Comment / Think carefully before changing auditor

It is fair to say that the 2021/22 year-end audit process has been tough for both NHS finance staff and auditors. While there weren’t any major financial reporting changes, the accounts preparation coincided with the resubmission of 2022/23 plans. And those working in commissioning will have been focusing on the closedown of clinical commissioning groups and the creation of integrated care boards.

Auditors faced increasing pressure from regulators and, therefore, increased audit risk, resulting in increased sample sizes, testing and levels of review. Some auditors have reported concerns about the quality of NHS accounts and working papers.

Relationships have undoubtedly been tested.

The experience this year-end won’t have made the external audit market problem any easier. After a bruising year-end audit, there might be a temptation to consider appointing a different auditor if the contract allows. Over recent years, we have increasingly heard from our members that they are finding it difficult to appoint an external auditor, with little or no interest being shown in invitations to tender for external audit services. Some members have also reported that their auditor has resigned or has declined to extend the current audit contract.

There is a popular misconception that if NHS organisations themselves cannot appoint an auditor, one of the national bodies has a duty to step in and find them one. This is not the case and hasn’t been since the abolition of the Audit Commission. Organisations should think very carefully before changing their incumbent auditor as they are likely to find that their problems have increased.

There are many complex and intertwined factors leading to the issues in the NHS external audit market, with similar issues being reported in local government. In my opinion, the main ones are increased audit regulation and a shortage in the supply of external auditors.

Focusing on the first of those, there is now significantly greater regulatory pressure from the Financial Reporting Council (FRC) on audit firms to deliver higher quality audits and to demonstrate much greater professional scepticism. With the increased expectations regarding quality, audit firms face an increase in both reputational risk and the potential for significant fines. They need to consider the risk of local audit to the firm overall, and its opportunity cost compared to delivering other services.

NHS financial constraints, reorganisations and increasingly complex arrangements (such as NHS subsidiaries and collaboratives) create more complex accounting and reporting arrangements, which lead to increased audit risk that auditors must consider in accordance with international accounting and auditing standards.

NHS bodies also have a very high public profile given the nature of their operations – so there are heightened reputational risks. The audit scope is also wider including value-for-money commentaries, regularity opinions (for some types of NHS organisations) and enhanced statutory reporting powers in the public sector.

The level of audit risk increases the amount of audit testing required, as well as the level and depth of internal quality checks, and therefore impacts on both the fee and relative attractiveness of the audit engagement.

The HFMA’s new briefing The NHS external audit market: an update on current issues sets out the factors impacting on the attractiveness of NHS external audit in more detail. The briefing also summarises the results of a survey of NHS finance directors carried out during May 2022.

In summary, two thirds of respondents had concerns about their ability to appoint an auditor in the future. On the more positive side, 98% of respondents rated the quality of their relationship with their external auditor as excellent or good. And 92% said that the relationship with their auditor was about the same as recent years or it had improved. While this is good news, the survey was carried out before the completion of the 2021/22 audit and finance directors may have a different view now.

You may well be thinking that the problems have been known about for a while and that there is very little that individual NHS organisations can do to remedy the situation. In the main, you would be right. However, there are some things that can help, for example understanding the pressures faced by auditors, valuing their work and undertaking a well-thought-through tender process in plenty of time before the current audit ends.

The new briefing also summarises the government’s plans for local audit. The Department of Levelling Up, Housing and Communities has confirmed that the Audit Reporting and Governance Authority (ARGA) (the new body due to be established to replace the FRC) will take on a systems leader role for both local government and health audits.

ARGA will have a specific objective to ensure that the local audit system operates effectively. It will also take on responsibility for producing the Code of audit practice, which is currently developed by the National Audit Office. The impact on the NHS remains to be seen, but the HFMA will liaise with ARGA and keep members updated.

The number of NHS audits will reduce due to the changes brought about by the Health and Care Act. There are also plans being put in place for ARGA to become the system leader covering both local government and health. But both these developments will take time to pay dividends. In the meantime, if public sector audit continues to be undervalued, less profitable than alternative sectors, time pressured and high risk, then there is the real danger that firms will choose to withdraw from the NHS market.