The government has confirmed that the newly announced regulator, the Audit Reporting and Governance Authority (ARGA), will become the system leader for local authority and health audit, as part of its response to the consultation on local audit framework published today (31 May), alongside its response to the consultation on reforms to corporate audit.

The response provides details about how the government intends for ARGA to operate as the local audit system leader including:

• ARGA will have a specific objective ‘to ensure the local audit system operates effectively’.

• Responsibility for setting the Local Audit Code and Guidance and the associated support networks will transfer over from the National Audit Office.

• A board member will be recruited with specific responsibility for the local audit unit.
• ARGA will be tasked with producing an annual report on its activities as system leader and the findings from local audits.
• The system leader will be funded directly by the Department for Levelling Up, Housing and Communities.

The response also includes an announcement that the government intends to legislate for all local authorities to have an audit committee with at least one independent member. ICAEW called for this change in its response to the consultation and in a recent submission to a House of Commons Public Accounts Committee inquiry into the local government finance system.

However, the government has not adopted ICAEW’s recommendation for the system leader to have specific objectives for promoting improvements in the quality and understandability of local authority reporting. The response states that the government does not intend for ARGA to have powers over individual audited bodies.

A shadow system leader arrangement at the Financial Reporting Council (FRC) will start from September 2022, until ARGA is established. Neil Harris, currently a Key Audit Partner at EY, will lead the new dedicated local audit unit as FRC’s first Director of Local Audit.

“We welcome the establishment of a system leader for local audit as a step to fixing the current crisis in the local audit system,” says Alison Ring, ICAEW’s Director of Public Sector and Taxation. 

However, Ring stresses that we will need to see improvements to local authority financial reporting and financial management in order for ARGA’s new team to be effective: “There is a pressing need for measures to make accounts more accessible and for ARGA to have powers over audited bodies.”

Support networks, such as the Local Audit Advisory Group, will continue, which is welcome news, Ring says. 

ICAEW is also pleased to see confirmation that local authorities fall outside the expanded definition of public interest entities (PIEs). Mandating audit committees will be of significant benefit to local authorities, explains Ring, providing challenge to council leadership and management on behalf of the public. Elsewhere, however, the response is lacking.

“Overall, these are tepid measures which will make limited difference to the overall health of the sector,” says Ring. “We need radical action to tackle over-complicated local authority accounts, weaknesses in financial management and a local audit market that is unattractive.”

The Chartered Institute of Public Finance and Accountancy (CIPFA) welcomed the confirmation that ARGA will be the systems leader for local audit, while expressing concerns about the current state of the local audit market, in particular the delays in publication of audited financial statements. 

“These delays have a substantial impact on staff resources, which in turn affects policy delivery – including the government’s Levelling Up agenda,” says Rob Whiteman, CIPFA CEO. “ARGA’s new dedicated team will need to have the right skills and experience if it’s to bring about positive and meaningful change to the sector.”

CIPFA also welcomed the government’s proposal to make audit committees compulsory for all English local councils. “We believe that an effective audit committee is essential for good governance arrangements – so this is good news.”

See also ICAEW’s broader response to the government’s announcement on corporate governance and audit reform.