The government has announced a review into the quality of local authority audits, examining the effectiveness of financial reporting and whether local councils are spotting warning signs early enough

Local authorities in England are responsible for 22% of total UK public sector expenditure. The review will look at the quality of local authority audits, whether auditors are using their reporting powers correctly and if councils are heeding audit recommendations.

It follows on from changes to the local authority audit regime after the passing of the Local Audit and Accountability Act 2014, with the abolition of the centralised Audit Commission and its replacement with a new, localised regime.

It will examine how councils publish their annual accounts and if their financial reporting system is sufficiently transparent to be held to account. The review will also look at whether there is an ‘expectation gap’ between what taxpayers believe an audit will deliver, and what it can in reality deliver.

Among the questions for consideration are whether the financial savings from local audit reforms have been realised, whether there is a more accessible audit market and an increase in audit providers and whether audit standards have been maintained or improved, and not been compromised.

The review will be led by the former CIPFA president Sir Tony Redmond, who is a former local authority treasurer and chief executive.

Communities secretary James Brokenshire said: ‘A robust local audit system is absolutely pivotal to work on oversight, not just because it reinforces confidence in financial reporting but also service delivery and, ultimately, our faith in local democracy.

‘There are potentially far-reaching consequences when audits aren’t carried out properly and they fail to detect significant problems.’

The review is a requirement of the changes in the Act, which call for a post implementation review of the audit framework and financial reporting elements of the legislation.

However, it has assumed greater significance due to developments elsewhere including the Kingman review of the Financial Reporting Council, the Brydon review into the quality and effectiveness of statutory audit and the Competition and Markets Authority’s report recommending changes to the statutory audit market that will impact on local audit.

Alongside this, there have been three recent public accounts committee hearings on the financial sustainability of local authorities, local audit in England and local authority governance. Finally, as part of its legal duties, the National Audit Office is required to review and replace the current Code of Audit Practice by April 2020.

Redmond is expected to report his initial recommendations in December 2019, with a final report to be published in March 2020.

Review of local authority financial reporting and external audit – terms of reference is here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/815781/Independent_Review_ToR.pdf

Fees for local authority and police audits were reduced by 18% in 2017. The market is dominated by Grant Thornton with fees of £14.4m per audit year and EY with £10.9m.

Pat Sweet