Public sector audit backlog threatens financial stability

MPs on the Public Accounts Committee (PAC) have called on the government to act ‘urgently’ to prevent further financial failures in local audit as unacceptable backlog grows

The huge backlog in auditing accounts across local government has increased the risk of more councils failing financially and undermined accountability for £100bn of annual spending, the Committee warned.

The problem has been exacerbated due to staff shortages as there are only 100 local audit partners with the powers to sign off audits.  

Just 12% of local government bodies had their audited accounts signed off despite an extended deadline in 2022. This compared to 45% of organisations which published audited accounts in 2019-20 by the deadline.

There were 632 unpublished audits at the end of 2021-22 financial year with more than 400 public sector organisations missing the audit deadline. Some local bodies have unsigned audits spanning several years.

In hearings held earlier this year, the government and the Financial Reporting Council (FRC) both told MPs that they did not know when the backlog would be cleared, meaning that a further deterioration in publishing audited accounts will continue in 2022-23.

Despite writing to auditors in March 2023 to urge joint action on tackling barriers to timely delivery, the Committee said that no information about ‘clear expectations in terms of dates by which performance will have improved’ was provided.

The PAC’s report said the future Audit, Reporting and Governance Authority (ARGA), which is meant replace the FRC as system leader, should be set up as soon as possible. Yet, there are still no signs of it happening, having stressed this point in a 2021 report.

Despite the pressing need for leadership within local public audit, ARGA will not be set up until 2024 at the earliest, PAC said.

The Committee also urged the FRC to set out how it will tackle the ‘long standing challenges’ in building capacity, capability and leadership in local audit.

Currently, there are less than 100 key audit partners registered to perform local audits, which the Committee described as ‘worryingly low’, adding that the government needs to ‘accelerate training’, something the PAC had already called for in 2021.

Dame Meg Hillier MP, chair of the Committee, said: ‘Our committee warned in 2021 that the system of local government audit was close to breaking point. Disappointingly, since then the situation has only gotten worse.

‘The cases of Croydon, Slough, Thurrock and Woking councils all should serve as flashing red signals for the government, and our report finds that the rot risks spreading to central government finance and the NHS.

‘There needs to be more resilience in the local audit market if the situation is to improve. Our inquiry heard there are fewer than 100 key audit partners registered to perform local audit, a worryingly low number. The government must get its hands round this problem as a matter of urgency.

‘It’s local taxpayers and service users who lose out when serious financial issues arise. The lack of timely accounts leave council taxpayers in the dark.’

The audit process provides a key element of assurance for financial planning, budgeting and management in local government bodies and accountability for £100 billion of spend, but this only works effectively when audit work is timely, the report warned.

It referenced how the delays in local audit were already creating problems in other parts of government.

For example, delays to the completion of 2020-21 local audits continued to add ‘uncertainty around progress’ with the whole of government accounts, which will be published more than 24 months after the financial year-end.

This has also caused delays to assurance on local government pension scheme accounts by up to four to five months.

Auditors and local authorities both report the pressures of regulation being a contributing factor to delays. The FRC used its sanction powers for the first time in 2022, issuing a fine of £250,000 for quality failings it identified in one local audit.

Sir Geoffrey Clifton-Brown MP, deputy chair of the committee, said: ‘The cumulative delay of auditing 632 local authority 2021-2022 accounts is a really serious matter, hindering accountability of £100bn of local government spending.

‘How many more horror stories are there remaining undetected, which ultimately always have to be bailed out at huge costs to the taxpayer? The fragility of the number of qualified people and firms tending to carry out these important audits means that the system will only get worse before it gets better.’

The report also touched on the concern that local government accounts remain ‘impenetrable’ to many, particularly for council taxpayers and services users to understand.

It highlighted that despite the FRC recognising the issue, reform of transparency in local audit would take a ‘long time’ to implement.

Sarah Sheen, acting head of standard setting at CIPFA, said: ‘A concerted effort is needed by all parties to ensure there is an appropriate response to, and expertise in, the local audit system.

‘Local authority accounts and their audit need to be proportionate to meet the needs of the users of those accounts, such as council taxpayers, service users and other resource providers.’

Public Accounts Committee report, Timeliness of local auditor reporting 

Croner-i Navigate provides guidance, commentary and tools for auditors. See the Auditing specialist entities Quick Link, Navigate Audit and Auditing Standards for a selection of these resources.

Max Austin |Reporter, Accountancy Daily 2022-23 

Max Austin, reporter at Accountancy Daily 2022-23 ...

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