That’s always a sticking point, always, with the audit, but this was not material. These were solar panels that we were using. It wasn’t an investment. It was a material issue, until suddenly it became material because of different valuations. So we’ve got three years unaudited accounts. We got an audit committee next week, and we’ll see what our auditors are saying about the backstop and where they’re going to get to with it. But I think it’s highly unlikely that we are going to get a full audit on either of those three years. We will get a disclaimer, I think, that’s what we’re expecting, which is for us, for an authority like Peterborough City Council, we have financial problems. We have exceptional financial support. For me, personally, from a professional point of view, it’s very, very important that we have that audit assurance. There is a perception even explaining that this is a national problem, and lots of authorities are in the same boat. It’s difficult for members to understand. They sort of think it’s because we’re not capable or competent. Reputationally, it’s bad for the council. It’s bad for everybody involved, really.

PL: Alison, everyone here is facing a huge raft of challenges. This new regime, why hasn’t it worked well?

AR: Well, Cecilie said, really, already, it’s just the perfect storm. You’ve had the lack of funding, then more demands on local authority services, social care, COVID, homelessness, the Ukraine. These are also exceptional things and more and more demands are made of local authorities. You’ve got the new auditing standards, as Paul referred to. You have the overlay of the IFRS on an existing accounting framework, and then, to cap it all, you’ve got all these different stakeholders involved, the FRC, CIPFA, MHCLG, LGA, councils, the NAO, ourselves, ICAEW…

PL: It’s a blizzard of acronyms, isn’t it?

AR: … but it’s also because they’re all coming at it from a different perspective. You’re just hearing the two perspectives there, really, of the audited body and the auditors. No one’s doing it because they think ‘Oh, we’re just going to do this to be awkward’…

PL: Absolutely.

AR: … but actually everyone’s trying their best. But actually, I do think we need to just really get some heads clashed together and say, ‘What are we going to do? This is not working.’

PL: Well, that takes us to our next point, really. We are where we are. Plenty of councils look very unlikely to have filed in time. Are these backstop dates going to get councils back on track? As you say, the next one’s February, but it’s not really looking like it, is it?

AR: Well, I think again, as Cecilie says, the problem is the snowball effect, where you have one set of accounts that aren’t finished effectively or audited, or fully audited or fully published, etc, then that creeps over to the next year with the opening balances. I mean, I think the hope is that maybe that we’re only going to be in this position for maybe two years. But, I mean, I think that’s an optimistic hope.

PL: Yeah. I mean, what do you think, Paul?

PD: I think I would agree with what Alison said there. I think the backstop is, realistically, the only option that we’ve got on the table at the moment. Otherwise, we’ll be auditing sets of accounts for years and years, and they will fall further and further behind. So the backstop does, as of the 1st of March assuming people have produced accounts, the backstop does draw a line under all of those earlier years, and then the next backstop is not for another 12 months. So 24/25 is a 12-month period for local authorities to produce accounts and auditors to audit them. Clearly, because of the opening balances issues, and we estimate 50% of local authorities will be backstopped, because of the opening balances issues that’s going to take some time to unwind in terms of removing qualifications and disclaimers of opening balances.

And I think we probably need to look at 2025 as a time where the main objective for the next calendar year, I think, is to get to a place where we are able to, accounts are able to be published, and auditors can do all the in-year expenditure, in-year income, those things, those items that truly affect the general fund balances or HOA balances, in detail, and that we get to a better place by the end of 2025. That having been said, the way to recover that opening balances position and get moved to an unqualified opinion is fraught with difficulty if an authority hasn’t been audited for several years. And I think there may need to be some sort of wider solution to that. Obviously government and other people are considering what that might be, but if you left it to the ‘just follow the auditing standards’, if a set of accounts hasn’t been produced for five years, sorry, if it hasn’t been audited for five years, you’re never going to get to a place where by the end of 24/25 audit, when the auditor’s going to be able to sign a true and fair opinion. That’s not going to happen, and it’s about how long that position lasts and what can be done to resolve that.

PL: Looking forward, Alison, what does ICAEW think about the need for wider structural reform? What would you like to see?

AR: Well, we did publish our vision for local audit. I think we just need to look at some lessons learned. We’ve still got recommendations from the Redmond Review from 2020, that need to be, I think, considered again. We’ve got recommendations made from the select committee around the use and users of accounts. So I think we do have to be bold, and it’s not just one thing that needs to be done. So we can’t just say, ‘All right, if we just fix the accounts, you know, that’s it, that’s the the solution’, we have to look at it as a system, that’s the problem. It’s a whole ecosystem that needs real consideration. Otherwise we are just going to fall into this situation again, I think.

PL: Cecilie, what’s your thinking about what needs to be changing within councils themselves?

CB: I suppose I’m thinking about …

PL: Do they understand the purpose and value of accounts as a starting point, do you think?

CB: I think the council understands the importance of having accurate accounts, and I think the council understands the importance of having timely accounts and meeting deadlines. From a personal point of view, I think that’s very important. We bring in external trainers every year to help members understand the accounts better, be able to scrutinise better. In fact, we have that training this week, and it’s not a big crowd pleaser but it helps members to understand what is it they need to look at, the changes, and they also hear a different voice, rather than hearing me talking about it all the time. So I think we do understand the importance, and we sort of understand the accounts. I think the accounts are far too complicated now, and I don’t really know how we can get around that. I remember saying the accounts are now 80 pages, they’re far too long. Now our accounts, I got 250 pages and trying to get proper engagement and proper understanding, it’s impossible. But what we also do, in accordance with a financial management code, we do a regular balance sheet review as well, to get members and officers as well to understand our balance sheet position, and the assets and liabilities, and understand what our capital financing requirement is, and the implications of taking on more borrowing. So we do try to make it more digestible, but it’s difficult.

PL: Are you unusual in bringing in external trainers?

CB: I think so. I do a lot of training myself as well, but members, to a certain extent, will say, ‘Well, you would say that and you always say that’. Having somebody externally coming in, and for the price, most local authorities are cutting back on all expenditure, but my view is that we need to cut down on the big stuff, not on the little stuff. Paying for an external trainer to come in and explain their accounts or local government finance, I think is a good investment, and our members appreciate it, and it’s not going to break … the stuff that’s going to break the budget is demand on children and adults and homelessness, not penny-pinching in trying to do training on the cheap. That’s my opinion.

PL: I can see Paul nodding.

PD: Absolutely agree with that point. I think it’s really important that members and officers that aren’t involved in finance do get to understand what the accounts mean. They are very complicated. Local government accounts are by far the most complicated in the public sector, by a long way. I do NHS audit as well; their accounts are far more straightforward. And there is a link between the fact their accounts are more straightforward and the fact that their audits usually get done on time. Those two things have a relationship, and there’s no doubt about that.

PL: What else do you feel as an external auditor that external auditors can contribute to moving this situation forward, perhaps in terms of the relationship with councils?

PD: I mean, I think we’ve sort of touched on the fact that where you get this position, where accounts are not audited for years, and there’s a whole range of reasons for that, and some will range from lack of resources on the audit side, or technical issues which we’ve touched on, which don’t appear to be of huge value from a member’s perspective, we have a difficulty in the relationship with some local authorities. There’s no doubt about that. And I think there needs to be a reset. And I do think the backstop does at least offer that chance to have a reset, a reset of the relationship. So I think that that’s really important. Once we get through February 25, I think, where it’s needed, it won’t be needed everywhere, but where it is needed, we need a reset of that relationship and a really clear approach to timetabling. I think what we’ve lost, what we’ve lost in the last five years, is a sort of drive towards deadlines and the commitment to deadlines. And I see that drifting off, both in terms of local authority responses in some cases, but also in terms of audit teams.

PL: Why do you think that is?

PD: I think people have to own and believe in the deadline. They have to believe there’s consequences for not meeting deadlines. And I think, obviously, Cecilie in her role, people like me in my role, I’ve had a long history of focusing on deadlines, but I think people coming into the profession now who see that they start on an honour audit on the 1st of January, and 18 months later, they’re still on it. They’re not going to be deadline-focused people, because their lived experience doesn’t say the deadline is important to them. So I think we just need, I think it’s part of this reset. It’s part of this reset at the end of February, with that backstop deadline that we all need to be part of a process of saying, right, 24/25 audits, whatever the outcome of it is, and even if you do get disclaimed opening balances or whatever it is, we need to meet that deadline. We need to set clear committee deadlines, and we need to focus on it, and we need to deliver and that requires both sides to work together.

PL: Alison, there’s a lot of tension here, isn’t there, between resources, audit quality, regulatory complexity. We need to find some sort of proportionality in all this. I know ICAEW sees it as a crucial issue, you’re doing a lot of work on it, aren’t you?

AR: Yeah. So we’ve got this campaign at the moment to actually really extol the virtues of having good financial skills in the local authorities, whether you’re a finance business partner, a finance director, etc, and actually the value of having those finance skills for the future. We need to invest in those finance teams, because I think in the end, if we try and cut the costs of, say, the finance team, or cut the cost of the audit, in the end, it costs more money. That’s what I would say.

PL: So the members who are directly interested in this, how can they get involved and, of course, also find support and guidance?

AR: We have so many free resources on our website, and we have a public sector community. We’ve got now over 13,000 members in that community, which is fantastic. And also I’m going to do a plug for the public sector conference on 6 December, which is virtual, and anyone can join up for that. And if you can’t make it on that day, you can listen to a recorded version later. But the point about the conference is it’s aimed at looking at the future skills required for the finance profession in the public sector. And it’s not the theory, this is what I’m really keen to emphasise, it’s around the practical things that you can do with new tools, such as AI or how do you actually interact with a counter-fraud professional –the practicalities of it as a finance professional in the public sector.

PL: In that vein, there’s a whole new content series, isn’t there, on the website? We’ll put the link in the show notes. But this involves case studies on best practice, so really hands-on guidance.

AR: But it’s really good. If you actually look at those case studies, the best thing is, well, obviously the case studies themselves, but it’s by people who are actually practitioners, and at the end of the case study, you’ll see there’s some top tips. And I think that’s the thing, it’s about the practice side of it, not just a theory.

PL: Thanks everyone. It’s a really, really interesting subject. I’ve no doubt we’ll come back to it, because obviously we’ve got backstop dates cropping up next year, early next year. If you are listening and want more detail, we’ll link to everything we discussed in the show notes for this episode. So go there first, and of course, as I said, the ICAEW website. Behind the Numbers will be back in December. We’ll be discussing how corporate sustainability reporting practices are evolving. Before then, join us for Accountancy Insights, covering the key news and updates you need before the end of the year. Thanks for listening.