The decision to close the Office for Local Government (Oflog) alone will not be enough to fix the local government audit system crisis in England, a parliamentary committee has warned. 

A letter to Secretary of State for Local Government Angela Raynor from the Housing, Communities and Local Government Committee calls for clarification on the government’s strategy to overhaul the local audit system in England.

The strategy, under consultation until 29 January, includes the establishment of the Local Audit Office (LAO) with a remit to coordinate and lead the local audit system, contract manage (including setting fees and appointing auditors), setting a Code of Audit Practice, oversight (including inspection, enforcement and supervision), and reporting.

Lessons from former Audit Commission

In the letter, committee chair Florence Eshalomi welcomes steps announced by the government to address the broken local audit system, but called for an explanation on how the LAO will ensure that lessons are learned from the experience of the former Audit Commission.

“We would also be grateful if you could explain how the new Local Audit Office will work to ensure that the production, content and format of local authority accounts is aligned with the purposes of the accounts, once these have been agreed following consultation,” the letter says.

It also urges clarity on proposals in the consultation, in particular the future role of the Financial Reporting Council and other bodies currently involved in the local audit system once the LAO takes over system leadership.

Lack of pace on audit reform

ICAEW is preparing its response to the consultation. It warns of a lack of pace in responding to the crisis and continues to advocate for fundamental reforms to ensure that we do not return to the same position of a backlog of published audited accounts in the future. 

Alison Ring OBE FCA CPFA, Director, Public Sector and Taxation at ICAEW, says: “Irrespective of where the role of system leadership sits, we must have financial statements that are clear for councillors and residents, since accounts are the bedrock of democracy, accountability and understanding of local government effectiveness and efficiency.

“As the government considers its approach to local government, the Ministry of Housing, Communities and Local Government should identify and align data requirements across central and local government to reduce duplication and the production of inconsistent and unused data. This requires sustained investment in local authority finance teams,” Ring adds.

Whole of government accounts disclaimed

In December, for the first time, the National Audit Office (NAO) disclaimed the 2022-23 whole of government accounts, caused in part by a lack of data from English local authorities; only 10% of England’s 426 councils submitted reliable date due to severe audit backlogs in the system. This has knock-on effects for the audits of other local public bodies such as in the NHS.

In its vision for local audit, ICAEW warns that there is insufficient capacity in the local audit market, while auditors, finance teams and regulators are not aligned in their view of audit risks. Under-resourced finance teams struggle to produce good quality working papers. Local authority finance teams and audit firms struggle to retain staff in the profession.

High-profile governance failures have led to significant financial losses. Meanwhile, “impenetrable” financial statements are not well understood and are not being used effectively to hold local public bodies to account, ICAEW says.

Further reading

Local audit crisis requires urgent attention, warns NAO