PSAA response to the NAO consultation on changes to the Code of Audit Practice


At the beginning of February 2024, the NAO launched a consultation on proposals with the aim of restoring timely, high-quality financial reporting and audit.

Below are PSAA’s responses submitted to the NAO’s consultation on changes to the Code of Audit Practice.

Question 1

Do you agree with the principles of effective co-operation during the handover period where there is a change in the appointed auditor? (The handover period is defined as the period from the date from which the new auditor’s appointment takes effect to the date on which the outgoing auditor certifies completion of their audit).

Response: Yes. It is vital that auditors co-operate to the fullest extent possible under industry standards in order to minimise the risk that issues relevant to the Code of Audit Practice do not receive appropriate consideration, and to maximise the efficiency of the audit process. Under the proposals outlined in the cross-system statement and the parallel DLUHC consultation the handover period will be elongated, with the 2023/24 auditor taking on responsibility from 1 April 2023, and in many cases will require dual working with the 2022/23 auditor until late 2024, a year later than normal. As the backlog solution progresses, we will continue to discuss with the NAO local audit team whether it would be useful to supplement the Code’s principles with any form of guidance or clarification in relation to handover.

Question 2

Do you think that the proposed Code requirements in respect of the ‘backstop’ dates are sufficient to require and enable auditors to report their opinion at the backstop date, apart from in the exceptional circumstances set out? If not, what needs to be added or strengthened?

Response: The Code requirements are sufficient. The Code is underpinned by statutory guidance issued by the NAO, and in terms of the financial statements work by the FRC’s pronouncements on the boundaries of acceptable application of auditing standards. We are aware that there are key details of the backstop application that continue to be worked on. The FRC has a critical role in the resolution of the technical audit challenges, and ideally it will be as proactive as possible to help minimise the resources this will absorb within the firms. We welcome the FRC dedicating a meeting of its Technical Advisory Group (TAG) to local audit, but it is vital that it is supplemented by ongoing dialogue between the firms, the FRC and the NAO. It is highly likely that issues and complications with the practicalities of implementing the backstop solution will continue to arise and require rapid resolution, and that PSAA is informed on all those discussions to help us determine fees that are appropriate.

The current audit opinion backlog is unprecedented, as is the expectation of significant use of the standard formal audit opinion architecture (eg disclaimed and modified opinions) to enable backstop dates to be met. As a result, disclaimed and modified opinions will be issued in a new and challenging context. As much clarity as possible needs to be provided to bodies, auditors and interested parties to enable understanding that this situation arises as an unavoidable consequence of measures to correct major problems in the local audit system. This is especially important in the context that disclaimed and modified opinions would more normally be interpreted as indicators of serious concerns about one or more aspects of a body’s financial statements. We are keen to support such messaging through PSAA’s communication channels to help equip our clients with the information and resources they may need to explain and evidence the position internally and to third parties.

Question 3

Do you agree that the Code should require auditors to perform a reduced scope of work on proper arrangements to secure VFM on a temporary basis for incomplete audits up to and including 2022-23?

Response: We agree that requiring a reduced scope is a sensible proposal in the circumstances as it offers the auditors an option as they assess how to deploy their resources across the potential priorities. The Code’s confirmation that auditors are free to follow up concerns that are beyond the reduced scope (‘other matter’ bullet point on page 39) is helpful in removing any potential interpretation that they are restricted in any way.

Question 4

Do you have any comments on the proposals for the reduced scope of proper arrangements set out under the reporting criteria that auditors are required to report for incomplete audits up to and including 2022-23?

Response: In our view, taking into account the current challenges facing local government bodies, the reduced scope retains the most critical aspects of the current Code.

We are aware that some auditors are planning their overall resource prioritisation with the assumption that they will apply the fuller requirements of the current Code, due to the timing of their VFM arrangements work, and the fact that the revised Code is at consultation stage with a substantial period of parliamentary approval to follow. Where this is the case, our expectation is that auditors will report on all of their work, and that the bodies concerned will benefit from a fuller VFM arrangements commentary. If the auditor chooses not to report the descoped elements following the approval of a revised Code, then no fee will be payable by the body or to the auditor for work associated with the unreported elements.

Question 5

Do you agree with the approach to enable the auditor to issue a combined commentary as part of a single auditor’s annual report for incomplete audits up to and including 2022-23?

Response: Yes. Our client surveys show that timeliness is a key factor in the usefulness of VFM arrangements reporting, and so the proposal to enable combining the outstanding years into one report is a practical and sensible step as it eliminates the issue of individual commentaries that are very much out-of-date.

Question 6

Do you agree that auditors should be required to return to the full scope of VFM arrangements work under the three reporting criteria set out under paragraph 3.11 of Chapter Three of the Code from audit year 2023-24 (the year of which the new audit appointments contracts under PSAA’s national scheme start)?

Response: Yes. It is important that full VFM arrangements reporting is restored as swiftly as possible during the recovery phase – this sends a clear signal about the importance of this element of audit work.  It will also help to reestablish VFM arrangements reporting as a key part of the assurance framework available to those charged with governance, and to be a rich source of independent information for other interested parties about local government bodies’ arrangements. The added assurance provided by the restoration of full VFM arrangements reporting will be particularly important where the audit opinion for 2023/24 onwards is modified or disclaimed due to the building back of assurance from the reset phase.

We recognise that there is a risk that returning to full VFM arrangements reporting for 2023/24 could be seen as prioritising this aspect of the Code above the financial statements’ opinion, given the expectation that some opinions could take several years to build back assurance following modifications and disclaimers. The aim must be that both elements of the Code are restored to full delivery as swiftly as possible, and the reality is that overall this will take longer in relation to opinion work due to the higher complexity of doing so.

Question 8

Do you agree that the Code should specify the 30 November as the date by which auditors should issue their auditor’s annual report based on the work they have completed so far rather than wait for the audit to be fully completed?

Response: Yes. We think that setting a date by which the AAR must be issued will help to establish it as an important milestone in the annual cycle of audit and finance reporting. The aim should be for the auditor to report their VFM arrangements commentary in the AAR, and doing so by 30 November will enable bodies to feed any relevant issues arising into the considerations for the next budgetary process. However, we note that if the deadline is set as 30 November 2024 for 2023/24, there is a risk that the content of many AARs will be limited and not include the 2023/24 VFM arrangements commentary, as auditors may not have completed the necessary work given that this is only 2 months after the 2022/23 proposed backstop date. We are concerned that this could undermine the credibility of the AAR going forward and make it harder to establish it as a key document. We are aware of a suggestion that consideration should be given to deferring the start of the 30 November deadline until the 2024/25 year, and that this be kept under review as the profile of likely audit reporting emerges, and this seems to be a sensible option to evaluate given the current level of uncertainty.

Question 9

Are there any other comments you wish to make?

Response: We are aware of the challenges that face bodies when they move from limited assurance to the full audit requirements. We would welcome the opportunity to work with the NAO, SAAA, DLUHC and others to explore alternative arrangements, and in our view Phase 3 should include a review of the options.

Question 10

Do you have any comments on whether any of the proposals outlined above could have disproportionate impact, either positively or negatively, on people with protected characteristics or wish to highlight any other potential equality impacts?

Response: No

Back to top