Audit Quality Monitoring Report 2018/19

Public Sector Audit Appointments Limited (PSAA) is an independent company limited by guarantee incorporated by the Local Government Association in August 2014.

The Secretary of State specified PSAA as an appointing person for principal local government bodies from 2018/19, under the provisions of the Local Audit and Accountability Act 2014 and the Local Audit (Appointing Person) Regulations 2015.

 

Compliance with Contractual requirements

PSAA monitors firms’ compliance with contractual requirements by considering performance against a range of contract indicators and also their compliance with agreed method statements.

PSAA has not been required to take formal action against any firm in respect of non-compliance with contractual requirements in respect of 2018/19 engagements.

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Contract performance indicators

During the year PSAA has reported publicly on firms’ performance against targets of particular interest to opted-in bodies. This has included information on delivery of audit opinions and other outputs in a timely manner, and matters which facilitate publication of annual accounts. For clarity, in order to comply with auditing and ethical standards there is no statutory or contractual requirement date for an audit opinion to be provided by the publishing date.

The expectation is that the audit report containing the opinion will be issued by the publishing date set out in the Accounts and Audit Regulations 2015 (or equivalent) wherever the auditor can do so under the auditing standards and the guidance issued by the NAO. This expectation has been written into the NAO Code of Audit Practice from 2020/21 onwards. It is firmly established practice in local government that if auditors are unable to issue an unqualified opinion at the publishing date then rather than issuing a qualified opinion they will delay issue until they can issue a non-qualified opinion. Regulation 10(2) of the Accounts and Audit Regulations 2015 specifically provides for the circumstances where an audit of accounts has not been concluded before the specified publishing date with the requirement of the Council to publish a notice reporting the delay and the reasons for it.

We are disappointed to report that 208 of 486 (43%) opinions were not given by 31 July 2019, a very significant increase compared to the previous year (65, 13%). This is concerning to all local audit stakeholders. We have liaised with NAO, MHCLG and HMT on the progress in completing the remaining audits. In all cases the challenge to return to a ‘normal’ timetable has been exacerbated by Covid-19 pandemic. In addition to local governance, stewardship and accountability concerns there is an unhelpful knock-on impact on the preparation and publication of audited Whole of Government Accounts. Table 5 below shows that, although progress has been made, 28 2018/19 opinions remained outstanding as at 30 November 2020.

Table 5: Delivery of audit opinions

Time profile of the completion of audits: opinions outstanding.

Year 31 Jul 2019 30 Sept 2019 31 Dec 2019 31 Mar 2020 30 Nov 2020
2018/19 208 142 85 61 30
2017/18 65 25 14 11 7

Source: PSAA

Firms explained that there were three main reasons for the delays of broadly equal occurrence with some audit delays having more than cause:

  • audit resourcing issues;
  • dealing with technical audit and accounting issues; and
  • issues with working papers or explanations provided in response to audit queries.

The lack of auditor resources where audit firms did not have sufficient staff to undertake particular audits emerged for the first time as a significant factor in 2018/19. This is symptomatic of the vulnerability that has developed in the local audit market and the lack of trainees and qualified staff with the appropriate knowledge to undertake this work. We note that the FRC in its thematic review of Audit Quality Indicators highlighted the positive impact on audit quality of a firm taking the decision to delay the audit timetable at a number of specific clients so that all audits could be resourced appropriately.  As noted above the publishing date is not a statutory target.

The bringing forward of the publishing deadline has exacerbated the position by restricting the number of audits that sector specialist auditors can work on, and our understanding is that the intensity of the resulting work has increased the attrition of local audit staff leaving the field.

The other delay factors have also been impacted by the bringing forward of the publishing date. The accounts are described by both CIPFA and Sir Tony Redmond as “impenetrable”, but are being produced by smaller hard pressed teams of accountants with competing priorities, undertaking more complex and innovative transactions, which can result in delays in preparation and resolution as the audit window has been shortened. The Redmond Review reported that auditors raised concerns about local authorities not providing properly prepared draft accounts supported by high quality working papers or not being available to answer audit questions. Scale fees and auditor resource plans are based on the draft accounts and supporting working papers being of an appropriate standard.

All parts of the financial reporting supply chain have their role to play in delivering high quality and timely audits. A priority message to firms has been to communicate clearly with bodies on:

  • the audit plan and timetable; and
  • any changes to that timetable and the reasons concerned.

Objections

Local audit is different from corporate audit in that the appointed auditor has certain statutory powers under the LAAA 2014, and also that local electors have the right to raise objections.

The nature of individual objections and the levels of complexity they involve vary enormously. For simplicity we monitor against the expectation that cases should be resolved within nine months from the point at which the objection is accepted by the auditor for review. We recognise that this timetable cannot be achieved in all cases, for example, where objections are related to complex or difficult legal cases, or where a resolution is delayed because an auditor is reliant on others for responses.

The NAO’s 2020 Code of Practice will require auditors to use best endeavours to complete their work on objections within six months including informing the objector and the body of their decision. We welcome particularly the requirement that where this is not possible that electors and bodies will be provided with a progress update every three months until the objection is decided.

Non-compliance with Terms of Appointment

There have been no significant areas of non-compliance with PSAA’s Terms of Appointment (ToA). We reported five occasions during the year where firms had not notified us of their intention to issue a qualified VFM arrangements conclusion.

Independence issues

The ToA require firms to notify PSAA of any potential threats to their independence which may arise. In relation to 2018/19 engagements we received three such notifications. In all cases the matter was dealt with appropriately with relevant disclosures being made to the audit committees of the authorities concerned. There have been seven matters raised with respect to 2019/20. Again these have been dealt with appropriately.

Non-audit services

Firms are able to provide certain non-audit services to audited bodies subject to the requirements of the FRC’s Ethical Standard and the NAO’s Auditor Guidance Note 1. Where the fee for such services exceeds the higher of £18,000 or 20% of the scale fee then the firm must seek PSSA’s confirmation that undertaking such work does not compromise their independence as auditor. The requirement by local auditors to provide a VFM arrangements conclusion is a key consideration in this judgement. The number of requests made has significantly reduced from earlier years because of changes to the Ethical Standard.

Table 6: Non-audit service requests

Number and value of non-audit service requests for the last three financial years.

Year Number of requests approved for non-audit services Total fee value of requests approved
2017/18 20 £810,134
2018/19 10 £336,773
2019/20 15 £203,550

Source: PSAA

We have no concerns about how firms are operating their internal control systems for maintaining their independence.

Complaints

Complaints can be an indicator of poor quality audit services. Under our complaints policy PSAA can consider complaints that relate to a possible failure in service by one of the firms of appointed auditors, but we cannot consider complaints about the professional judgements and decisions made by auditors, or the process followed in relation to elector rights as these are matters for the courts.

In the year to September 2020 there were four complaints to PSAA none of which were upheld. In 2019 there were also four complaints one of which was partially upheld. In one 2020 case a complainant was referred to the ICAEW as the appropriate regulatory body.

Method Statement

Certain parts of firms’ invitation to tender (ITT) responses in the 2017 PSAA procurement have been incorporated as ‘method statements’ in their contracts. The method statements cover a variety of topics that were all assessed as part of the tender evaluation process. PSAA has triangulated its monitoring of compliance with audit quality service information from other sources such as the professional regulatory reviews and client surveys. A client focussed version of the ‘method statement’ was provided to all bodies as part of firms’ normal planning and reporting and also alongside our client surveys.

As audit is a highly regulated profession, much of the firms’ method statements is contained in the expectations of the auditing standards in planning, conducting and reporting on an audit. The results of the regulatory reviews are reported above.

The findings from our client survey were that broadly 80% of finance directors and audit committee chairs considered that their audit service was meeting their expectations as set out in their method statement. Where this was not the case the main reasons highlighted were because of ‘audit delays’ and communications about this and fee variations. The results from the client survey have been drawn to the attention of firms (see below).

Data Confidentiality

We have reviewed and confirmed that firms’ data confidentiality arrangements remain appropriate. There have been no notifiable breaches of data confidentiality. The introduction of cloud-based data holding and two-factor authentication arrangements have done much to improve overall security.

Social Value

In accordance with our obligations under the Public Services (Social Value) Act 2012, we used the procurement to seek to improve the economic, social and environmental well-being through the supply of audit services under our contract, whilst acknowledging that this is difficult to frame and measure in a national contact.

As part of our tendering process we asked that firms specify how many apprenticeships, additional training, development and work experience opportunities would be provided as a result of the contract, and the measures that would be put in place to target these posts at people from more deprived communities. Across our five firms over 400 positions were to be provided across the life of the contract with 90 in place in the first year. Initial information shows that 137 positions were introduced in the first year of the contract.

A particular focus for all firms has been school leaver programmes for those not wishing to go to university (which had been the traditional joining route). Information on backgrounds has been more challenging to validate but firms have provided details of the strategies deployed to target potential employees in more deprived areas such as using blind interview techniques. One firm’s intake of 18 school leavers include 15% who had been recipients of free school meals.

Additionally our tendering process asked firms for information on what other economic, social and environmental initiatives they would undertake to deliver related to providing auditing services of their contract lot and what improvements in social value they expected those initiatives to stimulate. These vary by firm and include:

  • support for national and local charities;
  • committing additional time to social responsibility activities;
  • reduction in carbon footprint; and
  • supporting social mobility.
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