Is there a need to overhaul local auditing processes in the UK?

Following the recent publication of supplementary guidance by the National Audit Office (NAO), the Institute of Chartered Accountants in England and Wales (ICAEW) has made a compelling call to action for local authorities and audit firms to refocus efforts on resolving the ongoing local audit crisis.

This comes at a time when many local authorities are significantly delayed in finalising their external audits, raising serious concerns about accountability and financial stewardship.

The extensive delays in completing external audits have left numerous local authorities in England two or more years behind in publishing their audited financial statements. This backlog hampers the ability of council leaderships and management teams to be held accountable for their financial management of public resources.

The ICAEW underscores the importance of timely financial reporting, especially in the current challenging financial climate for most councils. Robust financial reporting and audit systems are essential to protecting the public interest and ensuring transparency.

The Scope of the Problem

As of 31 March 2024, the Public Sector Audit Appointments (PSAA) reported that 642 audited financial statements from 2022/23 or prior were still outstanding. This includes a significant portion of audit opinions yet to be issued for financial years as far back as 2018/19.

The audit crisis has resulted from a combination of factors, including a shortage of qualified auditors, complex accounting requirements, and resource constraints within local authorities. These issues have been exacerbated by the COVID-19 pandemic, which has strained local government finances and increased the workload for audit firms​

In response to the crisis, the Department for Levelling Up, Housing and Communities (DLUHC) has outlined a comprehensive plan involving three key phases to address the backlog and reform the local audit process:

1. Reset Phase: This phase focuses on clearing the backlog of audits up to the financial year 2022/23 by the proposed backstop date of 30 September 2024. Legislation and changes to the Code of Audit Practice are being implemented to support this goal. Auditors will be required to issue opinions based on the work completed, even if it means providing modified or disclaimed opinions due to the tight deadlines.
2. Recovery Phase: Following the reset, this phase aims to stabilize the audit process and prevent future backlogs by setting clear backstop dates for subsequent years. The goal is to ensure that audits are completed timely while maintaining auditor independence and compliance with International Standards on Auditing (UK)​.
3. Reform Phase: This long-term phase addresses systemic challenges within the local audit system. It includes measures to enhance auditor capacity, improve financial reporting standards, and ensure sustainable and timely audits. The Financial Reporting Council (FRC) and other system partners will play a crucial role in implementing these reforms.

The NAO’s Supplementary Guidance

The NAO’s supplementary guidance note (SGN 04) calls on external auditors to proceed with their work as planned, despite the absence of backstop legislation at this time.

This guidance is seen as a critical step in addressing the audit delays. The ICAEW’s spokesperson expressed relief and support for this directive, emphasising the necessity of sticking to the proposed timelines to avoid further setbacks.

The recovery plan hinges on meeting the proposed 30 September 2024 backstop date for completing outstanding audits up to the 2022/23 financial year. The ICAEW warns that missing this deadline could result in another year’s delay in getting local audits back on track.

Local authorities are urged to ensure that auditors have all the necessary information to finalize audits from previous years. Achieving this backstop date is pivotal in a multi-year plan to restore timely financial reporting and auditing in local authorities across England.

ICAEW has been proactive in responding to consultations and providing guidance on addressing the local audit crisis. Their vision for local audit, published last year, emphasizes the critical role of accountants and auditors in enhancing transparency and accountability in the public sector. The institute advocates for clear accountability, strong financial management, good governance, and value for money.

Impact and Accountability

The local audit delays have significant implications for accountability and transparency in local government. Timely audited accounts are essential for local authorities to plan effectively, make informed decisions, and manage public resources responsibly. Local residents, councillors, and central government rely on these audits to hold local bodies accountable for their financial management​..

To enhance transparency, the government plans to publish a list of local bodies and audit firms that meet statutory deadlines and those that do not. This move aims to increase accountability and encourage compliance with the new audit timelines. However, there are concerns about the potential consequences for local authorities and auditors who fail to meet the deadlines, with suggestions that more practical support and clear guidelines are needed rather than punitive measures.