Delays in completing audited accounts can have significant implications for local accountability and the effective management of public money.

Local public bodies deliver many services to residents, businesses and taxpayers and account for a significant amount of public spending. In 2019-20, local councils, local police and local fire bodies in England spent nearly £100bn delivering these services. High quality audit is essential for public trust in how taxpayers’ money is spent.

The NAO’s report examines the timeliness of auditor reporting on English local public bodies’ financial statements covering 2019-20, against the revised publication deadline of 30 November 2020. It sets out stakeholders’ views on the factors underlying late delivery and the impact of this. 

However, there was a further decrease in auditors delivering opinions in time for accounts publication deadlines, falling from 57% in 2018-19 to 45% in 2019-20. In 2017-18, 87% had been issued by the deadline. These delays, alongside concerns about audit quality and doubts over audit firms’ willingness to continue to audit local public bodies, highlight that the situation needs urgent attention. 

The Covid-19 pandemic has had a significant impact on delivery of the 2019-20 audits and the financial position of audited bodies, the NAO warned.

The pandemic put pressure on the audit process by challenging normal ways of working. It posed practical challenges in producing accounts and supporting evidence, and for auditors to carry out testing. Staff had to work remotely, and the second national lockdown came at a critical point in the audit cycle.

Concern over the potential financial implications of the pandemic for some councils meant that auditors had to pay particular attention to the financial position of each audited body, thereby extending and complicating the audit that needed to be completed.

Delays to the audit opinion, and the issue of recommendations to audited bodies, can mean that actions to improve financial efficiency and resilience are also delayed, and risks those actions being less effective.

There is also a shortage of specialist staff skilled in conducting public sector audits. The NAO said: ‘There is insufficient staff with the relevant qualifications, skills and experience in both local finance teams and firms serving the local audit sector, and a net loss of qualified staff from both.

‘The relative lack of attractiveness of the audit of local public bodies, compared with alternative audit opportunities available to staff, has contributed to a high staff turnover level. Competing workload pressures, both within the finance function and elsewhere in local authorities, diverted staff resources from completing working papers and preparing accounts within the time available for submission to the external auditors which made the preparation of accounts increasingly challenging.’

Concerns about the quality of local audit led to the Redmond Review which reported in September 2020 and recommended major changes in the organisation and regulation of local audit in England.

The government is currently considering the recommendations. Initially the Ministry of Housing, Communities and Local Government set out actions to support market stability, to alleviate some of the immediate funding and timing pressures facing audit firms and local authorities, but decided to consider further the central recommendation to establish a new independent regulator for local audit.

The public sector audit market is fairly concentrated with Grant Thornton the largest auditor in the market, followed by EY. Mazars, BDO and Deloitte also handle a number of local audits. However, the NAO said that the audit firms were not responsible for the delay in completing audits. There were 487 audits in total in the period covered. Of these 220 were completed in time to allow publication of accounts including an audit opinion by the statutory accounts publication deadline.

The NAO warned: ‘The lack of timely external audit assurance has a direct impact on affected local authorities’ planning processes, as most local authorities commence their annual budget planning during the autumn of the preceding year. Late delivery of an audit opinion makes it harder for local authorities to plan their budgets for the forthcoming year with certainty.’

The audit regulator, the Financial Reporting Council (FRC), inspected 15 financial statement audits in 2019-20 across seven local audit firms. It described the overall results as concerning, with only 40% of audits judged good or requiring no more than limited improvement, down from 64% in 2018-19.

The FRC said that urgent action was required from some of the firms, to take appropriate action to respond to the findings and ensure improvements were made in audit quality, given the deterioration in quality in the year.

Areas where improvements in audit quality were needed included:

• the valuation of property (including investment property);
• sufficiency of audit procedures to confirm that all expenditure transactions occurred and were recorded appropriately;
• the auditor’s response to fraud risks;
• consideration of the risk that money owed to the authority might not be collectable in full (impairment of receivables);
• valuation of assets supporting pension funds; and
• the effectiveness of the Engagement Quality Control review (an arrangement whereby a second audit engagement lead is used to ensure that key audit judgments are reviewed and challenged effectively).

CIPFA CEO Rob Whiteman said: ‘The inability of over half of councils and their auditors to be able to meet the publication deadline for audited financial statements is further evidence of the incredibly fragile and challenging state of the local audit market. The recommendations outlined in September’s Redmond Review should be treated as the best foundation to create and support a strong and sustainable local audit function.

‘A decade of austerity, cuts to audit fees and changes in the regulatory environment have meant that while local audit has become more complex, the pool of expertise available to complete timely, high-quality local audits and the ability of councils to pay has reduced. This requires a system-wide solution for both auditors and audited bodies.

‘CIPFA supports Redmond’s view that a single separate body bringing together responsibility for appointment of auditors, maintaining the Code of Audit Practice and performance monitoring would strengthen system leadership of local audit, enhance accountability, and improve assurance.’

NAO report, Timeliness of local auditor reporting on local government in England, 2020