By Don Peebles, CIPFA Head of Policy & Technical
Radical changes to local government audit arrangements and to financial reporting all feature in Redmond report, published yesterday.
Back in July 2019, when the announcement was made about what has since become known as the Redmond Review, things were different. Very different. The UK was still in the EU, Theresa May was still in office, James Brokenshire MP was Secretary of State for Communities and Local Government and the world had yet to hear about a city in China called Wuhan. Since then, our world has adapted to a new global challenge and any focus on external audit and financial reporting now seems a long time ago.
Now that the report has landed however, it resonates strongly at a time when vast amounts of public money is currently supporting our economy. Few could argue against the idea that modernising how we gain public assurance from public audit and financial reporting has never been more important.
That means that the much-delayed report - delayed because of a general election and global pandemic - has arrived at a time when local government, like the rest of the world, is being forced to change.
Local audit is the initial focus of the report which describes how the absence of the Audit Commission (and by extension, the district audit service) has had a direct impact on audit quality in several ways that are not always evident. The report challenges the number of regulatory bodies now involved and draws attention to their lack of local government focus. The professionalism of auditors is (rightly) not challenged by Sir Tony but he does identify serious concerns in the audit market and challenges the effectiveness of the role of public sector audit. His strongest observation however is the damning conclusion that ‘..current local audit arrangements fail to deliver’.
His solution is a radical one. The current disparate responsibilities of four separate bodies are recommended to be transferred to a single new body called the Office of Local Authority Regulation (OLAR). The proposed new body would be expected to procure and manage local audit contracts, manage a code of audit practice and both monitor and regulate local audit. The report makes it clear that the new body will be small and, by design, distinguishable from the previous Audit Commission. The creation of a new audit body would join up an overly fragmented structure for local audit in England and ensure a sustainable future for local public audit that is presently at risk.
The report also recognises that at a granular level, the skills of auditors must be more robustly supported. His conclusion comes from the recognition that of the five chartered accountancy bodies, only CIPFA focuses upon the public sector and only one of the firms uses CIPFA to train its staff. The report also hints at a drive for efficiency and support for external audit with a new role for internal audit. In this new and changing world of local government, the report offers a mild challenge to the effectiveness of audit committees and how they report and act on the work of the auditor.
Debate on the expectation of audit is framed in the context of a more modern concept – sustainability. It is in the exploration of what auditors could and should examine in relation to sustainability of local authorities that the report links the debate to the financial statements.
The report acknowledges that local authorities adhere to high global standards in financial reporting. It also expresses how commentators on local authority financial statements have increasingly commented on their length and complexity. The report uses the term ‘impenetrable’ and suggests that, as a result, the financial statements are not transparent. The modern local authority is of course a complex organisation and simplicity in its financial story is not readily achieved. Although we must draw a distinction between complexity and a lack of transparency, the report has sought to strike a balance between adhering to standards and finding a way to provide a revised version of financial information to the public. His solution is this; a separate but shorter financial report. The proposal is to present salient financial information to stakeholders in a more concise format in what is described as a simplified statement of service information and costs. Notably, the report picks out some current issues such as sustainability and exposure to commercial investments, for greater transparency in the new report.
So, new audit arrangements and a new financial report form the basis of the Redmond Review. Local government commentators will no doubt take time to digest the report. As for the public? The opportunity for greater assurance and access to a more readily accessible financial report will be of appeal. The one note of caution comes from Sir Tony himself when he identifies that primary legislation is essential to enable his vision to be achieved. It is now the decision of government on whether the necessary parliamentary time will be applied to realise that vision. Meanwhile, the debate on the reset of the process of assurance and of how financial reports are presented will commence.
This article first appeared in Local Government Chronicle.