Audit – Who Needs it?

It seems that whilst many companies are obligated to provide audited accounts and their directors are committing a criminal offence in failing to do so (not least risking asset seizure by the Crown), it seems there is another rule for the public sector - who with some exceptions are generally larger than their audited commercial compatriots.

Only 1% of local government bodies have received audit opinions on 22/23 accounts - Room 151

What was the lesson from Carillion ? It was a national scandal, and the lesson is to improve audit quality – a mandate that the Financial Reporting Council has taken on with vigour (and I think some success). And now we find out that public institutions have decided that they consider themselves well enough governed that an audit is not a priority and not even a requirement. Woking council, one of many, has gone bust with debts of ￡2bn – roughly the same as owed to Carillion ’s creditors but now the social cost is not whether schools close because rubbish bins are not emptied and floors not cleaned but whether the homeless get shelter and generally whether those in need get help.

Whilst I think it is reprehensible to accept low audit standards but it is worse to accept no standards at all. The recent decision by the Woking Borough Council on a medium term financial strategy was justified to ensure “open and transparent governance of the financial affairs of the council”. Woking Borough Council recent Standards and Audit Committee referred to 3 separate auditors in the same paragraph – all working for the council in different financial aspects. However the Chairman stated in the minutes that “it was clear that the Council not having received the benefit of an Audit Opinion since the 2018/19 accounts was having an adverse impact on the Council.” So it seems there is a view amongst councillors than an audit is of value and given it is a legal requirement, the system needs to change. Surely the country would be better served if the public institutions to whom we all subscribe are audited within a set time - without exception.

Just 1% of English councils published audited accounts by deadline | Local government | The Guardian

A delay in an audit opinion cannot be justified on any grounds when it is years overdue. If the auditors have not got the evidence within a reasonable period then the auditor’s opinion needs to be qualified. Failure of an auditor to put forward such an opinion in front of such delays in itself shows evidence of a lack of independence.

The Financial Reporting Council report into the failings of KPMG in the Carillion audit indicated a lack of independence. Safeguards are usually in place to address such issues and it should not be possible for auditors to continue in their role if they cannot. If KPMG had to resign there would be others to replace them. However for the public sector there are so few auditors that only 10 firms can accept appointments. Does this create a lack of independence in public sector audits? I think it is worse. The knowledge that you cannot be “fired” breeds concerning behaviour similar to a lack of independence. The willingness to withhold an opinion for years whilst audit evidence is secured is tantamount to a loss of independence.

Surely it is in the public’s interest to encourage by whatever means more auditors into sector so as to prevent even larger and more frequent disasters than Carillion . If that means the bar has to be lowered temporarily to increase numbers before training and reflection drive quality upwards then I think it is an acceptable price to pay. It is not acceptable for the public to pick up the bill for failing councils when they did not adhere to the expected scrutiny and governance rules in place in the first place.