Let me be frank upfront: for multiple reasons, the local government audit system has not worked as well as it should for a number of years in delivering timely assurance.
That is a message you have told us, that I have heard in my extensive meetings with the sector and which I conveyed to the Parliamentary Select Committee in July.
So, we need to fix this.
In my 10 months as the minister for local government, I have seen just how much amazing work local government does every day up and down the land. To enable it to do even more, it is imperative that there is a complementary and properly effective assurance framework.
To support that goal, we recently set out detailed proposals, developed with the Financial Reporting Council (FRC), the incoming shadow system leader, and other key partners, to tackle the serious backlog of local audits which are currently impacting the system and to put it on a sustainable footing.
While there are no easy solutions, I’m pleased that they have been broadly welcomed and I am grateful for further feedback from the sector.
The number of outstanding local audits dating back to 2015-16 is now too high, and is likely to increase further without action. I know that all of you who are responsible for local government finances, alongside your auditors, want to resolve this. That is a commitment I share.
To do that, we recognise there will be hard decisions. Our proposals include setting a series of statutory deadlines for account preparers and auditors to clear the backlog. I know the setting of ‘backstop’ dates may result in some qualifications and disclaimers of opinion in the short term. I recognise there is a keen interest in what all of this means in practice and that accounts preparers will be especially concerned about the potential reputational and financial risks.
Under these proposals, auditors would be expected to provide as much assurance as possible, reporting any significant concerns as normal. Their statutory duty to report on ‘value for money’ arrangements will remain unchanged, as will their ability to issue statutory recommendations and Public Interest Reports.
Our judgement is that this backlog needs to be cleared – not least so that audit can focus on current, rather than historical, assurance – and we will consult on this basis. It is vital for everyone that we get the system focused on the most recent period as soon as possible.
As others have noted too, clearing the backlog can’t be our sole focus. The return to timely audits must be sustained as part of an effective system underpinned by proportionate financial reporting, auditing and regulatory requirements; we cannot resolve a backlog one day only to see it starting to build again the next.
So, the second big endeavour is to ensure future local authority accounting and audit activity strikes a balance between maintaining the highest standards of financial reporting and the fundamental, day to day purpose of audit – to provide financial information and general assurance which is useful for taxpayers and others. That is why when it comes to debates on issues such as the accounting requirements for infrastructure assets, we need to consider our approach carefully. In the meantime, the Department for Levelling Up, Housing and Communities will seek to extend the legislative changes made in this area last year while the Chartered Institute of Public Finance and Accountancy (CIPFA) explores longer-term changes to reporting requirements for non-investment assets and pension valuations.
If requirements for operational asset and pensions valuations are revised, the FRC is minded to consider updating its approach to inspection activity in these areas. I strongly support both of these efforts.
In addition, the Comptroller and Auditor General is considering potential, time-limited changes to the Code of Audit Practice on certain balances in the accounts to prevent continued delays. Work will also progress to devise an escalated reporting framework for audit firms and local bodies to resolve issues ahead of statutory deadlines.
The issue of capacity in the audit market also needs further attention. In recognition of this, the FRC is already leading work to improve competition, capability and supply within the audit market. Continuous incremental increase in capacity will be important, but as it will take time to bring in new people, it still remains vital that we ensure that the system resets alongside this longer-term plan.
Taken together, this new approach seeks to provide a clear direction of travel and serious proposals to rise to the serious challenge of the delays facing local audit.
We are already undertaking detailed liaison, and encouraging significant further scrutiny, including to avoid unintended consequences. Engagement with our partners and the sector will continue into early autumn, including via a consultation process. Our aim is to begin implementing changes as soon as possible.
We all want to restore a system of timely financial reporting and external audit, providing the public with the assurance their hard earned money is being spent wisely and boosting trust and confidence in our great traditions of local democracy.
Your support and input in these endeavours would be hugely welcomed.
Lee Rowley is local government minister
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