Business Plan to 31 March 2025 - Page 3 of 6

Local audit context

The local audit context has evolved over the past two years, following the publication in December 2020 of the Government’s initial response to the Redmond Review and in the wake of the three other independent audit reviews of different aspects of the audit profession.
Several important developments have occurred and throughout this period we have worked energetically with DLUHC to both support their work (and that of other local audit players) to address the many challenges facing local audit.
However in overall terms the health of local audit is arguably worse now than it was two years ago. Urgent and early action is needed to address the serious risks and threats facing local audit, particularly:

At the publishing date of 30 November 2022, only 12% of local government bodies’ 2021/22 audit opinions have been given. Although this is slightly higher than last year’s 9%, this year’s publishing date is two months later. The daunting result is that over 630 audit opinions were outstanding at 1 December 2022.
The local audit system needs a plan to ensure that an unmanageable backlog does not become a permanent feature. Auditors are obvious key players in tackling this issue. But chief finance officers and audit committees have important roles to play too in ensuring that good quality pre-audit accounts and working papers are available and that the auditor’s queries are dealt with as soon as possible.

Since 2018 the Government has commissioned and consulted upon the recommendations of several independent reviews of audit. Firms now need certainty about the reforms to be implemented and the legislative timetable. The new regulator, the Audit, Reporting and Governance Authority (ARGA), will be a critical component as it takes on the role of local audit system leader.
The FRC appointed its first Director of Local Audit in September 2022. The FRC will assume the role of shadow system leader from January 2023 prior to intended establishment of ARGA when full system leadership is intended to commence.
We understand that a Memorandum of Understanding between DLUHC and the FRC setting out the FRC’s role and responsibilities as shadow system leader will be published, subject to Ministerial clearance, in the first quarter of 2023. The FRC’s Director of Local Audit will lead a dedicated local audit unit to perform the shadow system leader role and we (PSAA) have and will continue to work collaboratively with the FRC to share emerging issues, risks and contribute our views and ideas on local audit system reform
Continued uncertainty will fuel speculation about the Government’s commitment to reform and may cause firms to delay key strategic decisions affecting the growth of additional capacity to deliver local audits. Clarity about Government plans is needed as soon as possible.

The local audit market must grow to increase available capacity and to restore vital competition. Additional firms need to be encouraged to develop the capability to undertake local audits, with their sector-specific features.
The system should also consider the option of establishing a public sector-owned supplier. This would not be easy but should nevertheless be carefully evaluated to help manage fluctuations in capacity and protect against insufficient supply in future procurements.
Audit firms tell us that recruiting and retaining local audit staff is a significant problem. DLUHC has committed to develop a workforce strategy for local audit. The FRC’s Director of Local Audit will lead this work which he has signalled will commence work in early 2023. We hope it may lead to a significant coordinated recruitment campaign, emphasising the positive outcomes which effective local audit supports and influences – strong local accountability, good governance, better management and stewardship of public money.

Local audits have become more complex and demanding in recent years as the regulatory bar has been raised. Every audit now requires more work before a sound professional opinion can be given. This invites discussion of how the interests and needs of taxpayers compare with those of company shareholders and opens up the important bigger question of “What is local audit for?”.
HM Treasury is reviewing the basis of valuation of non-investment assets. The proposals may lead to a change in requirements and provide the first tangible steps towards the more proportionate audit, but will be subject to consultation.