Government plans to overhaul local authority audits have received broad support from the accounting profession, but concerns remain over whether the measures will be effective and address the deep-rooted structural challenges facing the sector.
The strategy, outlined in a consultation that ended in January, commits to several measures to fix what the government calls a ‘broken audit system’, including centralising audit oversight in a new body – the Local Audit Office (LAO).
‘The current system is broken beyond repair; it is clinging on by its fingernails’
The measures come amid a financial crisis among councils, with just 1% of local authorities and other bodies publishing audited accounts on time last year and a backlog of nearly 1,000 outstanding audits dating back almost a decade.
Further illustrating the dire straits of the system, the National Audit Office (NAO) refused in December to sign off the Whole Of Government Accounts for the first time after only 10% of local authorities submitted reliable data for the 2022-23 financial year.
‘Local audit reform is essential,’ says Stephen Fitzgerald, strategic director for finance at Woking Borough Council. ‘Without being too melodramatic, the whole system has fallen into disrepute, so you can’t leave it as it is. Every year more audits are delivered late. This situation needs to be dealt with, and hopefully local audit reform will provide a positive way forward.’
Centralising functions
Once established, the LAO will take on functions currently fragmented across other organisations, including contract management, setting a code of practice, and regulatory oversight.
The Public Sector Audit Appointments’ (PSAA) responsibilities for contracting and appointing auditors and setting fees for local authorities would be transferred to the LAO, and the Financial Reporting Council’s inspection and enforcement and some supervision of local bodies will end.
It remains to be seen whether it will alleviate pressures or create new administrative burdens
‘This degree of reform is essential,’ says Bill Butler, chair of the PSAA. ‘The current system is broken beyond repair; it is clinging on, if at all, by its fingernails. It massively upends the current arrangements.’
However, the Ministry of Housing, Communities and Local Government has stressed that the LAO will be ‘proportionate’ and will not herald the return of the ‘bloated’ Audit Commission.
But the Audit Commission, which was abolished in 2015, remains ‘a spectre at the feast’, and there is little detail on what sets the two apart in practice, according to Butler. ‘If you crossed out the word “bloated”, there are several things that look familiar in terms of coordination,’ he said.
The LAO could bring much-needed standardisation and oversight, addressing inconsistencies in audit quality and delays. However, it must be truly independent, well-funded, and structured to avoid additional bureaucratic inefficiencies.
Efficiencies?
The government has said the LAO will be fully resourced by 2027/28, but Mike Suffield, director of policy and insights at ACCA and a former director at the NAO, says the consultation is largely silent on how the new system will be funded.
‘The dissolution of the Audit Commission was a bit like King Henry VIII’s dissolution of the monasteries’
‘There is a lot more detail, thought and work to be done to flesh out how it will work in practice, how it is going to paid for, and what skills will be required for the different functions that are going to be resting in this new body,’ Suffield says.
In theory, re-centralising audit oversight should improve efficiency by reducing duplication and enforcing consistent standards. But it could also reduce flexibility for local auditors and add layers of bureaucracy, slowing down procurement.
‘If well-implemented, this could stabilise the local audit market,’ says Yusuf Erol, group managing director of Langbrook Finance. ‘However, it remains to be seen whether it will alleviate pressures or create new administrative burdens.’
Last resort
The LAO’s responsibilities could swell further under government plans to ‘urgently’ build some public provision to supplement private sector capacity by potentially giving the LAO the power to act as an auditor of last resort.
Suffield says that while this could theoretically provide a broader and more sustainable base for audit provision, he cautions the government to ‘think very carefully before going down that road’.
‘I can’t see how they would do it without cannibalising the audit firms already in the market,’ he says. ‘The overall benefit would be uncertain at best and would do little to help grow the supply of skilled auditors overall.’
‘The shortage is a significant barrier to effective audits and timely reporting’
Addressing the shortage of suitably qualified auditors is critical, as the limited number of audit firms in the market is at the heart of the backlog in local authority accounts.
‘The shortage is a significant barrier to effective audits and timely reporting,’ says Erol. ‘The increasing complexity of local government finances has not been matched by an adequate pipeline of new auditors, leading to delays and rising costs.’
Butler says that the PSAA ‘would love there to be somebody who we could put in where we can’t find anybody else to do it. But the dissolution of the Audit Commission was a bit like King Henry VIII’s dissolution of the monasteries. There is just wreckage. Creating that capacity is going to be a tricky thing to do.’
Key Audit Partners
To that end, the government is also reviewing the eligibility criteria for Key Audit Partners (KAPs) – who are required to sign off opinions – to ensure that the sector has access to the widest possible pool of qualified auditors.
The requirement that a firm must have two registered KAPs to compete in the market, along with the low numbers of KAPs – only around 100 – to support current contracts, is a barrier to both market entry and capacity.
The shortage of skilled auditors may require sustained investment
Expanding that eligibility and supporting professional development are steps in the right direction, says Erol. ‘However, more direct interventions – such as financial incentives for trainees, apprenticeships and clearer career pathways – could help ensure long-term sustainability.’
The government also proposes to mandate audit committees in local bodies with at least one independent member, and for local authorities’ audit reports to be considered by full council.
According to Erol, this ‘should improve governance by increasing financial scrutiny and challenge’. However, many authorities lack members with sufficient financial expertise, which could reduce the effectiveness of these committees.
‘The shortage of skilled auditors is ‘a deep-rooted problem that may require sustained investment in training and retention beyond what is currently proposed,’ Erol adds.
