Comments from ACCA to the Department for Communities and Local Government, December 2013.
Generally, in the absence of the Audit Commission, we are pleased to see provisions and regulations for a new sector led body making audit appointments for small local councils below a £6.5million threshold. Given that the proposed body will undertake some of the responsibilities currently being undertaken by the Audit Commission we believe that it will be critical that the transitional arrangements are managed effectively.
As reported in our previous responses to the development of the new audit framework for local government, we are of the view that audit committees, as opposed to the introduction of audit panels, offer the best solution for dealing with the appointment, removal and resignation of auditors. This would align governance arrangements’ with those that operate in the private sector and would also prevent an additional layer of bureaucracy being placed on local authorities. We believe that the provisions in the Bill and secondary legalisation should be amended to reflect this.
We take the view that it is important that there should be no artificial barriers put in place to prevent statutory auditors from any UK professional accountancy body from conducting local government audits. In respect of an application by a professional accountancy body for its qualification to be recognised as an appropriate qualification for local audit, we are concerned that regulation 3(3), Part 2, seems to suggest such an application could be refused by the FRC on the basis of ‘the existence of one or more other qualifications which have been or likely to be recognised in accordance with these Regulations’. If any of the UK professional accountancy bodies’ qualifications meet these requirements it should be recognised in the regulations. In our view, the FRC should not be restricting entry into the local auditor market in this way. We would also point out that there does not appear to be an equivalent restriction in Schedule 11 of the Companies Act 2006.
1. The Government does not intend to provide for smaller authorities to opt-out during a contract period, for the reasons given above. However, we would welcome comments on any circumstances under which a smaller authority should be able to opt-out of the specified person’s regime once the deadline for opting-out of a contract period has expire.
There could be a situation that arises where the income for a small local council falls below a £25,000 threshold during the duration of the contract. As a result the local council would be exempt an audit under Clause 5(6). A regulatory provision may need to be added to accommodate this situation.
2. We would like to understand if there are any circumstances in which the specified person should be able to forcibly opt-out a smaller authority. If this is allowed in any circumstances, what safeguards should there be to ensure that the authority is treated fairly and has sufficient time to appoint its own auditor in compliance with the law?
As far as we are aware there have been no instances of forcible opt outs under the Audit Commission’s regime and therefore cannot think of any reason why this should be any different with the proposed sector led body.
3. Should the specified person be required to publish the record of the names of opted-in and opted-out authorities, and, for opted-in authorities, to publish the names of the appointed auditors?
We agree that the specified person should be required to publish a record of the names of opted in and opted out local authorities and the names of appointed auditors. In our view this is an important aspect of accountability and good governance.
The record should also include details of audit opinions and qualified audit opinions, which should be reported on an annual basis to the Department for Communities and Local Government. The record will be important for identifying collective areas of financial and governance weakness and allow the process of audit to adapt and change overtime to help councils improve. Lessons should be learnt from the audits of small councils in Wales where one in five councils recently received qualified audit opinions. The poor results are resulting in a change of audit approach.
4. In the event that a smaller authority opts-out of the specified person’s appointment regime but then fails to appoint an auditor, should the Secretary of State be able to order that the authority is opted-in and require the specified person to appoint an auditor?
We agree that the Secretary of State (SoS) should intervene when a small authority opts out and fails to appoint an auditor.
5. Do you have any observations on the draft regulations for smaller authorities?
No further observations.
6. Are these the right criteria for suspension and the right process for exemption?
We agree with the exemption polices set out in clause 6(1).
7. Do you have any comments about the draft regulations on auditor panels and/or the resignation and removal of auditors?
We strongly believe that the provisions outlined in both the Local Government and Accountability Bill and accompanying secondary legislation should be amended to replace audit panels with audit committees. In the majority of instances local authorities have audit committees that oversee the relationship with the auditor. This is in line with what happens in the private sector (the UK corporate governance code says that boards should establish an audit committee).
The establishment of audit panels will potentially confuse existing and well-established governance arrangements for audit committees and scrutiny committees. The proposed arrangements could lead to a disconnect between the council, audit committee and audit panel, as well as increasing bureaucracy. A change would align this to health body’s arrangements and bring more consistency across the Bill. We would suggest making an audit committee a mandatory requirement in the Bill.
8. On the resignation and removal of an auditor, does three months give a reasonable period for relevant authorities to make a new appointment?
A three month period for the resignation and removal of the auditor and new appointment appears reasonable. However, as stated in our response to Q7, the resignation and removal of auditor should be the locus of the audit committee.
9. Do you have any comments about the draft regulations on auditor qualifications and major local audits?
10. Do the requirements in Part 2 of the regulations ensure a robust and appropriate qualification for local audit?
In answer to questions 9 and 10, we believe the draft regulations about the auditor qualifications and major local audits are broadly reasonable. We take the view that it is important that there should be no artificial barriers put in place to prevent statutory auditors from any UK professional accountancy body from conducting local government audits. In respect of an application by a professional accountancy body for its qualification to be recognised as an appropriate qualification for local audit, we are concerned that regulation 3(3), Part 2, seems to suggest such an application could be refused by the FRC on the basis of ‘the existence of one or more other qualifications which have been or likely to be recognised in accordance with these Regulations’. If any of the UK professional accountancy bodies’ qualifications meet these requirements it should be recognised in the regulations. In our view, the FRC should not be restricting entry into the local auditor market in this way. We would also point out that there does not appear to be an equivalent restriction in Schedule 11 of the Companies Act 2006.
11. Do the thresholds in Part 3 seem appropriate to capture the audits of significant local bodies?
The thresholds outlined in the draft regulations appear reasonable. However, it should be noted that because of the low numbers of significant spending local bodies, it will result in the same bodies being subjected to quality assurance time and time again. It will be important that a sensible quality assurance cycle is implemented.
12. Do you have any comments about these delegated regulations?
No further observations.
13. Do you have any comments on the arrangements for Public Interest Reports?
14. Do you have any comments about the provisions for financial management, internal control and internal audit?
15. Do you have any comments on the content of statements of account and the process for producing them?
We have no specific comments to make on questions 13, 14 and 15.
16. Do you have any comments on the bringing forward of the local government accounts timetable, or the practical issues a change would raise?
In our view the production of the whole of government accounts should be driving the timetable for local authority financial reports. Until the timing issue of finalizing local government accounts is resolved we will not be in a position to have timely government accounts. Local authorities have the processes in place and have a track record of reducing the timescales for the production of accounts, therefore, we do not foresee any major difficulties in reducing the timescales further.
17. Do you have any comments about Options 1 and 2, or any other options for that matter which would align inspection periods more closely?
18. What is the level of take up of these rights? What information do local electors access through these rights? What use is made of this information?
In answer to questions 17 & 18 the public rights and audit processes set out in Part 6 of the draft regulations appear reasonable. We have no preference based on the options presented for the periods that accounts can be inspected by the public. In our experience the take up has been generally low and there are now other mechanisms by which the public can challenge a council’s accounts, such as by initiating freedom of information requests.
19. Do you have any comments about additional publicity for the inspection period?
20. Do you have any other comments on the Accounts and Audit regulations for principal bodies?
We have no specific views on questions 19 and 20.
21. Do you have any comments on the content of Accounts and Audit Regulations for smaller authorities?
No further observations.