The new head of the National Audit Office has said the lack of audit concerns being raised in relation to council accounts makes him “uncomfortable” after a decade of austerity and increased commercialisation.
Speaking at the Chartered Institute of Public Finance & Accountancy conference on Tuesday, comptroller and auditor general Gareth Davies said the difficulties of Northamptonshire CC meant the sector could not ignore the possibility of further council failures.
“I think it’s surprisingly quiet out there in terms of audit warning signs,” he said. “I feel uncomfortable about the quietness given what has clearly been happening in a significant number of local authorities.”
Northamptonshire’s auditors had reported an adverse conclusion on value for money for two successive years before the council effectively declared itself bankrupt in early 2018.
Mr Davies, who was a partner at audit firm Mazars until taking on the top job at the NAO in June, said auditors needed to start “getting off the fence and speaking really clearly to members” not “hiding behind boilerplate language of audit”.
There has been growing concern about the quality of external audit in local government with communities secretary James Brokenshire today announcing former Cipfa president Sir Tony Redmond would chair a review of the current audit arrangements for local government.
Following the abolition of the Audit Commission in 2010, the Local Government Association set up Public Sector Audit Appointments which now procures auditors for almost all English councils. Contracts were let for the audit of council accounts for five years from 2018-19, which the PSAA said had reduced fees by 18%.
However, as LGC reported last month audit firm EY has been unable to meet the deadline to audit accounts by 31 July for 19 of the 184 organisations for which it won the contract. It said this was due to difficulty recruiting suitably experienced staff.
Mr Davies welcomed the review but said it was “interesting” the government was “already” planning to review the new arrangements.
“There is a high level of concern that [drive for efficiency has] gone too far and auditors are not able to spend the time with your key people that maybe they were in the past,” he said. “My personal view is there is something in that.”
The NAO is also reviewing its Code of Audit Practice for local authority audit, something it is required to do every five years by law. Mr Davies said response to an initial consultation on revisions to the code had highlighted value for money as an area that needed updating in light of councils’ greater commercial activity.
Mr Davies also revealed work by the NAO looking at council investment in land and property to generate an income suggested 80% of this activity had come from 20% of councils.
He said the NAO’s work would “hopefully shed some light on the issue of the appropriateness of these investments”.
“Across the whole of local government you’ll find really well thought through risk-based plans,” he said. “And others where you think ’would I as a member in the council be comfortable with the risk profile and the size of our balance sheet?’”
Mr Davies told delegates this commercial approach was one of three major trends that had changed the sector over the past decade with the others being greater costs being borne by service users and a growing understanding of the risks of contracting with private sector following the collapse of Carillion and some “near misses in the care market”.
He said local government had “learned the hard way” about the dangers of inflexible long-term contracts and this was leading to more services being delivered in house.
“Keeping up with the financial health of your key suppliers, in the end that’s your risk as much as theirs and you can’t outsource that, even if they said you could in the tender process,” Mr Davies warned.