The crisis in the audit of local authority accounts has been widely publicised with the Department for Levelling Up Housing and Communities (DLUHC) currently carrying out an inquiry into the current backlog that exists.
Auditing should be about the review of a local authority’s financial statements to ensure transparency and provide assurance that public funds have been used correctly. However, as the local authority accounting regime has become more complicated and more closely aligned to the private sector, the process of audit has been transferred to “firms” better placed to audit these complex financial statements, but the current situation suggests the transition isn’t working.
The history of local authority audit in England has been shaped by various legislative changes and reforms over the years.
The District Audit Act 1879 established the position of the District Auditor and provided a legal framework for the audit of local authorities. District Auditors had the power to examine the accounts and financial transactions of local bodies. I was lucky enough (or unlucky depending on your view of auditors) to work for the District Auditor and the audit of public sector accounts seemed to run fairly well with a clear timetable followed during the year to make sure audits were well planned and delivered on time, although admittedly the timetable to prepare and audit statements of accounts was over a longer timeframe than is currently the case. Another benefit of the District Audit service was that many auditors had experience in preparing the accounts of local authorities and for those that were career auditors they were trained in public sector accounting and encouraged to be CIPFA qualified.
In the 1980’s The Audit Commission was created, this was an independent public body responsible for ensuring the accountability of local authorities in England. The commission was tasked with appointing auditors and setting standards for local authority audits. Most audits were given to the District Audit Service to carry out but around 25% were awarded to private sector accountancy firms in order to make sure that public sector audit was being delivered to the same high standard as that of the private sector (although some high-profile audit scandals like the Enron case would put this comparison into question!).
During the late 1990s, the government introduced the Best Value regime, which aimed to improve the efficiency and effectiveness of local authority services. As part of this regime, the Audit Commission played a key role in assessing the performance of local authorities and promoting good governance.
The Audit Commission uncovered some notable cases of mismanagement by local authorities including the “gerrymandering” case at Westminster City Council and the national Fraud Initiative uncovered around £1.17billion in fraud but in 2010, the then Secretary of State for Communities and Local Government, Eric Pickles, started the process of abolishing the Audit Commission and effectively began to privatise the local authority audit regime.
The Local Audit and Accountability Act 2014 introduced further reforms to local authority audit. It established the framework for the new local audit system, which focused on increased transparency, accountability, and public involvement. Under this system, local authorities were required to appoint their own auditors, subject to approval by the Public Sector Audit Appointments (PSAA) organisation. The PSAA is an independent body responsible for appointing auditors to local authorities in England. It ensures that auditors meet the necessary standards and provides guidance to both auditors and local authorities.
As can be seen from the above there have been many changes to the audit landscape, but some would argue that there have been no improvements in the way that audits are conducted, and the way in which the District Auditor oversaw the annual inspection of a local authority’s accounts was probably more effective.
It is interesting to see the comments of the Chief Executive of CIPFA to the DLUHC enquiry where he has stated that International Financial Reporting Standards (IFRS) were not designed for public sector accounting however it is this body that prepares the Accounting Code of Practice which is based on IFRS and IFRS is seen as one of the problems that is causing the delay in audit, along with a lack of resources in the firms carrying out the audits.
The accounts prepared by local councils have become too complicated to prepare, too complicated to understand and too complicated to audit. Whilst it might make my job slightly less interesting perhaps a way to solve the audit crisis is to make local authority accounting less complex so that all stakeholders can understand them, and audits can be delivered on time!