September 30, 2022

Local audit and financial reporting: let’s take back control

Suresh Patel of Mazars suggests three steps auditors and council finance teams should take to help get financial reporting and local audit back on track.

Following my recent appearance on a panel at the CIPFA conference, I tried to think of an analogy that reflects the situation facing local government financial reporting and local auditing. As a movie buff, I can only think of movie titles. So far I have The Perfect Storm, Groundhog Day, The NeverEnding Story, and Terminator 2: Judgment Day. Believe it or not, there’s even a 2017 movie called “The Auditor”… I haven’t seen it so can’t comment, but I’m sure it’s thrilling.

Recently the Financial Reporting Council published its annual inspection reports on audits of some of the largest and most complex companies by the UK’s seven leading audit firms. Although overall audit quality has improved, two firms, including my own, were flagged as having unacceptable audit quality. Although these reports do not focus on local audits, it is clear from what has been published, reported and spoken that the current issues and challenges facing the audit profession in general and the local audit system in particular are not going away anytime soon.

There’s also a risk that we’ll all unreasonably look to the new leader of the system (ARGA – the Audit, Reporting and Governance Authority) as the golden ticket that will open the doors to the Wonka Chocolate Factory (my last movie reference!).

I wonder if we want to reject IFRS as the basis for good quality financial reporting in local government, not least because it works for much of the rest of the public sector, including the NHS and central government.

Don’t throw away IFRS

So what to do? Can we do anything to reverse the trend? What is under our control?

I saw a recent Room151 article from an experienced Section 151 officer who suggests that we are all looking at the wrong end of the telescope (great analogy) and that we should reduce “the demand for a meaningless level of detail ” in the accounts of the local authorities. I don’t disagree with the sentiment, but I would wonder if we want to throw in IFRS as the basis for good quality financial reporting in local government, not least because it works for much of the rest of the public sector, including the NHS and central government.

In my mind, there are three things that auditors and finance teams can control to start reducing the challenges we face so that we can start to see some light at the end of what has been for some time a very dark tunnel.

  1. Be realistic and honest about what is achievable

Auditors and finance teams need to be open and honest with each other about what is achievable and in what time frame. This applies both to the preparation of the statement of accounts and all relevant supporting documents and to the timing of the audit process with an audit team provided with the appropriate resources. Ideally, this open and honest dialogue will make it possible to set deadlines recognized by both sides as deliverables. This dialogue must be regular and with the right level of seniority.

  1. Throw away the “meaningless detail”

To steal a sentence, finance teams should use the scope of the local authority accounting code of practice to review the materiality of disclosures and the adequacy of accounting policies so they can narrow down some meaningless details. Auditors should work with preparers to provide an opinion on the relevance of what is not included or disclosed in less detail. Auditors should also take advantage of the advantage of consulting many different versions of local authority accounts to highlight good practice in a concise and meaningful way.

While it’s easy to point fingers, I sincerely believe that auditors and finance teams are working towards the same goal to get financial reporting and local audit back on track.

  1. Manage the project process

With the resources of auditors and finance teams remaining a challenge, we all need to make the most of what we have by helping our teams clarify what they need to do, how and when. And we should actively monitor and manage progress. We should apply detailed and robust project management techniques so that auditors and finance teams have visibility into the progress of accounts and the audit process, can see the critical path and take corrective action quickly when things start to derail. The process will not work effectively without strong project management from both teams.

While it’s easy to point fingers, I sincerely believe that auditors and finance teams are working towards the same goal to get financial reporting and local audit back on track. This may take longer than we all like, but rather than waiting for system reform or another task force, at least the three actions above are within our grasp and within our control.

Suresh Patel is a partner at Mazars.

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