Mazars: ‘Accounting issue’ to blame for local authority audit delays

Government analysis of the drop in local authority audit timeliness fails to identify “specific technical matters” as a key factor, according to Karen Murray, partner at Mazars.

A report published by the National Audit Office (NAO) in January revealed that auditors gave opinions on just 12% of local government bodies’ 2021-22 financial statements by the November 2022 deadline – down from 45% in 2019-20 and 97% in 2018-19.

The report acknowledged that “a variety of complex factors” are contributing to the downturn, drawing particular attention to staffing issues among audit firms and the increasingly complicated nature of council activities.

Infra assets a challenge

But Murray argues that the uptick in delays is “an accounting issue, not an audit issue”, citing ongoing challenges with the valuation of infrastructure assets – an issue raised by public finance body CIPFA in a May 2022 consultation.

“I think it’s important to note that anything that was late and not signed off by a particular date in 2021 would have been hit by the issue around infrastructure accounting,” she tells Accountancy Age.

Murray also argues that, while the NAO report does refer to the infrastructure accounting issue, “it doesn’t really link it to the effects”.

“I don’t think it specifically pulls out the number of authorities that were affected by that. From our perspective, it accounts for a significant proportion of it.”

In an attempt to resolve the issue, the Department for Levelling Up, Housing and Communities (DLUHC) recently introduced a temporary override on elements of the CIPFA code of practice for local authority accounting.

For Murray, this will see a number of delayed audits “come off a production line” and reach completion.

“Varied and complex”

The NAO, however, maintains its reserve on the subject, reiterating that a range of factors are to blame, including capacity issues at audit firms.

“Factors affecting timeliness of local auditor reporting are varied and complex,” a NAO spokesperson told Accountancy Age.

“[This makes] it difficult to attribute current delays to any particular accounting issue, the actions of auditors or preparers of accounts in isolation.”

“Work needs to continue to address capacity and capability issues within local audit and local government finance teams,” says CIPFA’s director of public financial management, Iain Murray.

CIPFA’s Murray also praises the relevance of the NAO’s report, arguing that it “underscores the difficult reality” facing local government and auditors.

Erosion of trust

The NAO report also makes several mentions of the “significant implications for local accountability”, arguing that audit timeliness is “essential to transparency”.

But Mazars’ Murray – while acknowledging “there is no doubt” that public confidence is maintained by effective audit – expresses a degree of skepticism regarding the true impact of the delays on public trust.

“There is no doubt that public confidence is maintained where there is effective audit and timely financial reporting, but quite how many people ever look at a set of local authority accounts is an interesting question, and I’m not sure it’s one that’s been answered.”

In contrast, the NAO spokesperson argues that the typically lower profile of local authority audits is not representative of their wider significance.

“Local authority accounts may not always be front page news, but this in no way diminishes the importance of local authorities being able to demonstrate that public money has been properly accounted for,” they state.

“Timely assurance from independent external auditors remains vital for maintaining public trust in local government and protecting taxpayers’ money.”

The capacity issue

While contesting the lack of distinction between “what is pressuring the market and what is a one-off issue”, Murray goes on to concur with some of the concerns regarding capacity, acknowledging the stark concentration of market share.

More than half of the share of the local audit market currently sits with two firms – Grant Thornton (36%) and Mazars (22.5%).

Murray explains that this places a degree of strain on the firm’s internal capacity, and that talent acquisition initiatives are being deployed to counteract this.

“As firms we are all working on the medium to long-term workforce plan and key to that is getting those people in at graduate and school leaver level.

“It’s a challenging marketplace at the moment when you’re looking for people who are already qualified and experienced in local audit. So our strategy at mazars is pretty much to try to grow our own people and train them to be local auditors.”

In October 2022, the Public Sector Audit Appointments body (PSAA) announced that Azets and Bishop Flemming are to enter the local audit market in 2023-24. However, with the new entrants replacing Deloitte and BDO, Murray questions whether the shake-up is likely to improve capacity in the market.

“The new entrants to the market don’t necessarily have an existing workforce of suitably qualified and experienced people. So we may still have the same problem.”

ARGA as system leader

Suresh Patel, fellow government audit partner at Mazars, argues that the establishment of a system leader for local audit will be a step forward for the regime.

The government confirmed in May 2022 that ARGA, the body set to replace the FRC as the UK’s audit regulator, will be appointed as system leader for local audit when it is established.

“The quicker that can happen the better. We along with most of the other firms in this market work not just in local government but central government, the NHS, and education, but there’s no real coordination across these departments,” says Patel.

“A system leader holding the ring across all of those entities would be extremely beneficial from an audit and financial reporting perspective.”

Patel also acknowledges the delays to the formation of ARGA, which was first suggested as part of the government-commissioned Kingman Review published in December 2018. While the new body will be beneficial in the long run, local audit delays are likely to persist for years to come, he says.

“The lack of realism in some parts of the sector about how quickly this is going to get back to some kind of normality is astounding.

I think it’ll be quite a while until we see rates get back up to what you might think is a reasonable level.”