The landscape of local audit in England has changed considerably since 2010. We have migrated from a model where the Audit Commission controlled all aspects of local audit arrangements, to a plural system that is entirely dependent on firms for its audit supply. Public Sector Audit Appointments (PSAA), created in 2014 as part of these changes, procures audit services, makes auditor appointments and sets scale fees for the 484 public bodies that have opted into our national scheme.
After completing our first collective local government audit procurement, valued at £140m for five years, we asked Cardiff Business School (CBS) to review our performance and help us develop and progress. Its report concluded that our work represented “an outstanding example of sector-led improvement”. This was particularly rewarding for the team given our compressed timetable, which meant that the invitation to tender and the contract design had to be finalised before we knew how many of the 495 eligible bodies had opted in to our offer.
CBS’ report also provides an interesting analysis of, and commentary on, the new local audit landscape. Its value lies in its identification of the challenges to be addressed if the regime is to succeed in the long-term, particularly the emphasis on the sustainability of audit supply. This chimes with CIPFA president Sarah Howard’s challenge to the sector, namely, where is the next generation of public sector professionals coming from?
Before considering sustainable audit supply in more detail, it is worth reflecting on the depth of the changes in the local audit framework since 2010.
The Audit Commission’s control of local audit arrangements has been supplanted by a system that is dependent on a range of specialist firms. The Ministry of Housing, Communities & Local Government is the commission’s residual body and has an overarching responsibility for the new framework set out in the Local Audit and Accountability Act 2014 (LAAA). The National Audit Office sets the Code of Audit Practice that establishes the scope of the auditor’s work – it is consulting on the next version which will apply for 2020-21 onwards. The Financial Reporting Council and ICAEW have complementary regulatory roles and responsibilities.
So, what are the issues identified by CBS that need to be tackled to future-proof the new regime and assure its resilience and success for the long-term?
Working in the new landscape
First, with so many different players in the new system, we need to face up to the risk of fragmentation. All the bodies involved must have a shared commitment to the system’s overall efficiency and effectiveness. We must all work collaboratively, respecting each other’s specialist roles, to deliver a seamless, joined-up system.
Second, we need to be ready for possible changes impacting audit regulation, auditing standards and audit firms. By coincidence, the LAAA is being rolled out at a point at which there is significant government and public concern about auditing, following a number of high-profile corporate failures in the private sector.
Recommendations from the Kingman and Competition & Markets Authority reviews are already in the public domain, with more to come when the Brydon review, looking at the quality and effectiveness of audit, completes its work. While the principal focus is on the audit of large companies, any resulting change in regulation, standards, firms or services will almost inevitably impact on local public audit. Some changes may be easy to accommodate, while others may be highly disruptive.
Third, if change has the effect of making the local audit market more or less attractive to suppliers, it may have a direct bearing on the sustainability of the audit model. This is a question that must be met head-on. We must also be alert to unintended consequences in important areas such as audit quality. Local audit is a niche market in which there are fewer than 10 accredited suppliers, with six currently carrying out local government audits. Distinctively, there is no longer a state auditor in the system to guarantee full coverage and continuity. Given the total dependence on firms, we have to find a way of ensuring that the market remains competitive and sustainable for the long-term. This is not an issue limited to PSAA. It is also a real challenge for organisations in the NHS and elsewhere opting to make their own appointments, particularly those that are relatively remote geographically.
Possible solutions include encouraging more firms to enter the local audit market by lowering the barriers and the costs of entry. Could we, for example, provide interested firms with access to advice and support to ease the entry route? Or adjust our tendering arrangements to offer smaller “starter-pack” contracts for new entrants?
We are also carefully following the private sector debate on joint audit appointments, as they have the potential to enable new entrants to gain experience of local public audits alongside established audit suppliers. Could such arrangements work effectively in local audit – including the likely additional cost? Would local bodies be willing to accept the appointment of inexperienced auditors or joint auditors in the interests of developing a more sustainable market in the long-term?
Other, more radical, options may include some form of state or not-for-profit audit supplier. This, in turn, would pose questions around viability, affordability, political acceptability and competition.
Old skills and new timetables
The sustainability of the local audit market is not just about the attractiveness of the sector to firms. It is also about the availability of people with the right skills. Auditors are required to understand the nature and business of the organisations they audit, and have a detailed knowledge of the requirements of the relevant audit, accounting and governance codes.
Auditors must also look at the organisation’s value for money, alongside their financial statements opinion, exercise a range of statutory powers and, in local government, deal with electors’ objections. This all requires experience and expertise. In a system in which the market shares of individual firms may ebb and flow as contracts are won or lost, investment in training and development of local audit staff is likely to fluctuate. This can lead to shortfalls in the supply of well-trained, suitably experienced audit staff. This is a particular challenge in audit leadership and management positions.
A further challenge arises from the local government accounts publication timetables introduced by the Accounts and Audit Regulations 2015 from 2017/18. This has created a pronounced spike in local government auditors’ work in June and July each year to meet the non-statutory target date for publication of audited accounts of 31 July (previously 30 September). This has effectively halved the window for delivery and doubled the staffing requirement for this period. For most firms this follows on immediately from intense activity in April and May on NHS audits and we know it is a major challenge for planning and resourcing audits.
The local audit system clearly needs continuous investment in training and development of staff over an extended period. Options include securing contractual commitments from firms and/or developing some form of joint training programme for local public auditors.
Finally, all of the challenges and questions posed need to be considered in the context that the sector itself is subject to increasing pressures and is developing different strategies to respond to its new circumstances. In particular, several high-profile cases have focused attention on the financial resilience of local authorities. This in turn has highlighted the gap in expectation between the requirements of the current code and the desire of officers and members for reassurance about arrangements for financial resilience and sustainability.
The NAO’s current two-stage review of the code provides an opportunity to discuss this issue and make appropriate adjustments. The debate alone will be valuable in terms of establishing a higher level of understanding of what auditors can and cannot do, and hopefully a consensus on what we want them to do within those boundaries. Their remit can be flexed, but it is not infinitely flexible.
The new local audit model has been successfully implemented, despite high levels of turbulence in the sector and the industry. That is no small achievement. But now it is up and running we need to look to the future and address some important issues to ensure that it remains effective and resilient for the long-term. No single party has a monopoly of wisdom to determine the precise road map that needs to be followed. We need all of the interested parties – the sector, the profession and all of the stakeholders of local audit – to engage and contribute to a collective response.
