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Since the collapse of Carillion in 2018, I have produced two reviews, a competition investigation and a white paper, totaling around 700 pages, into efforts to improve auditing in the UK.
However, this list is not complete. Feel sorry. It does not include Sir Tony Redmond’s 2020 review of local government audits, another 85 pages of which may be the biggest mess.
Even in the midst of a pandemic, those numbers are mind-boggling. Only 9% of local authorities in England were able to obtain an audit opinion on their accounts in 2020-21 by the September deadline.
The following year, only 12 per cent of audits were completed due to extended deadlines, a figure Minister Lee Rowley said in July had reached 27 per cent, resulting in a backlog of 520 sets of accounts for 2015-16.
This market failure has been festering for five years, rendering local authorities’ vital inspection and early warning systems costing £100bn a year ineffective.
This would have been bad even under the best of circumstances, but that’s not the case now. Woking, who is deeply in debt from investing in commercial property, took emergency financial measures in June. It follows Croydon and Thurrock, which issued so-called Section 114 notices last year, blocking non-essential spending following venture capital and poor governance.
The financial situation of local authorities in England is becoming increasingly dire. Birmingham City Council this week issued its own section 114, throwing the country’s largest authority into emergency measures that often mean cutting and substantially increasing council tax throughout the year.
Cuts in central government funding, inflation, high energy costs and growing demand for services such as adult social care and support for the homeless are taking their toll on many parts of the country.
Sigoma, a group of 47 large city authorities, warned last month that a third of its members could declare effective bankruptcy this financial year or next. The Local Government Association estimates that UK councils face a funding shortfall of £3bn over the next two years just to maintain services.
In a way, it’s all interconnected. With central government funding dwindling, some councils have added complexity to their accounts by seeking more business opportunities or taking on more risk. Treasury departments may also be cut to preserve front-line services, slowing account preparation.
Second, local government auditing capacity is insufficient: since 2015, local government accounts have all been audited by private accounting firms, and the pressure to reduce fees has discouraged new entrants and investment.
The Public Accounts Committee said there were fewer than 100 “key” audit partners – auditors senior enough to sign off on the local authority’s accounts – and most of them were over 50. Agencies procuring public sector audit services had difficulty finding the required competencies in previous audits. Big players like BDO and Deloitte opted not to participate in this round, while KPMG re-entered the market.
The government is trying to break the impasse. But the solution is elusive. It said in July that local authorities and auditors have until September next year to complete overdue accounts, but their quality will pass: the regulator’s Financial Reporting Council will drop audit checks by 2021-22. It will only check where there is a clear “public interest”, probably the most extreme case.
There are still doubts that this will translate into lasting improvements.
Despite the deluge of reports and urgent recommendations following Carillion’s collapse, it appears likely that much-needed audit reform may once again be put on hold.
The FRC is still awaiting legislation to give it more powers, the Audit, Reporting and Governance Agency (Arga). Rather than creating a new agency, as Redmond suggested, the government proposed in 2020 to make Arga a “system leader” for local audits to coordinate a fragmented and troubled market. Since Arga doesn’t exist, the FRC is becoming a “shadow system leader” but doesn’t have all the power it needs. In fact, it is still awaiting a shadow mandate from the government.
The result appears to be an ad hoc regulator trying to correct a dysfunctional auditing market, overseeing strained local government finances and trying to deliver some absolutely vital services. It was a mess indeed.
Helen Thomas@ft.com
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