Going, going, gone!

It has been a long time coming but the Audit Commission will disappear at the end of the month. Melanie Carter explains the key issues raised by the replacement regime.

You could be forgiven for thinking this was not news, but on 31 March 2015, in a few weeks time the Audit Commission will finally be abolished. It has been winding down for a number of years now, but come 1 April, it will legally (and in every other sense) cease to exist, and is not being replaced. A further period of transition will begin, which will culminate in the new local audit regime brought in by the Local Audit and Accountability Act 2014 (LAAA 2014) being fully implemented in 2017. These changes have significant implications for local authorities (and some other bodies), local government auditors, and local government electors. 

What does the future look like?

Some of the Commission’s functions are being transferred to various bodies, whilst others will disappear altogether. A company set up by the Local Government Association, Public Sector Audit Appointments Limited, will manage the appointment of auditors (including setting fees), until the new regime comes fully into force in 2017, after which audited bodies will appoint their own auditors. 

The Code of Audit practice will be produced and maintained by the National Audit Office, along with relevant guidance. NAO will carry out studies of groups of local authorities – just not individual authorities. The Commission’s inspection functions effectively ceased in 2010.

The Commission’s data matching functions, the National Fraud Initiative (which uses data matching techniques to prevent and detect fraud), will transfer to the Cabinet Office.   

Who will be subject to audit under LAAA?

Practically speaking, the list of public bodies subject to external audit in the new Act is very similar to the old, although joint committees will no longer be required to prepare ‘statutory’ accounts and will not be subject to ‘statutory’ audit (larger ones may still wish to prepare accounts and obtain assurance on these, albeit on a voluntary basis).

One notable feature of the new regime is that certain “entities connected with relevant bodies” will be subject to and have to comply with certain aspects of the regime (such as the power of auditors to write public interest reports on their affairs and the obligation of providing documents and information to auditors). Entities are connected where the relevant authority considers that the financial transactions or net assets or liabilities (amongst other things) should be part of the relevant authority’s statement of accounts (eg: Teckal companies, ALMOs etc.). 

What is the new local audit regime?

The fundamental change, from financial years 2017/18 onward is that local authorities will be responsible for appointing their own auditors, ensuring they meet the relevant eligibility criteria. When making appointments, audited bodies must consult their “auditor panel”, a committee (which authorities may already be thinking about setting up) made up of a majority of independent members (ie individuals who have not been members of the audited body for over five years or have other relevant connections). The auditor panel is tasked with advising the body on the maintenance of an independent relationship with its auditor, including on selection and appointment of auditors. This advice can be solicited or unsolicited.

The Act allows the Secretary of State to specify an ‘appointing person’. However, local government will need to press for such a ‘sector-led body’ to achieve the advantages for the sector of collective procurement and appointment.

The new objections procedure

The way auditors deal with objections by local government electors will, from financial years 2015/16 onwards, be subject to a new triage mechanism. The overall effect of this is that auditors will be better able to act proportionately and focus their efforts on objections which give rise to public interest issues and are an appropriate use of public funds.

As a first step, an auditor must now decide whether to consider an objection. LAAA 2014 explicitly sets out several factors that might suggest the auditor should not consider the objection including where the objection is frivolous or vexatious, and where the cost of considering the objection would be disproportionate to the sums to which the objection relates (unless the auditor thinks the objection might disclose wider concerns about how the authority is managed). There is a new right of appeal to the High Court from the decision not to consider an objection.

The Accounts and Audit Regulations 2015 which have just come into force have changed significantly, the audit timetable – this is being transitionally introduced however over the next three years. In relation to financial years 2015/16 and 2016/17, the requirement for category 1 authorities (generally authorities with gross income and expenditure above £6.5m) to publish the statement of accounts (and other documents, such as auditor’s certificate) will remain by the due date of 30th September. This brings the timetable for category 1 authorities to publish the statement in the 2015 Regulations into line with the timetable for larger relevant bodies to do so under the Accounts and Audit (England) Regulations 2011(which remains in force for the financial year 2014/15). However, for the financial year 2017/18 and onwards, category 1 authorities will have to publish their accounts by 31st July.

The responsible financial officer (the auditor will no longer have this role) will commence a 30-working day period during which the public may inspect the accounts and other relevant documents. This period is commenced by the responsible financial officer once they have signed the accounts. It commences the day after the unaudited statement of accounts, annual governance statement, and details relating to the period for the exercise of public rights are published. It is a major change that the right to make objections is also limited to this period (currently the right to make objections stays live until the audit is certified closed). There is to be a 10-working day period applicable to all authorities, such that the 30-working day period for public inspection of accounts must include for the purposes of financial year 2015/16, the first 10 working days in July. For the financial year 2017/18 this will change to the first 10 working days in June.  

The Regulations also bring in a new requirement for a ‘narrative statement’ covering financial performance and commenting on economy, efficiency, and effectiveness in the use of resources. This will need to be published first with 2015/16 accounts and local authorities are likely to need some guidance on how they should meet this new legislative requirement.

Finally, LAAA 2014 operates a modified regime in respect of “smaller authorities”. Smaller authorities are those whose gross income and expenditure for a year does not exceed £6.5m. The regime are set out in secondary legislation. Authorities whose gross income and expenditure exceeds £25,000 will be subject to a limited assurance engagement, whereas those whose income and expenditure can to opt-in or out of such a regime (but will be subject to transparency requirements). 

What is the real impact?

Time will tell of course, however, the most significant feature is the localism inspired agenda of local authorities appointing their own auditors. Whether the loss of independence in the appointment process will, in the long run, lead to any diminution in the fearlessness and therefore importance of external auditors to financial prudence and propriety will wait to be seen. What is clear however is that auditors will welcome with open arms the changes to the objection procedures, allowing them to concentrate their efforts on those objections that present genuine public interest issues.

Melanie Carter is a partner and Head of Public & Regulatory at BWB LLP. She can be contacted on 0207 551 7615 or This email address is being protected from spambots. You need JavaScript enabled to view it..