Local Audit Framework technical consultation: LGA response

• The Local Government Association (LGA) is the national voice of local government. We are a politically led, cross party membership organisation, representing councils from England and Wales.
• Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.
• This response has been cleared by lead members of the LGA’s Resources Board.

• Local government is one of the best regulated and most transparent parts of the public sector in this country. As democratically elected bodies, councils understand the need for good governance, of doing the right things at the right time and to spend public money well and wisely, and to be seen to be doing so. The system is a complex web of checks and balances, ensuring that decisions are made in public, and the outcomes of those decisions are also made plain. Despite escalating pressures, examples of councils failing in their responsibilities remain rare. Councils are complex organisations, and the LGA together with the sector, is committed to ensuring that the way public money is spent, and local decisions are made is as clear and relevant to local residents as possible. External audit is an important part of this system.
• As is recognised in the consultation, external audit of local government currently faces a number of problems. The local government audit market is very fragile. The late delivery of many 2019/20 audit opinions is concerning, and it is apparent that that the performance of the system has worsened, and missing audit deadlines has become normal. We recognise that extra demands on auditors over the last two years has led to the de-prioritisation of deadlines. This results in uncertainty for councils, creates extra work for finance staff, reduces transparency and potentially affects the trust citizens place in the system. It needs to be addressed.
• Overall, we believe that there is a need to better understand and address the problems faced by local audit and that a dedicated system leader with the powers and responsibilities as outlined in the consultation will be a step in the right direction. For these proposals to work there is a need for a dedicated and specialist team within the Audit, Reporting and Governance Authority (ARGA) with sufficient knowledge of local audit and local government. It is important to remember that local audit is an important part of the governance system for local authorities, but it is not an end in itself.  
• Local audit and local auditors need to be adequately skilled and have an adequate understanding of local government. It also needs to focus on areas that add value rather than on work that is not a priority for local government. It has previously been highlighted (for example in the report of the Redmond review) that many believe that the current focus on asset and pension valuations is inappropriate.
• The consultation also covers the role of audit committees and the appointment of independent members on them. We believe that independent members can bring valuable expertise to the work of audit committees, but it is a strength of local government audit that elected members of councils carry the responsibility of being charged with governance, and this gives audit committees democratic legitimacy. While guidance on good practice is to be welcomed, this is an area where one size does not always fit all, and it is important that councils retain the flexibility to make decisions about appointments to reflect local circumstances and needs.
• We welcome the proposals to give the appointing person greater flexibility on setting and varying audit fees as uncertainty over fees has been an issue for many councils. 
• Finally, the system needs to be properly funded. The additional £15 million provided for additional fees is welcome but at present it is a one-off sum while the costs it will cover will be ongoing.

Question 1: Do you agree with the proposed functions which the system leader for local audit needs to enable a joined-up response to challenges and emerging priorities across local audit? Please let us know any comments you have on the proposal.

The functions as outlined in the consultation are appropriate. 

Question 2: Do you have any comments on the proposed functions that ARGA should have alongside its new system leader responsibilities?

As noted in the consultation, local audit is different from company audit and has a wider scope. It is vital that the ARGA understands this, and that local audit is dealt with by a dedicated and specialist team within ARGA with sufficient knowledge of local audit and local government. Finally, the local audit system needs to work for councils and local residents and not just for national stakeholders, and the LGA will collaborate with the ARGA to ensure that the voice of councils is represented

To undertake the role of system leader effectively more work is needed to define clearly the scope of ARGA’s role.  The local audit system is one part of the local government assurance framework and there may be a danger that the local audit system leader is pressured into taking on other elements of the framework that would not be appropriate for its role as regulator. Safeguards need to be put in place to ensure this does not happen. The ARGA needs to avoid being seen as a non-elected watchdog of councils in its own right: its responsibility is to ensure that the role played by the auditors in that watchdog role is appropriately delivered. To do so it needs to respect the needs of councils as the local audit client as well as that of national stakeholders.

We are pleased the government has accepted our argument and recognised that there is a potential conflict between procuring and appointing auditors and regulating them. Public Sector Audit Appointments (PSAA) has been reappointed as the appointing person and remain separate from the ARGA. 

We note that the responsibility for the Local Code of Audit Practice will transfer to the ARGA. While we can see that this is logical, it should be noted that the way the National Audit Office has managed the code and revisions to it since 2015 has been very good. The consultation outlines a number of non statutory roles that the NAO has undertaken in relation to local audit alongside its responsibility for the Code. We believe that these have been helpful and that the ARGA should carry these out if it takes on responsibility for the Code.

Question 3: Do you agree that the system leader should conduct a full post implementation review to assess whether changes to the Code of Audit Practice have led to more effective external audit consideration of financial resilience and value for money matters two years after its introduction, with an immediate technical review to be conducted by the NAO? Please let us know any comments you have on the proposal.

While it is right that the changes that have been made to the Code of Audit Practice should be reviewed, we would question whether there is a need for two separate reviews, which could take several years given the time needed to legislate for and enact the transfer from the NAO to the ARGA. It would be better if a single review, ideally the NAO’s review, could cover all aspects.

Question 4: Do you agree with the proposals to ensure that ARGA has sufficient expertise and focus on local audit? Please let us know any comments you have on the proposals.

As noted above, understanding local audit and the sector is crucial. Therefore, the arrangements for liaison with local bodies and auditors are very important. The structure as outlined looks sufficient. The role of MHCLG in this could be pivotal and as it does not have a direct role in the proposals that is something that could be strengthened.

Question 5: Do you agree with the proposed role and scope of the Liaison Committee? Please let us know any comments you have on the proposal.

We agree the with proposed role and scope. However, the role of MHCLG in the whole process could be strengthened, so we would recommend that MHCLG continues to chair the Liaison Committee rather than passing this role to the ARGA.

Question 6: Do you agree that the responsibilities set out above will enable ARGA to act as an effective system leader for local audit? Are there any other functions you think the system leader for local audit should have?

As outlined in our responses to other questions, we are broadly supportive of the proposals. There is clear crossover between audit of local government and audit of health and fire authorities (particularly as the same auditors audit both bodies), which do come under the control of MHCLG. ARGA’s responsibility for local health audit is not entirely clear in the consultation, but it is hard to see how it will be able to function properly if it does not perform the same role for health that it will perform for local government. Government needs to do more work to ensure that the aspects of local audit that cut across the responsibilities of various government department are recognised and managed.

Question 7: What is your view on the proposed statutory objective for ARGA to act as system leader for local audit? Please include any comments on the proposed wording.

As already noted above, and as is acknowledged in the consultation, local audit is different from company audit. Therefore, retaining the company audit objective of “To protect and promote the interests of investors” without further qualification is not relevant to local government and encourages a view that local audit is being “tacked on” to the ARGA; this particular objective was written for the ARGA before it was announced that it would take on the role of local audit system leader. It would be helpful if it was reviewed and modified to take account of that.

 As noted above, local audit is not an end in itself – it is part of a much wider system. The additional statutory objective as local audit system leader “to ensure the local audit system operates effectively” is perhaps a bit vague and so could be strengthened. Our response to the answer to Question 2 provides some of the context.

Question 8: Do you agree with the proposal that ARGA will have a responsibility to give regard to the value for money considerations set out in the Local Audit and Accountability Act 2014? Please include any comments on the proposed wording.

Subject to the response to Question 2, the way value for money is audited will be essential to the system leadership role and to the role in maintaining the Code of Local Audit Practice. We have no suggested amendments to the wording.  A distinction needs to be drawn between responsibility for the audit of value for money and oversight of decisions taken by democratically elected councils.

Question 9: Do you agree that the proposals outlined above will provide an appropriate governance mechanism to ensure that the new system leader has appropriate regard to the government’s overarching policy aims without compromising its operational and regulatory independence? Please let us know any comments you have on the proposal.

The context provided in our answer to Question 2 is important, as is our response to Question 6.  The proposals place prime responsibility on the Department for Business Energy and Industrial Strategy (BEIS) which will have a prime interest in company audit.  Our concern over these proposals would be that MHCLG needs to continue to set the policy agenda and overall framework for the audit of local councils with the needs of councils and local residents in mind, and while local audit professional practice needs to be consistent with company audit, the important distinctions such as the different nature of the accounts and prime stakeholders are recognised.

Question 10: Do you agree that ARGA’s annual reporting should include detail both on the state of the local audit market, and ARGA’s related activities, but also summarising the results of audits? Please include any views on other things you think this should include.

There would appear to be some cross over here with the reporting currently undertaken by PSAA, although these proposals go a great deal further, as is appropriate for the regulator. PSAA and ARGA will need to co-ordinate what they report to avoid duplication.  The ARGA will need to aware that the language it uses in such reports may encourage the view that it is acting in a role as a watchdog of local councils (a role which it will not have) rather than in its true role as the watchdog of the auditor.

Question 11: Do you agree with the proposal outlined above relating to board responsibility for local audit? Please let us know any comments you have on the proposal.

We agree that having a nominated board member with responsibility for local audit is the right approach.

Question 12: Do you agree that ARGA’s local audit functions and responsibilities should be funded directly by MHCLG rather than a statutory levy?

We agree with this proposal. We believe that a levy arrangement here would be complicated to administer, create new burdens, and likely to be inefficient.

Question 13: Do you agree that ARGA should also take on system leader responsibilities for health audit? Please let us know any comments you have on the proposal.

As outlined in other answers, there is clear synergy with health audit as the same auditors audit both types of body, so the market is subject to the same pressures. We believe that the system leader role will be reduced if it does not include health.

Question 14: If you agree that ARGA should assume system leader responsibilities for health audit, do you think any further measures are required to ensure that there is alignment across the broader system?

This is an area that should be looked into. One obvious step would be to ensure audit timetables do not clash.

Question 15: Do you agree with the government’s proposals for maintaining the existing appointing person and opt-in arrangements for principal bodies but with strengthened governance across the system, including with the new system leader? Please let us know any comments you have on the proposal.

We welcome the fact that MHCLG has recognised the conflict between procurement and regulation of auditors and support the national appointing person arrangements as the best means for councils (the client bodies for local audit) to exercise influence over the service they are paying for.

Question 16: Do you agree with the proposal for strengthened audit committee guidance? Please let us know any comments you have on the proposal.

We support improved guidance in this area, so long as it remains guidance rather than direction. Local authorities need to be able to set up arrangements that best suit their local circumstances. We believe that independent members can bring valuable expertise to the work of audit committees, but it is a strength of local government audit that elected members of councils carry the responsibility of being charged with governance, and this gives audit committees democratic legitimacy.

Question 17: Do you have any views on whether reliance on auditors to comment and recommend improvement in audit committee arrangements is sufficient, or do you think the Department should take further steps towards making the committee a statutory requirement?

The vast majority of councils have an audit committee. The fact that every elected member of a council is among those charged with governance is an important strength of the system, and councils need to consider whether the full council is assisted in its role by setting up an audit committee. 

Question 18: Do you agree with the proposals that auditors should be required to present an annual report to full council, and that the audit committee should also report its responses to the auditor’s report? Please let us know any comments you have on the proposal.

As noted in the answer to question 17, the full council is the body charged with governance of the council and therefore it is right that the auditor should be required to present a report to it. The role of the audit committee should be decided by what is appropriate locally.

Question 19: Do you have any comments on the proposals for amending Key Audit Partner guidance or addressing concerns raised about skills and training?

Question 20: Are there other changes that might be needed to the Local Audit (Auditor Qualifications and Major Local Audit) Regulations 2014 alongside changes to the FRC’s guidance on Key Audit Partners?

Question 21: Are there other changes that we should consider that could help with improving the future pipeline of local auditor supply?

We are pleased that there are appropriate working groups reviewing this area. We would add that councils need auditors to be skilled and have sufficient knowledge of the local government sector. There is a concern that if auditors lack appropriate knowledge it has a major impact on the council as auditee and on the time taken to support the audit. The recent problems with local audit, including the severe and widespread delays on finalising audits for the past two years, have had a major impact on councils that should not be overlooked. 

Questions 22,23,24 all refer to smaller bodies. We would refer you to any response from the National Association of Local Councils (NALC).  

Bevis Ingram, Senior Adviser, Finance

Email: [email protected]