Audit Quality Monitoring Report 2020/21

Compliance with Contractual requirements

42. PSAA monitors firms’ compliance with contractual requirements by considering a range of performance indicators, and also their compliance with agreed method statements as set out below.

Contract performance indicators

43. During the year PSAA has reported publicly on firms’ performance against targets of particular interest to opted-in bodies. This has included information on delivery of audit opinions and other outputs in a timely manner and matters which facilitate publication of annual accounts. Sir Tony Redmond’s report on local authority financial reporting and external audit was published in September 2020. Since then the backlog of delayed audits has continued to increase.
44. The Code of Audit Practice from 2020/21 onwards includes the expectation that the audit report containing the opinion will be issued by the publishing date set out in the Accounts and Audit Regulations 2015 (or equivalent) wherever the auditor can do so under the auditing standards and the guidance issued by the NAO. However, the publishing date is not a statutory date, and there is no ‘backstop’ date by which auditors must issue an opinion. Established practice in local government is that if auditors are unable to issue an opinion at the publishing date, then they will continue their audit until they judge they are able to do so. Regulation 10(2) of the Accounts and Audit Regulations 2015 specifically provides for the circumstances where audited statements are not available before the specified publishing date, in that the body must publish a notice reporting the delay and the reasons for it.
45. The backlog of delayed audits continues to increase. We reported last year that 433 (91%) of 2020/21 audit opinions had not been given by the publishing date of 30 September 2021. Of those, 433, 161 (34%) remained outstanding at 30 December 2022. In addition to the sector issues previously highlighted (e.g. within the NAO’s March 2021 – Timeliness of local auditor reporting on local government in England), heightened audit risk around the accounting for and derecognition of infrastructure assets led to a general moratorium on the completion of audits for bodies with material infrastructure assets. It has taken nearly a year to broker a short-term solution which meets both accounting and auditing requirements.
46. At the publishing date of 30 November 2022, 56 (12%) of local government bodies’ 2021/22 audit opinions have been given. Although this is slightly higher than last year’s 9%, this year’s publishing date is two months later.
47. It is clear from correspondence and the information received from our client survey that timeliness is considered by our clients as a key element of receiving a good quality audit service. We know that delayed opinions disrupt related work plans for all parties, create uncertainty in relation to the organisation’s financial position, and weakened governance and accountability processes. Perhaps most obviously, delayed audited accounts are less valuable and relevant.
48. The causes of the delays are widely documented and covered by both the NAO report referred to above (in its recently published progress update) and the work of the Public Accounts Committee. Tackling the issues and dealing with the current situation must be a priority duty for the whole local audit system and its participants.

Specific Powers and Duties of Auditors

49. Auditors have specific powers and duties under the Local Audit and Accountability Act 2014 (the Act). These include considering whether:

• to issue a public interest report concerning any matter that comes to their attention during the course of the audit which they judge should be considered by the audited body or brought to public attention;
• an audited body should consider formally and respond in public to recommendations they are making (Schedule 7 of the Act); and
• to apply to the court that an item of account is contrary to law.

50. The table below shows how auditors have used their specific powers in the period covered by this report.

Table 6: Use of auditors’ specific powers

Use of statutory powers by date of issue.

Source: PSAA

Objections

51. Local electors have the right to raise formal objections with the auditor about the financial statements and other matters, a unique feature of local government audits.
52. It is widely recognised that not all cases can be resolved within nine months (the historical industry benchmark), for example, where objections are related to complex or difficult legal cases, or where a resolution is delayed because an auditor is reliant on others for responses.
53. However the current shortage of experienced local auditors, which is particularly relevant for the exercise of an auditor’s quasi-juridical powers, has impacted on the ability of all firms to conclude on objections. As of 31 December 2022 there were 40 objections unresolved within the nine-month time frame, including a number unresolved for significantly longer periods.
54. The 2020 Code of Audit Practice requires auditors to use best endeavours to complete their work on objections within six months including informing the objector and the body of their decision. Where this is not possible, we supported the introduction of a requirement to provide the objectors and bodies with a progress update every three months until the objection is decided.

Non-compliance with Terms of Appointment

55. There have been no significant areas of non-compliance with PSAA’s Terms of Appointment (ToA) for the year ended 31 March 2021 (the period of work covered by this report). We reported two occasions during the year where firms were late in requesting extensions to individual’s involvement at specific engagements. We reported one occasion where a firm did not provide a copy of a statutory report to PSAA in advance of issue as required.

Independence issues

56. We reported one occasion where a firm self-reported that tax services had been inadvertently provided to a local authority-maintained school. Appropriate action was taken to mitigate the risk to auditor independence and a change in auditor appointment was not necessary in this case.

Non-audit services

57. Firms are able to provide certain non-audit services to audited bodies subject to the requirements of the FRC’s Ethical Standard and the NAO’s Auditor Guidance Note 1. Where the fee for such services exceeds the higher of £18,000 or 20% of the scale fee then the firm must seek PSAA’s confirmation that undertaking such work will not compromise their independence as auditor. The requirement that local auditors provide a VFM arrangements commentary is relevant to this judgement. The number of requests made has significantly reduced from earlier years because of changes to the Ethical Standard.

Table 7: Non-audit service requests

Number and value of non-audit service requests for the last four financial years.

Source: PSAA

58. We monitor how firms are operating their internal control systems for maintaining their independence. Where breaches have occurred, we have reviewed the underlying cause and the mitigating actions that have been put in place to prevent re-occurrence.

Complaints

59. Complaints can be an indicator of poor-quality audit services. Under our complaints policy PSAA can consider complaints that relate to a possible failure in service by one of the firms of appointed auditors, but we cannot consider complaints about the professional judgements and decisions made by auditors, or the process followed in relation to elector rights as these are matters for the courts. We have a protocol with the relevant regulators for dealing with such complaints.
60. A number of opted-in bodies contacted us regarding the lack of timeliness in audit completion. We share the concerns of our clients. As we and others have reported previously, the reasons at any individual body will normally be a combination of different causes. The position in 2021/22 was exacerbated by the length of time taken by the sector to resolve concerns over the accounting for (and therefore the auditing of) authorities’ infrastructure assets (e.g. highways).
61. In the year ended 31 March 2022 there were no formal complaints made to PSAA that were relevant to our responsibilities. We referred one complainant to the ICAEW as the appropriate regulatory body.

Method Statement

62. Certain parts of firms’ invitation to tender (ITT) responses in the 2017 PSAA procurement have been incorporated as ‘method statements’ in their contracts. The method statements cover a variety of topics that were all assessed as part of the tender evaluation process. PSAA has triangulated its monitoring of compliance with audit quality service information from other sources such as the professional regulatory reviews and client surveys. A client focused version of the ‘method statement’ was provided to all bodies as part of our client survey and formed part of firms’ planning and reporting communications with audited bodies.
63. As audit is a highly regulated profession, much of the firms’ method statements are contained in the expectations of the auditing standards in planning, conducting and reporting on an audit. The results of the regulatory reviews are reported above.
64. The findings from our client survey were that 90% of responding finance directors and audit committee chairs considered that, allowing for the pandemic, their audit service was meeting expectations as set out in firms’ audit planning documentation to some extent. We report further on the results of the client survey below.

Data Confidentiality

65. We have reviewed and confirmed that all firms have information governance arrangements in place and data confidentiality arrangements remain appropriate. There are instances of breaches such as emails sent to an incorrect recipient, but no sanctions have been imposed by any regulator such as the ICO. Three specific data incidents were reported to us (one laptop theft and two incorrectly addressed e-mails). Our assessment of the incidents in conjunction with the firms and organisation’s concerned concluded that there were no notifiable breaches of personal data confidentiality. It seems likely that the introduction of cloud-based data holding, and two-factor authentication arrangements have done much to improve overall security, but there must be no complacency especially as technology will continue to evolve at a strong pace.

Social Value

66. In accordance with our obligations under the Public Services (Social Value) Act 2012, we used the 2017 procurement to seek to improve economic, social and environmental well-being through the supply of audit services under our contract, whilst acknowledging that this is difficult to frame and measure in a national context.
67. Our procurement required firms to specify how many apprenticeships, additional training, development and work experience opportunities would be provided as a result of the contract, and the measures that would be put in place to target these posts at people from more deprived communities. Our five firms committed to providing 400 positions across the life of the contract. Information provided by the firms shows that for the contract period to 2021/22, over 320 positions have so far been created in positions for graduate trainees and school leavers, including year-long work placements. In addition, there have been a further 160 fixed term placements.
68. A particular focus for all firms has been school leaver programmes and attracting employees from lower socio-economic backgrounds. Information on backgrounds is difficult to validate but firms have provided details of the strategies deployed to widen their talent pool and ensure inclusive attraction in order to provide greater opportunities for young people from disadvantaged backgrounds. Whilst measurement of performance continues to be challenging, we are confident that our initiative has contributed to the encouragement of firms to address these important issues.

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