Overview of the year
PSAA is the appointing person for audit services for principal local government and police bodies. It was originally specified as such by the Secretary of State in July 2016 and reaffirmed in May 2021. It operates in accordance with the provisions of the Local Audit and Accountability Act 2014 (LAAA2014) and the Local Audit (Appointing Person) Regulations 2015 (LAPR2015).
PSAA is responsible for appointing auditors and setting scales of fees for relevant principal authorities that have chosen to opt into its national scheme, overseeing issues of auditor independence and administering and monitoring compliance with the contracts awarded to suppliers to carry out local audits.
During this financial year audits in respect of 2020/21 were performed at 474 opted-in bodies (98% of eligible bodies) in a challenging context which included the COVID-19 pandemic. Disappointingly, a high proportion of those audits were not concluded in a timely manner adding to a growing backlog of outstanding audit opinions which represents a major concern for all interested parties. The absence of timely audit opinions poses a serious threat to public accountability, undermining the ability of local bodies to account effectively for their stewardship of public money to taxpayers.
Preparing for the second appointing period
A critical theme during this year has been the making of plans and preparations for the second appointing period which will commence in April 2023 and will cover the audits of the financial years spanning 2023/24 – 2027/28.
During 2021/22 PSAA embarked on a significant programme of work to:
- develop its offer for the national appointing person scheme for the second appointing period;
- invite eligible bodies to opt into the scheme; and
- undertake procurements, launched in February 2022, to let contracts with audit firms for audits of opted-in bodies from 2023/24 onwards and to establish a new Dynamic Purchasing System (DPS) for use, as necessary, during the second appointing period.
Encouragingly, 470 local government and police bodies in England (99% of the current total of eligible bodies) decided to opt into the scheme from April 2023. Only 5 eligible local bodies decided to make local arrangements for their auditor appointment.
PSAA launched two procurements, one for the main procurement of audit services for the period covering the audit of accounts from 2023/24 to 2027/28 and one to establish a DPS from which a number of audits are likely to be procured during the five- year appointing period. For example, the DPS may be used in situations where a change of auditor is required at a local body or as a result of new eligible bodies joining the scheme due to local government reorganisation.
PSAA’s procurement strategy has been developed and implemented with careful attention to detail. It reflects the results of extensive consultations with local bodies, the market and partners in the local audit system. The focus throughout has been to try to develop the best possible procurement approach which will meet the sector’s needs and be attractive to both new and existing suppliers. As well as meeting immediate needs, it is hoped that the procurement will mark real progress and contribute towards the development of a more sustainable market for local government audit services.
At the time of writing the main procurement of audit services is drawing to a conclusion with tenders due to be returned on 11 July 2022. The market for local audit services continues to face a number of significant difficulties which have been thoroughly documented following the Redmond Review and in related reports published by the National Audit Office and the Public Accounts Committee. (See footnote* on page 5) The outcome of the procurement is therefore eagerly awaited.
The challenging local audit market landscape
Local audit continues to be impacted by developments and trends in the wider audit industry. Following a number of high-profile corporate failures in the private sector, the Government commissioned a series of reviews in 2017-18 into different aspects of audit, led by Sir John Kingman, the Competition and Markets Authority (CMA) and Sir Donald Brydon.
The Kingman Review into the regulation of audit has already led to significant changes in regulatory requirements. As a result, auditors are exercising greater scepticism and audits are taking longer due to a requirement for increased resources and a different mix of skills. While Kingman’s primary focus was on large listed companies, the impact of his review has trickled down to local audit very rapidly.
The resulting changes were not envisaged when audit firms submitted tenders to PSAA during the 2017 procurement and, as well as introducing marked workload pressures, enhanced requirements have also led to a significant increase in the volume and scale of claims for fee variations in respect of necessary additional audit work. This has created significant additional work for PSAA.
Review of Local Authority Financial Reporting and Audit
The local audit system has also been the subject of a further review commissioned by the then Ministry for Housing, Communities and Local Government (MHCLG) and carried out by Sir Tony Redmond. Reporting in 2020, his review of local authority financial reporting and external audit, highlighted the significant challenges and turbulence within the local audit system, emphasising that local government audit is under-resourced, undervalued and is not having impact in the right areas. The report made a number of recommendations in relation to external audit regulation, smaller authorities audit regulation, financial resilience of local authorities and transparency of financial reporting.
The Department for Levelling Up, Housing and Communities (DLUHC), MHCLG’s successor, has provided its response to the Redmond Review in a series of statements issued during the year, setting out proposed actions to implement the majority of the Review’s recommendations. (See footnote)
Redmond review: Redmond_Review.pdf (publishing.service.gov.uk)
DLUHC response in December 2021: Measures to improve local audit delays – GOV.UK (www.gov.uk)
Timeliness of audit completion
Last year, we reported that at the target publishing date of 30 November 2020, only 45% of 2019/20 audit opinions had been given at opted-in bodies. Increased regulatory requirements, including the need to demonstrate scepticism throughout every step of the audit process, requires auditors to do more and different testing before a confident, safe opinion can be issued. Subsequent sign-off has been gradual rather than rapid and at 31 March 2022 there were 11% of 2019/20 opinions still outstanding.
The position has further deteriorated in relation to 2020/21 audits which have been affected by a variety of pressures including the impact of COVID-19 on the work required, additional audit requirements in the revised NAO Code of Audit Practice 2020, retention of experienced staff and increased regulatory focus, especially in relation to infrastructure assets. In respect of the 2020/21 audits, only 9% of audit opinions were issued by the revised target date of 30 September 2021. By 31 March 2022, 48% of opinions remained outstanding.
Both the NAO and the Public Accounts Committee have reported on this issue, emphasising the fundamental importance of timely opinions. The matter has been discussed at the Local Audit Liaison Committee, which brings together all the key stakeholders providing an appropriate forum given the whole-system nature of the action required to address the problem. In December 2021 DLUHC published a statement setting out its plan to chart a return to more timely opinions throughout the sector. Because of the scale and complexity of the problem, the Department acknowledges that a full recovery is likely to take several years.
This issue has a significant knock-on impact to the next appointing period. Instead of an early shift from existing to new contracts, it is now likely that the transition will be gradual and extend over a lengthy period. We are monitoring the situation closely and discussing potential implications with DLUHC on a regular basis.
Commissioning and undertaking research to inform our work
Where appropriate PSAA has continued to commission or conduct its own research to inform its work. This year our procurement strategy has drawn on, and been shaped by, the independent research report PSAA Future Procurement and Market Supply Options Review commissioned in 2020 and subsequent consultations with the sector and the market. We have also commissioned research in relation to the likely implications for audit resources and fees of a number of revised auditing standards and Code of Audit Practice requirements. The findings of this work have been published to assist planning for local bodies and suppliers. Further work has been commissioned in 2022 to consider the ongoing impact of these changes, and a second information paper for audited bodies is planned.
We have also carried out research focusing on audit risks and costs including a project to explore the estimated minimum cost of a Code-compliant audit. In the interests of transparency we have consulted on the possibility that we may propose the introduction of a minimum scale fee to coincide with the commencement of the second appointing period.
Setting audit fees and fee variations
Before 2022, the local audit regulations required that fee scales must be set before the start of the relevant financial year. In contrast, a significant proportion of audit work is undertaken after the end of the relevant financial year. This timetable has meant that PSAA has had to set fees without the benefit of up-to-date information on the outcome of the audits for the preceding year and without knowledge of the very latest developments in relation to changing regulatory requirements. In practice, having been set in accordance with this timetable, fee scales have quickly been overtaken by new and better information, creating a necessity for fee variations to compensate suppliers for additional audit work. Both audited bodies and audit firms have understandably found these arrangements frustrating.
During 2021 DLUHC consulted on proposed changes to the regulations, to allow for audit fee scales to be set to a more realistic deadline and providing more flexibility in relation to the impact on fees of changes in audit requirements. The updated regulations took effect in February 2022 and apply to the fee scale for 2022/23 audits, which PSAA must now set before 1st December 2022.
In January 2021 PSAA consulted on the 2021/22 fee scale. The consultation highlighted the pressures on audit fees of recurring additional audit work needed during 2018/19 audits in response to increased regulatory requirements in areas of the accounts such as property and pension valuations. (Fee variations in respect of 2018/19 audits totalled £4.835m – 17% more than the original scale fees for the year). As a result, we made some changes to 2021/22 scale fees, where it was possible within the statutory fee setting timescale to identify the ongoing impact of the additional fees needed at individual audited bodies. Our next consultation, on the 2022/23 fee scale, is likely to reflect the need to build in further additional fees, based on the outcome of 2019/20 audits and potentially 2020/21 audits. (By June 2022 fee variations received so far in respect of 2019/20 audits totalled £10.222m – 36% more than the original scale fees for the year, and variations in respect of 2020/21 audits total £3.027m – 11% more than the original scale fees for the year). The consultation will also cover the impact of recent increases in inflation, for which PSAA is required under the provisions of its audit contracts to adjust payment to audit suppliers.
Monitoring our contracts and the quality of audit services
We published our second Annual Quality Monitoring Report under the appointing person arrangements, covering the work of local auditors appointed by us for the 2019/20 financial year, with the aim of providing a rounded, well-informed view of performance and quality for each supplier. The report included the results of our second client survey on the quality of audit services and the outcome of the regulators’ inspection reports (FRC and ICAEW) on the quality of local audit work.
The regulators’ inspection reports covering a sample of 37 local government financial statement audits reported that there were eight (22%) that did not meet the required standard (which is being assessed as ‘good or limited improvements required’). In their previous report ten (37%) audits were judged as not meeting the required standard. The FRC identified that that they had seen tangible actions taken by the firms to respond to quality issues previously identified, but further work was needed to ensure that the observed improvement is both permanent and continuous. We have discussed with the firms their plans to address the matters raised by the professional regulators.
The inspections found that the quality of VFM arrangements work remained high, with all reviews (32 reviews) meeting the standard as in the previous year (27 reviews).
The client survey results reflected the current challenges, and respondents expressed their concerns about the wider local audit regime. Responses highlighted a number of recurring themes including the local impact of delayed audit opinions, the shortage of auditor resources, the level of scale fee variations, and the extent of the audit work now required on property and pension valuations.
As the Government takes forward its proposals to implement the recommendations from the various audit-related reviews and DLUHC implements proposals contained within its technical response to the Redmond Review, we are likely to continue to face an uncertain operating environment over the medium term.
We have particular concerns about the level of uncertainty and the large backlog of delayed audits. They have the potential to have an adverse impact on both the outcome of the current procurement, and the health and stability of the local audit regime as a whole.
We will continue to closely monitor the local audit landscape and work hard to understand the potential implications of any change for opted-in bodies, audit suppliers, key stakeholders and ourselves. We will continue to work closely with DLUHC, and we will fully engage with activities that support the design and development of the new arrangements. It is critically important that the market remains competitive and sustainable for the long term.
We are particularly keen to engage with and exploit the potential of the new Local Audit Liaison Committee (LALC), working with the other stakeholders with the aim of helping to build a more sustainable system, with timely delivery that meets the relevant quality requirements. We recognise that this will take time to achieve and that it will require all stakeholders to work together effectively through a challenging period.
Preparations for the next appointing period will continue to be a significant focus for PSAA over the next year. The outcome of our main procurement will be critically important and will set the context for the appointment of auditors to the opted-in bodies.
We look forward to moving on from managing serial problems within a fragile system to working with other local audit stakeholders to help design and implement a system which is more stable, more resilient, and more sustainable.
Refreshing the Board
During the course of the year we continued to refresh the membership of the PSAA Board, saying farewell to Stephen Sellers and Caroline Gardner, two founding members of our Board. We are indebted to both for the outstanding contributions which they have made to PSAA’s work and development.
Two new Board members, Fraser McKinlay and Mike O’Donnell have joined the Board following an open recruitment process and we look forward to working with them as PSAA goes forward.