Consultation outcome

Addressing the local audit backlog in England: Consultation response

Updated 9 September 2024

Introduction

Between 8 February and 7 March 2024 the then Department for Levelling-Up Housing and Communities (DLUHC) consulted on amending the Accounts and Audit Regulations 2015 as part of measures to tackle the backlog of unaudited local body accounts in England.

The proposals consulted upon included setting a statutory backstop date to clear the backlog of unaudited accounts up-to-and-including financial year 2022/23. They also included setting backstop dates for financial years 2023/24 to 2027/28 to enable the local audit system to recover.

In accordance with section 32 of the Local Audit and Accountability Act 2014, there is a statutory duty to consult the following entities in relation to amendments to the Accounts and Audit Regulations 2015:

• the Comptroller and Auditor General
• such representatives of relevant authorities as the Secretary of State thinks appropriate, and
• the recognised supervisory bodies

All the named stakeholders were consulted, and responses were welcomed from any individual or entity interested in the proposals, including all relevant local bodies, audit firms, and other organisations which form part of the local audit framework. There were 191 responses. A breakdown of the type of respondent and organisation they responded on behalf of is included at Annex A.

On 30 July 2024, the current government announced its intentions to pursue proposals (taking into account responses to the consultation) to address the local audit backlog. In parallel to publishing this response to consultation feedback, we have laid in Parliament regulations as well as, on behalf of the Comptroller and Auditor General and the National Audit Office (NAO), a new Code of Audit Practice. These will give effect to the proposals.

Statutory backstop for financial years up-to-and-including 2022/23

Question 1 sought views on requiring Category 1 authorities to publish audited accounts for all financial years up to and including financial year 2022/2023 by 30 September 2024.

Of those who submitted a response to the consultation, 82.54% agreed with this statement, 6.37% disagreed, 3.7% were unsure, and 7.41% did not answer this question. Many respondents noted that setting a statutory backstop to clear audit opinions for these years is a necessary and pragmatic step to clear the current backlog. Many also highlighted the lack of viable alternatives.

Some respondents expressed concern or uncertainty regarding the scale of modified or disclaimed audit opinions that would be issued due to the statutory deadline; the impact of these opinions on the subsequent processes by which auditors would rebuild assurance; and the risk of reputational impacts on local bodies of disclaimed or modified opinions.

Government’s position

Consultation feedback demonstrates strong support for setting a statutory backstop to clear outstanding audits up-to-and-included financial year 2022/23.

At the time the general election was called, the previous government had not indicated its intentions following the consultation. By the time the current government took office, the 30 September 2024 backstop was no longer viable, given the Parliamentary procedures required for changes to regulations and for the NAO’s replacement Code of Audit Practice.

We intend to set a backstop of 13 December 2024 for bodies to publish audited accounts for financial years up-to-and-including 2022/23. This represents the earliest viable alternative to the 30 September. The government has also tested the 13 December 2024 date with audit firms, representatives of local government and key system partner organisations. This approach will clear the backlog and enable a focus on recent accounts.

The government recognises that clearing the backlog is also likely to have unfortunate consequences in the short term. It has been forced to take this difficult decision due to the backlog we inherited. We are determined, however, to make the tough choices necessary to begin rebuilding the foundations of local government.

Where auditors have been unable to complete audits, they will issue a ‘disclaimed’ or ‘modified’ audit opinion. Auditors are likely to issue hundreds of ‘disclaimed’ audit opinions and disclaimed opinions will likely continue for some bodies for a number of years.

While there will be modified and disclaimed opinions, auditors’ other statutory duties – including to report on Value for Money (VfM) arrangements, and, if necessary, to exercise their power to make statutory recommendations and issue Public Interest Reports – remain a high priority.

In relation to reputational impacts, there will be extensive communications and engagement, to make clear the necessity of these steps and emphasise the context for modified or disclaimed opinions. Local bodies should not be unfairly judged based on disclaimed or modified opinions, caused by the introduction of backstop dates that are largely beyond their control. Auditors will be expected to provide clear reasons for the issuing of such opinions to mitigate the potential reputational risk that local bodies may face. We will work with partners to provide communications support to the system.

Statutory backstops for financial years 2023/24 to 2027/28

Question 6 sought views on requiring Category 1 authorities to publish audited accounts for financial years 2023/2024 to 2027/2028 by the following dates:

• 2023/24: 31 May 2025
• 2024/25: 31 March 2026
• 2025/26: 31 January 2027
• 2026/27: 30 November 2027
• 2027/28: 30 November 2028

Of those who submitted a response to the consultation, 49.21% agreed with these dates, 25.93% disagreed, 14.81% were unsure, and 10.05% did not respond to this question.

Overall support would likely have been higher, perhaps significantly higher, but for specific opposition to the 31 May 2025 backstop date (for financial year 2023/24). Critical feedback on the other backstop dates was limited.

Opposition to the 31 May 2025 date was informed by the clash with the unaudited (draft) accounts deadline for financial year 2024/25 (also currently 31 May 2025), as well as concerns regarding the interaction with auditors’ NHS audit work. Of those who suggested alternatives, a clear majority supported an earlier backstop for financial year 2023/24.

Some consultees raised queries or concerns about the extent, duration, and feasibility of work to rebuild assurance over this period. These themes were also evident in response to Question 12, which sought views on the feasibility of the rebuilding process. Some respondents also emphasised the importance of clear guidance on applying the International Standards on Auditing (UK) in the context of backstop dates.

Some respondents emphasised the potential reputational risks of disclaimed or modified opinions for local bodies over this period.

Government’s position

The government intends to set the following statutory deadlines for these years:

• 2023/24: 28 February 2025
• 2024/25: 27 February 2026
• 2025/26: 31 January 2027
• 2026/27: 30 November 2027
• 2027/28: 30 November 2028

The amended backstop date of 28 February 2025 for financial year 2023/24 will negate the issues highlighted with the proposed 31 May 2025 date. It will also ensure that the backstop will not fall within pre-election periods for local authorities, an issue that the Local Government Association (LGA) have emphasised as important.

The amended deadline of 27 February 2026 for financial year 2024/25 will also ensure that this backstop does not fall within pre-election periods for local authorities.

Compared with the dates originally proposed, the first backstop (for financial years up-to-and-including 2022/23) and the backstop for the following year (2023/24) will be closer together. This is consistent with the key ambition that we enable the system to focus on the most recent accounts, where assurance is most valuable.

In addition to being shaped by consultation feedback, the updated backstop dates have been considered further with audit firms, representatives of local government and key system partner organisations.

It is the aspiration of the government and key local audit system partners that, in the public interest, local audit recovers as early in this five-year period as possible. This means disclaimed opinions driven by backstop dates during this period should, in most cases, be limited to financial years 2023/24 and 2024/25.

Specific guidance for auditors will be published by the Comptroller and Auditor General and endorsed by the FRC, confirming that there are no contradictions to the requirements or the objectives of International Standards on Auditing (UK). A proportionate approach is required and all system partners including the FRC, NAO, auditors and account preparers, are aware that this is the government’s objective. The FRC’s and ICAEW’s regulatory activity would consider auditors’ adherence to the Code and whether proper regard has been given to the relevant statutory guidance.

As per our response to the feedback on the backstop for financial years up-to-and-including 2022/23, we recognise the importance of steps to address any potential reputational impacts of disclaimed opinions on local bodies.

Unaudited ‘draft’ accounts deadline for financial years 2024/25 to 2027/28

Questions 10 and 11 sought views on the 31 May deadline for the publication of unaudited (draft) accounts.

In response to Question 10, which asked whether the 31 May deadline remains appropriate for financial years 2024/2025 to 2027/2028, 30.37% of respondents agreed with this statement, 49.21% disagreed, 9.95% were unsure, and 10.47% did not answer this question.

Some respondents contended that 2 months between the financial year end and the publication deadline is insufficient given resourcing issues within financial teams, as well as a perceived growth in the complexity of accounts.

Some respondents contended that allowing more time for the preparation of accounts would improve their quality, and, by extension, the audit process hereby also benefitting auditors.

A significant number of respondents specified that the deadline should be moved to 30 June; a comparatively small number suggested a later date. It was also noted that, given auditors’ NHS commitments, extending the deadline to 30 June should not materially affect the amount of time that auditors have to work on those accounts.

Government’s position

We note the opposition to retaining the 31 May deadline and support for a deadline of 30 June. For financial years 2024/25 to 2027/28, the date by which Category 1 bodies should publish ‘draft’ (unaudited) accounts will change from 31 May to 30 June following the financial year to which they relate. This will give those preparing accounts more time to ensure they are high-quality accounts. This should, in turn, benefit auditors while still ensuring publication shortly after financial year end.

Exemptions from statutory backstops

Questions 3, 4, 6 and 7 sought views on possible exceptional circumstances in which Category 1 bodies might be exempt from meeting the statutory backstop dates.

Questions 3 and 6 focused on whether Category 1 authorities should be exempt from the statutory backstop dates where the auditor is unable to issue their opinion due to outstanding objections to the accounts that could be material to that opinion. A clear majority supported an exemption in these circumstances.

Questions 4 and 7 sought views on whether there were grounds for any additional exemptions from the backstop dates. Views were mixed – in response to both questions a similar proportion of respondents agreed and disagreed that there should be additional exemptions. A significant proportion indicated they were unsure.

Government’s position

Taken together, the consultation feedback indicates support for exemptions in limited and exceptional circumstances. We concur. Legislation will outline the following scenarios in which bodies may be exempt where the auditor has not entered their opinion by the relevant backstop date:

• where auditors are considering a material objection
• where an objector has appealed or could still appeal the auditor’s decision in relation to the objection
• the auditor thinks that an item of account may be contrary to law and has made, or is considering making, an application to the Court on that basis
• or from 2023/24, where the auditor is not yet satisfied with the body’s Value for Money (VFM) arrangements

Where such an exemption exists, the legislation will include a requirement to publish the audit opinion as soon as practicable. For transparency, if a body is exempt, they would be required to publish an explanation of their exemption on (or as soon as reasonably practicable after) a backstop date.

These exemptions also align with those for auditors set out in the NAO’s replacement Code of Audit Practice.

Compliance and delay notices

The consultation outlined the government’s intention to publish a list of local bodies and audit firms which meet statutory deadlines for the publication of audited accounts and those which do not, making it clear any instances where unaudited accounts had also not been published by the required date.

The consultation also sought views on whether there should be further consequences for firms or bodies which do not comply with the backstop date for financial years up-to-and-including 2022/23 (Question 5) or the subsequent backstops (Question 9). A slim majority of consultees opposed further measures relating to the first backstop; by contrast, a slim majority supported further measures relating to subsequent backstops. A significant number, in both contexts, were unsure. The consultation feedback illustrates the need for careful consideration, including given that non-compliance with a backstop might be a product of multiple factors.

Question 2 sought views on removing the current provision in Regulation 10(2) for Category 1 authorities to publish a ‘delay notice’ (if the audit has not concluded by the relevant date) in relation to any outstanding audits covering financial years 2015/2016 to 2022/2023. A clear majority supported this change. Some noted that the introduction of backstop dates should render this unnecessary, while others noted that this requirement would be superfluous given that ‘delay notices’ have already been issued for most of this period. Some consultees, nevertheless, raised a concern that removing this provision would undermine transparency and accountability for users of accounts.

Government’s position

The government will publish a list of bodies and auditors that do not meet the proposed backstop dates, which will make clear where ‘draft’ (unaudited) accounts have also not been published.

The current ‘delay notice’ requirement will no longer apply for financial years up to and including 2027-28. The legislation will impose a clear duty on bodies, unless exempt, to publish audited accounts for those years by the backstop dates (the NAO’s Code of Audit Practice will require auditors, unless exempt, to issue their opinions in time for the body to comply with the backstop dates). The Regulations will also require any body that fails to comply with a backstop to publish an explanation, to send a copy of this to the Secretary of State (to facilitate scrutiny) and publish audited accounts as soon as practicable.

We consider that the steps above are important for ensuring transparency and accountability, issues that consultees clearly felt were important. We will also keep the issue of consequences under close review and may explore further mechanisms to take appropriate action.

Publication of audit letters

Question 13 asked consultees whether they agreed that it would be beneficial for the 2015 Regulations to be amended so that Category 1 bodies would be under a duty to consider and publish audit letters received from the local auditor whenever they are issued, rather than, as is currently the case, only following the completion of the audit.

Of those who submitted a response to the consultation, 64.92% of respondents agreed that this change would be beneficial, 11.66% disagreed, 11.52% were unsure, and 8.9% did not answer this question.

Government’s position

Via changes to the Code of Audit Practice, the NAO is working to help restore timely reporting of auditors’ work on arrangements to secure value for money. Ensuring that local bodies are required to publish auditors’ annual reports when issued, will support these wider changes.

We intend to amend the regulations to refer to auditor’s annual reports, which will align with the terminology in the NAO’s Code, as well as require local bodies to consider and publish reports whenever they are issued.

Equality impacts

Question 14 sought comments on whether any of the proposals outlined in this consultation could have a disproportionate impact, either positively or negatively, on people with protected characteristics or wish to highlight any other potential equality impacts.

Of those who responded to this question, the overwhelming majority indicated they do not expect any such impacts. A couple of respondents mentioned burdens on local authority finance teams, including relating to the preparation of unaudited (draft) accounts by the current 31 May deadline, and that these may disproportionately affect women with caring responsibilities.

Government’s position

Having considered the consultation feedback, and a completed a wider assessment of the equalities impact, we are satisfied that the proposals should not have a disproportionate impact people with protected characteristics or other material equality impacts.

As noted in our response to feedback on Questions 10 and 11, we intend to extend the time available to produce and publish unaudited (draft) accounts.

Further feedback on the proposals

Question 15 for any further comments on the proposed changes to the 2015 Regulations, including relating to any unintended consequences.

Feedback on this question was varied. Many issues raised were also highlighted in response to previous questions, including the scale of modified or disclaimed opinions; the extent, duration, and feasibility of work to rebuild assurance; and the possible reputational impacts on local bodies.

Other feedback included queries about the implications of the proposals for audit fees and a small number of queries about the possible implications of disclaimed or modified opinions for private borrowing arrangements.

Some respondents commented on systemic problems in the local audit system, including, for example, the question of capacity to deliver audit work, capacity constraints within local government finance teams, and the proportionality of auditing and accounting requirements. These themes were also evident in some feedback on earlier questions.

Government’s position

In relation to audit fees, issuing a disclaimed or modified audit opinion and a subsequent return to being able to fully complete audits will require differing levels of work by auditors. Public Sector Audit Appointments Ltd (PSAA) will set scale fees and determine fee variations where the auditor undertakes substantially more or less work than assumed by the scale fee and will consult with bodies where appropriate. In doing so PSAA will apply the following principles: if auditors have worked in good faith to meet the requirements of the Code of Audit Practice in place at the time the work was conducted (and have reported on work that is no longer required), then they are due the appropriate fee for the work done, and the body is due to pay the applicable fee, including where there is a modified or disclaimed opinion. Conversely, if an auditor has collected audit fees in part or in full, and the backstop date means that the total work done represents less than the fee already collected, then the auditor must return the balance and refund the body the appropriate amount – this ensures that the bodies pay only for work that has been done and reported.

In relation to private sector borrowing arrangements, the current unprecedented situation in which audits are not being closed may be impacting some private borrowing already. There may be an impact on authorities’ ability to borrow money where disclaimed or modified opinions are issued as a result of the backstop dates. In cases of qualified or disclaimed audits due to the backstop dates, the expectation is that private lenders would factor in the exceptional context and consider their approach on a case-by-case basis.

Feedback on this question, as well as the wider consultation, highlights systemic issues that transcend the backlog. The government has inherited a broken local audit system in England. Clearing the backlog is not enough, which is why work is also underway to deliver the manifesto commitment to overhaul the system. The government will continue to review the evidence, including considering the recommendations of external reviews to date, and will update Parliament in the Autumn on the government’s longer-term plans to fix local audit.

Annex A: Overview of respondents

Table 1: Responses from individuals and organisations

Respondent type	Number of responses	Percentage
Individual	16	8.38%
Organisation	175	91.62%

Table 2: Responses by organisation type

Type of organisation	Number of responses	Percentage
County Council	15	7.85%
District Council	48	25.13%
London Borough Council	18	9.42%
Unitary Authority	32	16.75%
Metropolitan District Council	15	7.85%
Combined Authority	3	1.57%
Local Police Body	11	5.76%
Fire and Rescue authority	4	2.09%
Other local body	3	1.57%
Audit firm	8	4.19%
Other	21	10.99%
Not answered	13	6.81%