Agenda item

The Internal Auditor submits a report which provides the Audit and Risk Committee with a further update on developments in local (external) audit arrangements, that are associated with the Committee’s responsibilities.

The Committee is recommended to note the report.

The Internal Auditor submitted a report which provided the Audit and Risk committee with a further update on developments in local (external) audit arrangements that were associated with the Committee’s responsibilities.

Neil Jones, HoIAS presented the report and noted the following:

·         The report was the fourth brought to Committee, the timeline of which was highlighted in paragraphs 4-6 in the report and included information on the transparency of local audit reporting otherwise known as the Redmond Review.

·         The report noted that in May 2021, the Government published an update containing its plans for further implementing the Redmond recommendations.

·         Most importantly was the Government’s proposal that the system leadership for local audit leadership for external audit would be best placed with the yet to be established Audit, Reporting and Governance Authority (ARGA) which would replace the Financial Reporting Council (FRC) rather than a new arms-length body that Redmond recommended.

·         The Government foresaw further safeguards, and redistribution of responsibilities were proposed, but the arrangements for procurement and contract management for local audit would remain with the Public Sector Audit Appointments Ltd (PSAA) with commercial support from MHCLG.

·         There would be public consultation on the proposals before the Government’s summer recess.

·         There were two further MHCLG consultations outlined in paragraph 13 to the report, the outcomes of which were awaited.

·         The Government’s proposals had been mostly welcomed by stakeholders, but views on available skills, capacity on costs of local audit remained guarded.

·         The next round of procurement for external audits commencing from financial year 2023/24 were now beginning to be planned. The City Council had previously opted for the PSAA-led procurement. As part of its planning the PSAA had been consulting on its prospectus, and it was PSAA’s view that the market would remain relatively unstable and difficult to predict for some time.

·         The prospectus included plans to adjust the procurement ratio between quality and costs from an equal 50:50 to 80:20 ratio. There was some nervousness in local government in that whilst quality was clearly important, costs must not be excessive. Consultation on the prospectus closed on 8^th July and the Deputy Director of Finance had provided comment.

·         Since the report was compiled, on the 14^th July, the Public Accounts Committee (PAC) launched a report titled, ‘Local auditor reporting on local government in England’. The report was scathing of the Government saying that:

• Whitehall's oversight of external local government audit has become “increasingly complacent” and that the proposed solution involves treating public audit as “an afterthought”.
• Less than half of local authority audits met the deadline for completion in 2019-20.
• The local audit market is “now entirely reliant upon only eight firms, two of which are responsible for up to 70% of local authority audits”.

·         The PAC had questioned whether the “pressing” need for new system leadership in local public audit, identified in the Redmond Review, would actually be met by Government’s proposal for a future ARGA which would not be set up until 2023 at the earliest, i.e. more than four years since an oversight body was proposed by Redmond. The PAC considered it was unclear whether ARGA would actually fully address the current failings in the market for auditing local authorities, and in the meantime, Government had not provided credible detail on addressing the urgent problems that could not wait for ARGA.

·         The PAC had asked the Government to write and explain the accountability and governance arrangements of the new organisation, and how its performance would be monitored and evaluated. It had also recommended that Government should ensure that PSAA’s next procurement exercise  supported a new fee regime for local government audit, which was appropriately funded, and which brought fees into line with the costs of the work.

·         It was unlikely that responses would have been received from Government back in time to report to the September 2021 Audit and Risk Committee, so would be reported at the November 2021 meeting.

In response to Members’ questions, the following points were made:

·         A worry for Members was the changes to the ratio between quality and costs of 50:50 to 80:20 which had raised some questions. An area meeting was coming up with the Chief Executive of the PSAA and the Deputy Director of Finance would raise some questions. The local government media attention was frequent around these arrangements, and was not likely to cease until the PSAA came up with final proposals for procurement.

·         The Deputy Director of finance believed the 80:20 split was problematic and only putting 20% against costs risked them getting out of hand, as it was accepted that the scale of fees for audit work was currently too low and fees for additional work had been added in recent years.

·         The next meeting of the finance officers from the Leicestershire councils and districts, police and fire would have a full discussion on the PSAA proposals in the consultation. All were concerned and noted there were similar issues for the NHS. All audit firms were experiencing difficulties in recruiting and retaining the necessary staff, and about half of the 2021 audits were not going to meet deadlines.

·         The External Auditor noted the challenge was in trying to make the role of public sector audit attractive, to make it a career.

·         Parliament had already gone into summer recess. Members were not filled with confidence with the public consultation that had been launched, or that officers would be able to present their comments as part of the consultation.

The Chair thanked the Officer for the report and input from the Committee and Officers.

RESOLVED:

1.    That the report be received and its contents noted.