Local government’s audit crisis

Plans to fix local government’s audit problem amount to only ‘sticking plaster interventions’. These are the words of senior politician Meg Hillier, an MP and chair of the influential House of Commons Public Accounts Committee (PAC).

In PAC’s recently published annual report, Hillier writes: ‘Local authorities need timely audits, so they know the resources which they have available and can make informed budgetary decisions. However, the backlog of audit opinions is unacceptably high.’

Indeed, the numbers are eye-watering for a country that prides itself on stable governance. At the end of September 2023, incomplete audits peaked at 918. Only 12% of audit opinions arrived in time for the 2021-22 deadline, and that was after extensions.

Work has continued, however, and it is understood that around 700 audits remained outstanding as of December 2023. Hillier adds: ‘Delays increase the risk that issues will go undetected.’

Of course, the sector did not need Hillier to tell it what it already knew. Some councils have two or even three years of incomplete audits. The repercussions have been mixed. In some cases, finance teams have witnessed a lifting of the stress associated with audit simply because audit teams have been absent.

In other cases, anxiety levels have peaked, according to some sources, as finance teams face increased demands as audits go through a stop-start process that is out of kilter with the usual annual work cycle. A changed audit methodology, according to insiders, has also expanded workloads.

The crisis is not without context. The core spending power of England’s local authorities dropped 20% between 2010 (when ‘austerity’ policies were introduced) and 2019. It remains 11% behind where it was 14 years ago. A number of councils hit the news after issuing section 114 notices, effectively going bust, with others predicted to follow.

Myriad causes

The causes of the difficulties are multi-faceted. Expert audit staff are in short supply as the sector struggles with a recruitment crisis. At the same time, audits have become more complex.

Stephen Fitzgerald FCCA, veteran interim finance director in the local government sector, says: ‘As with the whole public finance sector, there is a shortage of appropriately qualified finance professionals to fill key roles to complete audits in a timely manner. The whole public finance sector needs to be adequately resourced, including external audit.’

Indeed, it is not only local government that has seen change. Kevin Ellis, finance chief at the Trinity Laban Conservatoire of Music and Dance, says: ‘In the past, audits used to last two or three weeks and they now seem to drag on and on.’ He estimates the most recent audit took eight weeks.

In addition to staff shortages and complexity, observers believe audit methodology has contributed to delays. According to Stephen Sheen, founder of Ichabod Industries, an accounting adviser to local government, issues arose after auditors moved away from ‘systems-based’ auditing (checking whether controls are working and then relying on the outputs) to testing transactions and balances to see if they have been accounted for appropriately.

‘The latter,’ says Sheen, ‘is much more time-consuming for accountants in terms of searching out supporting documentation. And as soon as anything goes wrong, sample sizes are extended to try and water down the extrapolated error.’

Lost focus

Perhaps more galling for finance teams is what they believe is a shift away from looking at topics that have a material impact on a council’s finances.

‘There needs to be an appropriate balance between granular scrutiny of local government and an audit focus on those issues that are material to the financial sustainability of local authorities,’ says Fitzgerald.

Andrew Smith, executive head of finance at Eastleigh Borough Council in Hampshire, agrees that materiality is a concern. His own council’s audit saw much attention given to valuations. ‘It’s of no financial consequence to the authority whatsoever,’ says Smith. ‘There’s no impact on the balance sheet.’

Sticking plaster

Whitehall is not ignoring the crisis. In February, the Department for Levelling Up, Housing and Communities launched a consultation on plans to ‘reset’ local government. Consultation is now closed, but the proposals included a ‘backstop’ date of 30 September this year for local government auditors to issue opinions based on ‘work they have been able to complete’.

It would allow auditors to issue ‘modified’ or ‘disclaimed’ audit opinions ‘even in cases where little to no substantive testing has been carried out’. It is these plans that Hillier called a ‘sticking plaster’.

It may have compounded problems. Observers report some auditors holding off on further work, treating the backstop as a ‘guillotine’ that will allow them to issue ‘disclaimed’ opinions on incomplete audits and then move on. It is understood regulators are urging auditors to avoid this approach.

The Local Government Association (LGA) worries that the backstop plan ‘could potentially limit the information’ on which finance chiefs and audit committees can rely ‘as there could be accounts that members are asked to sign off that have had very limited audit (or even in extreme cases, no audit at all), and where the view or opinion of the auditor is therefore very limited’.

Among local government officers, there are also concerns about how auditors will define ‘opening balances’ when auditors do get back to work if some audits remain unfinished. However, the backstop is the only plan on offer.

Whether it alleviates audit woes, however, depends on ‘what comes next’, according to one expert. What many seek is not a short-term fix, but stability in the audit market and a simplified system that is lasting.

In a recent statement, that view was echoed by Cllr Pete Marland of the LGA’s economy and resources board, who declared that a ‘long-term solution is needed to this crisis’.