Comment / Audit is key concern in year-end process

Each year, we survey our members to see how the year-end went – to learn lessons for the next year and to help inform our work programme. There are some recurring themes. The agreement of balances exercise is a pain and would be so much better if everyone fully engaged and understood the rules. There are usually difficulties for some bodies with information on senior managers’ pensions. And everyone would always like all of the guidance and templates earlier than they get them.

2018/19 saw the application of two new accounting standards – covering financial instruments and revenue from contracts. We expected that these would have caused some difficulties and most respondents reported their implementation had been a drain on resources. The main complaint was that it had been time consuming to understand the new requirements and assess the impact for very little actual change to the numbers being reported.

Going into the year-end process, we also knew that the clarification to the RICS valuation guidance that was published in January was likely to be an issue. This related to the asset lives that should be used for accounting and valuation purposes. The main complaint here was that there was no central steer about how the issue should be treated in the 2018/19 accounts.

What was not expected was that some NHS bodies would miss the submission deadline because their audit was not complete. In the 2017/18 survey, we noted an increase in the number of comments about the auditor so, this year, we asked whether the audit process was better, the same or worse than last year. Around a third of respondents reported that it was worse with another 10% reporting that it was about the same, but that was not a good thing.

There were two main issues identified – firstly the timeliness of the work and the sign-off of the audits. Respondents reported changes to reports between the audit committee and the board meeting to sign off the accounts. And they also highlighted that issues were being raised for the first time at audit committees. This, in part, seemed to be down to auditor internal review arrangements – respondents indicated that local audit teams had to wait for central teams to review and conclude on issues.

This is understandable to an extent – almost half of the providers had their audit opinion modified in respect of the use of resources conclusion and/ or going concern. Any modified opinion is always a red flag to audit firms’ risk management teams. This coupled with the fact that the audit profession has been under fire for perceived high-profile failings such as Carillion and Patisserie Valerie means that a level of central review is to be expected. But it is frustrating when there is a deadline to meet.

The second complaint was that local audit teams did not seem to be appropriately resourced in terms of numbers of staff but, more often, in terms of experienced staff. This meant that NHS bodies had to deal with more auditor queries, but also meant that some issues had to be revisited once senior members of the audit team reviewed the audit file.

Again, the use of non-public sector specialists is to be expected when auditors must complete all of the NHS and local government audits within such a short timescale.

There will, no doubt, be some difficult discussions going on between NHS bodies and their auditors about 2018/19. However, we should start to look ahead to the preparation and audit of the 2019/20 and 2020/21 annual report and accounts. 

It is highly unlikely that the timetable will move so, for public sector auditors, this is always going to be a very busy period. We can expect that audit firms will again have to use non-public sector specialists to meet the deadlines. With the reorganisation of the Financial Reporting Council, it is unlikely that the focus on auditors will let up soon. So, the level of risk management by audit firms is likely to continue to mean that there will be central review of local audit teams’ work and decisions. 

What is new in the next two years is the application of the IFRS 16 leasing standard, which will far outstrip the resource required this year to implement IFRSs 9 and 15. Most NHS bodies treated the implementation of these standards as issues the finance department dealt with at the end of the financial year. This cannot be the case for IFRS 16.

It is widely accepted that the leasing standard will change the financial position of NHS bodies – so financial plans for 2020/21 will have to be based on the new lease accounting arrangements. The work done to complete these plans, later this calendar year, is likely to change the lease disclosures in the 2019/20 accounts. The closing balances and disclosures relating to leases in the 2019/20 accounts will be the opening position for the implementation of the new standard, so they need to be as complete as possible going into 2020/21.

To add to the pressure in 2020/21, auditors will also be applying the new Code of audit practice for the first time. If the proposals to change the value-for-money reporting arrangements are adopted, then this will be an additional pressure on audit teams and the central risk management teams. The audit code is currently out for consultation and the HFMA will be responding. If you want to be part of that work please contact [email protected].