Independent review into the arrangements in place to support the transparency and quality of local authority financial reporting and external audit in England

Independent review into the arrangements in place to support the transparency and quality of local authority financial reporting and external audit in England


Foreword                                                                                                                                  3

Review Objectives                                                                                                                 4

Executive Summary                                                                                                              5

Part 1: Strategic Call for Views

Chapter 1: Definitions of audit and users of the accounts                                          9

Chapter 2: The Expectation Gap                                                                                     12

Part 2: Technical Call for Views

Chapter 3: Audit and Wider Assurance                                                                          16

Chapter 4: The Governance Framework for the Audit System                                18

Chapter 5: Audit Product and Quality                                                                             22

Chapter 6: Auditor Reporting                                                                                           27

Chapter 7: The Framework for Responding to Audit Findings                               31

Chapter 8: The Financial Reporting Framework                                                         33

Chapter 9: Other Issues                                                                                                     37

Appendix 1: About this Call for Views                                                                            40

Appendix 2: Independent review into the arrangements in place to support the transparency and quality of local authority financial reporting and external audit in England                                                                                                                                  42


I am pleased to have been asked to undertake this review of the effectiveness of audit in local authorities together with an assessment of the transparency of financial reporting delivered to users of annual reports and accounts.

This call for evidence is a key part of the review in determining whether the requirements of the Local Audit and Accountability Act 2014 are being fulfilled. I will look to test the assurance processes in place with regard to the value for money arrangements together with financial resilience in local councils.

I will talk to practitioners who work in this sector alongside the audit community and it would be beneficial to the review for this call for evidence to include as much factual analysis and hard data as is possible to illustrate the outcomes of current audit and financial reporting arrangements.

All information supplied to the Review will be considered carefully before formulating the final report for submission to the Secretary of State. Your contributions will be much valued and thank you for taking the time to participate in this exercise.

Tony Redmond



Review Objectives

1.    The Review will examine the existing purpose, scope and quality of statutory audits of local authorities in England and the supporting regulatory framework in order to determine:

·         Whether the audit and related regulatory framework for local authorities in England is operating in line with the policy intent set out in the Act and the related impact assessment;

·         Whether the reforms have improved the effectiveness of the control and governance framework along with the transparency of financial information presented by councils;

·         Whether the current statutory framework for local authority financial reporting supports the transparent disclosure of financial performance and enables users of the accounts to hold local authorities to account; and

·         To make recommendations on how far the process, products and framework may need to improve and evolve to meet the needs of local residents and local taxpayers, and the wider public interest.

Executive Summary


1.    The Review is calling for views and information on the quality and effectiveness of the audit of local authorities in England. The definition of local authority comprises councils, including parish councils, Police and Crime Commissioners, Fire and Rescue Authorities, Independent Drainage Boards and Parks Authorities. It does not include Clinical Commissioning Groups or NHS Trusts. The Review would like your views, supported by evidence where possible, on the extent to which local authority accounts and the local authority audit process allows users of those accounts to hold local authorities to account for their use of resources. The Review would also like your views on how local authority accounts and audit process might be developed to better meet users’ needs and serve the interests of other stakeholders and the wider public interest.


2.    In providing responses, consideration should be given to both the accounts production and audit processes, to the accounts and audit product and to the governance framework for local authority audit. The Review is mindful that whilst all these elements are linked, there are distinct issues of quality and effectiveness. These are explored in the main body of this document.


3.    By audit, the Review means the external audit of the statutory accounts and the related work that supports the opinions provided in the external audit report published with a set of financial statements. It does not include internal audit work or other forms of assurance, other than where these interact with the external audit process. These interactions are discussed in the technical Call for Views.


4.    By financial reporting, the Review means the statutory accounts, produced after each year end, that are subject to external audit. It does not include the financial statistics that all local authorities are required to prepare for central government or any other financial reports or data that a local authority uses as part of its financial planning and budget monitoring processes.


5.    Views are particularly sought on how the accounts and audit of local authorities could be improved to provide greater assurance to locally elected members along with local taxpayers and service users.


6.    This call for evidence forms two parts, which respondents can complete as they see fit. These are:

a.    Strategic Call for Views focussing on what the users of the accounts expect from the local authority accounts production and audit process.

b.    Technical Call for Views which, in addition to the matters covered in the Strategic Call for Evidence, asks for views on the detailed statutory and professional frameworks underpinning the audit and financial reporting framework.

Relevance to other areas of reform

7.    This Review is primarily interested in the local authority financial reporting and audit product, along with the governance and regulatory framework for the audits of local authorities. Other areas that the Government is looking at include competition in the audit market for FTSE250 companies, the quality of Companies Act audits and the role of the regulator for those auditing listed companies. These areas are being addressed through respectively, the CMA Audit Markets Study1, the independent review of the Financial Reporting Council2 and Sir Donald Brydon’s review of audit quality3.


8.    Nevertheless, this Review recognises that the findings from these separate areas of reform and enquiry have considerable relevance to the quality of the local authority audit and financial reporting processes and product along with the governance framework for local authority audit. In particular the independent review of the FRC has made specific recommendations to address issues with the governance framework for local authority audit. This Call for Views specifically invites input on some of the matters that these Reviews and investigations have highlighted.


Scope of this Call for Views

Part 1: Strategic Call for Views

9.    Chapter 1 (Definitions of audit and its users) provides an overview of local authority audit in the local government sector and what it is supposed to deliver. It considers developments over time that have shaped the local authority audit processes and product and explores potential users of the accounts.


10.  Chapter 2 (The expectation gap) compares the requirements of local authority audit, including the opinion on the systems in place for economy, effectiveness and efficiency of service delivery in statute and in international standards with what is currently expected of audit by elected representatives and other stakeholders.

Part 2: Technical Call for Views

11.  Chapter 3 (Audit and wider assurance) looks at the role of audit within the wider context of the assurance that local authorities are expected to provide to elected representatives, central government and other stakeholders regarding the use of resources and key risks. It seeks views on whether external auditors should make greater use of the work of internal auditors and whether there should be a role for auditors in assessing other statutory reports that local authorities are required to produce.


12.  Chapter 4 (The governance framework) looks at the governance framework for local authority audit. It explores whether the fragmented nature of the framework is detrimental to the quality of the audit process and product and whether the current regulatory framework drives particular and possibly sub-optimal behaviours by auditors. It asks for views on the Recommendation made by the Independent Review of the Financial Reporting Council that the regulator for local authority audit should ideally be a separate body that has (or could develop) a deeper expertise in the local audit world.



2 Independent Review of the FRC

3 Brydon Review - Audit

13.  Chapter 5 (Audit product and quality) looks at the local authority specific elements of audit quality. It asks for views on whether the auditors of local authorities have sufficient understanding of the business to focus on the right risks for both the financial audit and value for money opinions. It questions whether the definition of the ‘going concern’ assumption used for private sector audits is appropriate for local authorities.


14.  Chapter 6 (Auditor Reporting) looks at statutory and non-statutory audit reports. For local authorities this includes Public Interest Reports, Statutory Recommendations and Advisory Notices, as well as the audit certificate and audit completion report that are common to the public and private sector. It explores whether auditor reporting is timely and whether the structure and format of reports is conducive to communicating useful information to stakeholders.


15.  Chapter 7 (How local authorities respond to audit findings) looks at the steps that local authorities take to respond to audit qualifications, statutory recommendations and other audit findings. It explores whether local authorities are taking action to address audit findings and whether changes to the governance framework would enable elected members to hold the executive to account for doing so in a more effective manner.


16.  Chapter 8 (The financial reporting framework) looks at the specific characteristics of the local authority financial reporting framework. It explores the impact that the difference between the basis on which the balanced budget is calculated and the basis on which financial results are reported has on the transparency of local authority financial reporting; on whether the statutory adjustments to get from one basis to the other drives peculiar and possibly sub-optimal behaviours by local authorities. It asks what statutory and non-statutory measures could be taken to improve the transparency and usefulness of local authority accounts.


17.  Chapter 9 (Other issues) looks briefly at a number of other matters related to the quality and effectiveness of local authority audit. These include group accounts, outsourcing, and inspection and objection powers. It also covers matters relevant to smaller authorities.


18.  A list of questions is provided at the end of each chapter. It is not necessary for respondents to answer every question, should they wish to focus on a specific area of interest to them. Equally respondents are free to comment on any other issues arising from this document and provide supplementary evidence if they wish to. Supplementary information submitted that is not directly relevant to any of the questions will be considered, provided that it is relevant.


19.  This call for views closes on 22 November at 5pm. Responses should be submitted to

























Part 1: Strategic Call for Views

Chapter 1: Definitions of audit and users of the accounts


1.    The audit framework for the annual financial statements produced by local authorities is based on and to a large extent is consistent with the framework for the audit of financial statements produced by listed companies.


2.    The audit of financial statements in the UK has been shaped by developments in company law and in the auditing standards set in the UK by the accountancy professional bodies, the Auditing Practices Board established in 1991 and (since 2004) the Financial Reporting Council (“FRC”). The standards that UK auditors are required to follow are adapted from those set by the International Auditing and Assurance Standards Board and comprise a mixture of guiding principles and specific processes and procedures that an audit must include.


3.    The interpretation of this statutory and standards-based regime has also been influenced by a number of landmark legal cases over time. Company law does not explicitly define the meaning or purpose of audit, nor for whose benefit it is undertaken. The absence of clear statutory objectives has left scope for the courts to play a significant role in determining auditors’ responsibility, the manner in which they are discharged and to who they owe a duty of care. This is as true for local authority audit as it is for the audit of companies.


4.    Local authority audit differs from the audit of companies in two main ways:

a.    There is an additional audit opinion. Commonly known as the Value for Money opinion (“vfm opinion”), auditors are actually required to provide an opinion on the adequacy of systems in place to support the economy, effectiveness and efficiency in its use of resources. Whilst auditing standards provide a framework within which an audit of financial statements must be conducted, they do not apply to the audit work supporting the ‘vfm opinion’. Instead, the Statutory Code of Audit Practice (“the Audit Code”) produced by the National Audit Office (“NAO”) on behalf of the Comptroller and Auditor General, provides limited guidance on the work auditors need to undertake on these systems.

b.    The financial audit opinion will always report that all local authorities are a going concern. Auditors are required to test and report on the ‘going concern assumption – i.e. whether an entity will continue to exist for the following twelve months. If an entity is not a going concern assets and liabilities are valued on a different basis and the auditor modifies their financial audit opinion. As local authorities have a continuing responsibility to deliver statutory services, irrespective of whether there is sufficient money to do so, the accounts will always meet the going concern test. This means that the assurance that an auditor gives on going concern is meaningless when assessing a local authority’s financial resilience.

Users of the accounts

5.    Defining the users of local authority accounts is difficult. Auditing standards define the users of the accounts for a private sector entity as: “– existing and potential investors, lenders and other creditors”4. Other stakeholders who will have an interest in private

4 International Accounting Standards Board Conceptual Framework for Financial Reporting – para. 1.5

sector accounts are suppliers, customers, regulators and ratings agencies. All of these stakeholders can be expected to have a reasonable level of financial literacy and familiarity with the format and content of financial statements and annual reports. In addition, they are largely interested in similar information.


6.    This does not necessarily hold true in the local authority sector. Auditing standards suggest: “In the case of a public sector entity, legislators and regulators are often the primary users of its financial statements.” 5 The Chartered Institute of Public Finance and Accountancy (“CIPFA”) currently defines the primary users of local authority financial statements as “service recipients and their representatives and resource providers and their representatives”.6


7.    This definition in and of itself is open to considerable interpretation. Service recipients and their representatives is presumably intended to mean local residents and their locally elected representatives, but could also include Members of Parliament, the media, financial advisors, and lobby and special interest groups. Resource providers and their representatives is presumably intended to mean central Government but could also include tax payers (both Council Tax and non-Domestic Rates) and their representative groups and other funding organisations.


8.    There also needs to be an acknowledgement that other user groups exist.  These include but are not limited to existing and potential lenders, credit ratings agencies, trade unions, statisticians, analysts, academics and think tanks with an interest in local government. Local authorities are increasingly delivering core services through more complicated and innovative organisational structures, so it would be reasonable to expect the range of users of accounts to increase.


9.    This policy poses a particular challenge in ensuring that audited financial information presented by local authorities is focussed on the needs of the key users of accounts. Different stakeholder groups will be interested in different information, have differing expectations of whether a particular transaction is material, will have differing expectations of the audit process and will have differing levels of financial literacy.


10.  What is also different between local authority accounts and company accounts is the absence of an analyst community. In the private sector, market analysts review the annual accounts and other financial information published by listed companies and provide a summarised view of what this means for the financial health and future prospects of that company. No such community exists in the local authority sector, which means that users of accounts have less help in interpreting what the financial information means.

Q1. Who, in your opinion, are the primary users of/main audience for local authority accounts?

Q2. Who are the other users of local authority accounts? Are any of these other users of accounts particularly important?

Q3. What level of financial literacy/familiarity with accounts and audit is it reasonable to expect the primary users of accounts to have and what implications does this have


5 – para. A2

6 CIPFA Statutory Code of LA Accounting Practice 2019-20 – para.

for the information presented in accounts and/or the information that should be subject to external audit?

Q4. Does the external audit process cover the right things given the interests of the primary users of the accounts/is the scope of the opinions wide enough?

Q5. Is the going concern opinion meaningful when assessing local authority resilience? If not, what should replace it?

Chapter 2: The Expectation Gap

1.    The term ‘expectation gap’ has generally been used to characterise a perceived difference between what users of the financial statements and other stakeholders expect from an audit and what an audit is required to deliver under the statutory framework and appropriate professional standards.


2.    In the local authority sector examples of audit expectations that are not matched (or not matched fully) by the corresponding statutory and regulatory framework include:

a.    An expectation that the audit will provide an opinion on the value for money of service delivery;

b.    An expectation that the audit will provide assurance over the effectiveness of service delivery;

c.    An expectation that the audit will provide assurance over the financial resilience of the authority;

d.    An expectation that the auditor will have actively sought out any evidence of fraud;

e.    An expectation that the auditor will have confirmed that specific grant income has been spent solely on the purposes for which it was intended; and

f.     An expectation that the audit opinion covers all of the financial and non-financial information included in the annual report and accounts.


3.    The key decisions in relation to the future prospects of a local authority are taken by elected members and statutory officers (rather than by auditors). Responsibility for establishing an appropriate and effective system of control is split between three officers, each of whom have a specific area of responsibility set out in statute, as follows:

a.    Head of Paid Service (typically the Chief Executive or Managing Director): overall responsibility for the management and co-ordination of employees of the authority to enable efficient and effective discharge of statutory responsibilities.

b.    Chief Finance Officer (typically the Finance Director or Borough Treasurer): proper administration of financial affairs, including ensuring the authority has sufficient reserves to manage financial risks. The Chief Finance Officer also has personal responsibility for issuing a statutory warning notice to full council or equivalent if it looks like there is insufficient resource to meet future expenditure. This is known as a “Section 114 Notice”.

c.    Monitoring Officer (typically the Borough Solicitor or Head of Law and Democracy): maintaining the constitution and ensuring the lawfulness and fairness of decision making.


4.    In some authorities, responsibility for service delivery is further diffused. In upper and single tier authorities, the Director of Adult Services and Director of Childrens’ Services have responsibility for the efficiency and effectiveness of service delivery in their areas of responsibility. In Police and Crime Commissioners and Fire and Rescue Authorities, the elected representatives oversee service delivery which is the responsibility of the Chief Constable and Chief Fire Officer respectively.


5.    Where a local authority suffers financial or service failure, this is the responsibility of elected representatives and statutory officers. An unmodified audit report and vfm opinion is not a guarantee that a local authority is in robust financial health or that it is delivering effective and efficient services. Nor does the scope of the vfm opinion

specifically require an auditor to form a view on the financial resilience of a local authority. However, an effective audit may help avert a failure through providing an early and public warning that highlights significant risks.


6.    In addition, where senior external audit staff have an ongoing informal relationship with statutory officers and elected representatives that enables them to provide real-time constructive challenge, this may support local authorities in delivering more efficient and effective outcomes.


7.    Auditors of local authorities have statutory powers that provide them with a number of mechanisms that allow them to sound an early warning. Some of these can be used outside the normal financial audit cycle. Details of these powers and their use is discussed in Chapter 6.


8.    Auditors of local authorities also have a duty to investigate objections raised by electors. Electors have the right to inspect accounts and underlying records for a 30 day period that must include the first ten working days in June and if they have concerns to raise an objection with the auditor. The auditor is required to consider whether to investigate and formally respond to objections after due consideration of the significance of the subject matter vis a vis the time and resource required to investigate. This could give rise to a further expectation gap, where electors expect that an auditor will investigate any matter they choose to raise at any time.


9.    Perceptions of audit coverage or lack of audit coverage of new activities that are growing in popularity in the sector, for example, commercial property purchases, joint arrangements and wholly owned commercial subsidiaries also contribute to the lack of clarity about what auditors do and what they should be doing.


10.  Finally, there are a number of factors common to all local authority external audit engagements that could add to the expectation gap. Key amongst these are:

a.    Fraud – external auditors are required to consider the risk of material fraud when conducting a financial audit but are not required or expected to develop procedures to identify all instances of fraud or irregularity.

b.    Performance information – external audit does not give any assurance over performance information. If performance information is reported in the same document as the audited financial statements, the auditor is required to read that information to ensure that it is not inconsistent with the financial statements (if relevant) and what they know about the local authority, but not to do any additional work to test its accuracy or reasonableness.

c.    Future prospects – an audit is backwards looking and an external auditor is not currently required to assess forward financial plans or strategies.


11.  A variant on the expectation gap argument is that it is actually an audit quality gap, that auditors of local authorities have some or all of inadequate sector knowledge, inadequate skills, inadequate resources or inadequate systems to fulfil their statutory responsibilities. Audit quality is discussed in more detail in Chapter 5.


12.  These various potential gaps can be categorised into three main areas:

a.    Knowledge gap – do users of accounts understand what the statutory framework requires auditors of local authorities to do?

b.    Evolution gap - is there a difference between what users of accounts expect auditors to do and what they are responsible for doing?

c.    Quality gap – do external auditors do the things that they are supposed to do to with and appropriate degree of knowledge, skill and rigour?


Q6. In your opinion, what should an external audit of a set of local authority financial statements cover?

Q7. In your opinion, what should the scope of the external auditor’s value for money opinion be?

Q8. What is your view on the scope of an external audit engagement as described in Chapters 1 and 2 of this Cal for Views? If it is different from your expectations, does this have implications for the reliance you place on external audit work?

Q9. Should the external audit engagement be extended? If so, which additional areas/matters are most important for external auditors to look at? What would be the cost implications of extending the engagement to the areas/matters you consider to be most important be?

























Part 2: Technical Call for Views

Chapter 3: Audit and Wider Assurance

1.    Assurance is commonly defined as a process leading to a statement which provides stakeholders with confidence that outcomes will be achieved.


2.    Most taxpayers, residents and other stakeholders expect elected representatives and statutory officers to be truthful in their communications regarding service delivery outcomes and the financial resilience of their local authority. They are also likely to want assurance that funds have been spent appropriately and effectively to support delivery of statutory outcomes and local policy priorities. In the local government sector this seems to mean different things to different stakeholders.


3.    The MHCLG Accounting Officer’s System Statement for Local Government includes external audit as part of the governance framework but does not use the external audit process to gain assurance over its effectiveness. Instead it lists a wide range of financial and non-financial data that “is considered and analysed in the Department to provide indications of which local authorities or groups of authorities are at highest risk of financial distress, service failure or other inability to meet statutory duties.” 7


4.    It is an interesting question whether such assurance should be delivered through a statutory audit or through some other assurance mechanism. This question is more complicated for local authorities than for other types of entities for a number of reasons.


5.    Firstly, local authorities are required to produce a number of statutory reports that set out key financial strategies and plans, that must be approved by full council, but which do not form part of the annual report and accounts document. These include but are not limited to the Balanced Budget Report, the Chief Finance Officer’s Report accompanying the budget (also known as a “Section 25 Report”), the Mid-Term Financial Strategy, the Capital Strategy, the Investments Strategy and the Minimum Revenue Provision Strategy. The balanced budget calculation is set by primary legislation. The content of many other statutory reports is set by legislation or through statutory codes.


6.    Secondly, local authorities are required to provide a number of detailed statistical returns to central government covering both capital and revenue income and cost data, at least annually. There is a statutory code, the Service Reporting Code of Practice (“SeRCoP”), that sets out how to allocate costs between service areas in these returns. However, spend on service areas in accounts is no longer required to be presented on a SeRCoP basis.


7.    Finally, all local authorities are required to make publicly available a wide range of financial information under the transparency code, including every item of expenditure of more than £500. It is unclear how or whether this information is quality assured or whether the transparency data should be reconciled to the information presented in the financial statements.


8.    Many local authorities deliver a range of complex services, some of which are looked at by specialist inspectorates but most of which are not. Key amongst these are the DHSC and DfE inspectorates, respectively the Care Quality Commission and OFSTED, which monitor and inspect and therefore could be said to provide wider assurance over the

7 MHCLG Accounting Officer System Statement – Annex A

quality of adults and childrens’ social care; and the police and fire inspectorate, HMICFRS, whose inspections cover service resilience in addition to the effectiveness of service delivery.


9.    In addition, many authorities are delivering these services through increasingly complex business models. This means that those providing audit and wider assurance services need to have access to a range of specialist skills and experience beyond audit and accounting. They also need to have sufficient understanding of the wider regulatory framework.


10.  The final piece of the assurance jigsaw is internal audit. The relationship between internal and external audit is discussed in Chapter 5.

Q10. Should the scope of the vfm opinion be expanded to explicitly require assessment of the systems in place to support the preparation of some or all of the reports that statute requires to be presented to full Council? If you do, which reports should be within scope of the external audit vfm engagement? If not, should these be assessed through another form of external engagement? If you believe that the vfm opinion should be extended to cover these reports will there be implications for the timing of audit work or auditor reporting?

Q11. Should external auditors be required to engage with Inspectorates looking at aspects of a local authority’s service delivery? If you believe that this engagement should happen, how frequent should such engagement be and what would be the end purpose of doing so?

Chapter 4: The Governance Framework for the Audit System

Responsibilities following the abolition of the Audit Commission

1.    Before it closed on 31 March 2015, the Audit Commission was responsible for appointing auditors for local government, NHS trusts, health housing and other local bodies in England. Approximately 70% of these audits were carried out by District Audit, the Commission’s in-house audit practice, the rest being contracted out to private sector auditors.


2.    A number of reasons were given for the abolition of the Audit Commission. It was perceived as being unaccountable to ministers and Parliament, as the both the regulator and largest provider of audit services to the sector, it was considered to have an inherent conflict of interest and there was a perception that the CPA/CAA regime had turned it into more of an inspectorate than a regulator or external audit provider.


3.    The Local Audit and Accountability Act 2014 transferred the audit functions previously carried out by the Audit Commission to a range of successor bodies as follows:

a.    Management of audit contracts – transferred to Public Sector Audit Appointments Ltd (“PSAA”), an independent company created by the Local Government Association. This company has also taken on statutory responsibility for bulk procurement of audit contracts, for all councils that have not opted-out. An equivalent body, Smaller Authorities Audit Appointments Ltd performs the same functions for parish councils, independent drainage boards and other smaller authorities.

b.    Registration and professional conduct of auditors – transferred to the professional accountancy bodies. Currently all firms qualified to conduct local government audit are registered by the ICAEW.

c.    Quality assurance for audit engagements – firm’s internal procedures; which in turn are monitored and assessed by the Financial Reporting Council (“FRC”).

d.    Grant certification – the role of making arrangements for housing benefit subsidy calculations transferred to PSAA until the audit contracts ended. Other grant certification work was not transferred to a successor body.

e.    Code of Audit Practice and supporting guidance – transferred to the Comptroller and Auditor General (“C&AG”), the Head of the National Audit Office (“NAO”)

f.     Provision of information about audit – the C&AG was given responsibility for the guide to the electorate’s rights with regard to the audit of their local authority. PSAA was given responsibility for publishing summary reports on the results of audits and auditor compliance and audit quality. PSAA’s responsibility for publishing the summary report lapsed in 2018-19.

g.    Whistleblowing – external auditors became prescribed persons to which whistleblowing disclosures could be made. The C&AG’s responsibility as a prescribed person for whistleblowing disclosures was extended to include disclosures from those working in local government.

Current position

4.    The new arrangements have been gradually introduced since 2015-16. 2018-19 is the first year for which all the arrangements have been in operation. However, the key characteristics of the framework, with the split of responsibilities between the C&AG, the FRC, audit firms and PSAA have remained constant since 2015-16.


5.    The most visible aspect of the new regime, and one of the key objectives of the Local Audit and Accountability Act 2014, is the reduction in audit fees. PSAA’s website states “scale audit fees and indicative certification fees for most audited bodies [for 2015/16] have been reduced by 25 per cent based on the fees applicable for 2014/15” 8, and fee scales reduced by a further 23 percent9 on the retendering of audit lots for the 2018-19 audit cycle.


6.    A key characteristic of the governance framework set up to replace the Audit Commission is the fact that, other than deciding when to conduct a best value inspection, there is no role for MHCLG.  This was a deliberate consequence of the policy intent when the Commission was abolished. Recently, MHCLG has set up a discussion forum, the Local Audit Delivery Board, that brings all parties with responsibility for the governance framework together. However, this Board has no statutory basis and does not have a clear remit.


7.    Whilst some have argued that it is too early to assess the effectiveness of the current framework, others have raised concerns that the fragmented nature of responsibilities for assuring quality means that no-one has oversight of the state of audit in the sector, there has been a loss of sector specific knowledge and it is too easy for those with responsibility to claim that a particular area of concern is outside their remit. Most recently these concerns have been raised in Sir John Kingman’s review of the FRC. The summary findings and recommendations are reproduced below.


























Independent Review of the Financial Reporting Council: Executive summary of findings on local audit

There are important differences between local authority audit and private sector audit:

Auditors of local public bodies report not only on the financial statements, but also on arrangements for securing value for money, and financial sustainability;

Auditors of those bodies carry out their work on behalf of the public, yet in comparison to the lines of accountability in companies between the directors, audit committee and shareholders, there is substantially lower awareness and challenge of the auditors’ work in the public sector;

The FRC’s enforcement powers in relation to local audit are meaningfully different in comparison to its powers in relation to private sector statutory audit. The former are not within scope of the Audit Enforcement Procedure.

Instead of the question as to whether an auditor has ‘breached a relevant requirement’, a far narrower test applies in relation to local audit – that there are reasonable grounds to suspect misconduct, and that the matter appears to raise ‘important issues affecting the public interest’; and

Unless the local body is also a Public Interest Entity, there are no requirements regarding the rotation of auditors.

Historically, the AC also appointed auditors to a range of local bodies in England and Wales, as well as setting and overseeing relevant standards, and conducting UK-wide antifraud work. Since the AC’s abolition in 2015, the new local audit framework enables bodies to procure and appoint their own auditors from an open and competitive market of qualified providers. However, 98% of relevant authorities have opted into a central procurement body. The Review has serious concern that those arrangements, in practice, are prioritising a reduction in cost of audit at the expense of audit quality.

These arrangements, if allowed to persist, run a very clear risk of allowing weak and limited audit disciplines to prevail in local government. This is particularly concerning given the vital role played historically by district auditors for instance, in detecting and seeking out corruption.

Particularly at a time when local authorities are under acute financial pressure, and some local authorities are engaging in risky speculative ventures, high-quality and robust scrutiny of local authorities’ finances and financial management in the public interest is a critical part of local democracy. The Review is very concerned that the quality of this scrutiny is being pared back at the worst possible time.


The Review recommends that the arrangements for local audit need to be fundamentally rethought. This should include robust assessment and scrutiny of the quality of local audit work, with individual reports shared with audit committees and published; a more appropriate threshold for enforcement action; and, bringing together in one place all the relevant responsibilities, so a single regulatory body can take an overview.

Such a role (regarding local audit) could be taken on by the FRC or its successor body, but the Review recommends that it would be much better undertaken by a separate body that has (or could develop) a deeper expertise in the local audit world. That body should have a different and much more focused remit than the former Audit Commission. It should have a clear objective to secure quality, and should set the relevant standards, inspect the quality of relevant audit work and oversee the relevant professional bodies. It should also take on responsibility for appointing auditors for local bodies and agreeing fees.

Q12. Does the current procurement process for local authority audit drive the right balance between cost reduction, quality of work, volume of external audit hours and mix of staff undertaking audit engagements?

Q13. How should regulators ensure that audit firms and responsible individuals have the skills, experience and knowledge to deliver high quality financial and vfm audits, whilst ensuring the barriers to entry do not get too high?

Q14. What metrics should regulators use when assessing whether financial and vfm audits are delivered to an appropriate level of quality?

Q15. Do you agree with the Independent Review of the Financial Reporting Council’s findings and recommendations; and why do you agree/not agree? If you agree with the recommendations do you think the ‘single regulatory body’ should be the “successor body to the FRC” or a sector specific entity? If you do not agree with the recommendations are there any other changes you would make to the regulatory framework for local authority audit?

Chapter 5: Audit Product and Quality

1.    The Public Accounts Committee has raised significant concerns about the quality of local government audit coverage and quality, reporting: “There are a number of issues with external audit. Some council chief executives, finance directors and heads of internal audit raised concerns with the National Audit Office that the contribution of external audit to local governance has reduced recently. CIPFA told us that it shared this concern, which it linked to the change to reduction in audit fees. 25% of finance directors at single tier and county councils felt that their audit fees in 2017–18 were too low relative to the risk that their authorities face. Over half of finance directors at single tier and county councils (which have responsibility for social care services for vulnerable people) wanted some change to their external audit. The most common change, wanted by 26% of these finance directors, was more value for money work, particularly in relation to financial sustainability.” 10


2.    There are two key aspects of audit quality, which are not necessarily complementary. These are:

a.    The quality of the auditor’s performance against whichever standards or principles have been agreed; and

b.    The quality of the audit output in meeting the legitimate expectations of the users of the accounts.


3.    This review is primarily interested in the second of these two aspects. However, this chapter along with Chapter 6 – Auditor Reporting includes coverage of the quality of the auditor’s performance. It is also important to note that the two aspects of audit quality are interlinked.

Quality in local authority external audit

Binary nature of audit opinions

4.    Under the current framework, auditors of local authorities issue two audit opinions: the financial audit opinion; and the vfm opinion. These two opinions are largely pass or fail tests.


5.    Vfm audit opinions are discussed in Chapter 6. The financial audit opinion is either

clean also known as unmodified or it is modified in one of three ways:

a.    An ‘except for’ opinion – means the financial statements are true and fair except for the treatment or presentation of one or more specific items.

b.    An ‘adverse’ opinion – means the financial statements are not true and fair.

c.    A ‘disclaimer’ of the opinion – means that the auditor is unable to obtain enough evidence to assess whether the financial statements are true and fair.


6.    Auditors can also present a clean opinion with an emphasis of matter, where they want to highlight an issue. However, local authority auditors have additional reporting options (see Chapter 6), which means there is no incentive to issue an emphasis of matter.






10 PAC report - Local Government Governance and Accountability (15 May 2019)

7.    The pass or fail nature of audit opinions means that they are seen as a nuclear option. Auditors have to pass a number of internal professional and legal tests before issuing a modified opinion, which could make them very reluctant to do so.

Financial Audit

8.    Current work by audit regulators and inspectors is thought to focus on the first issue, of how well audits deliver on the standards. This poses a particular issue for public sector audit, where some financial reporting and auditing standards have to be adapted or interpreted to be relevant.


9.    The FRC’s reports on the performance of audit firms raise concerns about the lack of professional scepticism and challenge rather than failures of audit process. Whilst the FRC does not publish local government specific audit quality data, it has indicated in Audit Delivery Board meetings that the quality of those audits tends to be lower than private sector audits conducted by the same firms. There is also a widely expressed concern that the reduction in fees has led to a change in the mix of staff undertaking local authority audits – i.e. teams are less experienced and have less sector specific knowledge, which has a detrimental impact on quality.


10.  The FRC has fewer powers when it identifies poor quality local authority audits than it does when it identifies poor quality Companies Act audits. Specifically, it does not have the same powers to serve enforcement orders or impose financial penalties on local authority auditors who fail to meet their statutory responsibilities. Although these powers have rarely been used, the fact that the threat of use exists for private sector audits but not for local authority audits could influence resourcing decisions made by Audit firms.


11.  Some auditors have countered that the FRC’s regulatory regime is actively detrimental to the quality of local authority audits. To get a clean bill of health from the FRC, auditors are forced to focus time and effort on areas that would be high risk in the private sector but are not for the public sector. If true, this could be a sector specific example of ‘auditing to complete the audit file’, rather than to reach the correct opinion.


12.  Some auditors have countered that the FRC’s regulatory regime is actively detrimental to the quality of local authority audits. To get a clean bill of health from the FRC, auditors are forced to focus time and effort on areas that would be high risk in the private sector but are not for the public sector. If true, this could be a sector specific example of ‘auditing to complete the audit file’, rather than to reach the correct opinion.


13.  There is also a question about whether the way auditing standards define materiality drive quality outcomes in the local government sector. Auditing standards require external auditors to determine the quantum and nature of errors that would be material to users of the account. They are then required to determine “performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures.”11 The standard further suggests that for public sector entities, total or net expenditure is the most appropriate basis for setting materiality.


14.  There is a question as to whether total or net expenditure is the most appropriate basis for setting materiality for all LAs. Materiality for LA Pension Fund audits is already set

based on net liabilities. There is a question as to whether the same approach should be adopted for those LAs with a disproportionately large balance sheet relative to their net expenditure.


15.  Auditors are allowed to set a lower performance materiality where balances are particularly sensitive but cannot set a higher performance materiality. This poses a particular problem for the audits of many smaller local authorities, where the balance sheet is disproportionately large relative to gross or net expenditure. To comply with auditing standards, the auditor is required to focus more time and audit effort on balance sheet items, even where these may be less risky or of less interest to users of the accounts. Whilst amending auditing standards is outside the scope of this Review, views on the extent to which this and other professional standards have a positive or negative effect on audit quality would be welcomed.


16.  Finally there is a question about whether auditors have sufficient understanding of the business to be able to focus on the right areas. Understanding the business is a key part of any audit. Together with the assessment of balances against performance materiality it drives how much effort is focussed on any specific area. The local authority regulatory framework is different to that of other sectors, and the incentives and risks are different. As audit firms draw upon a wider pool of staff to undertake LA audits, there is a question of the extent to which their audit teams are able to maintain and demonstrate appropriate skills and knowledge to meet the legitimate expectations of users.


17.  Another aspect of understanding of the business is consistency of accounting judgements made by auditors. Unlike companies, local authorities all undertake the same broad range of services and engage in similar transactions. In the past two audit cycles different audit firms have made different judgements in relation to matters such as Inverse Floater ‘Lender Option Borrower Option” loans, pension deficit valuation following the McCloud judgement, and acceptable treatments for Minimum Revenue Provision. It is arguable that these differences have increased uncertainty and cost for both local and central government, without improving audit quality or adding any transparency that would help users of the accounts.

VfM Audit

18.  The NAO’s Code of Audit Practice sets out the procedures that auditors must have regard to when undertaking work to support a vfm opinion.12 The NAO is currently consulting on updating this code.


19.  The current Audit Code is a high-level principles-based document. What is noticeable is that other than referring to the need to comply with relevant professional standards, there is no mention of audit quality. The proposed updates to the Audit Code indicate that the NAO is not proposing to provide any more detail on quality. This is a particular issue for vfm audits where Auditing Standards are neither relevant nor applicable. The current Audit Code is supplemented by a number of Auditor Guidance Notes (AGNs), which have the same status as the Audit Code. AGN03 covers vfm audit. It takes the form of a principles-based note, with a supplementary document for each sector. AGN03 provides information about sector developments, inspectorates whose work auditors may want to have regard to and about the key documents auditors may want to


12 NAO Code of Audit Practice – chapter 3

look at when forming their audit opinion. There is no mention of audit quality or the work auditors need to undertake before forming their vfm opinion.


20.  It therefore seems that other than auditing standards, which are not designed for ensuring that enough work has been done to form a vfm opinion, there is no definition of what a quality vfm audit looks like. Nor does there seem to be any basis for a regulator to form a view on whether an audit firm’s procedures are adequate to deliver quality outcomes.

Reliance on Internal Audit

21.  All local authorities should have an internal audit function that complies with Public Sector Internal Audit Standards. These standards define the role of internal audit as providing “independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”13 In practice internal auditors of local authorities cover a range of areas including but not limited to financial resilience, aspects of service delivery, fraud investigations and the operating effectiveness of control frameworks.


22.  Whilst being mindful of the prohibition in UK Auditing Standards of external auditors placing direct reliance on the work of internal audit the Review is interested exploring the relationship between internal and external audit, particularly if a closer or more codified relationship could lead to higher quality outcomes.

Resourcing Audit Engagements

23.  Delivering high quality audit products is dependent on auditors having sufficient staff with the expertise and sector knowledge to audit local authority accounts. Events during 2018-19 have called into question whether there is enough expertise or resource in the sector. In August 2019, PSAA reported that for 2018-19 accounts, 209 out of 497 audited accounts produced by local government bodies were not delivered on time (2017-18: 64 out of 495 missed the deadline).  Whereas in 2017-18, technical accounting issues, client issues and outstanding objections were the main reasons for missing the statutory deadline, in 2018-19 we have been informed that roughly a third of the audited accounts that that were not delivered on time, were late due to issues at audit firms.


24.  The Review is interested in views on the impact that the failure to meet statutory deadlines has had on the quality and usefulness of the audit process, on the real world impact for local authorities of this delay, and in suggestions for changes that could be made to the framework to mitigate the risk that this situation reoccurs in future years.


Q16. Do external audit firms have enough understanding of the local authority regulatory framework to focus audit work on the right areas? How do they/should they demonstrate this? Who should regulate this work?

Q17. Do auditing standards have a positive impact on the quality of local authority financial audits?


Q18. Do audit firms allocate sufficient resources to deliver high quality and timely audits? How is consistency and quality maintained in external audit work? To what extent is there consistency in audit teams year on year? What more can be done to ensure consistency between firms?

Q19. To what extent are senior audit staff, particularly the responsible individual signing the audit certificate, visibly involved in audit work? Who do senior audit staff meet with?

Q20. Should external auditors consider financial resilience as a key factor when designing their vfm work programme? If so, what factors do they/should they consider as indicative of a lack of financial resilience?

Q21. Does the Code of Audit Practice provide enough guidance on how much work needs to be done to support the vfm opinion? If not, what should it cover?

Q22. Do auditing standards provide appropriate guidance on quality standards for vfm audits? If not, is guidance needed and should it be included in the Code of Audit Practice or elsewhere?

Q23. What is the current relationship between external and internal audit? How should that relationship be developed to add most value to local authorities and local residents?

Q24. What should happen when a regulator finds that a local authority audit has not met quality standards? Where should the balance between ensuring effective enforcement action against auditors and maintaining participants in the audit market lie?

Chapter 6: Auditor Reporting

1.    Auditors of local authorities have a wider range of reporting powers and duties than the auditors of companies. These are:

a.    The audit certificate and report, which differs from private sector audit certificates in that it has two opinions, the financial audit opinion and an opinion on the adequacy of systems in place to support the economy, effectiveness and efficiency of service delivery, commonly known as the “vfm opinion”; and

b.    Sector specific statutory reporting powers.


2.    The Brydon Review is looking at financial audit opinions and reports in some detail. The arguments made to and conclusions reached by Sir Donald Brydon are likely to be relevant at least in part to the financial audit opinion. In addition, there have been no qualified financial audit opinions in the LA sector since the new arrangements were introduced in 2015-16.


3.    Therefore that discussion is not repeated in this Call for Views, which focuses on the format and timing of the vfm opinion; and secondly the use, format and timing of the sector specific reporting powers.


VfM certificates and reports - format

1.    It is arguable that users of local authority accounts are more interested in the vfm opinion than in the financial audit opinion. Currently vfm audit is largely a pass or fail test. The Audit Code requires auditors to form an opinion on whether “In all significant respects, the audited body had proper arrangements to ensure it took properly informed decisions and deployed resources to achieve planned and sustainable outcomes for taxpayers and local people.”


2.    The vfm audit opinion is either clean also known as unmodified, or is modified in one of two ways:

a.    An ‘except for’ opinion means that the LA has proper arrangements in place except for in one or more significant areas.

b.    An ‘adverse’ opinion means that a LA does not have proper arrangements in place.


3.    There are two things to note about this opinion: firstly it is backwards looking – it provides no assurance on whether those arrangements will remain in place going forward; and secondly it provides no assurance that value for money outcomes have been achieved. This is reflected in the Audit Code which requires auditors to consider outcomes to the extent they provide evidence to support the arrangements that the LA says it has.


4.    In addition, it is a single opinion covering all of the financial management, financial resilience and service delivery aspects of value for money. This had led to a situation where the most common reason for a qualified vfm opinion is an Ofsted judgement that childrens’ services were “inadequate”. When PSAA published its summary report on the results of 2017-18 audit work it listed 32 qualified vfm opinions. Half of these were due

to an “inadequate” Ofsted rating.14 The circumstances supporting an “inadequate” Ofsted rating are fully explained in a detailed and publicly available report. Given this, it is not clear how qualifying the vfm opinion adds to transparency.


5.    The NAO consultation on the new Audit Code recognises that there may be room to improve the format of the vfm opinion and asks a number of questions about how changes to the Audit Code can make auditor reporting more impactful. This Review is also interested in ideas about how the vfm opinion could be enhanced to provide more transparency to users.

VfM certificates and reports - timeliness

6.    Questions have been raised both about how long it takes before an auditor feels comfortable in issuing a qualified vfm opinion and about when the vfm opinion would be most useful to members.


7.    Often modified opinions are delivered well after the event that led to a qualification, in extreme cases some years later. For example, during 2016-17 Spelthorne Borough Council, which had net service expenditure of about £10m p.a. purchased the BP Campus for £385m. The auditors issued an adverse vfm opinion in March 2019, by which time Spelthorne had substantially revised its approach to commercial property acquisitions and had built its portfolio through about £600m of additional purchases.


8.    The purpose of presenting this example is not to criticise or challenge why the auditors took so long to come to an opinion in this case, but rather to ask whether an opinion formed so long after the event that led to concerns can ever be said to enhance transparency and accountability of members.


9.    The timing of the vfm opinion, whether modified or not is also of interest to the Review. Given that the vfm audit looks at the arrangements in place to secure value for money outcomes, it does not necessarily need to be linked to the statutory deadlines for preparing and auditing financial statements. This differs from central government, where the vfm opinion on the ‘regularity’15 of transactions is directly linked to the annual accounting cycle. The Review is interested in when in the annual cycle an opinion on arrangements in place to secure value for money would be of most use and the resource implications of decoupling the timing of the financial audit and vfm opinions.

Statutory Reporting Powers – use and timeliness

10.  Auditors of local authorities have statutory powers that provide them with a number of mechanisms that allow them to sound an early warning. Some of these can be used outside the normal financial audit cycle. These are:

a.    Statutory Recommendations – the auditor has the power to make written recommendations to the audited body, which need to be considered by full council or equivalent in public and responded to publicly. Recommendations can be made during or at the end of the audit and must be copied to the Secretary of State.



14 Report on the results of auditor's work (Oct 2018) – list of qualified opinions will not include LAs where the 2017-18 audit was concluded after the PSAA report was published.

15 Regularity is defined in Managing Public Money as public funds being spent in a way that is “compliant with the relevant

legislation (including EU legislation), delegated authorities and following the guidance in this document.” (Section 2.4)

b.    Public Interest Report – the auditor has the power to report publicly on any matter that comes to their notice that may be of interest to the authority or the general public. Public Interest Reports can be made at any time and must be copied to the Secretary of State.

c.    Advisory Notice on the Budget – if the auditor considers that a budget presented to and approved by full Council or equivalent is unlawful they can issue a public advisory notice stating that fact and/or make an application for judicial review.

d.    Application to the courts – if an auditor considers that an item of account is contrary to law, they can make an application to the courts to disallow it.


11.  These powers have not been used to a large extent. Table 1 details the number of times each power has been used for principal councils16 in the final two years of the Audit Commission regime and the first three years of the current audit framework as reported in the summary publications “Report on the results of auditors’ work” published by PSAA.



Table 1: Modified auditor reporting 2013-14 to 2018-1917

Columns in grey indicate last two years of Audit Commission regime 2015-18 - Local Audit and Accountability Act 2014 implementation period







Modified vfm opinion






Modified financial statement opinion













Public Interest Report






Advisory Notice






Application to Courts







12.  The number of modified vfm conclusions significantly increased from 2013-14 to 2014- 15, but has remained fairly constant since. Given the increase financial pressure local authorities have been under in recent years an increase in modified vfm conclusions is not that surprising. However, as mentioned elsewhere, the most common reason for a modified vfm conclusion is an inadequate Ofsted report. Since Ofsted does not inspect every local authority’s Childrens’ Services provision every year qualifications for this reason are somewhat ‘sticky’. Once a local authority’s vfm opinion has been qualified on these grounds it will be continue to be qualified in every year until an Ofsted inspection changes the assessment of Childrens’ Services.


13.  The use of statutory recommendations has remained at a fairly consistent low-level. This may not be an issue if significant control issues are being reported to elected representatives through other methods.


14.  Public Interest Reports have always been very uncommon but seem to no longer be used. This is surprising given the increasingly high profile of commercial and other new arrangements entered into by some local authorities.


16 Principal councils are defined as upper and single tier authorities, shire districts, fire and rescue authorities, local police bodies, combined authorities and passenger transport authorities.

17 Source: PSAA. Stats correct as of September 2019. Does not include outstanding audits.


15.  An advisory notice on the budget and an application to the courts are rightly seen as nuclear options. Given this, it is not surprising that the only council to receive an advisory notice has been Northamptonshire CC and no application to the courts has been made under the current regime.


16.  The Review is interested in views on whether sufficient use has been made of each of modified vfm opinions, statutory recommendations and public interest reports, where these powers have been used whether this has been done in a timely fashion, and in the barriers (if any) for using statutory reporting powers.

Publishing a summary of the results of local authority audits

17.  Between 2015-16 and 2017-18 PSAA took over responsibility for producing a report summarising the results of local government (including police and fire) and NHS audits. Now that the new audit regime has been fully implemented, this responsibility has lapsed. The Review is interested in views on whether a summary publication of audit results adds value, if so what it should cover and in which entity is best placed to produce it.

Q25. Do you think that the format of the vfm audit opinion provides useful information? If not what would you like it to cover?

Q26.Do you think the vfm opinion should be qualified solely because a local authority has received an inadequate Ofsted opinion or a similar opinion from another inspectorate?

Q27. Do you think that the vfm opinion is presented at the right point in a local authority’s annual financial management and budgeting cycle? If not when do you think it would be most useful?

Q28. Where auditors have identified significant issues, audit certificates and reports have often been delayed? Why do you think this is and can changes be made to the framework to encourage earlier reporting of significant issues?

Q29. In your view, what sorts of issues should Public Interest Reports be used to highlight?

Q30. Statistics demonstrate that very few Public Interest Reports and Statutory Recommendations have been issued. Why do you think this is? Does it indicate an issue with the framework or common behaviours? If you think this is an issue, what can be done to incentivise more frequent and timely reporting of significant issues?

Q31. Does a publication summarising the results of local authority audits add value? If so who should publish it and what information would they need to have access to to perform this function effectively?

Chapter 7: The Framework for Responding to Audit Findings


1.    This chapter looks at whether the governance framework for responding to audit findings and qualified audit reports incentivises LAs to take recommendations seriously. It also considers the profile of modified audit opinions.


2.    Whilst some have argued that the auditors of large companies are too slow to highlight issues, when they do raise concerns, there tends to be an immediate and significant impact on the share price of that company. Auditors do not necessarily have to report to have an impact on the value of shares. An auditor announcing that it is going to resign from a listed company audit can have the same impact. This provides a powerful incentive to management, to respond to or to look like they are responding to audit recommendations provided in the annual Audit Completion Report.


3.    The same incentive does not exist in local authorities, which have no share price and which are funded largely based on an assessment of relative need. When a local authority receives a modified audit opinion, there is no evidence that this is publicised by the LA or the auditor and such opinions are rarely reported in the sector press.


4.    The Best Value Inspection of Northamptonshire County Council (“NCC”) noted that the auditors recorded an adverse vfm opinion in both 2015-16 and 2016-17, but that “neither of these reports seemed to trouble NCC” and that “there is no evidence that the second adverse best value judgement … was escalated to full council.”18 Whilst, as the Best Value Inspector highlights, NCC is an extreme case and their lack of reaction to the audit report is unusual, there does not seem to be any consistent practice for much of the sector in the way that auditor reports are received and responded to.

Who do external auditors report to

5.    PCCs and Chief Constables are required to have Joint Audit Committees (“JAC”), with independent members. These are normally chaired by the PCC. JACs are responsible for receiving audit reports and provide independent assurance on the adequacy of the corporate governance and risk management arrangements in place and the associated control environment, advising according to good governance principles and proper practices. There is an expectation that the Chief Finance Officer and Chief Executive will attend all JAC meetings and the Chief Constable will attend the meeting where the audit certificate and report is presented.


6.    Mayoral Combined Authorities are required to have an Audit Committee with an independent chair. The other members of the Committee can be independent or as seems to be common practice can be elected members from the constituent authorities. Other types of councils are not required to have Audit Committees although in practice many do. Where a local authority does not have an Audit Committee auditor reports are received by another appropriate committee. There is no statutory guidance or freely available sector specific good practice guidance on either the membership or scope of Audit Committees or their equivalents.

18 NCC Best Value Inspection - paras. 3.85 & 3.86.

7.    A CIPFA survey19 published in November 2016 found that 92% of Audit Committees or equivalent were Chaired by an elected member, normally one appointed from the majority group and 61% had no independent members. Virtually all of these committees considered both external and internal audit reports along with the annual governance statement. Heads of Internal Audit and Chief Finance Officers attended 97% and 95% of meetings respectively. Strategic Directors attended 37% of meetings and Chief Executives 24% of meetings. The survey did not collect data on skills and training of members or on when issues were escalated to full council.


8.    There does not seem to be any more recent sector-wide information on which committees receive audit reports, on their membership, attendees, terms of reference or on what gets escalated to full council or other bodies. Nor does there seem to be any explicit requirement for auditors to follow-up on the implementation of non-statutory recommendations, particularly where these relate to vfm arrangements.


9.    The use to which audit reports are put by stakeholders is also unclear. Public Interest Reports and Statutory Recommendations must be copied to the Secretary of State. However, MHCLG has no responsibility for taking action when it receives such a report and, other than the best value inspection powers, which are rightly seen as a nuclear option to be used only as a last resort, no authority to take any action. PSAA must be notified when a qualified opinion is issued, but has no responsibility for taking any action.


10.  The Review is interested in respondent’s views on whether the governance framework for considering internal and external audit findings encourages local authorities to take prompt action in response to issues raised and whether it supports continuous improvement.

Q32. To whom should external auditors present audit reports and findings; is it the audit committee, to full council or equivalent or another committee? If findings are not presented to full council or equivalent what information (if any) should full council or equivalent receive?

Q33. In your authority, what is the membership of the audit committee (number of members, how many are independent etc) and which officers typically attend?

Q34. How should local authorities track implementation of recommendations made by internal audit, external audit and relevant statutory inspectorates? What should the external auditors do if recommendations are not being implemented?

Q35. Should there be a role for an external body in tracking action taken in response to modified audit opinions and/or statutory recommendations and public interest reports? If so should that responsibility sit with MHCLG, the sector specific oversight body recommended by the Independent Review of the Financial Reporting Council or another body?







19 committees-in-local-authorities-and-police

Chapter 8: The Financial Reporting Framework

The purpose of financial reporting in the local authority sector

1.    Financial reports provide basic information to people interested in the performance of an entity. Most of the money that local authorities receive is provided from general or local taxation. Given this, it is reasonable to expect people outside the body who are interested in a local authority’s financial performance to want to know how the money being managed is being spent. This includes knowing whether the local authority is performing effectively to achieve what was intended with the money.


2.    Other than through use of inspection and objection rights (see chapter 6), many of the individuals with an interest in the performance of a local authority do not have the power to require the authority to produce customised financial or performance information. Instead they rely on the financial statements. This means that to be relevant the information produced in local authority financial statements must meet the accountability and/or decision-making needs of users and be sufficiently transparent and understandable to be interpretable by a reasonably well-informed person.

Introduction to the framework

3.    When producing financial reports, local authorities are required to have regard to the Statutory Code of Local Authority Accounting Practice (“the Accounting Code”), issued by the CIPFA. The Accounting Code is based on private sector accounting standards other than where they have been adapted for the specific circumstances of local authorities or where these conflict with specific statutory requirements. When implementing, adapting or interpreting accounting standards, the Code seeks to maintain consistency, with other parts of the UK public sector. Preparation of the Code is overseen by the CIPFA/LASAAC Accounting Code Board, which comprises representatives of types of local authorities and supreme audit institutions in all four jurisdictions of the UK, the Financial Reporting Council, auditors and independents. MHCLG has observer status on this Board.


4.    The Code applies to principal councils, police and crime commissioners, chief constables, fire and rescue authorities, the Greater London Authority, mayoral combined authorities, passenger transport executives and national parks authorities in England. It also applies to similar authorities in Wales, Scotland and Northern Ireland, although the legislative framework for these authorities is different and they are outside the scope of this Review. The Code does not normally apply to subsidiary companies consolidated into local authority accounts. Such companies use the applicable private sector accounting framework.


5.    The Code is updated annually and a new edition is published each financial year.  It is not a free document. Purchasing the 2019-20 Code from CIPFA costs £340 (hard copy) or £710 (online copy). CIPFA’s sales numbers demonstrate that not every local authority purchases a new Code for every financial year.


6.    The Code does not apply to parish councils, ports authorities or independent drainage authorities with gross income and expenditure of less than £6.5m per annum (which is currently all of them). The accounting and governance framework for these authorities is set by an organisation called the Joint Panel on Accountability and Governance (JPAG),

which comprises representatives of the associations for each type of smaller authority, auditors active in the sector, the National Audit Office, the Smaller Audits Appointments Authority Ltd and MHCLG. Smaller parish councils fill in a simplified financial return on a receipts and payments basis. Further discussion of smaller authorities is included in Chapter 9.

Format of local authority accounts

7.    The first thing that is noticeable when looking at local authority accounts is their length. Table 2 compares the length financial statements section from the 2018-19 annual reports of five local authorities selected at random to the financial statements section from the 2018 annual reports of two large and complex private sector corporations.


Table 2: Financial Statements – example of number of pages


Net General Fund Service Expenditure

Financial Statements Length (pages)20

Bristol City Council



Fenland District Council



Leeds City Council



Richmondshire District Council



Merseyside PCC



Royal Bank of Scotland PLC







8.    The second key aspect of local authority accounts is that they look different to central government and private sector accounts. All local authority accounts have two sector specific primary statements. In addition to this, some authorities are required to produce supplementary accounts.


9.    Table 3 shows the primary statements and supplementary accounts that the user can expect to find in a set of local authority accounts.


Table 3: Local Authority Accounts – Primary Statements and Supplementary Accounts (local authority specific statements in red)



Comprehensive Income and Expenditure

Statement (CIES)

Summary of the resources generated and consumed by the council on an accruals basis.

Shows gross and net expenditure by service area and other income and expenditure incurred by the council.

Movement in Reserves Statement (MIRS)

Shows how the movement in reserves in the Balance Sheet is reconciled to the CIES deficit and what adjustments are required to be charged to the General Fund balance for

Council Tax setting purposes.

Balance Sheet

Sets out the Council’s financial position at the year end.

Expenditure and Funding Analysis


Summarises the annual expenditure used and funded by the Council together with the adjustments between the funding

and accounting basis to reconcile with the CIES.

Cashflow Statement

Summarises the inflows and outflows of cash for revenue and capital transactions during the year.


20 Number of pages counted does not include annual report, governance statement or audit report

Collection Fund Account21

-     Billing authorities

Agent’s statement that reflects the statutory obligation for billing authorities to maintain an account showing collection of Council Tax and National Non-Domestic Rates (NNDR) and

the distribution of these taxes to precepting authorities.

Housing Revenue Account (HRA)

-     LAs with social housing stock

Local authorities are not allowed to cross subsidise provision of social housing from general taxation or vice versa. The HRA shows the major elements of expenditure on social

housing and how these costs are met.


10.  The statements referred to above are supported by Accounting Polices and Notes to the Accounts. Many of the notes are those required by accounting standards. However, the local authority specific primary statements have local authority specific notes.

The balanced budget requirement and statutory adjustments

11.  The key financial control in local government is the balanced budget requirement. Every local authority is required to approve a balanced budget by either 1 or 8 March before the start of the financial year to which it relates. The calculation that local authorities are required to make is set out in primary legislation. It can be summarised as:



Net service expenditure                       (x)

NNDR & grant income                         x

Other income/expenditure                  x/(x) Appropriations from/to reserves x/(x) Council tax requirement                                            x


12.  The balanced budget calculation has a lot to recommend it. The fact that full council or equivalent passing the balanced budget makes the council tax charge for the coming year lawful provides a strong incentive to set and approve a balanced budget every year. Local authorities are also required to maintain a self-assessed level of general fund reserves commensurate with sound financial risk management. When a local authority overspends it will need to generate additional income or will need to utilise reserves, which will mean that there is less resource available to support the following year’s budget.


13.  There are a couple of issues with the calculation. Firstly, it was designed in 1992, prior to the introduction of accruals accounting in the local authority sector; and secondly, as the specific calculation is set out in primary legislation, changing it would require including amending clauses in an Act of Parliament covering an appropriate topic.


14.  Following the adoption of accruals accounting by the local authority sector and as International Financial Reporting Standards (“IFRS”) have continued to develop, successive government have sought to protect council tax payers from accruals movements that do not have an immediate impact on the costs of service delivery through means of statutory overrides.




21 Districts and Unitary Authorities including London Boroughs collect Council Tax and NNDR. They are known as ‘billing authorities’. Taxes collected are shared between billing authorities and other authorities with a right to a share of those taxes (known as ‘precepting authorities’) in proportions set out in statute.

15.  The most significant of these adjustments relates to depreciation. Local authorities are required to charge depreciation on assets in the same way as any other entity. They then reverse out the depreciation charge in the EFA and replace it with a prudent provision for the debt taken out to acquire assets (Minimum Revenue Provision).


16.  The adjustments process has two consequences. Firstly it greatly increases the length of local authority accounts as in addition to having between two and four additional primary statements (all with their own notes), the accounts report some transactions on both an accruals and a funding basis and include notes reconciling the two; and secondly, neither the CIES or the Balance Sheet show the true financial position of an authority. To understand that position it is necessary to understand how the outturn reported in these statements reconciles to the basis on which the balanced budget calculation is made.


Recent developments in the sector

17.  The length and difficulty in understanding local authority financial information has been a subject of discussion for some time within the sector. For example, CIPFA has produced a strategy discussion paper on whether the current Accounting Code supports the production of useful information in a cost-effective manner.


18.  There has also been a push to put more useful summary information in the narrative section appended to the front of the financial statements. However, as highlighted in Chapter 2, this information is not subject to audit. All the auditor is required to do is to read this narrative information to ensure it is not inconsistent with the accounts or their understanding of the business.


Q36. Do local authority accounts allow the user to understand an authority’s financial performance and its financial resilience? If not, how could they be revised to be more understandable? What information could be presented to enable users of the accounts to understand whether the financial position of a specific LA is getting better or worse?

Q37. The UK Government is committed to maintaining IFRS based accounting for the UK public sector. Given this, how would you recommend resolving the mismatch between the accruals and funding basis to improve the understandability of local authority accounts?

Q38. Do you think that summary financial information should be reported in the annual report section of the accounts? If so, on what basis and should this information be covered by the financial audit opinion?

Q39. If you think that summary financial information should be reported in the annual report section of the accounts, should it be presented with performance information? If so, what performance information would be of most interest to stakeholders?

Chapter 9: Other Issues

Inspection of and objections to items in the accounts

1.    Inspection and objection rights are intended to allow local residents to hold their councils to account. Local authorities are required to publish their unaudited accounts on the council website for a continuous 30 day period that must include the first ten days in June. Local residents, interested persons and journalists can inspect the accounts and related documents. Those on the electoral register can also ask questions about the accounts produced by their local LA and raise an objection with the external auditor to a transaction therein.


2.    The auditor is required to consider all objections and if they have merit, to launch an investigation. Investigations can lead to a Public Interest Report or to an application to the courts to declare a transaction unlawful. If the matter does not warrant either of these outcomes, it may still be a matter that the auditor may wish to raise with the authority or to consider as part of their routine planned audit work. Where an auditor investigates they will write to the person who raised the objection setting out the results of their investigation. They do not copy this letter to the LA, MHCLG or any other party.


3.    There has not been any objection on accounts has led to a Public Interest Report or an application to the courts since the introduction of the current regime. Anecdotal evidence suggests that there are two types of objections. Some local residents have specific issues with their local authority’s expenditure on one or more items and raise objections on the same matter every year. The second type of objection is where special interest campaigns have tried to get local residents to object to the same item in accounts across a number of local authorities. This type of objection has been made in relation to PFIs and Lender Option Borrower Option loans (LOBOs).


4.    There is no central record of how many objections have been raised by authority, what percentage of these have led to investigations and/or recommendations to management, or what the costs of this process have been both for auditors and local authorities. Where objections have been raised about a sector-wide, for example LOBOs, they have taken a long time to resolve and in for some LAs this has held up completion of the audit process.

Changes in local authority business models

5.    As alluded to elsewhere in this call for views, the business models adopted by local authorities have seen significant change since the current audit regime was introduced.


6.    The first significant change is the general power of competence introduced in the Localism Act 2011. This allows local authorities to set up wholly-owned subsidiaries, which are allowed to do anything a legal person can do. Before 2014-15, the general power of competence was not widely used. However, in recent years local authorities have increasingly used this power to set up subsidiaries covering a large range of business activities. Thinking about the impact general power of competence companies have on the financial and vfm audit opinions poses a challenge for auditors, as irrespective of whether they are material enough to require group accounts, they can expose local authorities to financial and reputational risk or divert management attention away from core service delivery.

7.    The second significant change relates to wider partnership working – how local auditors can cooperate effectively with each other when reporting on partnership working. Partnerships are often non-statutory arrangements in which local auditors can only report on the arrangements in place within the individual bodies they audit. Some of these are set up by agreement between local authorities. Others such as Clinical Commissioning Groups and some Local Enterprise Partnerships have been set up as a result of government policy.


8.    The final significant change is the increase in borrowing to fund commercial property acquisition (“commercialisation”). In some cases local authorities have designed commercial property strategies purely to generate a return. However, many of these strategies will also be focused on regeneration and increasing local economic activity. Commercialisation provides a challenge for the financial audit partly due to the materiality considerations discussed in Chapter 5 and partly due to the auditor’s need to consider and understand appropriate laws and regulations. It poses a challenge for the vfm audit opinion partly because the auditor will need to check whether an authority has appropriate systems in place to manage this activity and partly because of the risk of diverting management attention.

Smaller Authorities

9.    As noted earlier in this call for views, the local authority financial reporting and audit framework includes smaller authorities. Smaller authorities, also known as “Category 2 authorities”, are parish councils, drainage authorities and similar with gross annual income and expenditure not exceeding £6.5m. Smaller authorities with gross income or expenditure of more than £200k are required to prepare a simplified accruals Annual Governance and Accounts Return. Those with income and expenditure of less than

£200k can prepare a receipts and payments Annual Governance and Accounts Return. Those with no income and expenditure are allowed to send a statement to their auditor declaring themselves to be exempt from preparing accounts.


10.  Smaller authority Annual Governance and Accounts Returns are subject to a limited assurance review. Undertaking a limited assurance review primarily involves performing inquiry and analytical procedures, thereby enabling the auditor to reach a conclusion on whether anything has come to their attention that indicates that the accounts are not true and fair.  The conclusion provides some assurance to users of the accounts but less than a full audit certificate.


11.  The first issue the Review wants to explore is the adequacy of this opinion for all smaller authorities. As services and assets are transferred to them a small number of parish councils are approaching the £6.5m threshold. Given the sums of money they have stewardship for, questions have been asked about whether they should be subject to a level of external review greater that a limited assurance engagement. One of the issues with this suggestion is that the next level of assurance recognised by professional standards bodies is a full external audit, and legislation already allows Category 2 authorities to ‘opt up’ if they so wish.


12.  The second issue the Review wants to explore is the inspection and objection regime for smaller authorities. A few smaller authorities receive a large number of objections on each set of accounts. As auditors are allowed to charge additional fees to recoup their

costs in responding to objections, the financial burden on smaller authorities whose accounts are objected to can be disproportionate, potentially leading to an increase in Council Tax bills for local residents. The Review is interested in suggestions in the way this burden can be reduced, whilst retaining the right for all local residents to inspect and object to items of account.

Q40. For larger authorities, does the inspection and objection regime allow local residents to hold their council to account in an effective manner? If not, how should the regime be modified?

Q41. Is more guidance needed to help auditors assess the impact of significant changes to common business models? If so is this guidance needed to support the financial audit, the vfm audit or both?

Q42. Is the financial reporting and audit framework for larger category 2 authorities appropriate? If not, what additional information should be subject to audit/assurance and what would be the cost implications of this?

Q43. For smaller authorities, does the inspection and objection regime allow local residents to hold their council to account in an effective manner and is the cost of processing and responding to objections proportionate? If not, how should the regime be modified?

Appendix 1: About this Call for Views

Who is this for?

1.    The Review would welcome views from any respondents with an interest (direct or indirect) in local authority audit and financial reporting.

How to respond

2.    This call for views closes on 22 November 2019.

3.    Please send any response to

4.    If you do not have access to email, you can write to Redmond Review Secretariat 2nd Floor Fry Building, 2 Marsham Street, London, SW1P 4DF.

Disclosure of the information you provide

5.    Because information provided in response to this call for views will be received by the Review Secretariat which is hosted by the Ministry of Housing, Communities and Local Government, that information may be subject to publication or release to other parties or to disclosure in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 2018 (DPA) and the Environmental Information Regulations 2004).

6.    If you want information you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, amongst other things, with obligations of confidence.

7.    In view of this it would be helpful if you could explain to us why you may regard the information you have provided as confidential. If we receive a request for disclosure of the information, we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances.

8.    An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding.

Personal data

9.    The following is to explain your rights and give you the information you are entitled to under the Data Protection Act 2018.

10.  Please note that this section only refers to your personal data (your name address and anything that could be used to identify you personally) not the content of your response to the consultation.

The identity of the data controller and contact details of our Data Protection Officer

11.  MHCLG is the data controller. The Data Protection Officer can be contacted at

Why we are collecting your personal data

12.  Your personal data is being collected as an essential part of the consultation process, so that we can contact you regarding your response and for statistical purposes. We may also use it to contact you about related matters.

Our legal basis for processing your personal data

13.  The Data Protection Act 2018 states that, as a government department, MHCLG may process personal data as necessary for the effective performance of a task carried out in the public interest. i.e. a consultation.

With whom we will be sharing your personal data

14.  Your data will be shared with the Independent Reviewer.

Your rights, e.g. access, rectification, erasure

15.  The data we are collecting is your personal data, and you have considerable say over what happens to it. You have the right:

·         to see what data we have about you

·         to ask us to stop using your data, but keep it on record

·         to have all or some of your data deleted or corrected

·         to lodge a complaint with the independent Information Commissioner (ICO) if you think we are not handling your data fairly or in accordance with the law.

16.  You can contact the ICO at, or telephone 0303 123 1113.

17.  Your personal data will not be sent overseas.

18.  Your personal data will not be used for any automated decision making.

19.  Your personal data will be stored in a secure government IT system.

Appendix 2: Independent review into the arrangements in place to support the transparency and quality of local authority financial reporting and external audit in England

A.     Purpose

The Secretary of State for the Ministry of Housing, Communities and Local Government (MHCLG) invites Sir Tony Redmond to conduct a Review of the arrangements in place to support the transparency and quality of local authority financial reporting and external audit including those introduced by the Local Audit and Accountability Act 2014 (the Act). The Review will not look at broader issues of local authority finances and sustainability.

B.     Review objectives

The Review will examine the existing purpose, scope and quality of statutory audits of local authorities in England and the supporting regulatory framework to in order to determine:

·         Whether the audit and related regulatory framework for local authorities in England is operating in line with the policy intent set out in the Act and the related impact assessment

·         Whether the reforms have improved the effectiveness of the control and governance framework along with the transparency of financial information presented by councils;

·         Whether the current statutory framework for local authority financial reporting supports the transparent disclosure of financial performance and enables users of the accounts to hold local authorities to account; and

·         To make recommendations on how far the process, products and framework may need to improve and evolve to meet the needs of local residents and local taxpayers, and the wider public interest.

C.     Scope

The review’s scope is taken to include the objectives and context included in these terms of reference.

In practice, this means the review is likely to focus on the following questions;

·         Have the financial savings from local audit reforms been realised?

·         Is there a more accessible audit market and has there been an increase in audit providers?

·         Have audit standards been maintained or improved, and not been compromised?

·         Is there an ‘expectation gap’ in what external audit provides? What is the nature of the gap and how can it be filled?

·         Are auditors properly responding to questions or objections by local taxpayers?

·         Are auditors using their reporting powers in an appropriate way?

·         Are audit recommendations effective in helping local authorities to improve their financial management?

·         Are councils responding to auditor recommendations in an appropriate manner?

·         Whether local authority accounts report financial performance including use of resources against budget in a manner that is transparent and comprehensible to council tax payers and the general public?

·         Does the financial information provided in local authority accounts facilitate scrutiny by local taxpayers and by the local press?

The financial reporting and audit framework for Clinical Commissioning Groups, NHS Trusts and Foundation Trust and special trustees for hospitals is outside the scope of this Review. This is because these bodies have significantly different statutory bases and governance frameworks to other bodies covered by the Act.

D.     Context

Local Government in England is responsible for 22% of total UK public sector expenditure. It is essential that local authority financial reporting is of the highest level of transparency to allow taxpayers to understand how their money is being spent.

The responsibilities for the framework within which local authority audits are conducted is the Local Audit and Accountability Act 2014. It gave effect to manifesto commitments to abolish the Audit Commission and its centralised performance and inspection regimes and put in place a new localised audit regime, refocussing local accountability on improved transparency.

Now the Act has been fully implemented, the Government is required to review its effectiveness. This review will meet MHCLG’s commitment to undertake a post implementation review of the audit framework and financial reporting elements of the Act. The Government wants to use this opportunity to step back and review the effectiveness of the local authority financial reporting and audit regime. Developments in the sector such as the growth of commercial investment activity have led to a perceived widening of the ‘expectation gap’; that is, the difference between what users expect from an audit and the reality of what an audit is and what auditors’ responsibilities entail. There may also be an expectation gap between the information that users of local authority accounts believe is needed and what is available to them through audited financial statements or other publicly available information.

Other elements of the Act, including openness transparency of council meetings, the local authority publicity code and intervention powers are outside the scope of this Review.

MHCLG will undertake a post implementation review of those elements of the Act in house.

This Review has assumed greater significance due to developments elsewhere. BEIS commissioned Sir John Kingman in April 2018 to carry out a review into the role of the Financial Reporting Council and, in February 2019, Sir Donald Brydon to carry out a review into the quality and effectiveness of statutory audit (reporting in December 2019). In addition, the Competition and Markets Authorities’ 18 April 2019 report recommends changes to the statutory audit market that will impact on local audit. Alongside this, there have been three recent PAC hearings on: the Financial Sustainability of Local Authorities (Nov 2018) Local Audit in England (Jan 2019) and Local Authority Governance (Mar 2019). Finally, as part of its legal duties, the National Audit Office is required to review and replace the current Code of Audit Practice by April 2020.

E.     Governance

The review will be led by Sir Tony Redmond and report to the Secretary of State for Communities and Local Government

The Independent Reviewer will be supported by an Advisory Group that will advise on the direction of the review and sources of evidence and will help to scrutinise and challenge emerging findings and recommendations.

F.      The Review Secretariat

There will be a small dedicated Review Secretariat acting in support of the Independent Reviewer.

G.    Stakeholder Engagement

The Review will undertake engagement with a wide range of stakeholder groups, including those representing the interests of local authorities, the accountancy profession, and local residents and taxpayers in order to fully understand the range of issues and to ensure constructive challenge.