Overview of the year
During this financial year the backlog of unaudited accounts continued to overshadow local government, adding to the serious concerns about local public accountability and the impact on assurance on the sector’s governance and financial management. The Government introduced statutory backstop dates for audit years to 2027/28 and a comprehensive reform strategy for the local audit system, which included folding PSAA’s responsibilities into a new body, the Local Audit Office (LAO). This is a significant starting point on a long and crucially important journey to overhaul local audit.
Developments to address issues in the local audit system
Since 2018 local government external audit has been affected by regulatory reforms, capacity issues and increased complexity, which has had a devastating impact on the delivery of audits and resulted in a backlog of unaudited local government accounts. This has had a profound effect on PSAA, impacting on many different areas of our appointing person role and increasing both the volume and complexity of our work.
The National Audit Office (NAO), the Public Accounts Committee (PAC) and the Levelling Up, Housing and Communities (LUHC) Select Committee all expressed growing concern about a local audit infrastructure unable to cope with the demands placed on it. They highlighted the important challenges facing the local audit system and the serious consequences for accountability and effective management of the public bodies and services concerned.
Our written evidence to the Levelling Up, Housing and Communities Committee inquiry on Financial Reporting and Audit in Local Authorities in April 2023 provides a short history of how the situation developed.
The new Government announced in July 2024 that an overhaul of the local audit system was needed to deliver the reforms required ‘to enable taxpayers to get better value for money’, a commitment that we strongly support.
The announcement introduced statutory backstop dates for all audit years up to 2027/28, including 13 December 2024 for audits up to 2022/23, and 28 February 2025 for 2023/24 audits. Where an auditor was unable to obtain sufficient evidence for the audit, they were able to disclaim their opinion, and, where necessary, value for money arrangements commentaries could cover multiple years. Where an audit has been disclaimed it may take several years before an auditor will be able to give an unmodified opinion.
Revisions to the Accounts and Audit Regulations and the Code of Audit Practice were laid in September 2024 to give legal effect to backstop measures to deal with the backlog.
The Ministry of Housing, Communities and Local Government (MHCLG) issued its plans for local audit reform in April 2025. It invited comments as part of a consultation to which we submitted a response. The plans included the establishment of a Local Audit Office (LAO) to oversee local audit, to simplify and streamline the current fragmented system, and to ensure efficiency, transparency and value for money.
This difficult but necessary solution has unprecedented consequences for the sector and the bodies affected, and recovery from the backlog will be challenging for all parties. We welcomed the solution and look forward to being an active participant in implementing the changes to overhaul the local audit system.
In July 2025 the Government laid in Parliament the English Devolution and Community Empowerment Bill. Part 4 covers the local audit aspects including the creation of the LAO as a central part of reforming England’s local audit system. As set out in the Bill the LAO will have five strategic responsibilities, including coordinating the audit system, managing contracts, setting the Code of Audit Practice, overseeing quality, and issuing national reports on the health of local audits. It will therefore subsume the current responsibilities of PSAA. Responsibility for the Code of Practice on Local Authority Accounting will remain with CIPFA. The Bill is currently passing through Parliament.
PSAA is considering the implications and has identified the broad areas of work required to support a successful closedown of PSAA and transition to the LAO alongside performing our appointing person role. This will be a significant focus of our work during 2025/26.
Audit services market
Our last main procurement in 2022 took place against challenging circumstances of a troubled audit profession, a turbulent market and a local audit system facing unprecedented difficulties including a large volume of delayed audit opinions. Our procurement secured just enough audit supply for the bodies that opted into our scheme, but there was and remains little or no spare audit capacity.
Alongside changes to local audit the Government is also pursuing a local government reorganisation agenda, including the creation of new combined authorities. We have made several appointments to them and over the next few years, expect to make more as the Government’s plan for devolution in England accelerates.
Auditor Appointments for 2028/29 and 2029/30
In late 2024/25 we started to explore our options to secure audit services for opted-in bodies from the 2028/29 audits. Our contracts include the option to extend by up to two years by mutual agreement. We were seeking the most beneficial way forward providing the best contractual position and minimal disruption to the sector. Following an assessment of the options, which covered extending the current contracts, undertaking a new procurement and a hybrid solution of both options, we were able to secure contract extensions for the two audit years, 2028/29 and 2029/30. This will provide a period of stability for the transition to the LAO.
Monitoring our contracts and the quality of audit services
We published our fifth Annual Quality Monitoring Report (AQMR) that covered the work of local auditors appointed by us for audits from 2018/19 to 2022/23. The report was shorter than in previous years as the impact of the audit backlog restricted the range of information available to report on, including the regulators’ suspension of routine inspections and our decision not to run an annual client survey. Our Annual Contract Monitoring Report, published in October 2025, captures the progress since.
We have strengthened our contract monitoring arrangements from 2023/24 and evolved our approach to the annual report and client survey. However, the suspension of routine inspections continues. This impacts on the level of assurance provided over the quality of auditors’ work, an essential part of our contract monitoring regime. We are concerned by this and continue to press for a suitable regime to be put in place as soon as possible to provide effective assurance on audit work.
Proposals for local audit systems leadership
From July 2021, MHCLG was the interim system leader with the Financial Reporting Council (FRC) operating as shadow systems leader from March 2023 to February 2025. MHCLG is now preparing for the establishment of the LAO, which will have a focused mandate to reform the local audit system.
MHCLG established the Local Audit Liaison Committee (LALC) to co-ordinate the work of the local audit system to resolve the issues impacting local audit. MHCLG replaced LALC with a Transition Board which brings together key local audit stakeholders to support the transition to the reformed system.
Looking ahead
We will continue to actively support the reforms and continue to collaborate with stakeholders through the Transition Board.
We will continue to work to understand the potential implications of the local audit reforms for bodies, audit firms, and key stakeholders. It is particularly important that the local audit market evolves, improving competition and assuring sustainability for the future.
The plans to overhaul the local audit system to address the systemic challenges that led to the backlog are welcome. We are committed to do everything we can as part of a collective systemwide effort to develop and deliver the critical changes required to ensure that current challenges are addressed and proper audit assurance is provided in a timely manner.
The proposed solution requires sustained goodwill and commitment from all parties. It is critical to acknowledge that, whilst the establishment of the LAO is a significant step in addressing the issues, there is a pressing need to use the current momentum to work on solutions to address the more immediate issues impacting local audit. This includes the need to look at how long the build back of audit assurance will take and the need for an effective audit inspection regime to provide assurance over all aspects of public audit quality.
The solution must address the overly complex and cumbersome local government accounting requirements, the capacity and recruitment/retention problems faced by finance teams in local bodies, and the lack of capacity in the audit supply market.
Board changes
On 1 February 2025 PSAA appointed Alan Edwards, Irene Asare and Liz Murrall as directors to the Board and Adrian Lythgo as independent member on the Audit Committee.
Current directors Fraser McKinlay and Marta Phillips stepped down from the Board on 28 February and 31 March respectively. PSAA thanks them for their significant contributions.
Keith House and Mike O’Donnell have continued in their director roles. Mike’s tenure as a Board member ended on 30 September 2025, and PSAA thanks him also.
The new Board looks forward to playing its part in the development of the LAO and in future local audit reforms.
Bill Butler
Chair
Tony Crawley
Chief Executive