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Subject:
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The Redmond Review
of Local Audit and Financial Reporting
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Date of Meeting:
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12 January 2020
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Report of:
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Acting Chief Finance
Officer
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Contact Officer:
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Name:
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Nigel Manvell
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Tel:
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01273 293104
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Email:
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Nigel.Manvell@brighton-hove.gov.uk
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Ward(s)
affected:
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All
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FOR GENERAL
RELEASE
1
PURPOSE OF REPORT AND POLICY CONTEXT
1.1
The Local Audit and Accountability Act 2014 introduced a new audit
regime for local government to replace the previous arrangements
under which the Audit Commission performed that role. In June 2019,
Sir Tony Redmond was asked to undertake an independent review of
the effectiveness of the new local audit arrangements and the
transparency of local authority financial reporting. The guiding
principles for the review were ones of accountability and
transparency.
1.2
This report provides a summary of the findings and recommendations
and updates the committee on the recently provided response from
the Ministry of Housing, Communities & Local Government
(MHCLG).
2
RECOMMENDATIONS
2.1
That the Audit & Standards Committee note the report.
3
CONTEXT/ BACKGROUND INFORMATION
3.1
The guiding principles of the Redmond Review were ones of
accountability and transparency. The review questions: how are
local authorities accountable to service users and taxpayers and
how are auditors accountable for the quality of their work; and how
easy is it for those same individuals to understand how well their
local authority has performed and what assurance they can take from
external audit work?
3.2
The review was concluded in September 2020 and the resulting report
is entitled “Independent Review into the Oversight of Local
Audit and the Transparency of Local Authority Financial
Reporting”. The report is available on the .GOV.UK web site
and the web link is provided under ‘Background
Documents’ below. The report made 23 recommendations to the
Secretary of State for Housing, Communities & Local Government,
the Rt Hon Robert Jenrick MP and the key findings and
recommendations from the report are summarised below.
4
KEY FINDINGS OF THE REVIEW
Local Audit Arrangements:
4.1
The most significant finding concerned the lack of coherence in the
oversight of local audit arrangements, including the approach to
procuring external auditors. There were concerns expressed
regarding the effectiveness of local audits, some of which were
linked to the effectiveness of the current fee structure. The
report reflects that fees are probably 25% less than they should
be, which has impacted on the quality of auditors and, in
particular, the level of experience and knowledge of local
authority accounts and audit. This is evidenced in part by the fact
that 40% of the 2018/19 audits were not completed by the deadline
of 31 July 2019 and 55% of 2019/20 audits were not completed by the
extended 30 November 2020 deadline.
Governance Arrangements:
4.2
The report raised the question of whether Audit Committees
understand the issues sufficiently to be able to question and
challenge in an effective way. There are relatively low numbers of
independent Audit Committee members across the sector generally,
little communication between Audit Committees and inspectors and no
formal exchange of views.
4.3
It was also commented that Internal Audit is not formally used by
External Audit as the code of practice does not require them to
liaise with internal auditors. The report observes that there was
also little evidence of any relationship between the Audit
Committee and Full Council, with very few reports passing on to
Full Council from Audit Committees. There is also a question around
the role of the three statutory officers (Chief Executive,
Monitoring Officer and S151 Officer) in terms of their level of
engagement with the external auditors, either together or
individually.
Reporting:
4.4
The report observes that the current arrangements do not easily
allow the public to understand the accounts. There is more that
could be done to improve their transparency and accessibility as to
what local authorities do and how they have performed.
5
SUMMARY OF THE REVIEW’S RECOMMENDATIONS
5.1
The report puts forward 23 recommendations to the Sectary of State
for Housing, Communities & Local Government for consideration.
The key recommendations are as follows:
Recommendations for the oversight of Local Audit Arrangements:
·
A new ‘Office of Local Audit Regulation’ (OLAR) should
be established, having responsibility for procuring, managing,
overseeing and regulating local audits. OLAR would include the
current responsibilities currently fulfilled by the Public Sector
Audit Arrangements Ltd (PSAA), National Audit Office (NAO) and
Financial Reporting Council (FRC), with staff being TUPE
transferred to the new body. The report emphasises that OLAR is not
a recreation of the Audit Commission, with staff numbers in the
region of 30-35 being significantly lower. OLAR could impose
sanctions where there are significant issues in a local authority,
for example, for financial resilience issues where MHCLG have been
called to intervene, for example, following a public interest
report from the external auditor or the issuing of a Section 114
report by a Chief Finance Officer.
·
A linked recommendation includes creating a Liaison Committee,
chaired by the Ministry of Housing, Communities & Local
Government (MHCLG) comprising FRC, NAO, Institute of Chartered
Accountants in England and Wales (ICAEW), Chartered Institute of
Public Finance and Accountancy (CIPFA), Local Government
Association (LGA) and authority representatives, as well as
Probation, Home Office and Audit Partners. The Committee would meet
quarterly and provide a link to the regulator (OLAR), as well as
providing a facility for feedback and commentary in how local
audits are being undertaken.
·
A further recommendation is that the fee structure needs to be
revised to reflect the true cost with local audit firms included in
any consultation.
Governance Recommendations:
·
At least 1 independent member to be required on each local
authority’s Audit Committee.
·
There will be a formal requirement for local authorities’
three statutory officers to meet external audit partners at least
annually.
·
There will be a requirement for Audit Committee members to receive
appropriate training.
·
It is proposed to move the audit completion date back to 30
September each year from the current date of 31 July. [Note: due to
COVID-19 the 2019/20 deadline was moved for one year only to 30
November 2020.]
·
It is proposed that the annual audit report should be presented to
the first Full Council meeting after 30 September by the External
Auditor.
·
There is a recognition that auditors must have the skills and
training required but so must the local authority finance
staff.
Financial
Reporting Recommendations:
·
A new standardised statement of service information and costs to be
prepared to enable comparison with the approved budget to the
statutory accounts. The Chartered Institute of Public Finance &
Accountancy (CIPFA) will be consulting on a proposed format for the
new statement, which will be trialled for the 2020/21 year end. If
adopted, the statement will be subject to audit.
·
CIPFA should be required to review the statutory accounts, in the
light of the new requirement to prepare the standardised statement,
to determine whether there is scope to simplify the presentation of
the local authority accounts by removing disclosures that may no
longer be considered necessary.
6
MHCLG RESPONSE TO THE RECOMMENDATIONS
6.1
The ministry’s response to the recommendations was published
on 17 December 2020 and a summarised version of its responses to
each of the 23 recommendations is provided at Appendix 1. Many of
the recommendations have been accepted but will only come into
force when the relevant codes or practice, regulations or statutes
are amended or passed.
6.2
The main implications for local authorities will be:
·
A likely increase in External Auditor scale fees to address the
recommendations for improving the quality and timeliness of
external audit. In this respect, MHCLG have also announced, as part
of the provisional Local Government Financial Settlement 2021/22,
that £15 million additional funding will be provided
nationally to help local authorities meet the anticipated increase
in costs.
·
A change to the deadline for the completion and approval of the
annual Statement of Accounts from 31 July 2020 to 30 September 2020
for a minimum period of 2 years after which this will be
reviewed.
·
If ultimately accepted, the creation of new oversight arrangements
including an Office of Local Audit & Regulation (OLAR) to
replace the roles of the current bodies which will include taking
over responsibility for procurement of local audit contracts,
producing annual reports summarising the state of local audit,
management of local audit contracts, monitoring and review of local
audit performance, and determining the code of local audit
practice. However, this is the main area that the government has
stated in the media that it is not convinced about and plans to
conduct a further review of governance to look at other options.
MHCLG’s detailed response to these oversight recommendations
will not therefore be provided until Spring 2021.
·
The Full Council of each local authority will be required to
receive an annual report from the external auditor after 30
September each year, irrespective of whether the accounts have been
certified.
·
All local authorities will be required to appoint at least one
independent member to their Audit Committee. However, this council
has long had in place good practice and has already appointed two
Independent Persons to its Audit & Standards Committee and will
therefore automatically comply with this requirement.
·
There will be a formal facility for the CEO, Monitoring Officer and
Chief Financial Officer (CFO) to meet with the Key Audit Partner at
least annually. Similarly, this authority already follows good
practice and the Chief Executive and Chief Finance Officer meet
regularly with the external auditor. The Monitoring Officer can
easily be brought into this arrangement.
·
There will be a requirement (which could be through a code of
practice, guidance or regulatory change) for External Audit and
Internal Audit work to be aligned where it is relevant to assisting
the external auditor to form their opinion. MHCLG will consult with
the National Audit Office and CIPFA regarding the mechanics of this
recommendation.
·
There will be a requirement for every local authority to prepare a
standardised annual statement of service information and costs,
including comparison with the budget agreed to support the council
tax/precept, and for this to be presented alongside the statutory
accounts. The statement will also be externally audited. MHCLG will
work with the Local Government Association (LGA) and CIFPA
regarding the format and content of the statement.
7
ANALYSIS & CONSIDERATION OF ANY ALTERNATIVE OPTIONS
7.1
If accepted, most of the recommendations of the Redmond Review
regarding financial reporting will become minimum requirements on
local authorities through changes to the relevant codes of practice
or associated regulations agreed with the relevant regulatory and
professional accountancy bodies. Similarly, arrangements for local
audits, including fee scales, would be set by the new body (OLAR)
if its creation is ultimately confirmed by MHCLG. Local authorities
will, as now, be consulted by their appointed external auditor on
the annual audit plan and any specific control or governance risks
that the external auditor proposes to address in their audit of the
accounts.
8
COMMUNITY ENGAGEMENT & CONSULTATION
8.1
The Redmond Review encompasses not only principal local authorities
but also Police & Crime Commissioners, Fire and Rescue
Authorities, Parish Councils and Drainage Boards. The Review issued
a ‘Call for Views’ and received 156 responses and
carried out more than 100 interviews across the sector in forming
its conclusions and recommendations.
9
CONCLUSION
9.1
The Redmond Review report is presented to the Audit & Standards
Committee for information along with MHCLG’s response to the
recommendations. None of the recommendations, whether accepted and
confirmed by MHCLG or not, are yet in force. However, the report
indicates the likely implications for local authorities on the
basis that the recommendations so far accepted by MHCLG will be
implemented as recommended by the review.
10
FINANCIAL & OTHER IMPLICATIONS:
Financial
Implications:
10.1
Most of the recommendations of the review, if all ultimately
accepted, do not have direct financial implications for the
authority. For example, the preparation of a ‘standardised
annual statement of service information’ is a new requirement
but is not expected to require additional staffing or other
resources as it is expected to be a summarised version of
information already provided in the annual financial statements.
Similarly, regular training of local authority finance staff is
already provided for and this authority is not one of those that
has ever failed to meet the statutory deadline. The provision of
additional training for Audit & Standards Committee members and
Independent Persons can be provided within existing resources as
required.
10.2
Conversely, any increase in the fee scales provided to external
auditors will have a financial implication for the council. The
amount of any increase is not known although the report indicates
an increase of at least 25% is probably needed which could be
between £25,000 to £40,000 for Unitary Councils.
However, as noted in the report, MHCLG have confirmed, through the
provisional Local Government Financial Settlement 2021/22, that
additional funding of £15 million will be provided nationally
to assist local authorities in meeting any increase in fees. The
distribution of this funding across local authorities is currently
unknown and it remains to be seen whether or not this will cover
any negotiated increases.
Finance Officer Consulted: James
Hengeveld
Date: 17/12/2020
Legal
Implications:
10.3
As noted at paras 6.1 and 6.2 above, the recommendations which have
been accepted in principle by the ministry will not come into force
until existing codes of practice, regulations or statutes are
amended or new requirements are introduced. As a result, this
report is for noting only. Any changes to the council’s
arrangements which require formal approval will be the subject of a
future report to Committee.
Lawyer
Consulted:
Name Victoria
Simpson Date:
20/12/2020
Equalities
Implications:
10.4
There are no equalities implications arising from this report.
Sustainability Implications:
10.5
There are no sustainability implications arising from this
report.
Brexit
Implications:
10.6
There are no Brexit implications arising from this report.
Any Other
Significant Implications:
None
SUPPORTING DOCUMENTATION
Appendices:
1. Summary of
MHCLG’s response to the Redmond Review.
Background Documents
1. The
Redmond Review. Web link to the full report:
Local authority financial reporting and external audit: independent
review - GOV.UK (www.gov.uk)