The shortcomings of local government audits: why collaboration is needed to fix the problem
04 February 2021
It is safe to say that there has been an alarming fall in the quality of local government audits over recent years. In the 2018/19 audit year, a staggering 40% of audit opinions did not meet the target date of 31 July. And yet important deadlines being missed is not the only issue. A significant amount of audits have not met the desired standards and the market remains in a precarious state. What’s more, the government-issued Redmond review highlighted an absence of system leadership and a failure in making reports accessible for taxpayers.
But what caused these shortcomings?
There are numerous issues present throughout the local audit process and, with so many different bodies involved, the problems cannot be placed on one individual’s or organisation’s shoulders.
Inexperienced auditors play a part, as do budget cuts, and these each impact one another. With local authorities struggling to find funds to pay the desired audit fee, auditors have little time and a reduced ability to complete their work to the calibre expected. Having less money to spend has also led local authorities to make riskier financial choices. This has made the market an even more unappealing prospect for audit firms and does not help them to recruit skilled auditors. Sir Tony Redmond worries that these problems could lead to firms leaving the market and consequently leaving local government audits in an even more fragile position. Furthermore, with financial reports not transparent enough for the general public, taxpayers are unable to hold their local authorities accountable.
What are the government doing to tackle the problem?
Responding to the recommendations in the Redmond review, the department of Ministry of Housing, Communities and Local Government (MHCLG) have introduced several measures. These include:
- providing local authorities with a further £15 million in funding for 2021/22 to help them pay higher audit fees and improve the clarity of their statuary accounts, so that taxpayers can better understand them and hold their local government responsible
- temporarily changing the deadline for publishing audits from the 31st of July to the 30th of September to help relieve the growing pressures on audit firms
- introducing a requirement for external auditors to present their audit reports in council meetings to address any issues as quickly as possible
The MHCLG have decided not to implement Sir Tony Redmond’s proposal for a new regulator to supervise the entire local audit process. Although this was recommended to address the incoherency caused by a lack of leadership overseeing all the organisations involved, the government hope that their other actions will be enough to turn things around.
Nonetheless, with multiple organisations implicated in local government audits, the government recognise that 'a collaborative effort' is key to achieving positive change. As such, they have pledged to work with key stakeholders going forward.
The importance of collaboration
From regulators such as the FRC and professional bodies like PSAA, to audit firms and local authorities themselves - there are a range of different organisations who have a vital role to play throughout the local audit process.
ICAEW have summarised how they anticipate MHCLG will work with these stakeholders. For example, they will:
- look into the entry requirements for Key Audit Partners with the FRC and ICAEW, who, as regulators, are both keen to see an improvement in the standard of local audits
- create a suitable framework for the audit profession by liaising with the government Department for Business, Energy, and Industrial Strategy (BEIS) and empowering those who work in local audit to influence the process
- support local government to improve their understanding of their finance team resources and encourage them to think about how they can best boost their resources
The government also intend to set the Redmond review recommendations swiftly into motion by communicating with the Treasury, who are responsible for identifying and managing public finance risks and are currently failing in this regard.
The future of local auditing
It is likely that successful collaboration between regulators, audit firms, local authorities and government departments will mean the difference between local government audits improving their shortcomings or succumbing to an even worse state. This is a prospect that it is firmly in the minds of relevant stakeholders.
ICAEW, for instance, argue that “all these stakeholders need to work with each other and not against each other if local authority financial reporting and audit are to be resilient, relevant and reliable.”
Some have already made the commitment to collaboration. David Rule, the executive director of supervision at the FRC, states that the regulator “will be working with stakeholders on the Redmond review recommendations.”
This bodes well for the future, although there is undoubtedly much work to be done in ensuring that the shortcomings of local government audits are resolved and the quality improved. In a time of uncertainty and change, discover more about how you can instigate positive change in the audit profession.