Consultation
At the beginning of February 2024, DLUHC launched a consultation on proposals with the aim of restoring timely, high-quality financial reporting and audit.
Below are PSAA’s responses submitted to DLUHC’s consultation on addressing the Local Audit Backlog in England.
Question 1
Notwithstanding the possibility of exemptions in exceptional circumstances (covered by questions 3 and 4 below), do you agree that Category 1 authorities should be required to have published audited accounts for all financial years up to and including financial year 2022/2023 by 30 September 2024?
Response: Agree
Do you have any comments on this issue?
The introduction of statutory backstops is a necessity as it is a key element in the best available plan to tackle the wholly unacceptable backlog of audit opinions and to begin the process of restoring timely independent assurance in relation to local bodies’ financial statements and VFM arrangements. However, all parties need to continue to work together to mitigate the very significant professional and reputational inherent risks that this course of action brings on a personal, organisational and sector level. DLUHC working with other organisations in the system, needs to ensure that all affected bodies are able to reference suitable statements that will enable them to explain to third parties the reason for any modified or disclaimed opinion that arises from the backlog solution.
Question 2
Do you agree that the requirement at Regulation 10(2) for Category 1 authorities to publish a delay notice should be disapplied in relation to any outstanding audits covering financial years 2015/2016 to 2022/2023?
Response: Agree
Do you have any comments on this issue?
Noting the reference to exemptions to the backlog solution in other questions, it follows that in order to avoid confusion for all interested parties, there needs to be clear guidance on the publication requirements and expectations for bodies and auditors where any exemptions apply. For example, does the disapplication of Regulation 10(2) not apply to bodies that are exempt from the backlog solution?
Question 3
Do you think it would be appropriate for Category 1 authorities to be exempt from the statutory backstop date of 30 September in circumstances where the auditor is unable to issue their opinion due to outstanding objections to the accounts that could be material to that opinion?
Response: Agree
Please explain your response.
When considering objections, auditors are acting in a quasi-judicial capacity and need to consider options including seeking court action. They are required to complete their review of relevant matters and conclude on the potential application of their responsibilities. We note that the NAO Code consultation recognises that there may be an ongoing investigation that is not generated by an objection, that could also have potentially material implications and could require the auditor to seek recourse to the courts. We are working on the basis that all parties recognise that the wording of this exemption is co-ordinated with the NAO’s Code, and so should not be limited to objections.
Question 4
Do you think there would be any other exceptional circumstances which might create conditions in which it would be appropriate for Category 1 authorities to be exempt from the 30 September backstop date?
Response: Agree
Please explain your response, including, where relevant, details of exceptional circumstances you consider would justify an exemption.
We note that the NAO Code recognises that if the auditor is unable to satisfy themselves about the body’s arrangements to secure economy, efficiency and effectiveness then the requirement to issue the audit opinion to enable the backstop date is disapplied for the auditor. Logically, if the auditor is unable to issue the opinion, then the body cannot publish audited accounts. As per our comments on question 2, there needs to be a clear framework setting out how both parties are expected to explain that they are not meeting the backstop. For example, if the auditor is unable to complete the VFM arrangements work because of an external factor (eg awaiting crucial information from a third party), should the reporting of that be distinguishable from circumstances where completion is not possible because either the auditor or the body has not met their respective requirements?
We recognise the proposed backlog solution comes with significant short- and medium-term challenges in order to enable a long term solution. We also recognise that there may be a small number of exceptional examples where the public interest test could identify that the backstop solution does not lead to the best outcome in the long term. It is essential that any potential exemptions are identified as soon as possible, and that in such cases there is provision for all options to be explored alongside the possibility of requiring the full audit to continue (eg where specific assurance is needed rather than the whole audit, a better solution may be to commission a specific review to target the required assurance through the use of agreed upon procedures).
There may also be isolated instances where there is no auditor in place, rendering it not possible for the body to meet the backstop date.
Question 5
We intend to publish a list of local bodies and audit firms which meet statutory deadlines for the publication of audited accounts and those which do not. Do you think there should be additional consequences for Category1 authorities or audit firms (excluding an authority or firm covered by an exemption) if they do not comply with the statutory deadline of 30 September 2024?
Response: Disagree
Please explain your response and, where relevant, include any suggested consequences.
The proposed solution requires goodwill and co-operation from all parties to remove the backlog, but it is critical to acknowledge that neither the reset nor the recovery phase address the fundamental and systemic problems in the supply market, or the capacity and recruitment/retention problems faced by finance teams/bodies. These problems are acknowledged in the Joint Statement and will be a focus of the reform phase which will begin soon, but will not be in place for September 2024.
The local audit system is currently in a very fragile state, and introducing consequences at this point would bring the risk of overall market contraction and/or a reduction the range of suppliers willing to engage with the market, which is already significantly short of where it needs to be to provide competition and the ability to function smoothly. It also risks impacting on the willingness of practitioners to work in senior roles in local government finance.
We note that the question states the intention to publish a list of outcomes. We consider that it is essential that if DLUHC produces such lists that it provides substantial wraparound information that explains the extraordinary circumstances. This would be consistent with the strong emphasis in the Joint Statement and other commentary that the context of disclaimers and modifications needs to be clearly explained globally and at an individual body level. If DLUHC publishes an outcome list in isolation and without the global context, then this would risk undermining the efforts of the bodies and auditors to explain the non-standard opinions at a local level. There is particular sensitivity in relation to publishing whether or not the bodies met the statutory deadline for pre-audit publication. There is much coverage of capacity challenges in finance teams and the wider workforce that the finance team relies on for data and information needed to construct the financial statements. The s151 Officer is required to declare the pre-audit accounts to be true and fair, and there is no equivalent to the auditor’s option to disclaim or modify their opinion. The risk is that the publishing of a list with no context or explanation will result in unfair criticism of s151 Officers when the reality is that they are acting responsibly in accordance with their professional responsibilities in the particular circumstances.
Question 6
Notwithstanding the possibility of exemptions in exceptional circumstances (covered by questions 7 and 8 below), do you agree that Category 1 local authorities should be required to publish audited accounts for financial years 2023/2024 to 2027/2028 by the following dates?
2023/24: 31 May 2025
2024/25: 31 March 2026
2025/26: 31 January 2027
2026/27: 30 November 2027
2027/28: 30 November 2028
Response: Unsure
Do you have any comments on these dates?
Our main concern about these dates is that the 31 May 2025 deadline coincides with the current statutory date for pre-audit publication for 2024/25, and also cuts into the main NHS audit timetable, an issue because most suppliers cover both sectors. We note that there are no easy options – moving the date forward to 31 March 2025 has the complication of being only 6 months after the first backstop date and clashing with the 2025/26 budget preparation period. Moving it back would elongate the process further. Deciding on the final date needs input from both practitioners and auditors, but crucially they themselves need clarity about the ask of them in terms of their respective Codes. As the Joint Statement recognises, there is on-going work to establish what audit work is needed, particularly in relation to building back assurance following disclaimers and modifications, and so in our view the final decision on the timings needs to be kept under review until the relevant information is available.
Question 7
Do you think it would be appropriate for Category 1 authorities to be exempt from the statutory backstop dates for Phase 2 in circumstances where the auditor is unable to issue their opinion due to outstanding objections to the accounts that could be material to that opinion?
Response: Agree
Please explain your response.
The reasons are the same as for question 3.
Question 8
Do you think there would be any other exceptional circumstances which might create conditions in which it would be appropriate for Category 1 authorities to be exempt from the backstop dates for Phase 2?
Response: Agree
Please explain your response, including, where relevant, details of exceptional circumstances you consider would justify an exemption.
Retaining the facility to recognise exceptional circumstances across such a large and diverse client base appears to be a logical step. The key is to ensure that the application is restricted to truly exceptional circumstances where a body cannot meet the backstop dates through no fault of its own, and where it has exhausted all reasonable options to meet it.
For example, if an unforeseeable change in a key officer’s or auditor’s personal circumstances means that they become unavailable at short notice, the body or supplier will require time to identify a suitably qualified and experienced substitute. Realistically the new officer or auditor will also require time to enable them to complete the financial reporting/audit process to the appropriate professional standard. The Department could have the ability to grant exemptions for a specified time in the appropriate circumstances.
Question 9
We intend to publish a list of local bodies and audit firms which meet statutory deadlines for the publication of audited accounts and those which do not. Do you think there should be additional consequences for Category 1 authorities or audit firms (excluding an authority or firm covered by an exemption) if they do not comply with the statutory deadlines for Phase 2?
Response: Disagree
Please explain your response and, where relevant, include any suggested consequences.
The reasons are the same as for question 5.
Question 10
The Accounts and Audit Regulations 2015 (regulation 15(1)(a)) currently requires Category 1 local authorities to publish unaudited accounts by the 31 May following the end of the financial year. In light of the proposed deadlines for the publication of audited accounts, do you think the 31 May deadline remains appropriate for financial years 2024/2025 to 2027/2028?
Response: Disagree
Please explain your response.
Whilst there will be bodies that are able to produce high quality pre-audit financial statements by 31 May, there are others that will benefit from more time, especially given the other pressures on s151 officers, finance teams and the other officers that supply data and information to them. A later deadline does not preclude those that wish to issue by 31 May to do so, but in practice given NHS audit deadlines there will be many local government audits that will not start until July at the earliest.
Question 11
The existing annual deadline for the publication of unaudited accounts is 31 May. As set out above, we are proposing a backstop date for the publication of audited accounts for the financial year 2023/2024 of 31 May 2025. This would mean that 31 May 2025 would be the statutory deadline for both the publication of audited accounts for financial year 2023/2024 and unaudited accounts for financial year 2024/2025. Do you expect this would create any significant issues?
Response: Agree
Please explain your response.
See question 6 and question 10. In our view extending that deadline until say, 30 June would enable bodies to make better decisions in relation to the management of competing priorities, whilst avoiding any negative implications for the financial reporting process.
Question 12
The government anticipates that the Phase 1 backstop proposals will result in modified or disclaimed opinions. A modified or disclaimed opinion at the end of Phase 1 would require auditors to subsequently rebuild assurance. The Phase 2 backstop dates are intended to enable this work to be spread across multiple years. Given this additional work, and noting the further explanation at paragraphs 15 to 46 of the Joint Statement, do you have any views on the feasibility of audited accounts being published by the proposed statutory backstop dates for Phase 2?
Response: The feasibility of these proposals will rely heavily upon the need for clarity in relation to the requirements on preparers and auditors. As the Joint Statement recognises, there is on-going effort to establish what audit work needs to be done, particularly in relation to building back assurance following disclaimers and modifications. It is also clear that there needs to be on-going communications to ensure that all interested parties understand the context for the building back period, and that in particular prompt, clear, authoritative and comprehensive formal guidance for all practitioners has a crucial role to play.
In some cases, it is possible that the combined effect of the proposals for the reset and recovery phases may result in a series of disclaimed or modified opinions covering multiple financial years. This has potentially adverse implications for both good financial management and local public accountability in relation to the bodies concerned. It is important that the likelihood of such outcomes is made clear and that any measures which may be able to mitigate such outcomes are explained.
Question 13
Do you agree that it would be beneficial for the 2015 Regulations to be amended so that Category 1 bodies would be under a duty to consider and publish audit letters received from the local auditor whenever they are issued, rather than, as is currently the case, only following the completion of the audit?
Response: Agree. Although the auditor’s annual report will be available when issued via the relevant meeting papers, it would have more prominence if it is published separately and appropriately promptly and prominently.
Question 14
Do you have any comments on whether any of the proposals outlined in this consultation could have a disproportionate impact, either positively or negatively, on people with protected characteristics or wish to highlight any other potential equality impacts?
Response: No
Question 15
Finally, do you have any further comments on the proposed changes to the 2015 Regulations not covered by the questions so far, including relating to any unintended consequences?
Response: The proposals result in a very complex fees position that PSAA will need to work through. Whilst the Appointing Person Regulations provide the framework for making fee determinations, the fees follow the volume of work that auditors are required to carry out, for example when disclaiming where limited work has been done, or building back assurance following a disclaimer. As the work required has not yet been defined, we are not currently able to quantify fees. We will communicate on fees when we are able to do so.
The proposals mean that some bodies will receive disclaimed or modified opinions through no fault of their own. In addition to the reputational and practical risks, the added consequence is that these bodies will be required to pay for the additional work needed to build back assurance at the significantly higher fee rates that apply for 2023/24 and subsequent years. In our view DLUHC should consider the case for providing funding for the additional audit costs that these bodies will incur as a result of the backlog solution.
A further complexity is that suppliers have needed to decide how to prioritise their resources in real time, alongside the local audit senior stakeholders designing the backlog solution, following on from the Ministerial roundtables in Spring 2023 and the Ministerial statement in July. Whilst the time taken to agree the proposals reflects the complexity of identifying a solution that is technically, politically and practically acceptable, an unintended consequence is the prospect of a divergence in suppliers’ prioritisation decisions (noting that the suppliers are independent entities, and that data is needed to establish the post-consultation position). There is concern that this may add further confusion to third parties’ interpretation of the range of audit outcomes.
While work is underway across system partners to develop a local audit workforce strategy, it will take time to come to full fruition and for there to be a significant growth in audit supply, or for a significant upturn in the resources available to finance teams. Additionally, the totality of the current proposals offers limited prospect that the audit requirements as a whole will decrease. All system partners therefore need to work collectively to avoid an unintended consequence being that the backlog is replaced by unacceptably high levels of disclaimed and modified opinions on an ongoing basis, due to a lack of capacity to build back assurance. It is essential that all avenues for reducing the workloads of both preparers and auditors continue to be explored.
We consider that the reform phase that all system partners have committed to in the Joint Statement is critical to avoiding a recurrence of the current crisis. It includes continuing the work on the local audit system architecture, reforming the financial reporting framework, and tackling the workforce challenges including strengthening supply. Another important issue to consider is the very challenging step up from the limited assurance and audit regimes (working in conjunction with SAAA) and most of all, establishing the purpose of the local government financial statements and local audit. PSAA is ready to work with other system partners to tackle these challenges.