Introduction – Page 1
PSAA is pleased to take the opportunity to respond to MHCLG’s consultation on its local audit reform strategy. Our press release of the 18 December 2024 set out our overall position on the strategy, and our commitment to working with partners to deliver the change that is needed. Our responses to the specific consultation questions are set out below.
Question 1
Do you agree the LAO should become a new point of escalation for auditors with concerns?
Response: Strongly agree. There is a need for the LAO firstly to build and maintain the trust of auditors in terms of how it deals with the information provided to it. It is also vital that bodies are consulted on how the escalation process will work, including at what stage a body will have the opportunity to provide its view, which may differ from that of the auditor. If bodies do not have clarity on how the relationships work and the boundaries of information-sharing/consultation, then there is a risk of bodies deciding not to share rising issues with their auditor.
Question 2
Do you agree relevant issues identified should be shared with auditors, government departments and inspectorates?
Response: Agree. On principle we agree as the ultimate driver is the protection of the public purse, but there would need to be a clear framework for sharing to ensure everyone (including bodies) know where they stand. There are existing models within UK audit that could provide useful sounding boards for making this a success.
Question 3
Should the LAO also take on the appointment and contract management of auditors for smaller bodies in the longer term? If so, when should responsibilities transfer from SAAA?
Response: In our view MHCLG and SAAA are best placed to work this through including the timing of any transfer.
Question 4
Should the LAO oversee a scheme for enforcement cases relating to local body accounts and audit?
Response: Any enforcement scheme would need to be co-ordinated with the relevant Institutes and RSBs, and so we consider this is a matter for them to consider in conjunction with MHCLG.
Question 5
How could statutory reporting and Public Interest Reports be further strengthened to improve effectiveness?
Response: The LAO could emphasise how important it is that auditors make use of the options available to them and then demonstrate this by giving the auditor’s consideration of reporting an appropriate weighting in the quality assessments of audit work. It is also important that if auditors consider that their statutory reporting has not been taken sufficiently seriously that they raise their concerns to the LAO (in line with question 1).
Question 6
Should the scope of Advisory Notices be expanded beyond unlawful expenditure, or actions likely to cause a loss or deficiency, as defined by the Local Audit and Accountability Act, to include other high-risk concerns?
Response: No. Local Government auditors already have a unique range of options to report their concerns in the public domain, a significant strength of the local audit framework that allies to local government’s transparency agenda. Rather than expanding the use of Advisory Notices, our view is that auditors should be encouraged to use these existing options where appropriate. An important driver for achieving this is that quality assessments of their work should cover the entirety of the Code of Audit Practice, including their statutory reporting of concerns (e.g. Statutory Recommendations under Schedule 7 (2) of the Audit and Accountability Act 2014 and Public Interest Reports).
We strongly agree with the local audit strategy’s position that audit work should feed effectively into the wider early warning system. This would mean that when an auditor exercises their reporting powers then in most cases it should be for others to decide on whether a direct intervention is appropriate. It is currently extremely rare for an auditor to issue an Advisory Notice, and in our view that is appropriate and they should remain as a response to extreme circumstances only.
We also consider that broadening the use of Advisory Notices would increase the risk of auditors becoming embroiled in political issues, and that it could become another barrier to audit firms being willing to participate in the local government market.
Question 7
Should the LAO own the register of firms qualified to conduct local audits?
Response: Yes. A register of firms qualified to conduct local audits has ensured that any procurement process (whether by ourselves as Appointing Person or by an individual or group of bodies) results in an approved firm being appointed. We also note that we have subsequently benefited from there being a defined market when making certain decisions that would otherwise have been more complicated. However, we are also acutely aware that the registration requirements of the current arrangements have become a significant barrier to entry to new firms in some cases, and as the strategy highlights, the supply market is severely restricted.
The strategy sets out that the LAO will be making all local government audit appointments (we note that the City of London Corporation may be subject to specific consideration), and in other areas of the UK where this approach applies there is no register – the procuring body is able to make the assessment of suitability itself. In our view there is therefore a fundamental question of whether there needs to be a register at all when the LAO is in existence, although we note the uncertainty over the future arrangements for the NHS where all bodies are currently required to make their audit appointments from the register.
If there is to be a register for local audit qualified firms, then separating it from the ICAEW and giving it to the LAO means a dual registration process, and a risk of duplication/confusion (there would be a further complication if the NHS retains the current arrangements and the LAO does not procure for that sector) and so consultation with the ICAEW would be important in the decision-making process.
One option would be for the LAO to have a register at firm level only, and for it to ensure that there are no inappropriate barriers to entry.
Question 8
Should the LAO hold the power to require local bodies to make changes to their accounts, so that auditors could apply to the LAO for a change to be directed instead of needing to apply to the courts?
Response: No. Applications to court to change the accounts are extremely rare. The need to change accounts is normally dealt with via discussion between management and the auditor, including making Prior Period Adjustments where material changes are needed to the accounts relating to a period before the set being audited. We do not consider that empowering the LAO to direct bodies to change the accounts is either an appropriate or helpful addition to this process – the vast majority of amendments are best dealt with via standard accounting and auditing processes.
The concept of an auditor seeking to ask a court to order the rectification of accounts is rooted in the options available to electors when lodging an objection. Rather than seeking to redirect that option in isolation to the LAO, in our view the key issue is that there is a need for a holistic review of the framework for elector rights to ensure that it is fit for purpose in the modern era. This would take into account developments such as the Freedom of Information Act, how the current arrangements are used in practice, and a cost/benefit assessment taking into account the outcomes.
Question 9
What are the barriers to progressing accounts reform?
Response: The concept of accounts reform has been discussed for many years across the sector, but there has always been a reason why it has not been delivered. To address this the starting point is to define the purpose of local government accounts and audit. This was an interesting debate within the LUHC Select Committee discussions that illustrated the different views, and the different perceptions has made progress on reform more difficult to deliver. We welcome the greater clarity that the local audit strategy provides on the purpose of accounts and audit, including the clear message on ensuring value for money for the taxpayer. All too often progressing reform has stalled due to dogged adherence to accounting and auditing requirements that are rooted in the requirements of the corporate sector. All parties now need to ensure that their consideration of potential reforms has that message at the forefront, and that their governance arrangements enable change to happen. We have set out our views on the way forward for reform in our answer to question 14a.
Question 10
Are there structural or governance barriers to accounts reform that need to be addressed?
Response: Yes. Please see our response to question 9.