Measures aimed at clearing the audit backlog introduced by the government in September ‘are a terrible option but the least terrible option in the circumstances’, according to one public sector expert.
The government introduced new legislation, The Accounts and Audit (Amendment) Regulations 2024, to address the significant delays in local authority audits by setting backstop dates for local bodies to publish their audited accounts.
‘If you have someone who is critically ill, the first thing you do is stabilise them’
Uncomfortable but necessary
Although aspects of the proposals are uncomfortable, particularly around issuing modified or disclaimed audit opinions, they are seen as necessary given the scale of the backlog and lack of viable alternatives.
‘If you have someone who is critically ill, the first thing you do is stabilise them,’ says Bill Butler, chair of Public Sector Audit Appointments at the Financial Reporting Council (FRC). ‘I think the backlog does that; it creates a pause. It means we can rule a line across delayed audit opinions.’
Only 1% of local bodies published audited accounts on time last year
Without these measures, audits would continue to be delayed – only 1% of local bodies published audited accounts on time last year – and the system will move even further away from timely assurance.
The statutory backstop of 13 December 2024 for the publication of audited accounts for all financial years up to and including 2022/23 appears to have been effective, according to Dan Bates, a local government finance specialist.
‘A whole load of authorities that hadn’t published for a long time suddenly published their 2022/23 accounts to get ahead of that backstop date,’ Bates says. ‘Local authorities overall met those first timescales. However, he adds, ‘My worry is that a disclaimed audit will be an easy way out in some instances.’
Disclaimer dysfunction
Auditors that have not been able to complete the audit by the December backstop have to issue ‘disclaimed’ or ‘modified’ audit opinions. Modified opinions indicate areas of concern without fully rejecting the financials. Disclaimed opinions suggest that the auditor could not form a reliable opinion due to insufficient information or other limitations.
The main reason there will be a disclaimer is if the auditor believes that they cannot reach the required level of assurance by the deadline. However, it is widely expected that auditors are likely to issue unprecedented numbers of ‘disclaimed’ audit opinions – running into the hundreds – which will likely continue for some bodies for several years.
It is ‘inevitable and unavoidable’ that there is going to be a lack of accountability
Mike Suffield, ACCA’s director of policy and insights, says that it is ‘inevitable and unavoidable’ that there is going to be a lack of accountability around local government finance because of the volume of disclaimed audit opinions.
‘As soon as you have got a disclaimed opinion, you have got no assurance over the opening balances,’ he says. ‘The whole system has swallowed that as a necessary cost to try and get things back on track. I sympathise with that but, for a period, that crucial accountability over the use of local authority funds is disappearing.’
The FRC has said it will pause routine inspections of major local audits for financial years up to and including 2022/23, unless there is a clear public interest case to do so, to allow auditors to focus on clearing the backlog and returning to timely reporting.
‘Like with IT systems, it doesn’t matter however many beta versions you have; when you launch it live the users break it,’ Butler says. ‘We are finding our way; everybody is finding their way.’
The reforms fail to address the fundamental issues around capacity
Capacity concerns
There are also backstops for the subsequent years up to 2028 to allow full assurance to be rebuilt over several audit cycles. Without this, auditors would need to rebuild all assurance in the first year following a modified or disclaimed opinion, risking a recurrence of the backlog.
But despite the effectiveness of the reforms in clearing the backlog, experts say they fail to address the systemic and fundamental issues around capacity and capability in local authority finance and audit teams.
‘The backstop date enables closure on incomplete accounts, but that alone will not resolve the problem,’ says one local authority finance director.
They believe that a fundamental review of the public sector audit process will have to come eventually ‘because the complex nature of local authorities’ finances and resourcing issues in the sector mean it is difficult to get these accounts completed, audited and signed off within a reasonable timeframe’.
There is no doubt that part of the problem at least is that there aren’t enough auditors to do the work.
‘You can design this timetable, you can provide the advice and support that auditors need to make it work, but none of it gets at the problems that led to all this in the first place: a lack of capacity and capability both on the part of finance departments and the part of the external auditors,’ Suffield says.
Efforts are under way to address the problem. The FRC has already revised guidance allowing for ‘responsible individuals’ with significant statutory audit experience to apply for key audit partner status if they have undertaken pre-approved local audit specialist training.
‘Improving the capacity and capability of local auditors and audit firms is essential to address the systemic timeliness issues and rebuild the system to provide the assurance the public deserves,’ says Sarah Rapson, the FRC’s executive director of supervision.
Guidance
The Accounts and Audit (Amendment) Regulations 2024 were published alongside a revised Code of Audit Practice from the National Audit Office (NAO). To support auditors in meeting their responsibilities under the code, the NAO has issued specific guidance, endorsed by the Financial Reporting Council, on implementing the reset and recovery of local audit.
This guidance sets out auditors’ duties and how to navigate out of those disclaimed audit opinions and reconstruct the accounts over a period of years. It also encourages a risk-based, proportionate approach, allowing auditors to prioritise areas of higher financial or operational risk.
