The Department for Levelling Up, Housing and Communities (DLUHC) is consulting on proposed legislative changes that would force local authorities to publish their audited financial statements by specific deadlines, even if their auditors aren’t yet satisfied with them.

The proposed changes to the Accounts and Audit Regulations 2015 (AAR 2015) that regulate audited financial statements for local authorities in England are part of a series of measures to clear a backlog of 771 overdue audits as at 31 December 2023.

The first phase of the proposals will require larger local authorities to finalise all their outstanding audited financial statements by 30 September 2024, bringing audits up-to-date for financial years 2015/16 through 2022/23. For the most recent financial year ending 31 March 2023, this will be 18 months after the balance sheet date.

Phase two relates to the current and future financial years, and proposes gradually shortening the statutory deadline for audited financial statements until it aligns with what was previously a target date for publication of eight months after the year-end, as follows:

• 2023/24: 31 May 2025 (14 months)
• 2024/25: 31 March 2026 (12 months)
• 2025/26: 31 January 2027 (10 months)
• 2026/27: 30 November 2027 (8 months)
• 2027/28: 30 November 2028 (8 months)

If confirmed, these proposals would require external auditors to complete their audits even if they have been unable to obtain sufficient appropriate audit evidence in time. This would result in an auditor having to issue a modified opinion, either through qualification or through issuing a disclaimer of opinion.

Parallel proposals have also been launched by the National Audit Office, which is consulting on consequential changes to the Code of Audit Practice. The CIPFA LASAAC Board will also consult shortly on related changes to the Code of Practice for Local Authority Accounting

As the rules currently stand, local authorities can issue a delay notice if an audit has not been completed by the target date set by central government. The proposed amendment would mean that local authorities will need to publish their audited financial statements including any modifications that may be necessary to the audit opinion.

In a statement, DLUHC said: “This consultation seeks views on amending the Accounts and Audit Regulations 2015 as part of a package of cross-system measures to clear the backlog and put the system on a sustainable footing.”

Only 1% of English councils - that is five out of 467 – managed to get their 2022/23 financial statements signed off by the 30 November 2023 target date. Some local authorities still have unaudited accounts going back as far as the 2017/18 financial year.

Worryingly, delays are prevalent across local authorities who have issued s114 ‘bankruptcy’ notices: all seven councils who have issued such a notice since 2020 have delays in publishing audited financial statements of at least three years. They include Slough, one of ten public bodies with five years of unaudited accounts, and Woking, Croydon, Nottingham and Thurrock, who are each missing four years of audits. This highlights a key risk of financial issues going undetected at local authorities as a result of the delays.

Alison Ring OBE FCA, ICAEW Public Sector Director, said: “The growing crisis in auditing local authority financial statements has undermined trust in the numbers, at a time when councils are having to make tough choices based on financial information that has not been subject to the rigours of an external audit.

“Audited financial statements are critical to effective financial management in local authorities and how they are held to account. We hope that as many local authorities as possible will be able to resolve accounting issues in time and publish audited financial statements with clean audit opinions. Some local authorities may receive a modified audit opinion, but on balance this is preferable to allowing the local financial reporting and audit crisis to continue to go unresolved.”

Ring said this was a short-term measure to tackle the symptoms that have given rise to audit delays and marked a first step to returning timely accountability to local authorities on a regular basis. “However, it is essential that we also address the underlying issues facing local authority finance teams in preparing financial statements and the external auditors in auditing them,” Ring added.

ICAEW has called for reform to make the accounts more understandable and used more effectively in holding local authorities to account. It also says investment in finance teams is needed alongside better governance and improvements to accounting processes and controls, and steps to expand capacity in the local audit market.

DLUHC’s consultation is to run for four weeks and will close on 7 March 2024.