The House of Commons Public Accounts Committee (PAC) recently launched an inquiry on the local government finance system and its challenges. On Monday 29 November 2021, PAC held a formal meeting where MPs questioned officials from the Department of Levelling Up, Housing and Communities (DLUHC) and HM Treasury.

The meeting covered topics as wide-ranging as social care and the financial sustainability of local authorities. However, in light of the news that only 9% of local authorities managed to publish audited 2020-21 accounts by the statutory deadline of 30 September 2021, a significant focus was on the significant problems in local audit. 

MPs accused the officials of “flying blind” in their assurances that the financial data they have from local authorities shows that the sector is financially sustainable because they lack the external assurance from timely audits.

ICAEW submitted evidence to the inquiry, which echoed many of the points previously made in its response to DLUHC’s consultation on the local audit framework. The evidence stated that the “government’s response so far has not recognised the urgency of the crisis in local authority reporting and audit”. It called for action to increase the attractiveness of local audit ahead of the forthcoming 2022 procurement.

ICAEW’s evidence was directly quoted by MPs on three occasions during the hearing. Sir Geoffrey Clifton-Brown MP used ICAEW’s example of comparing the audit fee for a FTSE 250 company to that charged for a much larger-sized council to ask whether the government needs to provide more funding for adequate fees to sustain high-quality audits. The DLUHC officials confirmed that they expect audit fees to increase.

ICAEW’s submission highlighted that the timeliness problems were symptomatic of the wider issues in the reporting system. It called for the strengthening of local authority finance teams and governance and a strategy for addressing the low level of reserves in many local authorities. 

ICAEW also highlighted to PAC that there would be significant benefit from a parliamentary enquiry into the purpose of local authority accounts as this could act as a catalyst for addressing Sir Tony Redmond’s conclusion that local authority accounts are “impenetrable”. The recommendations in the report arising from the Public Administration and Constitutional Affairs Committee’s (PACAC) 2016-17 inquiry into central government accounts had a positive impact on central government financial reporting.

In addition to submitting evidence to PAC, the ICAEW public sector team continues to work with key stakeholders to push for action to address the significant issues. ICAEW is involved in the Financial Reporting Council and CIPFA-led working groups looking at the Key Audit Partner eligibility criteria and training and technical support for auditors.

ICAEW has also been emphasising to DLUHC that it will not be able to address the timeliness issues in local audit without tackling the wider issues and has asked for the government response to be driven by the three principles of a whole system approach, sector attractiveness and reducing complexity. 

Oliver Simms, Manager, Public Sector Audit and Assurance, at ICAEW commented: “It was good to see MPs on the Public Accounts Committee understand how delayed audit opinions undermine the Department for Levelling Up, House and Communities’ monitoring of local authority finances and question key government officials on this important topic using ICAEW’s evidence.”

“The timeliness issues in local audit are however symptomatic of a wider broken reporting and accountability system. We hope when the Department publishes its response to the consultation on the local audit framework, it takes a whole system approach and proposes concrete measures to increase the attractiveness of local audit and reduce unnecessary complexity”.

You can read ICAEW’s submission to the Public Accounts Committee inquiry Local government finance: Overview and challenges here. A transcript of the formal meeting is here.

You can read ICAEW’s response to the Department for Levelling Up, Housing and Communities Local audit framework: technical consultation here.