The government risks missing a key opportunity to fix the local audit crisis, leaving the whole country in the dark about council finances.
The government has unveiled the plans to fix the local audit crisis with a new body, the Local Audit Office (LAO). Action can’t come soon enough.
Last year only 4% of local councils submitted audited accounts on time for 2023/24, even lower than the 10% last year that prompted the National Audit office to take the unprecedented step to disclaim the Whole Government Accounts, essentially a refusal to sign off the accounts as correct. This year, that step has been taken again. The government promises to tackle the local audit backlog with backstop dates that would help councils catch up. But with so few submissions of audited accounts, millions of pounds of local authority spending may yet go unscrutinised for years to come.
The government’s plan to fix this mess is to set up the LAO, revealed in the English Devolution and Community Empowerment Bill in July. A body to specifically manage local audits is much needed, and Research for Action has advocated for local audit reform to be separate from corporate audit for years. But we are concerned the reforms don’t go far enough. Having researched the local audit crisis for years, we’re worried the government isn’t fully grasping this vital opportunity to sort out a system that is fundamentally not fit for purpose.
Since the abolition of the Audit Commission in 2015, local authorities have been audited by private companies, leading to a crisis that has contributed to many of those authorities losing control of their finances and declaring effective bankruptcy in recent years, including high profile-cases like Birmingham and Slough.
The new LAO will take on responsibility for auditor appointments, fees and maintaining a register of audit providers, and could itself become an audit provider. This is good. But the draft legislation is worryingly thin on detail about the LAO’s regulatory role, and we are concerned the reforms will not be enough to tackle the failing market if private provision remains the norm.
Why is the government tinkering with opening the door to possible public provision rather than guaranteeing timely, good quality local audits as a public function?
There are fundamental problems with letting private companies decide what is in the public interest. Our 2021 report Democracy Denied documented the way current local government audit arrangements contribute to a deficit in oversight and failure to consider the public interest. Private audit firms who are supposed to scrutinise councils act in consultancy roles for them.
There are also previous commitments from the government that don’t feature in the legislation, such as the LAO publishing national insight reports on local audit health, which could include emerging trends, as well as statutory recommendations and public interest reports.
We’ve found that the current oversight structure is fragmented; no regulatory body is willing to intervene even though residents are sounding the alarm across the country. That’s why we think it’s vital that the LAO has a remit for carrying out regular investigations on cross-cutting issues, tackling fraud and corruption, and setting up a complaints and appeal process for audit that is open to the public.
It is also deeply concerning that there is no mention of the public or civil society’s role as stakeholders, or access to information or public accountability rights. The public needs to have a role – in the current system they are seen as an inconvenience rather than participants in accountability processes that are crucial for a functioning democracy.
The Bill does mandate audit committees with at least one independent member, which we hope will strengthen oversight. But we believe audit committee chairs should also come from opposition parties where possible, and committee membership should be allocated according to parties’ vote share rather than seats.
The reforms could go even further by strengthening current public rights to inspect accounts and file objections, or introduce local public accounts committees with guaranteed citizen participation. But with the English Devolution proposals to further centralise power to mayors and get rid of the committee system that some councils have now, the government is heading in the wrong direction.
These audit reforms must not only sort the backlog but put public interest at the heart of local audit, making it easier for the public to scrutinise spending at their local town hall.
Audit needs to be seen as part of wider accountability processes that are necessary for democracy, rather than a purely technical exercise based on efficiency that can be carried out by private providers with no understanding of the values that should be guiding the public sector. To put public interest in its heart, accountability needs to include real-time, dialogue-based democratic practices.
The second reading of the English Devolution Bill is scheduled for 2 September, when MPs will debate it for the first time. Unless the government legislates a more comprehensive role for the LAO, addresses the issue of private audit firms and considers the public’s vital role, it will be a missed opportunity to genuinely sort out this broken system.
Photo: “Vintage Filing Cabinet” by Crys is licensed under CC BY-NC-SA 2.0.
