A huge backlog in auditing accounts across local government has increased the risk of more councils failing financially and undermined accountability for £100 billion of annual spending, MPs have warned.
A report by the cross-party Public Accounts Committee highlights the impact of widespread delays to external scrutiny of councils’ financial health and concludes the situation could worsen due to a lack of Government action.
With the same limited pool of local auditors also working across other parts of the public sector, there is also a risk that auditing of central government and NHS spending could be delayed, the committee said.
Just 12% of local government bodies received auditors’ opinions enabling them to publish their accounts by an extended deadline in 2021-22.
This compares to 45% of bodies which published audited accounts in 2019-20 by the required date.
More than 400 bodies missed the deadline in 2021-22, pushing the cumulative backlog of unpublished audits for all years to 632.
This suggests there will a further deterioration in publishing audited accounts for 2022-23, with the Government and the Financial Reporting Council (FRC) unable to say when the backlog will be addressed, the committee said.
Gareth Davies, controller and auditor general at the National Audit Office, recently told the committee that the “ratcheting up” of audit requirements regulated by the FRC in light of scandals in the private sector was a major contributing factor to the delays.
Government plans to establish the Audit, Reporting and Governance Authority (ARGA) as a “system leader” for local government audit in a bid to address delays have stalled.
Intermediate arrangements for the FRC taking on a leading role are yet to formally begin.
Dame Meg Hillier, the committee’s Labour chair, accused the Government of failing to respond to warnings over audit failure provided by councils which have declared effective bankruptcy.
She said: “Our Committee warned in 2021 that the system of local government audit was close to breaking point. Disappointingly, since then the situation has only gotten worse.
“The cases of Croydon, Slough, Thurrock and Woking councils all should serve as flashing red signals for the Government, and our report finds that the rot risks spreading to central government finance and the NHS.”
Dame Meg described the number of firms currently registered to carry out local audit, which is fewer than 100, as “worryingly low”.
“The Government must get its hands round this problem as a matter of urgency. It’s local taxpayers and service users who lose out when serious financial issues arise. The lack of timely accounts leaves council taxpayers in the dark,” she added.
The report makes a series of recommendations largely focused on the Department for Levelling Up, Housing and Communities and the FRC providing clarification on how they will address problems in the local audit system.
These include providing details of plans to mitigate the impact of delays and develop the audit workforce.
The committee has also called for the department to set out its contingency plans should the legislative programme not allow for ARGA to be established in this Parliament.
Sir Geoffrey Clifton-Brown, Conservative deputy chair of the committee, said the audit backlog should be taken seriously as Government bailouts following the financial failure of councils cost taxpayers “huge” amounts of money.
He added: “The cumulative delay of auditing 632 Local Authority 2021/22 accounts is a really serious matter, hindering accountability of £100 billion of local government spending.
“How many more horror stories such as Croydon, Slough, Thurrock, and more recently the shocking case of Woking council are there remaining undetected, which ultimately always have to be bailed out at huge costs to the taxpayer?
“The fragility of the number of qualified people and firms tending to carry out these important audits means that the system will only get worse before it gets better.”
The Department for Levelling Up, Housing and Communities has been approached for comment.
