The local authority audit backlog: pensions considerations

A recent joint statement from the Department for Levelling Up, Housing and Communities (DLUHC) and the National Audit Office (NAO) announced proposals to help restore the timely audit of local authority accounts in England. Garry Smith explores what these proposals could mean for local authority pensions reporting moving forward.

The audit backlog has existed for some time, but following a great deal of detailed work across the industry, the joint statement issued on Friday 9 February from the DLUHC and the NAO detailed proposals to clear the backlog and embed timely audit. 

Included is a proposal for the Chartered Institute of Public Finance and Accountancy (CIPFA) to consult on temporary changes to the Code of Practice in Local Authority Accounting for 2023/2024 and 2024/2025. Now that the consultation has commenced, we take a look at the full detail of the potential implications for pensions reporting. 

The overall outlook 

The general thrust of the various proposals in the joint statement is to have a “reset” phase which clears the backlog of audits for years up to and including 2022/23 by 30 September 2024. This backstop date applies even if auditors issue a modified opinion due to not being able to complete all audit work by that date. From that point on, and to mitigate the risk that backlogs will re-emerge, the audit system will enter a “recovery” phase with progressively reducing timescales for signing-off subsequent audits. This will allow assurance to be rebuilt over several audit cycles.

To aid the recovery process, CIPFA is consulting on proposals that reduce pensions disclosure requirements for at least two years, with the idea being that reduced disclosures will ease the burden on auditors and aid the system getting back on its feet. 

Although the headline in the consultation is that the proposals reduce the disclosure requirements around pension liabilities / assets to be in line FRS102 (UK GAAP)  instead of International Financial Reporting Standards (IFRS) – the detail is slightly more subtle.  For the 2023/24 and 2024/25 reporting periods, the proposal is to retain most of the existing Code requirements, which remain consistent with IFRS, but remove two specific elements, namely the sensitivity analysis and a narrative description of any asset-liability matching strategies.  All other aspects of the pensions calculations and disclosures remain as per the current Code, and in line with IFRS.  

The perils of unintended consequences

We do not believe that any of the actuarial firms have contributed to the auditing backlog through late production of accounting reports.  However, for the 2023/24 period, preparations are well underway to produce 31 March 2024 reports under the existing Code for local authorities.  Any last-minute changes to the Code, even if only for disclosures, could complicate that work.  Any potential gains for the preparers or auditors of accounts from slightly less detailed disclosures might easily be undone merely by the extra work required to implement the change of approach. 

At this stage, and bearing in mind that the consultation remains open until 29 March, we are keen not to dismiss the proposals out of hand.  And we recognise that all parties are acting creatively to try to resolve a complex situation. However, we remain to be convinced that removing two relatively minor and straightforward disclosure requirements will do much, if anything, to help with signing-off the pensions aspects of local authority accounts over the coming two years.  

Our current view is that we will continue with our work for the March 2024 year-end and intend to produce accounting reports containing the full sensitivity analysis as usual.  As well as helping us meet our professional requirements to communicate risk and uncertainty, we understand that auditors might find the sensitivity analysis to be a useful diagnostic used in the testing of other disclosed items.  Removing a potentially useful set of statistics that aid the overall audit process risks increasing auditor queries and requests for additional information, hence we will continue to provide it.

If the proposals do not proceed, authorities can use our results as normal, transcribing the sensitivity analysis into their accounts.  If the proposals are accepted and implemented, authorities can merely ignore the sensitivity analysis when preparing their accounts.

We will be delighted to assist local authorities prepare their disclosures, both the numerical and narrative aspects, as required.  As a matter of good governance, it is good practice to periodically review the narrative of pensions disclosures to ensure they remain appropriate, so this may be a good time to take a deep dive irrespective of the outcome of the consultation.  

We have submitted very detailed comments on the proposals to CIPFA for those interested in the minutiae, which can be accessed at the link below.

This is definitely one for local authorities to keep an eye on, and we encourage them to participate in the various DLUHC, NAO and CIPFA consultations over the coming few weeks.  

Note – this blog was updated from the version published on 12 February to reflect the content of the CIPFA consultation.