1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Housing, Communities & Local Government (the Department); Public Sector Audit Appointments Ltd (PSAA); audit firms EY and Grant Thornton; and from Sir Tony Redmond, author of Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial Reporting [the Redmond Review]. We also received written evidence from a number of individuals and organisations.
2.In 2019-20, the 487 local authorities, local police and local fire bodies in England were responsible for approximately £100 billion of net revenue spending. Local authorities are responsible for delivering many of the public services which local taxpayers rely on every day. Local authorities are required to prepare and publish financial statements setting out their financial performance and to account for how they have used their resources in the year. The Local Audit and Accountability Act 2014 (the 2014 Act) set out the local audit arrangements from 1 April 2015 that apply to local authorities. Multiple organisations play a part in the local audit system, including: the Ministry of Housing, Communities & Local Government (the Department); the National Audit Office (NAO); Public Sector Audit Appointments Ltd (PSAA); the accountancy institutes: the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Institute for Chartered Accountants of England and Wales (ICAEW); the Financial Reporting Council (FRC); and audit firms.
3.The Department has oversight of local authorities and is responsible for maintaining a set of statutory codes and rules for local authorities. The NAO maintains a code of audit practice for audits of local authorities and issues guidance to auditors. PSAA is responsible for securing arrangements for the independent appointment of auditors on behalf of local authorities which opt into its services and for setting audit fees. The external auditors audit the financial statements of local authorities and conclude on whether an authority has made proper arrangements for securing value for money. The FRC monitors and reports on the quality of these audits. The Department for Business, Energy and Industrial Strategy (BEIS) will become the sponsor department for the new Auditing, Reporting and Governance Authority (ARGA), once it is established, but the Department will hold Accounting Officer responsibility for the local government role of ARGA.
4.The Accounts and Audit Regulations 2015 specify a date by which a local authority should publish its accounts. The auditor needs to provide its opinion on the local authority’s financial statements in time to enable the authority to include it in its published financial statements. The original deadline for local authorities to publish their 2019–20 accounts was 31 July 2020. The Department put the deadline back to 30 November 2020, under the Accounts and Audit (Coronavirus) (Amendment) Regulations 2020, to reflect the burden on local authorities and audit firms of the COVID-19 pandemic. By the extended deadline of 30 November 2020, only 45% of local authorities had published their 2019–20 accounts. This compared with 57% of local authorities which published their audited accounts on time in 2018–19 and 87% in 2017–18.
5.We asked the Department what impact delays to audit delivery were having. The Department emphasised the importance of timeliness in auditing local authorities and the serious risks that arise from any delays as management action to address any failings is subsequently delayed. The Department also highlighted that delays in auditing local authorities had wider repercussions, including on audits of some government department accounts and the production of the Whole of Government Accounts. For example, the 2019–20 audits of the Care Quality Commission and of the Department for Environment, Food & Rural Affairs, were delayed due to issues with the audit of the Local Government Pension Schemes. The Department considered that a local authority was in a stronger position to complete its budget setting process each Autumn if its auditors had already completed their audit of the previous year’s accounts, as the audited accounts often formed the underlying basis for the budget setting process. The Department felt that audited accounts provided confidence, assurance and transparency for the budget setting process. It noted that there had been recent cases where an audit had revealed information that affected the value of a local authority’s reserves and which had knock-on effects on future budgets.
6.The London Borough of Hackney was concerned that in May 2021 it was still awaiting the audit opinion from the audit of its 2019–20 accounts, and that this had been the first time in many years this had occurred. The borough told us it considered the delay brought it reputational issues and also affected the assurance that those charged with governance expected from its financial statements for 2019–20. Durham University considered it was essential that audited financial information was published on a timely basis, emphasising that the information formed the basis for decision makers about how funding was allocated and where it went, for citizens to evaluate the way that local services were run, and for stakeholders to scrutinise financial performance.
7.We asked the Department to explain the causes of delays to audit firms’ audits of local authorities, given these had begun before the impact of COVID-19. The Department indicated that there was no single cause for the delays in completing audits of local authorities from 2018–19 onwards, and that a variety of factors had been responsible. Staff in the finance function of local authorities and audit staff had been required to perform additional work in response to increasing requirements from regulators. The Financial Reporting Council (FRC) had increased its expectations of audits following high profile corporate failures, such as Carillion. As a result, audit firms had faced a significant increase in work in completing local authority audits, such as on asset and pension valuations, and audit staff had also been reliant on receiving timely responses from valuers. The Department considered that these changes were factors in delaying audit completions.
8.The deadline for local authorities to publish their accounts has changed over time, being 30 September up to 2017; 31 July for 2018 and 2019; and for 2020 the original 31 July deadline was extended to 30 November. Grant Thornton felt that the deadline of 31 July each year was no longer sustainable due to the complexity of local authority financial statements and the amount and nature of work that auditors were required to do. Grant Thornton considered that the earliest date each year to which auditors could complete audits of local authorities, to the right quality standards, was 30 September. The London Borough of Hackney also told us that earlier audit deadlines were not achievable, particularly for larger, complex, authorities.
9.We pressed the Department on when we would see improvements in the timeliness of local authorities publishing their audited accounts. The Department felt that it would not be possible to bring timeliness back on track in one audit cycle in 2021, given the impact of Covid-19. It explained that it had adjusted the deadline for local authorities to publish their accounts to 30 September for 2021 and 2022. It would then review what the appropriate deadline should be. It expected to have better visibility of the completion of local authority audits by 2022, and that we would see progress in timeliness in the audit cycles for 2021 and 2022. The Local Government Association noted that the move of the audit deadline to 30 September for the next two years was a positive one.
10.High-quality audits of local authority financial statements are important to assure taxpayers, stakeholders, and users of the accounts, that local authority accounts have been properly prepared, and to maintain trust in audited accounts. The FRC is the independent body responsible for monitoring the quality of major local authority audits. The Institute of Chartered Accountants in England & Wales (ICAEW) monitors the quality of other local audits. In October 2020, the FRC raised concerns over the quality of local audit. It found that just 40% of audits required no more than limited improvement, down from 64% in 2018–19.
11.The Department said it considered itself to be the steward of the system for auditing local authorities and acknowledged that it was important to maintain the quality of audits of local authorities. Audit firm EY told us that it safeguarded quality before deadlines. It explained that it would not provide an opinion on its audit of local authority to an “arbitrary deadline” or without sufficient evidence, at the appropriate quality, to support it. Audit firm Grant Thornton felt it had come under pressure to complete its audits to time, but,as with EY, it emphasised it felt it was more important to deliver the audit opinion to the right quality and only issue the audit opinion when it was ready, than to meet deadlines. Grant Thornton believed that this was the right thing to do, as otherwise it would not be giving the right level of assurance to local authorities on their financial statements and on their financial sustainability. The Local Government Association also recognised that the extra work demands on auditors in auditing local authorities had led auditors to de-prioritise deadlines.
12.Sir Tony Redmond emphasised the need for much greater transparency in the financial reporting of local authorities, to turn accounts that were impenetrable to the public into simpler information that the public wanted to know about. His review had recommended that the Chartered Institute of Public Finance and Accountancy (CIPFA) examine whether the accounts could be simplified, but he did not feel that this could be fully achieved within the framework of statutory accounts. Sir Tony considered that a simple standardised statement would help the public to understand a local authority’s financial position and how it had performed. He proposed a further way to bring greater transparency to the public would be for a local authority’s auditor to present a report to its council members each Autumn. He explained that the report to the council meeting would be in the public domain, and provide an opportunity to cover the issues of interest to the public. Sir Tony acknowledged that the desire for greater transparency had to be balanced against any sensitivity of the information, in deciding what could be disclosed.
13.Durham University highlighted that local authority accounts were an important means of democratic accountability, and could cover issues of financial sustainability, financial and service resilience and equity, and that work was needed to resolve questions of what local electors should be getting from accounts and the functions that accounts should be performing. The University agreed with Sir Tony’s proposals for bringing performance and financial information together and the need to make the data accessible to users of the accounts. The ICAEW also pointed out that financial statements were critical to decision making and a key tool in ensuring local authorities were accountable to councillors and residents, but they were not understandable or sufficiently transparent.
14.The audit firms EY and Grant Thornton told us that some local authorities had increasingly complex financial arrangements, for example in their borrowings, investments and financial instruments. EY explained that the more investment properties a local authority held, the more difficult it had become to arrive at valuations for the properties. EY added that the valuation of assets supporting pension funds and of investment properties required significant input from its specialist real-estate valuation teams to ensure that valuations were appropriately reported. The audit firms pointed out that, at the same time, the FRC had challenged auditors to improve the work they do in auditing these complex arrangements, and held the audit firms to account for the quality of their audit work.
15.Sir Tony Redmond told us that local authorities considered that audits give too much attention to the valuations relating to pension funds and property. He added that local authorities believed the work that auditors had to carry out on valuations was excessive, as they argued that these valuations did not have an impact on their financial resilience and overall financial stability. Sir Tony confirmed that he agreed with local authorities. He considered that some areas of audits to which the auditors gave much attention were not proportionate to the risk to the overall financial stability and resilience of local authorities. The Local Government Association also pointed to the additional work that audit firms are required to do as a result of the requirements of the FRC, and that many believed this work was not a high priority in the governance of local authorities.
16.The Department agreed with Sir Tony’s assessment that local authorities’ audited accounts were hard reading, and with his proposal for a summary statement in plain English. The Department had asked CIPFA to look at simplifying local authority accounts. This included examining the issues behind the growth in the length of statutory accounts and the scope to simplify the code of accounting practice. The Department also wanted the new system leader to look at whether it could reduce some of the accounting and audit requirements for local authorities, where they related to areas of less risk.
17.In May 2021, the Department announced its updated response to recommendations in Sir Tony Redmond’s review, from September 2020. We challenged the Department on whether the new arrangements would have any real effect on the efficiency of local government auditing. In the response, the Department expressed its view that the Audit, Reporting and Governance Authority (ARGA), the new regulator being established to replace the FRC, would be best placed to take on the local audit system leader role. The system leader would be a single body aiming to resolve the fragmented structure of public sector audit, which is dispersed around different bodies, and with no one body looking for systemic problems, co-ordinating different parties, or monitoring and acting on emerging risks. The Department believed the proposals it had announced would tackle the weaknesses in the market for auditing local authorities and the fragmented nature of the different responsibilities of the bodies involved. We questioned whether ARGA would really have the degree of independence needed to look at the specifics of local government audit. The Department indicated that ARGA would establish a unit with local government audit expertise, aimed at ensuring that the specific nature and circumstances of local government were not ignored.
18.Given that ARGA is not going to be set up until 2023 at the earliest, we pressed the Department on what would happen in the interim. The Department acknowledged that it would take time to establish ARGA, and that doing so would require legislation. It accepted the importance of having stronger system leadership during the transition to establishing ARGA. The Department reported that, in the interim, it would chair a liaison committee to bring responsible bodies together. It recognised the need to take actions that would have the greatest impact quickly, and to tackle immediate issues, such as consultation on changes to regulations that set audit fees.
19.The Department had asked PSAA to continue as the appointing body for procuring audit services, unlike the recommendation in Sir Tony’s review to create a new body as a system leader, an Office of Local Audit and Regulation, which would have had responsibility for procuring audit services. When we asked why the Department had taken a different approach, it explained that, in its view, including procurement within the system leader would have created a potential conflict of interest and it envisaged there would be a benefit from independence between the procurement process in PSAA, and the oversight of quality in ARGA.
20.The Department confirmed that ARGA would be accountable to the Secretary of State for Business, Energy and Industrial Strategy. The Department explained that it would hold Accounting Officer responsibility for the local government role of ARGA and for all aspects of the local government audit and accountability system, including public interest reports which enable auditors to put into the public domain their concerns and recommendations for action on matters that come to their attention in their work. The Department added that it would need to work within the oversight arrangements for ARGA, to ensure that the interests of local government were properly reflected and represented.
1 C&AG’s Report, Timeliness of local auditor reporting on local government in England, 2020, Session 2019–21, HC 1243, 16 March 2021
2 Sir Tony Redmond, Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial Reporting, September 2020
3 C&AG’s Report, paras 1, 1.3, 1.5, Figure 1
4 C&AG’s Report, Figure 1 and para 1.4
5 C&AG’s Report, para 1.8
6 C&AG’s Report, Figure 2 and para 9
7 C&AG’s Report, Figure 3
8 Q 15 evidence session of 20 May 2021
9 C&AG’s report, para 2.9
10 Q 17 evidence session of 20 May 2021
11 London Borough of Hackney submission paras 5 and 6
12 Centre of Public Accountability, Durham University submission, page 1
13 Q 13 evidence session of 20 May 2021
14 C&AG’s Report, para 2.16
15 Q 13 evidence session of 20 May 2021
16 C&AG’s Report, Figure 2
17 Qq 4, 26 evidence session of 17 May 2021
18 London Borough of Hackney submission, para 4
19 Q 41 evidence session of 20 May 2021
20 Local Government Association submission, page 2
21 C&AG’s Report, para 1.2
22 C&AG’s Report, para 2.25
23 C&AG’s Report, para 2.28
24 Q8 evidence session of 20 May 2021
25 Q 14 evidence session of 17 May 2021
26 Qq 2, 7, 31 evidence session of 17 May 2021
27 Q 9 evidence session of 17 May 2021
28 Local Government Association submission, page 1
29 Q 59 evidence session of 17 May 2021
30 Q 60 evidence session of 17 May 2021
31 Q 62 evidence session of 17 May 2021
32 Centre of Public Accountability, Durham University submission, page 3
33 Institute for Chartered Accountants in England and Wales submission, pages 1, 3, 4
34 Qq 3, 19 evidence session of 17 May 2021
35 Q 38 evidence session of 17 May 2021
36 Qq 3, 8 evidence session of 17 May 2021
37 Q 46 evidence session of 17 May 2021
38 Q 47 evidence session of 17 May 2021
39 Local Government Association submission, page 1
40 Q 19 evidence session of 20 May 2021
41 Q 47 evidence session of 20 May 2021
42 Ministry of Housing, Communities and Local Government, , 19 May 2021
43 Sir Tony Redmond, , September 2020
44 Q 4 evidence session of 20 May 2021
45 Qq 22, 23 evidence session of 20 May 2021
46 Q 6 evidence session of 20 May 2021, Ministry of Housing, Communities and Local Government, , 19 May 2021, paragraph 77
47 Qq 6, 40 evidence session of 20 May 2021
48 Q 21 evidence session of 20 May 2021
49 Q 22 evidence session of 20 May 2021
50 Q 70 evidence session of 20 May 2021
51 Qq 25–27 evidence session of 20 May 2021
52 Q 23 evidence session of 20 May 2021