Addressing the backlog in local audit

Published: 13 February 2024

8 minute read

In this In-Conversation, FRC Director of Stakeholder Engagement and Corporate Affairs Kate O’Neill sits down with Executive Director of Supervision, Sarah Rapson to discuss the backlog in local audit and its impact on the public. Kate and Sarah look at the role the FRC plays in local audit and how it is supporting the Department for Levelling Up, Housing and Communities on the recently launched consultation on proposals to reset the system.

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0:10
Hello there and welcome to an FRC In Conversation. My name is Kate O'Neill, I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC and today we're joined by Sarah Rapson, the Executive Director of Supervision here at the FRC. Welcome, Sarah. Hi, Kate. Good to be here. Hello. Today we're talking about a topic that perhaps some of our listeners weren't aware that the FRC has roles in, and that is local authority audit which includes the NHS.

0:40
So basically this has become a hotter topic even for those outside the auditing and accounting world because there has been a lot of media attention about the backlog of outstanding audit opinions which have now reached over 700 at the end of December ‘23. So, Sarah, can you briefly explain to our listeners why this backlog has built up and the impacts the backlog is having?

1:05
Timely, high quality financial reporting and audit of local bodies is a vital part of our democratic system, and we should all care about the fact that there are over 700 outstanding audit opinions because we're all council taxpayers and we're all, you know, users of public services, and understanding that money is being spent well is really important to us. It's not a new issue, it's been building over many years and it's not going to surprise listeners to know there isn't one single reason why either: it's a combination of the fact that there's a lack of shared vision of the purpose of local audit; there's a lack of capacity and competition in the audit market itself with the audit firms; there's a capacity issue in the public bodies themselves - in their finance

1:44
teams - and it's also quite a complex area; there's a complexity of financial reporting and auditing standards as they apply; and then, finally, there's a small number of local authorities, aren't there, and it's been in the public domain, that have got poor leadership, poor governance, poor risk management and poor internal controls and have ended up with, you know, some real quite significant issues and also including going bankrupt. So, a really important area, complex to sort out and we've got a really important role here. And as you said, it's a systemic issue. I mean it's not a one off in or one geography or one type of authority, It's a systemic issue. So who are the key bodies involved in trying to solve some of the pressures and problems

2:25
and what are the FRC's roles in that system? So we have our traditional, if you like regulatory role in local audits. So we set the auditing standards, we supervise the auditing firms and we regulate CIPFA and the ICAEW - who have important roles in this sector also - and we inspect the major local audits themselves. We are also the incoming shadow system leader, and we work really closely with a whole group of other organisations to try to move the system forward. Really importantly, we work with the department for levelling up, DLUHC, who have overall policy responsibility for local audit reporting and governance frameworks. We work really closely with the NAO,

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National Audit Office that set the code of audit practise. We work with CIPFA who lead on the qualifications for local audit and code of practices for the sector. And we work with the PSAA who does the contract management and the procurement with the audit firms. They in turn are owned by the Local Government Association, which is the representative body for local government and we work really closely with them. And that's even before you get to, as you mentioned earlier, Kate, the NHS, the police and other public bodies. So a lot of organisations need to come together and we have a real leadership role in making sure that we do do that to try and sort these very systemic issues out. What does system leader mean? I mean, leadership, which the FRC has a shadow system leader role here, but what does that actually mean? So the role as incoming shadow system leader is a really important one for the FRC, but it doesn't mean that we are responsible for fixing all of the issues in local government or even in local audit just by ourselves. It's really important that we diagnose the issues, we come up with potential solutions for sorting out some of these systemic issues and we convene all of the different participants in the system to make sure that they are also playing their part.

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So really we've got the FRC has a dual role balancing flexibility around standards while still upholding audit quality as reforms are implemented. How do you reconcile that at the FRC with that incoming shadow system leadership role?

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We're very clear that we've got two quite distinct roles here, both when we talk externally and also when we do our work internally, our traditional regulatory work if you like. And actually it's been hugely helpful having both roles that have been the regulator and the system leader in our decision-making and also shaping the proposals that we'll come on to talk about in a moment. I think it's been hugely helpful being the owners of the auditing standards and being able then to interpret them in a flexible way such that we can make progress

5:00
and also maintain audit quality. It's really helpful to have the existing supervisory relationships with the audit firms as we also want to talk to them now about local audit. And actually when we're seeking to make regulatory interventions, it's been really helpful to be able to explicitly take into consideration the system view in our decision making. So we find that internally we are able to make better decisions and also externally we're in a really good position because we've got regulatory responsibilities anyway to be able to make sure that the system

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comes together and comes up with the right solutions for the way forward. And that's just looking at the kind of current status, right. But looking beyond just clearing the current backlog, what role do you see the FRC playing to support longer term reforms and get us back to a place with these authorities where timely, high-quality reporting and audits just become normal again?

5:53
so we’ve been collaborating to develop proposals to deal with these exceptional circumstances and restore high-quality, timely financial reporting and audit. And we've shaped the response into three phases. Phase one is reset, phase two is recovery and phase three reform starts to look at what do we need to do in the longer run. We've been working really closely with DLUHC who have recently launched a consultation into local audit covering the proposals

6:24
to establish a statutory backstop date. and phase one of this work would involve a reset. And what I mean by that is that the proposals are to legislate for a statutory backstop date for the publication of audited financial statements up and to FY 22/23 by September 2024. Just to jump on that, Sarah. So the backstop date is kind of a line in the sand, right, and gives people the opportunity

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to, through that period, get the audit opinion - maybe modified, maybe not - in place to kind of reset. That's right. What are you going to say to people who maybe the modified opinion may have some not really big problems through to the more headline grabbing ones that we've seen. Not all local authorities are the big bankrupt stories or financial investment stories that we've seen in the press. Some of them can be just resource issue and now they're getting a chance to get an ordered

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and then signed off and on. Yeah. so this is a really important point, Kate. So there is definitely a risk that a local body being issued with a modified or a disclaimed audit opinion. It could be interpreted that there are some significant leadership, management, governance, financial management issues that are unfairly because the backstop date and a modified opinion has been applied. So we will be providing auditors with guidance as to what they need to do to be really clear as to why the modified

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or the disclaimed opinion if it's being applied, has been applied. And doing that it will encourage the right behaviours to get on with the backlog rather than be afraid of modified opinion if that is applied exactly. So phase two we're calling recovery is a series of further statutory backstop dates for the next five years. So for 23/24 financial year out to 27/28, which is the rest of the existing contracts with the audit firms and that's in billing auditors to rebuild the assurance

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over that five year period. Where there has been a modified opinion as part of the reset. And in parallel, CIPFA is going to make some temporary changes to the code of practise on local authority reporting to reduce burdens for preparers and auditors to make it easier to do the work. And then finally on reform - phase three - we will, alongside system partners, continue to work to address the systemic issues and get back to really importantly the timely financial reporting and audit that we would all want to see. So it's really coming together

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and with the right intentions to clear the backlog and reset for a more positive future around this important reporting. So how is the FRC involved in these consultations? We've been working really closely with the department for levelling up who are issuing a consultation to get views on changes to the Accounts and Audit Regulations 2015 to introduce the backstop date of the 30th of September and a series of future backstop dates over the following five years. And in parallel, the NAO is seeking

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views on the changes to the code of audit practice to support auditors to do that and to promote more timely reporting of their work on value for money arrangements. And then also CIPFA are seeking views on temporary changes to the code of practise for local authority accounting to reduce the burdens I talked about a minute ago, focusing particularly on operational property and pensions, which we know the sector will definitely appreciate. Who are these consultations designed at? I mean, is it a fairly focused group? Are we expecting people to be very involved in their variety of roundtables and

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webinars who have a particular interest or is this for everybody? The FRC is working really closely with DLUHC throughout the consultation and we'll be holding round tables on their behalf and all those stakeholders who are interested are more than welcome to come and to join the conversation. The FRC will also be meeting with the audit firms both at the senior level and also on the technical level. We'll be taking part in DLUHC webinars and of course hosting information about our consultations on the FRC website. So would encourage us to take a look

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cause that's where you'll find out how to get involved. So really it's a bit of a wait and see what comes out of the consultations and then moving into the next phase that we do hope with both our hats on at the FRC as the incoming shadow system leader and the FRC as an audit standard setter, that we really see the right behaviours come across the system to get the backlog cleared and move on to the next phase. So do you think that's a fair summary of where we'd like to get to post the consultation? Definitely. And I think we're in a really good place to be able to do that.

10:58
The issues will only be resolved if we work right across the system. And I've been really encouraged with how well we've been working with all the partners listed earlier in this really important area. And I think we've come up with a very positive way forward. Let's clear the backlog over the next three to five years. And in parallel, we need to work on with the system how we're going to resolve some of the bigger issues around workforce about capacity, how the money flows and maintaining high-quality financial reporting and audit for the future.

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Thank you, Sarah. We're looking forward to seeing the results of the consultation and the work that the FRC is doing in partnership with all of the participants in the system for the right outcomes for this very important sector.