In Conversation: Local audit backlog measures and audit opinions

Published: 15 November 2024

9 minute read

In our latest In Conversation podcast, Kate O’Neill, Director of Stakeholder Engagement and Corporate Affairs, is joined by Mark Babington, Executive Director of Regulatory Standards, as well as Mike Newbury, Director of Local Audit Code and Guidance at the National Audit Office, and Iain Murray, Director of Public Financial Management at CIPFA, to discuss the measures introduced to address the backlog of local body audits and how they will impact the audit process and the type of opinion issued.

Transcript

0:10
Hello there, and welcome to another edition of the FRC in Conversation series.

0:15
My name is Kate O'Neill.

0:17
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.

0:21
And today I'm joined by Mark Babington, our Executive Director of Regulatory Standards and two guests to the FRC, Ian Murray, Director of Public Financial Management at CIPFA and Mike Newbury, Director of Local Audit Code and Guidance at the National Audit Office.

0:40
Today we are going to talk about the very interesting topic, but a very important topic of local authority audit and also go through some of the recent developments in this system to help more timely audits be achieved.

0:55
Mark, do you want to quickly explain what the backstop measures are because they've been referenced obviously very heavily and being seen to be very important to getting the system working better.

1:07
And why were they implemented?

1:09
So Kate, there has been a problem for a number of years with the timeliness of local authority financial reporting in audit and a significant backlog of accounts awaiting audit has grown up in the system.

1:22
The response to that on the part of the government has been to set a series of statutory backstop dates.

1:29
So therefore you need as a local authority to have published your financial statements along with an auditors report by a series of backstop over the next few years.

1:41
And effectively by that point your auditor will issue an opinion.

1:46
Now we'll discuss later what the implications of that are, but it means that there is now a date for each financial year that you can be no later than.

1:55
And it will help to address this significant backlog that's grown up and also help to put the system back on its feet so it can deliver timely financial reporting, which is essential.

2:05
Thanks, Mark.

2:06
But how have these backstop measures affected the audit process?

2:09
Because it is quite unusual to be allowed to have a later filing date, isn't it?

2:15
Well, what's happened, Kate, is that in some cases the backlog goes back a number of years.

2:20
So there are examples of local authorities that haven't had an audit opinion and haven't had published audited financial statements for periods of 3-4 or five years.

2:30
So what this is effectively saying to the auditor is by the backstop date, you have to issue the opinion.

2:37
You can give that date.

2:39
And if you've not finished your work, you have to consider what that opinion might be.

2:44
So it could, for instance, be one where it is scope limited because the auditor hasn't been able to get all of the evidence they need.

2:52
Or it could be one where the auditor says, I haven't even started the audit yet and therefore all I'm able to do is say I can't give you an opinion.

3:01
So a disclaimer.

3:03
And so if that's one of the expected consequences of these proposals, Mark, a local body could get a modified or disclaimed opinion in the short term.

3:12
I mean, what does that mean for a client or a customer of an audit firm if you get a disclaimed or modified opinion?

3:20
So a disclaimed opinion is effectively the auditor hasn't got evidence to be able to tell you whether the accounts give a true and Fair view, whether they've been properly prepared.

3:31
So what they're actually saying is I'm, I'm unable to give you assurance over this period.

3:36
Now that's a very unusual situation to find yourself in.

3:40
We see it very, very rarely in the corporate sector.

3:44
But we are in a unique sort of situation with local public audit and it's required government to take some fairly significant action to avoid a situation where we just go ever further forward with a backlog that grows and grows and grows.

4:00
Now this means it's going to be really important that the communication by the auditors to explain what they've done is really clear and is there and can be used by people who would have relied on those financial statements.

4:14
So if they're clear about where a disclaimed opinion has been caused by these measures, is that different to the usual situation that a disclaimed opinion is given?

4:26
Well, usually a disclaimer of opinion would be given because the auditor hasn't been able to get evidence in support of their work.

4:33
But normally an auditor plans and performs their audit to be able to issue an opinion.

4:39
What's happened in this case is that the law has intervened and said you are out of time.

4:45
So that decision has been taken in a sense out of the auditors hands and out of the hands of the local authority and this statutory backstop has now been set.

4:55
Thanks Mark and Mike, Are you able to briefly explain what the code of audit practise is and changes made in the latest version?

5:04
Yes, of course for this is may not be familiar with this sector.

5:07
The requirements on auditors of local public bullies are set out in statute in the Local Audit and Accountability Act 2014.

5:17
That Act also gives the Comptroller and Auditor General (the CNEG) the duty of preparing and maintaining code audit practice.

5:27
So the duty the C&AG has is to look at what his view represents, best professional practise for the particular sector that we're having a look at and determine what code requirements he should place all auditors doing that that work.

5:43
What the C&AG.

5:45
has done is to say that the best available professional standards that auditors should be applying are the are the ISAs and therefore the auditors should comply with the ISIS when carrying out their audits of financial statements.

6:01
It's really important though to reflect that the public audit round also requires auditors to undertake work to be satisfied about the arrangements that the public bodies have in place to secure value for money.

6:15
The three ES and those requirements are also set out in the Code of Audit Practise and auditors also have a range of other statutory duties and responsibilities that are set out in the Act and the Code Audit Practise covers and specifies how auditors should be carrying out that work.

6:35
Thanks Mike.

6:35
This sounds like there is a lot in the Code to help auditors going through this backstop.

6:41
But what supporting guidance are available to auditors in navigating the backstops?

6:46
Because as you and Mark have both said, this is an unusual situation.

6:50
It is, it's wholly unprecedented.

6:51
Don't think any jurisdiction anywhere has attempted to do this sort of thing on a system wide basis.

6:57
So as I said earlier, auditors have to comply with the code of audit practise.

7:01
The C&AG can also issue statutory guidance and working together with our colleagues from the FRC teams, both the local audit and regulation standard team, we've developed a set of specific guidance.

7:13
These are called Local Audit, Reset and Recovery Implementation Guidance, more stuffily known as LARRIGs.

7:20
And these cover a range of issues that auditors need to have regard to when they're working their way through backstop, which is coming up fairly shortly.

7:29
And then thereafter, in terms of the work that they all need to do to rebuild that missing assurance when auditors have been either modified or indeed disclaimed, like you mentioned value for money work.

7:41
I mean, for those unfamiliar about what that term means, could you explain what auditors value for money work is and why it's important, especially through a period of this navigating the backstop dates?

7:55
Oh, sorry.

7:55
Value for money has always been a key building block of public audit.

8:00
The Code of audit practise specifies a number of areas that auditors should be interested in when they're thinking about the value for money arrangements that are in place in a given public body.

8:12
What we've done through this code of practise though is to reflect that because of the special circumstances here, we want auditors to focus on a couple of particular areas, especially financial resilience.

8:23
We want them to bring together their value for money reporting into a single report if that's appropriate for those outstanding years.

8:32
And then what we're looking to do is forward it to return to a full value for money reporting schedule as soon as possible and then thereafter to do that on a much more timely basis.

8:43
So auditors will be required to report annually by the end of November each year on the status of their audit, including the value for money arrangements for it.

8:53
This work is more useful to local public bodies when it is reported on a timely basis and and that's what the current aims to do.

9:02
If you're working in a finance team at local authorities, how should they be thinking about how they prepare for audits under these new measures and how should they be working with their auditors during, as we've all agreed, these unprecedented times?

9:17
Thanks, Kate.

9:17
So I think this is a really important thing to say is that we know that there isn't necessarily a one size fits all approach here.

9:23
So as we go through the backstop dates in the coming weeks, there will be some audits which may well be in a position where they can be finished so that disclaimed or modified opinion can be avoided.

9:33
We know that there will be somewhere there are gaps in assurance which could be minimised through closer working between the finance team and the audit team.

9:41
And there will unfortunately be those where auditors are likely just to perform minimal procedures and it's more likely that a disclaimed opinion is going to be the outcome.

9:50
So I think the first thing is to have an honest conversation between the audit team and the finance team about where in that scheme you are.

9:57
And if you can avoid disclaimed opinion or you can minimise the impact of the disclaimed opinion by focusing on some specific areas, then that's obviously in everyone's interest.

10:08
So I guess also we don't want people being compared and contrasted negatively because they receive a modified or disclaimed opinion for the reasons that Mark described before.

10:18
Absolutely.

10:19
So in some cases this isn't a disclaimed or modified opinion because of things that have gone on at an audited body.

10:25
This is disclaimed opinions because I think, as Mark said, the law has stepped in to say that we need to clear this backlog because that's in the wider public benefit or the wider public interest to do that.

10:36
And auditors should be explaining the reasons for their disclaimed opinions.

10:40
And so I think it's really important that local authorities and their finance teams understand the reasons and make sure that it's not necessarily seen as a black mark professionally because this isn't something that has happened because of the events that the council or within the finance team.

10:55
It's very much circumstances in lots of cases will be beyond council's control.

11:00
There might be situations surely, where if you received a disclaimer, it limits your ability to access or continue with loans or accessing suppliers or even on your existing covenants.

11:12
What do you think local authorities should be thinking about in those circumstances?

11:17
I think it's worth reiterating these are unprecedented circumstances and situations and we have heard stories of where local authorities are already having some difficult conversations or having to make alternative arrangements.

11:29
What the hope would be though that where we're looking at disclaimed or modified opinions as a result of the backstop dates.

11:34
So those opinions which are being modified because of the circumstances and because we're stepping in in this way, those really should be seen and dealt with on a case by case basis.

11:44
I think the government has been really clear that that that's the case.

11:48
And I think where that's not happening, it will be really important that local authorities go back and have a conversation with government through the Ministry of Housing, Communities and Local Government to explore the circumstances and understand what the barriers are in those conversations.

12:05
So when will we be able to take stock of how effective the backstop measures have been in clearing the backlog?

12:12
I mean, Mark, is there a start off date that we'll start to see the movement we need here?

12:18
It's going to be cumulative, Kate, but the first backstop date is going to kick in shortly.

12:24
And therefore what we're going to see probably by the other side of Christmas, we'll have the first batch of disclaimed or scope limited opinions that have happened as a result of this legislation.

12:37
So what we'll be able to do then is working with other partners is to work out is this making the progress that we need to make.

12:44
So subsequent backstop dates will work in the same way.

12:48
And and then what work can we do with our partners in the system to say how do we work with local authorities and their auditors so they're able to develop procedures that allow them to rebuild assurance in a timely way.

13:02
So the intention is to get people up and running again with unqualified auditors, reports and reporting on a timely basis as soon as we can.

13:12
But I think it's really important to reflect on Ian's point, which is there is no one-size-fits-all on the facts and circumstances that apply in each engagement.

13:21
So there'll be a lot of work and a lot of engagement ongoing.

13:25
I guess from what you've all said, this transparency and good communications really will underpin this very unusual set of circumstances because the worst outcome, I guess would be for the local authorities not to understand on what basis they may receive a modified or disclaimed opinion.

13:43
Absolutely.

13:43
We want this to be an informed conversation between all parties.

13:47
So it's really important that, as you say, there's that transparency and clear communication.

13:53
So the reason and auditor issues, a modified or disclaimed opinion is well understood that a local authority is able to communicate with people who look at that modified or disclaimed opinion and have questions that they need to answer.

14:08
And also those authorities where there is still significant public interest, entities that come to light are able to raise those and engage with the ministry on an appropriate basis.

14:20
So there'll be lots of communication.

14:23
Thank you all.

14:24
Well, these are unprecedented measures, but they do sound like they've been well thought out to help all involved get the right outcome and clear the backstop.

14:33
Thank you Mark Babington, Ian Murray and Mike Newbury for being on our FRC in conversations on the important topic of local authority audit.