The Audit Commission for England and Wales was abolished by the coalition government almost a decade ago. First its inspection regime was terminated, and then its district audit service (which conducted most local authority audits) was closed.
Since then, private firms have been engaged to audit councils through Public Sector Audit Appointments. PSAA was set up by the Local Government Association and based at LGA’s London offices.
But there is now a widespread view that the new regime lacks rigour. This was demonstrated by the large number of consultation responses to the review of local audit conducted by Tony Redmond, which was published in September. Many respondents expressed serious concern about the state of the local audit market and the effectiveness of audits. In particular, there are worries that firms’ audits do not always focus sufficiently on councils’ financial sustainability and value for money.
Respondents also suggested that fees may be insufficient to enable firms to provide audits in a sufficiently in-depth or timely manner.
A further problem is that local authority accounts are difficult for the public – and elected councillors without financial expertise – to understand properly. The Redmond review proposes that simplified accounts be produced alongside the main annual financial reports.
The review recommends the creation of a new regulatory body – the Office for Local Audit and Regulation (OLAR) – to be responsible for procurement, contract management, regulation and oversight of local audit. Its role will include working with the Financial Reporting Council to set audit standards.
The engagement of audit firms would be accompanied by a new price and quality regime to ensure audits are performed by auditors with the necessary skills, expertise and experience.
But the review stresses that the new body will not be a ‘mark two’ Audit Commission. OLAR will be a small and focused body, with a staff of 30 to 35 people and an annual overhead of around £5m, compared with the Audit Commission’s £90m.
Maggie McGhee, executive director for governance at ACCA, who was a member of the Treasury Financial Reporting Advisory Board, supports the Redmond review and its proposals. She explains: ‘The recommendations provide a clear opportunity to support a holistic reform of local government audit and accounting – avoiding the fragmentation that has developed in recent years. Clear, transparent financial reporting and quality audit is the cornerstone of trust.
She says that a robust audit plays a crucial role in showing taxpayers how their money is being spent and that making this transparent and accessible to all is key to accountability. ‘It was excellent to see the recognition that there needs to be a sensible balance between cost-effective services and the quality and time needed for audit firms to do the best possible job,’ she says.
'The recommendations provide a clear opportunity to support a holistic reform of local government audit and accounting – avoiding the fragmentation that has developed.'
The Local Government Association was guarded in its response to the review. It pointed out that councils are cash-strapped and will want additional central government funding to meet increased audit costs.
‘Effective external audit and clear and transparent financial reporting are vital and councils take them extremely seriously,’ says Richard Watts, chair of the LGA’s resources board. ‘This report rightly recognises that current audit arrangements are not working as well as they should and provides some helpful recommendations to try and improve them.’
Watts says that local audit, like the rest of the sector, has had to withstand a lot of change – from the impact of funding reductions to responding to controversies about the role of audit in the private sector. ‘We agree that more needs to be done to ensure external audit staff are sufficiently experienced and qualified. We are also pleased Sir Tony has accepted our recommendation for MHCLG [Ministry of Housing, Communities and Local Government] to create a new audit liaison committee, which will allow key players to address emerging issues.’
Joint procurement model
Watts points out that councils overwhelmingly placed their confidence in the joint procurement model to commission audit services. ‘It is positive that this principle has been accepted by the review, and we look forward to working with this new body to build on its success.
‘However, the fundamental issue about too few participants in the audit market and too few qualified staff in firms will be difficult to resolve and will need to be a priority for stakeholders acting together. A number of councils are already being told that their audits will be late, as there is not enough capacity in the system. The LGA wants to work with the government, external auditors and other stakeholders to come up with a solution together on this problem.’
Implementation of the Redmond review will require either new regulations or legislation, and so its recommendations will not come into effect immediately.