The Levelling Up, Housing and Communities (LUHC) Committee has published 24 written evidence submissions from local authorities and other stakeholders ahead of the first evidence session of its inquiry into financial reporting and audit in local authorities on Monday (15 May).
The submissions cover issues concerning the users and uses of local authority accounts and audit, the understandability and accessibility of local authority accounts and audit, addressing findings in audits, and making local authority accounts meet the needs of users better.
In evidence submitted by the Local Government Association, the organisation suggested three measures to make the “best use of audit time and finance officer time to finalise accounts quickly”.
These included: amending the requirement on auditors to use “most up to date figures” for pension valuations as at 31 March 2022 and accept figures used in draft accounts; for councils with several years outstanding, to concentrate audit effort on the most recent years; and to deprioritise a value for money statement for any year except the most recent.
In its written submission, Manchester City Council called for “a stepped plan to clear the backlog” of local authority of audits and accounts and “some pragmatic solutions to stop the constant development of post-balance sheet events”.
The authority also called for realistic deadlines for 2022/23 to enable the work to be managed and delivered, and a more rounded approach to how local authority audit is regulated “that doesn’t just focus on the balance sheet and looks at financial resilience and risk”.
Horsham District Council took the view that local accounting requirements are not proportionate as “it takes a small team of council officers two months to bring the accounts together in the current 54-page format”. This is despite officers automating some sections of the statements so that the data is directly derived from the ledger system, the council said. “Other detailed sections still require significant manual intervention, and others, such as pension fund information, require a reliance on third party data and therefore their timings.”
The new local audit system leader role should include enforcing a return to the September audit opinion deadline, the council added. “Ultimately, officers want to present a simple, understandable set of statements to audit by 31 May and complete the audit before the information relating to the audited year becomes distant, and before the next round of budget setting in September. The external auditor would in turn be able to audit the statements more effectively, focusing on areas of higher risk in more detail, and following their auditor’s nose. The public would in turn be able to better understand their local authority accounts, alongside the regular financial and performance information.”
Labour MP for Sheffield South East Clive Betts is the chair of the 11-person Levelling Up, Housing and Communities Committee
Knowsley Council noted that the government’s requirement to revert to a statutory deadline of 31 May for the publication of draft accounts was causing “significant and unnecessary pressure for local authorities at a time when the volume and complexity of the work involved is continuing to increase”. A proposal from many local authorities that the previous ‘extended’ deadline of 31 July should be continued was rejected by the government.
The council was also critical of local government funding cuts and its particularly significant impact on the most deprived areas of the country. “Any future local government funding settlements must be based on an appropriate needs-based methodology which effectively recognises need and levels of deprivation within an area,” the council stated. Funding must also be “allocated on a multi-year basis in order to ensure local authorities can plan in a sustainable manner”.
Tim Cutler, lead partner for local government audit at KPMG, stated that the “sheer size and complexity” of local authority accounts would discourage all but the most financially literate stakeholders from reviewing them. “This clearly does not encourage engagement with local authority finance,” he said. “We would endorse an additional simplified statement of accounts (or a simplification within the full accounts) more aligned to International Financial Reporting Standards (IFRS) which contains the key disclosures familiar to regular readers of financial accounts. This could be augmented by more consistent reporting of more prospective financial and operational indicators which would encourage more engagement by local taxpayers.”
Cutler also suggested that any audits subject to delays over 18 months beyond the end of the period being assessed “should simply be concluded by reporting issues by exception rather than assessing arrangements and writing commentary which may no longer be valid or useful. This comment could equally be applied to the backlog of outstanding and historic financial statement audits which will have little benefit to stakeholders if completed several years later.”
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However, written evidence submitted by CIPFA, the professional body for people in public finance, opposed calls to simplify and streamline local government accounts.
It stated: “CIPFA is of the view that calls for simplification most often seek to align the statutory framework for council tax/budget setting process. This is not an accrual accounting framework and for proper reporting of resources and their use, CIPFA could not recommend this approach.”
CIPFA stated that a discussion is needed to understand what streamlining or simplification of accounts is intended to mean.
The evidence said: “CIPFA is keen to ensure that the focus is on accountability to council taxpayers and service users and council members as their representatives as the primary users of the accounts.
“It therefore considers that the focus should be on developing better reporting so that the accounts and the statements that accompany them are able to convey their key messages to these primary users.”
The written evidence submissions from local authorities and other stakeholders address the uses and limitations of financial reporting and audit, while providing recommendations for improvement
Professor Laurence Ferry, of Durham University and Rutgers University, and Dr Henry Midgley, of Durham University, shared a joint statement in which they suggested “that a local public accounts committee could assist in providing an assessment of the local accounts for local voters and providing a filter between the auditor and the local voter”. The pair also said that local audit needs a national system in which data is “shared, published (where appropriate) and explained comparable to what happens elsewhere in the UK”.
In its written statement, the Department for Levelling Up, Housing and Communities outlined the work it had already done to bring “marked change to the financial reporting and audit system”. The department said it recognised that further action may be required and was “therefore committed to considering any recommendations or conclusions the committee brings forward”.
The LUHC Committee’s first evidence session of its inquiry into financial reporting and audit in local authorities will question Sir Tony Redmond, author of the Redmond Review; Neil Harris, director of local audit at the Financial Reporting Council (FRC); Sarah Rapson, deputy CEO and executive director of Supervision at FRC: and a panel of academics and experts.
The cross-party group of MPs will question the witnesses on topics relating to the purpose and understanding of local audit and the impact of local authority accounts and audit findings.
The session is also like to explore the role of audit in local accountability and democracy and the extent to which accounts provide a clear picture of the financial sustainability and resilience of a local authority.
MPs will also examine the views of witnesses on whether there is a crisis in audit in England’s councils and on the future role of the Auditing, Reporting and Governance Authority (ARGA), which will replace the FRC.
The LUHC audit inquiry follows a recent Grant Thornton report that suggested increased government intervention could address the delays to local government audit that have beset the sector in recent years. The report called for intervention in councils where there are significant failures in reporting and an unwillingness to take “necessary steps to produce robust financial statements”.
The full written evidence submissions can be read here.
Reporting by Jason Holland and Aysha Gilmore.
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