The Department for Levelling Up, Housing and Communities (DLUHC) has announced a package of measures to tackle delays in local audit, following the news that only 9% of 2020-21 local authority audited accounts met the 30 September 2021 deadline. 

The planned measures include:

• A consultation in early 2022 on reforms to the Key Audit Partner (KAP) eligibility criteria, including the introduction of alternative routes for experienced Responsible Individuals.

• Development of additional support for audit firms including a technical advisory service and additional training.

• An additional £45m of funding over the three-year Spending Review period to support local authorities to invest in finance teams and meet the costs of audits.

• Strengthened guidance for local authority audit committees including a clear recommendation for the inclusion of independent members with a view to making this a statutory requirement in future.

• Specific grants for training for audit committee chairs.

• Agreement with CIPFA/LASAAC on a project to improve the presentation of local authority accounts in time for the 2022-23 financial year.

• A request to CIPFA/LASAAC to consider temporary changes to the Accounting Code over the valuation of operational property. 

• An extended deadline for the publication of audited accounts of 30 November for 2021-22 and then a deadline of 30 September for the following five years.

• An industry-led workforce strategy for local audit.

ICAEW called for many of these measures in its response to DLUHC’s technical consultation on the local audit framework, which closed in September 2021, and in its submission to the Public Accounts Committee (PAC) inquiry into the timeliness of local auditor reporting in July 2021. ICAEW believes that audit delays are symptomatic of wider problems in the local authority reporting and audit system and looks forward to DLUHC’s formal consultation response expected in 2022.

In the meantime, these proposals seek to address some problems identified by the Redmond Review into local authority financial reporting and audit, including the need to improve the understandability of local authority accounts and to strengthen local authority audit committees. Oliver Simms, Manager for Public Sector Audit and Assurance at ICAEW, commented: “We strongly agree with the government’s commitment to ‘a whole system response’ and are pleased the proposals announced this month are consistent with this approach.”

A key issue for many stakeholders is the disconnect between the areas of focus for local authority finance teams and the areas of focus for Financial Reporting Council Audit Quality Reviews, particularly around property valuations. Public sector accounting guidance requires many more assets to be revalued than is typical in the private sector, but then excludes revaluation reserves, depreciation charges and impairments from the key financial metrics of importance to local authorities. HM Treasury will be undertaking a thematic review of the valuation of operational property in public sector accounts, the area where this disconnect has proved most pronounced.

Henning Diederichs, Manager for Public Sector Financial Reporting at ICAEW, commented: “We welcome HM Treasury’s review into how properties are accounted for in local authority financial statements, as this has become a major issue for both finance teams and audit firms, both in satisfying increasingly onerous documentation and audit testing requirements and in making it difficult to meet deadlines given the resources available.

“We do not, however, support temporary amendments to the Accounting Code. These would just store up problems for future years and could result in prior-period restatements. If information about the valuation of operational property is not sufficiently important for users of the accounts in 2021-22, it is questionable as to how useful it will be in subsequent years.”

Although many of the measures that ICAEW has called for are included in DLUHC’s announcement, there are several that are noticeable by their absence. There is still no clarity about the future of the important technical networks currently run by the National Audit Office (nor whether the future system leader) will be responsible for the quality of local authority financial reporting. There is also a lack of clarity over whether larger local authorities will be treated as public interest entities as part of the wider audit reforms currently being consulted on by the Department for Business, Energy and Industrial Strategy (BEIS).

ICAEW also has concerns about how effective the proposed workforce strategy can be without looking across the whole system and the wider drivers causing talented professionals to leave local audit. Our submission to the recent PAC inquiry into local government finance called for “a clearer articulation” of “what local authority financial reporting and audit are for and why they matter”.

Although the package of measures includes additional funding for local finance teams and auditors over the next three years, the provisional local government finance settlement published on the same day only covered funding for local government for one financial year (2022-23). Uncertainty over future funding continues to be a significant challenge for local authorities in the effectiveness of their financial planning, making it more difficult to ensure that they obtain the best value possible from the public money they spend on our behalf. 

Alison Ring, Director for Public Sector and Taxation at ICAEW, commented: “We welcome the government’s measures and their commitment to a whole system approach to fixing many of the problems in the current broken local audit and reporting system. In particular, we support proposals to look again at the key audit partner eligibility criteria, and additional funding to strengthen financial reporting teams. However, there is a need for a clearer vision of what local authority audit and reporting is for, which the government and the new system leader with the Audit, Reporting & Governance Authority will need to take forward.

“It is vital for both local authorities and audit firms that government provides as much certainty as possible to allow for effective planning and so we were disappointed that the formal consultation response has been further delayed into the new year and that the opportunity of a three-year Spending Review has not been used to set a three-year local government finance settlement.”