The Public Accounts Committee (PAC) has today published a report on local auditor reporting on local government in England, in which it warns that “without urgent action from government, the audit system for local authorities may soon reach breaking point”. 

The PAC report follows a National Audit Office report published in March on the timeliness of local auditor reporting, which identified that 55% of local authority 2019-20 audit opinions missed the extended statutory deadline of 30 November 2020.

Evidence sessions were held in May with audit firms participating, with ICAEW submitting written evidence commenting that the delays to 2019-20 audit opinions were symptomatic of wider problems in local audit. These include limited capacity in the market, its unattractiveness to new entrants and the lack of understandability of local authority accounts. 

The PAC has reflected many of these concerns in their report, highlighting that there are only eight firms in the local authority audit market and two of those firms are responsible for around 70% of the audits. Fees based on bids made by firms in 2017 for the lots of local authority audits for the five years from 1 April 2018 no longer reflect the costs audit firms incur to carry out the work as audit requirements have increased.

The PAC also agrees with Redmond Review’s call for a systems leader for local audit, which was supported by ICAEW in the written evidence. They believe this needs to be addressed more urgently than the Ministry of Housing, Communities and Local Government (MHCLG)’s current plan of an interim liaison committee to oversee local audit prior to the Audit, Risk and Governance Authority (ARGA) assumption of regulatory powers over local audit that is not expected to occur until at least 2023.

The PAC report makes a series of recommendations for MHCLG including that it:

• works with the FRC and accounting institutions to implement quicker training and accreditation to increase the number of suitably qualified auditors;
• ensures that the Public Sector Audit Appointments (PSAA)’s next procurement brings fees into line with the cost of the audit work; and
• writes to the committee by September 2021 setting out its plans to get local audit back on timetable, its contingencies should more audit firms leave the market and how will it address the need for strong system leadership now.

ICAEW made many similar points in its response last week to PSAA’s market engagement exercise survey on the procurement strategy for local authority auditors for the 2023/24 to 2027/28 appointing period. However, this is in the context of PSAA’s current remit, which limits its ability to address many of the issues that the PAC has raised. More information on the survey, including the draft prospectus introducing the national procurement scheme, can be found on the PSAA website.

MHCLG has rejected Sir Tony Redmond’s recommendation for a single systems leader for local audit, with procurement retained by the PSAA while regulation goes to ARGA. PSAA will therefore continue to be the body responsible for appointing auditors to principal local authorities and police services that have opted into the national procurement scheme. 

PSAA is proposing to introduce a number of changes from the last procurement including:

• an increase in the total number of lots and a reduction in size of the largest lots;
• the adoption of an 80% quality: 20% price weighting compared to the previous 50%:50% split; and
• the inclusion of one or two lots specifically targeted at encouraging new entrants such as through joint arrangements with experienced suppliers. 

In its response, ICAEW welcomes PSAA’s proactive and innovative attempts to encourage new entrants into the local audit market and promote audit quality but we express concerns about whether some of the proposed measures will work in practice. 

ICAEW echoes the PAC’s call for audit fees that reflect the cost of audit work and so make the local audit market more attractive to new entrants. However, the current proposals make it difficult for firms to accurately calculate fees because the PSAA intends to allocate individual audits only after the awarding of lots. Instead, ICAEW calls for PSAA to divide lots based on geographic regions and publish details of which opted-in bodies are allocated to each lot in advance of the procurement so firms can assess the risks involved and hence provide more accurate bids.

You can read ICAEW’s response here: ICAEW Representation 64/21: PSAA market engagement for 2023/24 – 2027/28 appointment period

Alison Ring, Director, Public Sector, at ICAEW commented: “This report echoes many of our concerns about local financial reporting and audit in England. We agree there needs to be urgent action to improve the timeliness of local authority accounts, and to address the real risk of the local audit market collapsing because of its reliance on just eight firms, two of which are responsible for 70% of local audits.

“We support the PAC’s recommendations for making the local audit market more attractive to new firms, increasing the supply of appropriately qualified and trained auditors, and addressing the pressing need for an oversight body ahead of ARGA taking up the role in 2023. We are also very pleased that the PAC has recognised the need for government and local authorities to do more to improve the quality of council annual reports and financial statements, and make them easier to understand.”

Oliver Simms, Manager, Public Sector Audit and Assurance, at ICAEW commented: “The PAC is right to highlight that the market is unattractive and ICAEW made this point in our response to PSAA’s survey. While we strongly welcome the objectives PSAA have set around encouraging new entrants and promoting quality, we have concerns on whether the proposals as currently set out will achieve them. We recommend that PSAA make the procurement more transparent and attractive to firms by allocating local authorities and police services to lots in advance, enabling firms to submit more realistic bids.”

Read the full report: System of local government audit close to “breaking point”