Code of Audit Practice will retain principles-based approach

The National Audit Office (NAO) has set out the framework for a revised Code of Audit Practice for public sector auditors with a sharper focus on value for money and clearer reporting, while retaining the current principles-based approach

The plan is to finalise a new Code by late summer and put this out for consultation over the autumn before it goes through the parliamentary process, ready to come into force from April 2020.

‘We propose to maintain a single Code supported by sector-specific guidance to clarify expectations in particular areas and allow flexibility for adapting to any future changes,’ the NAO confirmed, rather than diluting the Code by sub-splitting it into separate sets of rules for nice sectors.

The NAO has published a summary of the responses, which overwhelmingly called for local auditors to have a sharper focus on value for money and clearer reporting.

The current principles-based approach will be maintained, but the Code will include more detailed sector-specific guidance.

‘We identified broad support for maintaining the principles-based approach through a single Code covering both NHS and local government sectors (including police and fire),’ the NAO stated.

A single code was the favoured approach from respondents to the consultation who generally said that a more prescriptive Code could limit auditors’ ability to make judgments in the light of local circumstances and risked the introduction of a ‘tick box’ approach to audit work.

They also stressed the need for a principles-based Code to be supplemented with more detailed sector-specific guidance to set out further expectations of how the principles should be applied.

There was strong support for more detailed guidance on a number of principles-based issues, including proportionality and the exercise of auditors’ additional powers (section 4 of the Code), and professional scepticism and challenging management, particularly around efficiency and effectiveness in terms of spending taxpayers’ money.

Several respondents suggested that the public accountability concept would be more effective if it were focused more on the importance of the local auditor’s role in ensuring public accountability for the management of public money, and in ensuring that auditors had regard to consideration of the public interest when carrying out their work.

‘We will review the current principles and consider strengthening references to those relating to proportionality, professional scepticism and acting in the public interest to help explain the importance of the wider scope of local public audit, and we will consider whether elements of existing auditor guidance on reporting should be elevated to the Code,’ the NAO confirmed in the consultation response statement.

Risk reporting

The NAO is considering whether the new Code should introduce a requirement for auditors to consider and report on specified risks each year such as risks to financial sustainability and financial governance. However, it stressed that auditors should retain the ability to take account of local circumstances when determining the amount of work necessary to respond to these risks.

It will also consider whether to give auditors more flexibility to consider emerging risks, which may not constitute a significant risk in the year of audit, but which may have a significant impact on the audited body over the medium term.

 ‘Auditors need to ensure that where they are identifying risks and issues, they are drawing attention to them promptly and clearly, so that bodies can take appropriate corrective action and the executive can be held to account,’ the NAO said.

Having reviewed the consultation responses, the NAO said it would consider whether the Code should put greater emphasis on the need for ‘timely’ reporting, not only in terms of reporting by required deadlines, but also in terms of raising issues at the appropriate time, and also escalating them appropriately through the exercise of additional powers where necessary.

‘We will set a clear expectation that when auditors report their findings, they should set out their judgments clearly along with a summary of the evidence on which those judgements are based. The auditor should also explain the impact the judgement has on the body itself and set out clearly the actions the auditor is recommending that the body take in response,’ the NAO report said.

Auditing standards

The consultation also gauged views on whether public sector audit should remain aligned with globally accepted auditing standards – International Standards on Auditing (ISAs).

There was overwhelming support for no change to the current approach to standards, but some respondents warned that ‘that this results in auditors focusing considerable amounts of resource on auditing figures in the financial statements that some preparers see as being less important, such as valuations of certain types of asset, or the valuation and disclosures of pension liabilities’.

The Code will remain aligned to generally accepted auditing standards, NAO confirmed, stating: ‘It is important that local public bodies broadly comply with International Financial Reporting Standards (IFRS) and are audited to International Standards on Auditing (ISAs). This is an important discipline, which supports the credibility and consistency of financial reporting in the public sector as a whole. From a wider perspective, it also supports the “Whole of Government Accounts” process.’

Next steps

The NAO will consult on the draft Code text later this summer with plans to finalise the document by the end of 2019, ready to be laid in parliament early in 2020.

The new Code will apply from audits of local bodies’ 2020-21 financial statements onwards.

This work is part of a regulatory five-year review of the Code, required under the Local Audit and Accountability Act 2014. The current Code came into force on 1 April 2015, and its maximum five-year lifespan means it now needs to be reviewed and a new Code laid in parliament in time for it to come in to force no later than 1 April 2020.

Local audit in England Code of Audit Practice Summary of consultation responses, issued 30 July 2019

Report by Sara White | 30-07-2019

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