It has been clear for a long time that local audit is in crisis. The causes are multi-faceted and complex. We have been pressing the Government to set a firm timetable by which timely audits will be restored.
About the Local Government Association
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This response has been cleared by the lead members of the LGA’s Economy and Resources Board.
Introduction
- It has been clear for a long time that local audit is in crisis. Identifying the causes of the crisis is not simple; it has been recognised that the causes are multi-faceted and complex and will take time to address. We have been pressing the Government to set a firm timetable by which timely audits will be restored so it is positive that DLUHC has published proposals.
- Taxpayers and residents should demand and be entitled to full confidence in local authority accounts and this is currently not being delivered due to delays in finalising audits. The need to come to a pragmatic solution to the backlog is urgent. However, this must not lead to reputational damage for councils as a result of a problem that is not of their making. There is much in the back stop proposals from DLUHC that will be hard for local authorities to deal with (and also much that will be hard for others in the system). Nevertheless, overall, the proposals from DLUHC represent the best opportunity for resolving the situation and must therefore be supported overall. We also welcome the opportunity to comment on CIPFA’s proposals.
- The fact that the proposed reset period will take until 2028 shows the complexity of the problem to be solved. Ultimately, a long-term solution is needed to this crisis which will require a joint effort from a range of stakeholders including the Government, the audit firms, the regulators as well as CIPFA. Annex 3 of the current consultation shows a timeline of actions that the Chartered Institute of Public Finance and Accountancy / Local Authority (Scotland) Accounts Advisory Committee Code Board (“CIPFA / LASAAC”) will take through to 2028 and this is helpful as it acknowledges that further and deeper changes will be needed in the long-term; more detail on this is needed. It is crucial that the actions taken are part of a long-term plan that will restore confidence in the local audit arrangements, restore timely audits permanently, and improve financial reporting.
- It is also important that the proposals in this consultation align with the consultations that closed on 7 March from DLUHC and the NAO. Our responses to those consultations are published in our website: LGA response: Consultation: addressing the local audit backlog in England and LGA response : Local audit in England Code of Audit Practice. Draft Code Consultation. In those responses while we welcomed that the back stop proposals should draw a line under the current backlog, we also drew attention to a number of potential risks arising from this, including the possible undermining of confidence in the totality of local government accounts more generally.
- The current consultation from CIPFA / LASAAC should be about proposals to reduce the amount of audit and accounts preparation work in order to support the implementation of back stops. The consultation includes only two proposals and one of these is being put forward as being only “optional”, which is likely to work against the aim of reducing work. The timing of the consultation is also problematic for local authorities as by the time any proposals are finalised, work on 2023/24 accounts will already have started.
- It is apparent from annex 2 to the consultation that the majority of suggestions to seek to reduce the amount of work required have already been rejected or watered down. It is disappointing that the proposals are therefore unlikely to have a significant impact, and this is a concern for what is likely to be proposed to support the long-term reform of the audit system.
- CIPFA / LASAAC has stated its intention to consult further, later in 2024, on longer term measures that will affect the 2025/26 accounting code, including:
- extending the application of the temporary solution for infrastructure assets beyond 2024/25,
- proposals for the measurement of operational property, plant and equipment, having regard to the HM Treasury Thematic Review, which will further explore simplifying requirements, and
- proposals for more proportionate reporting on pensions in local authority financial statements.
- We believe that these measures are an essential minimum if there is to be any chance of enabling the “recovery” part of the local audit proposals and preventing a further back log in unaudited accounts. There is a real risk that without simplification, the back stop proposals will result in permanent disclaimers to audit opinions due to lack of audit firm capacity, if so, this will fatally undermine the audit function. We would point to our response to earlier consultations on the statutory override for infrastructure asset accounting, our response to CIPFA’s survey on possible long term arrangements on this, our response to HM Treasury’s Thematic review and to the more recent consultation on Non-investment Asset Valuation for Financial Reporting Purposes.
- We note that CIPFA / LASAAC did not reach a unanimous view on putting proposals in the invitation to comment, and that a significant minority of the CIPFA / LASAAC Board members were against proposing any changes. We also note that responders are asked for “clear accounting reasons” to support any views on the proposals. The current unprecedented and exceptional situation facing local audit and accounts requires a pragmatic solution and a creative response that is realistically “good enough”. Much of the current crisis in local audit has come about because of too much concentration by auditors on areas where paper values play little or no role in the decision making, finances and financial sustainability of local authorities but all that matters are “clear accounting reasons” for figures in the accounts.
- Annex 2 to the invitation to comment raises a concern that proposals “might move CIPFA / LASAAC too far away from its role in developing high-quality financial reporting”. It is important to bear in mind that “high-quality financial reporting” is for practical purposes non-existent when there is a significant backlog of outstanding audits, many going back several years.
- Finally, we note that as at the time of issuing the current consultation CIPFA / LASAAC has a backlog in publishing minutes of its meetings stretching back to November 2021. This makes it more difficult to understand the debate that has taken place and makes the conclusions less transparent.
Specific questions
Simplifying measurement for operational property, plant and equipment using indexation.
Question 1. Do you agree with the proposal that, for local authorities in England only and for the 2023/24 and 2024/25 reporting periods, the application of the requirements of the Code should be amended so that asset values in the financial statements may be based on the most recent valuation which has been subject to audit, adjusted for depreciation, and updated by a standard centrally determined index?
If not, why not? Please provide reasons for your view.
The application of a centrally determined methodology for these assets and for this period is to be welcomed. The aim should be to reduce or eliminate additional audit work on challenging valuations and methodology, additional reconciliations. and eliminate the need to produce new valuations using a different methodology. The proposal here is a step in the right direction but does not go far enough and is unlikely to have sufficient impact. It is clear that the intention is to make the adoption of the central methodology optional rather than mandatory. As such it opens the door to different interpretations by auditors and accounts preparers. As a result auditors may feel the need for justification of decisions and approach taken by accounts preparers, and consideration of alternatives, potentially resulting in considerably more work all round. If the methodology were to be mandated then the scope for different interpretation would be eliminated and the audit work could concentrate solely on matters of fact (such as calculations), resulting in a simplification of approach and a significant reduction in time taken.
Question 2. Do you consider that this would have a beneficial effect (a net reduction) in the overall workload for preparers, having regard both to additional work that would be required to implement the change, and anticipated reductions in requirements to provide additional evidence to auditors and to resolve auditor queries?
If not, why not? Please provide reasons for your view.
Question 3. Do you consider that this would have a beneficial effect (a net reduction) in the overall workload for auditors?
If not, why not? Please provide reasons for your view.
Also see answer to question 1. In theory, this change could have a beneficial effect by enabling a net reduction in workload and reducing the amount of work on valuations overall over the two years, with preparers being able to undertake a simpler valuation process and auditors having their work reduced to just checking agreed calculations. However, because adoption is optional rather than mandatory, it is less likely to have a positive impact. It is possible that if an auditor believes the adoption and methodology should be challenged then any benefits will be much reduced and may even be eliminated and in fact there may be additional work for both accounts preparers and auditors.
Question 4. Who do you consider would be an appropriate authoritative body to determine the indices to be applied?
If CIPFA / LASAAC does not see it as its role to nominate a body for this, then, as this is a short-term measure, it would seem to be appropriate for DLUHC working with the Financial Reporting Council (FRC) as system leader to nominate the appropriate authoritative body.
Question 5. By what date would you need this information to be able to effectively implement an indexation approach?
This is a question for individual local authorities to answer. However, we have heard concerns from some local authorities that it is already very late for this to be implemented for 2023/24, and possibly too late.
Question 6. Do you have any other comments on this proposal?
No further comments.
Reduced pensions disclosures
Question 7. Do you agree with the proposal that, for local authorities in England only and for the 2023/24 and 2024/25 reporting periods, the application of the requirements of the Code should be amended so that reduced pension disclosures are required, as outlined in the exposure draft?
If not, why not? Please provide reasons for your view, noting any specific pension disclosures for which you consider this approach to be problematic.
We agree with this proposal.
Question 8. Do you consider that this would have a beneficial effect (a net reduction) in the overall workload for preparers, having regard both to additional work that would be required to implement the change, and anticipated reductions in requirements to provide additional evidence to auditors and to resolve auditor queries?
If not, why not? Please provide reasons for your view.
We expect that this will have a beneficial effect for accounts preparers but suggest that notice should be taken of responses to this question from individual local authorities.
Question 9. Do you consider that this would have a beneficial effect (a net reduction) in the overall workload for auditors?
If not, why not? Please provide reasons for your view?
We expect that this will have a beneficial effect for auditors but suggest that notice should be taken of responses to this question from individual local authorities.
Question 10. Do you have any other comments on this proposal?
No further comments.
Other matters
Question 11. Do you have any other comments on how the short-term proposals might be implemented?
For example, having considered the proposal in this ITC, to the extent that you are in favour of them, do you agree or disagree that this is an appropriate matter for specification in the Code, which is a matter for CIPFA/LASAAC to determine under its usual process?
We note that CIPFA / LASAAC has had problems formulating these proposals as is outlined in Annex 2 of the consultation. We also note the comment that some members of CIPFA / LASAAC suggested that “if normal accounting practices are to be suspended with an adverse effect on the quality of financial reporting, it would be better for government to specify the form of accounting through a statutory instrument.” Given the problems CIPFA / LASAAC has had with formulating these proposals and the need for a pragmatic solution and a creative response to the local audit crisis, it may be that it would be better if the Government should specify the requirements as is suggested here, providing it can be done quickly.
It is noteworthy that the temporary solution to the issue of accounting for infrastructure assets was only put in place by use of a statutory override and that this followed earlier unsuccessful attempts to find a solution by CIPFA / LASAAC.
Original consultation
Contact
Bevis Ingram
Senior Adviser Finance
Phone: 079 2070 2354
Email: [email protected]