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Question 11
Should any action to accounts reform be prioritised ahead of the establishment of the LAO?
Response: Yes. In our view action to reform the accounts must be a very high priority and it is essential that momentum is built rapidly for change and then maintained. This is a key driver for our answer to question 14a.
Question 12
Are there particular areas of accounts which are disproportionately burdensome for the value added to the accounts?
Response: Yes. We have long stated our concerns that the volume of accounts preparation and audit work now perceived to be needed to be Code of Audit Practice compliant in relation to the valuation of operational Property Plant and Equipment and Pensions is disproportionately burdensome. The changes that emerge from the work have little or no effect on the services that local government bodies provide. Rapid reform of both the accounting and auditing approaches is vital if the Local Audit Office is to be able to operate in a fit for purpose framework.
Question 13
Do you agree that the current exemption to the usual accounting treatment of local authority infrastructure assets should be extended and if so, when should it expire?
Response: Yes. We agree that it should be extended until a sensible solution is found that does not absorb significant levels of scarce resource on a matter that has little or no impact on the value that taxpayers get from the preparation and audit of accounts.
Question 14a
Should the LAO adopt responsibility for CIPFA’s Code of Practice on Local Authority Accounting?
Response: Disagree. In line with our response to question 11, we consider that action to reform the accounts is needed urgently, and it cannot wait until the LAO is created. The body best placed to deliver that is CIPFA. However, we are also aware that reform has been discussed for many years with limited change. Nevertheless, we consider that CIPFA is best placed to build and maintain the necessary momentum for change and signalling that the accounting Code is to move to the new body could significantly reduce the chances of that happening in practice.
If CIPFA is given notice that it is to retain the Accounting Code then it is vital that the sector is provided with clarity about its plan to deliver through rapid and sustained action, including key milestones on the road to significant changes that are focused on the needs of the taxpayer. If CIPFA were to retain the responsibility for the Code, it would be vital for it and the LAO to work closely together in the revised governance arrangements, including ensuring that the focus is not lost and that the accounting and auditing requirements are aligned.
If the decision is made now that the LAO will adopt responsibility for the Accounting Code then there would be a significant risk that any momentum that it is building would fall away. There would also be the practical implications of the LAO having responsibility for a Code that applies to all of the UK.
We also note that there are some concerns that having responsibility for both the accounting and auditing Codes in one body comes as a potential conflict of interest. We think that this risk could be managed, but even so our view remains that the best solution is for CIPFA to retain the Code for at least the medium term as this offers the best chance of a positive outcome – the debate could then be revisited in the longer term if appropriate.
Question 14b
Are there other options relating to responsibility of CIPFA’s Code of Practice?
Response: Yes. In line with our response to question 14a, we consider that CIPFA should retain responsibility with the proviso that it demonstrates appropriate momentum and clear plans of how that will be maintained, working to a defined timetable with clear milestones and outcome measures. This is needed to give the preparers and auditors confidence that the changes to the Accounting Code that are vital will be delivered in a viable manner.
Question 15
Should the Accounting Code be freely available if it is not transferred to the LAO?
Response: Yes. We agree that in principle the Accounting Code should be freely available. However, as noted in the strategy, the Accounting Code and the accounts that emerge from it are complicated, and so the guidance notes are key to bridging them for preparers, auditors and interested third parties including electors. The consultation is silent on whether these would also be freely available.
Whatever is decided on charging, there needs to be a realistic funding mechanism for the vital work that is needed to produce an updated Accounting Code, the accompanying Guidance notes and for maintaining them to ensure that they remain fit for purpose.
Question 16
What additional support should be provided to finance teams, audit committees and elected members to develop and strengthen financial governance?
Response: Bodies such as CIPFA, the LGA (we support the delivery of its Leadership Essentials courses for Audit Committee Chairs) and ICAEW provide support programmes for these groups, and so are best placed to work with them to identify what further is needed. As a more general point we think that one of the best ways to help them is to deliver the greater proportionality of accounts and audit products, which makes their roles clearer, more rewarding and more understandable.
Question 17
How should KAP eligibility be extended further, should some categories of local audit be signed off by suitably experienced RIs (and if so, which)?
Response: In our response to question 7 we considered the concept of a register of audit firms who are eligible for appointment in the context of the intention for there to be no option for bodies to appoint their own auditor. Similarly, here there is a question of whether there needs to be a specific KAP registration process or whether the Responsible Individual (RI) process can be adapted to incorporate local audit, or whether the LAO could be enabled to approve KAP equivalents (who are not RI accredited). One option would be to mandate the specific CIPFA training designed to allow RIs in firms to gain KAP status (or the accredited in-house equivalent) if they are not sufficiently experienced. We would re-iterate that clarity is needed on the NHS position where local appointment is currently standard.
If some form of KAP specific registration is retained or if it is blended into the wider RI registration process then it is essential that there is agreement across all relevant parties that it will need to be more flexible than is currently the case and so becomes less of a barrier to entry, whilst maintaining public confidence that only firms with the necessary skills are undertaking local audits. As for question 7, we consider that consultation with ICAEW would be helpful in finding the appropriate balance.
In terms of categories, the overriding aim should be that sign off should be done by suitably qualified individuals. If a KAP process is retained (rather than leaving the judgement to firms to deploy their RIs) then more flexibility is needed in terms of registration categories, recognising the different specialisms within local audit. For example, although local government pension funds are earmarked for significant change, until that is delivered it would be helpful to facilitate a specific KAP status in relation to them. Given the significant difference in complexity between NHS and local government accounts there is a case to consider creating NHS only KAPs – this would also recognise that there are suppliers that service the NHS and not local government and would provide greater clarity on the pool of available KAPs for each sector.
Ultimately the driver for change should be for the LAO, the firms, ICAEW and CIPFA, in consultation with MHCLG and the sector, arriving at a framework that does not put inappropriate barriers in place whilst ensuring that those signing local audit opinions have the appropriate training, skills, resources and support.
Question 18
Should the market include an element of public provision?
Response: Yes. In our view some form of auditor of last resort needs to be in place as soon as is practicable. We recognise there will be significant challenges in making this a reality.
Question 19
If yes, should public provision be a function of the LAO?
Response: The ownership of the public provision partly depends on the model to be brought in – either a permanent workforce (which could be owned by the LAO but be at arm’s length or hosted elsewhere) or a resource to be called on (which would be externally based), noting that the commercial arrangements would need to be viable. Whatever the arrangements, the LAO would need the power to direct the public auditor to take up an appointment.
Question 20
What should the initial aim be in relation to proportion of public and private provision?
Response: We strongly agree with the concept of having a form of public provision that is capable of stepping into any local government audit and delivering whatever is needed. The absence of such provision has been a major hindrance to being able to resolve the current supply issues – unlike other areas of the UK or the NAO, there is no ‘grow our own’ option for local audit in the face of limited supply.
We are fully aware of the practical and technical complications of setting up any form of public provision, including the risk that it destabilises current suppliers by absorbing their staff, and any development in this area needs to be carefully co-ordinated with existing and potential suppliers.
There are different models of public provision, and the LAO (or Government whilst it is in development) needs to decide if the public provision is to be a permanent provider that can step in wherever needed, or some form of call off arrangement. The proportion of public provision stems from this strategic decision, but we note that there are significant complications with both models, including developing and maintaining a workforce and audit approach that are fit for purpose to deliver a modern audit, and how to find the balance of keeping the workforce occupied whilst also maintaining their availability to undertake any audit (thereby ruling out it taking on most non-audit work at any LAO client).
A further question would be whether public provision would be available to the NHS market if its procurement does not become part of the LAO’s responsibility.