NAO consults on enhanced reporting in new code of audit practice

The National Audit Office (NAO) is consulting on the draft text for the new Code of audit practice, which will come into force on 1 April 2020, writes Lisa Robertson. This will apply to audits of 2020/21 financial statements onwards.

The code is a principles-based document, covering local public services in England, including the NHS and local government sectors. Auditors of these bodies are required to comply with the code in meeting their responsibilities. Areas covered include: the audit of the financial statements; the auditor’s work on economy, efficiency and effectiveness of corporate arrangements (value for money arrangements, or VFM); reporting the results of the auditor’s work; the auditor’s additional powers and duties; and smaller authority assurance engagements.

The new code comes at a time when audit is in the spotlight, particularly in light of recent corporate failures such as Carillion. In response to last year’s Kingman review of the Financial Reporting Council (FRC), the council will be replaced by a new enhanced regulator, the Audit, Reporting and Governance Authority (ARGA). It will have a new mandate, new leadership and stronger statutory powers.

Alongside this reform, the key changes to the code focus on enhanced auditor reporting to ensure it is more meaningful and has a greater impact. The main changes for NHS organisations are the approach to assessing arrangements to secure VFM and reporting of the results of the auditor’s work.

The current code requires auditors to make an overall, binary conclusion about whether or not proper arrangements were in place during the previous financial year.

In the NHS, a large proportion of qualified conclusions have been issued in recent years, many related to failures to meet financial targets or problems with financial sustainability.

The new code aims to maximise the impact of current local audit work already undertaken. It replaces the requirement for an overall conclusion with the requirement for commentaries on financial sustainability, governance and improving economy, efficiency and effectiveness.

The draft code also sets more detailed expectations about what effective reporting should look like. Auditors will be required to produce a report on the financial statements and an annual report. The annual report will bring together all audit work over the year, with a core element being the commentary on VFM criteria, including recommendations.

Making the best use of the work already done, actions that need to be taken should be reported to organisations and the public in a clear, readily understandable and accessible manner no later than 30 September.

The HFMA welcomes the proposed new audit approach to assessing and reporting on VFM and maximising the impact of local audit work. In the past, it has had concerns that NHS organisations may not fully understand the auditor’s conclusion on the arrangements to secure VFM and the action they need to take as a result. The new commentaries, tailored to local circumstances, should be easier to understand and help focus NHS organisations’ attention on the areas that need improving.

However, the association does have concerns about the potential impact of any extra work on audit fees, which would be an additional financial pressure on NHS resources. We are also aware that the 2018/19 accounts process was challenging for local government and NHS bodies, exposing a lack of audit capacity, exacerbated by the bringing forward of the local government audit deadline.

The HFMA will be working with members to review the draft code and assess its impact on audit resources, responding to the NAO’s consultation by 22 November 2019. It is interested in your views to ensure it fully represents members. To share your thoughts, e-mail [email protected].

• The NAO will be exploring what the new code means for local organisations and audit committee chairs at the HFMA audit conference on 13 November. The NAO has also launched a strategic review on its future strategy and would welcome responses from HFMA members on its work, role and how it communicates.

Lisa Robertson is an HFMA policy and research manager