In Conversation: An update on Local Audit

Published: 26 September 2024

6 minute read

In this In Conversation podcast episode, Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs, and Sarah Rapson, Executive Director of Supervision, sit down to explore the Financial Reporting Council's role as the system leader, the recent legislation introducing backstop dates for audited accounts, and the ongoing efforts to tackle the audit backlog while improving the long-term sustainability of the local audit system.

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Transcript

0:10
Hello there and welcome to another FRC in Conversation podcast.

0:15
My name is Kate O'Neill.

0:16
I'm the Director of Stakeholder Engagement and Corporate Affairs.

0:19
And today I'm joined by Sarah Rapson, the Executive Director of Supervision at the FRC.

0:25
Welcome, Sarah.

0:26
Thanks, Kate.

0:27
Good to be here today.

0:28
We're talking about really having a bit of a check in, I guess on the hugely busy time that the FRC has had in the local authority ordered.

0:39
But I think, Sarah, before we go into that recent activity, be great if you could explain to our listeners what the role of the FRC is as the system leader for local audit in the UK and what does that actually mean?

0:52
So our bowl as system leader is to convene everybody and to coordinate the local audit system, bringing together different partners across what is quite a fragmented sector.

1:03
So government regulators, the auditors themselves and other public bodies, and through the Liaison Committee, which I chair, seek to get solutions to some of the pretty intractable problems that the sector faces.

1:16
So we do have the system leader role, but it's also fair to remind people that we also regulate the sector.

1:21
So we set the standards, we inspect and we hold people to account.

1:24
So we have that other role here too.

1:27
So as you say Sarah, this is a incredibly important but fragmented system and so many parts of UK daily life are affected by local authorities.

1:37
But after a huge amount of work from everyone in the system, the government has recently laid legislation introducing backstops for audited accounts.

1:46
How significant is this step and how has the FRC been involved in getting us to this important juncture?

1:54
It's a really significant milestone, Kate, For the sector, the legislation is the first step to rebuilding the local audit system to deliver the assurance which the public deserves.

2:04
Teams across the FRC, but also working with MHCLG and all the other system partners for the last year 18 months, have been working on the development and the consultation and now the implementation of these proposals, which essentially set out the first backstop date of the 13th of December 2024 for all historic accounts for up to and including years 22/23 and a series of dates that follow for future financial years.

2:33
And the priority now is to bring that to life for all parts of the systems, which is us, other regulators, preparers and auditors to work together to make this a success.

2:42
Ahead of the first backstop date, we've also been working with the NAO, the National Audit offers on guidance for auditors during this.

2:51
Can you elaborate on this collaboration and the main points of the recently published very important guidance?

2:57
So we collaborated with the NAO on the development of the wonderfully titled LARRIG, which stands for the Local Audit Reset and Recovery Implementation Guidance.

3:08
This is to support the audit firms so that they know how to step in to deliver against these backstop dates.

3:14
Really important that we endorse them and we're seen to endorse them and they will help auditors meet the requirements of the revised Code of Audit practise, which the NAO own.

3:24
And we'll also include guidance on requirements to communicate where disclaimed opinions are driven by the backstop dates.

3:30
So if there is a disclaimed opinion and it's a consequence of the backstop dates, it's really important that the auditors and the preparers are clear about that and it isn't to do with other issues like poor governance or poor management controls and so on.

3:43
So if it's to do with the backstop date, it needs to be really, really clear.

3:47
So what impact do you expect these new backstop dates to have on reducing the backlog of audited accounts for local authorities?

3:54
Is it going to be the silver bullet that fuels all of the issues in the sector?

3:59
Everybody recognises that this will be uncomfortable.

4:01
It's absolutely necessary.

4:03
But you're right, Kate, it's not a silver bullet.

4:05
We need to be realistic.

4:06
This is going to take some time.

4:08
So for example, the last backstop date is out in 2027, so it's not going to happen overnight, but we do want to encourage both preparers and auditors to return to normal as quickly as is sensibly possible.

4:21
We also have just launched the escalated reporting framework.

4:25
What is this framework and how is it going to help repairers and auditors identify potential issues meeting these backstop dates?

4:35
The escalated reporting framework, so the ERF for sure, is a voluntary scheme for the audit firms, which will enable them to tell us at the FRC you have any emerging issues in the local audit system relating to potentially not being able to meet the backstop dates.

4:51
It is really important for us to have early intelligence because it may well be that we need to change something in the system to support.

4:57
We also want to know how things are going.

5:00
The initial roll out is focused on the 1st 2 backstop dates.

5:04
So that's the 13th of December 24 and 28th of February 25, and we'll be issuing more details in due course.

5:10
Kate.

5:11
This is quite a good way in which the framework can help auditors and preparers kind of flag up issues as they emerge, rather than feeling like they're just adding to some of the problems in the backstop.

5:23
We're also conducting a market study on NHS orders.

5:27
So why are we doing this study and what are the key areas that we're going to be focusing on?

5:33
We talk about local audit, we talk a lot about local authorities.

5:36
But of course local audit does include other public bodies, including the NHS.

5:42
And we know that the audit firms typically tend to use the same teams to do both the local authority audit and NHS audit.

5:50
So these markets are inextricably linked as it relates to order to capacity and we felt we really wanted to understand the NHS market better.

5:58
We've got a good understanding of local authorities, but we want to understand NHS better and the issues that the NHS audit market might be facing.

6:05
So a market study launched, it's focused on the procurement of audit services by NHS providers and integrated care boards.

6:13
It's going to look at things like barriers to entry expansion for firms and the unique features of the regulatory framework.

6:20
And actually there may be something in the way that the NHS approach, this might be useful for us to think about as it relates to other parts of the local audit system.

6:28
And when's that expected to conclude and results findings shared with people.

6:34
So we're looking to publish the interim findings later on this year and then the full report in spring next year.

6:40
So the backlog seems to be a symptom of more systemic issues in local audit.

6:44
Sarah, so how is the FRC looking at long term sustainability of local audit in the UK?

6:53
You're absolutely right, Kate.

6:54
The statutory instrument and the Code only reflect the reset and the rebuilding of the system of local audit in the longer term.

7:02
A major area of focus for the FRC is also the capacity and the capability of the audit market itself.

7:10
I've talked already about the NHS Audit Market study.

7:13
We're also working on a workforce strategy which we aim to publish later on this year.

7:17
And we're going to set out some recommendations to increase capacity and capability in the workforce.

7:22
That is of both auditors and preparers and ways that systems partners can work together to promote local audit as a noble profession, which it is of course.

7:31
I think people sometimes forget, Sarah, the huge part of audit about being the public interest and it would seem to me the local authority NHS areas are absolutely key.

7:41
As I said at the beginning, it's key to a well functioning UK for all of its citizens because it's really at the heart of so much of daily life.

7:50
Well Sir, it's been an incredibly busy six months or so.

7:54
But I guess as you said, the legislation really is a key turning point for allowing the local authorities and their auditors really start the process of moving this backstop on with longer term aspirations that you've outlaid back capacity and capability in the audit market to support this important work.

8:16
So thanks, Sarah, for joining me today in this FRC In Conversation podcast.

8:20
And I guess we'll be asking you back in six months, maybe around February, the date of the second backstop to see how well this legislation is supporting moving the backlog on.

8:32
Yes.

8:32
And we'll be able to update, won't we, through the data that we get through the ERF, which I mentioned before and see exactly how much progress is being made