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Local Audit Escalated Reporting Framework Terms of Use
The FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.
The Financial Reporting Council Limited 2024
The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS
Introduction
1The Financial Reporting Council (FRC) is the system leader for local audit in England, working with system partners to support a strong, well-functioning local audit system. The FRC and MHCLG jointly published a Memorandum of Understanding in March 2023 outlining the five responsibilities for the system leader.
2In July 2023, the Minister for Local Government published a Cross-System Statement to Parliament setting out proposals to tackle the backlog in unaudited local authority financial statements. This included a commitment for the system leader to “devise an escalated reporting framework for audit firms and local bodies to resolve issues ahead of statutory deadlines".
3The first phase of the Escalated Reporting Framework (ERF) is a 'focused' roll-out to obtain information from audit firms active in the local audit market.
4These terms of use apply to all firms active in the local audit market which use the ERF from its launch through to February 2025, for information regarding audit years up to and including 2023/24. The ERF applies to all audits subject to the Local Audit and Accountability Act 2014 (LAAA) with the exception of the audits of local NHS bodies.
Purpose of this document
5This document outlines:
- The objectives of the ERF;
- How the ERF will operate;
- The principles for providing information under the ERF; and
- How the FRC will act on and share information received through the ERF.
Objectives
6The principal objective of the ERF is to identify issues that give rise to the risk of the local audit backlog recurring, and where possible mitigate that risk. It is designed to:
- provide early intelligence to the FRC as system leader where issues arise which could give rise to local bodies missing the statutory backstop date. These issues could occur in financial reporting, financial resilience, governance or audit.
- enable appropriate intervention or support to be designed and implemented to mitigate the risk of local bodies missing the backstop date. This could include through escalation within the FRC, to MHCLG or another relevant system partner.
- enable the FRC as system leader to regularly monitor progress with local audit delivery in a timelier way, identify where system-wide issues or risks are emerging and take cross-cutting actions to mitigate these risks in a timely manner.
7In the first phase, leading up to the backstop dates of 13 December 2024 and 28 February 2025, the ERF will primarily focus on meeting the first objective of providing early intelligence. Design and implementation of mitigating actions will be more feasible from the second phase, for 2024/25 audits onwards, from March 2025.
8While information will be gathered in respect of individual audits, this will be for the purpose of identifying risks that require a system-wide response and enabling this to be convened with system partners. Therefore, the FRC will not seek to alleviate issues with individual audits that do not relate to meeting the statutory backstop dates.
9The scope of information relevant for the purposes of the ERF is limited to information about issues which could give rise to an audit missing a backstop date, and does not require auditors to raise other issues which may make an audit or local body 'high risk', such as the likely issuance of a Section 114 notice1 (e.g. unlawful expenditure), unless the issue itself gives rise to a risk of the audit missing a backstop date. It does not replace any current oversight or regulatory responsibility of the FRC or any other system partner.
Operation of the ‘focused’ ERF
10The 'focused' ERF will gather information through:
- Periodic meetings between the FRC's Local Audit team and each firm currently active in the local audit market, and
- Firms providing information via a dedicated mailbox, through emailing [email protected].
11The ERF will be operated by the FRC's Local Audit team. The ERF will operate independently of the FRC's wider supervision and inspection activity. It does not replace any existing requirement for audit firms to engage with the wider FRC for any other purpose.
Principles for providing information under the ERF
12The ERF relies on the voluntary cooperation of local auditors to provide the relevant information to the FRC. The ERF is envisaged as a collaborative undertaking to support the mutually beneficial aim of improving the governance of the local audit system.
13Firms should notify the FRC of issues arising in relation to individual audits, or a cross-section of audits, where there is a risk that these issues give rise to an audit, or audits, missing the backstop dates of 13 December 2024 (for audit years up to and including 2022/23) and 28 February 2025 (for audit year 2023/24). The purpose of this disclosure is for the FRC, as system leader, to be aware of audits where there is a risk of missing a backstop date and seek to convene appropriate system responses where possible.
14Before reporting it through the ERF, local audit firms must discuss the matter giving rise to the risk of missing the backstop date with the relevant local body or bodies to determine whether a mitigation can be identified locally. The FRC should not receive information about an issue which has not previously been discussed with the relevant local body or bodies.
15The relevant local body or bodies should be notified by the audit firm that an issue will be reported to the FRC via the ERF, apart from in exceptional circumstances where this may not be appropriate – for instance if this may give rise to an ethical breach.
16Issues should be raised as soon as possible and ideally within one week of them emerging / the local auditor concluding that they could lead to the risk of an audit or audits missing a backstop date.
17Before reporting an issue through the ERF, local auditors must ensure that any information provided to the FRC is done so lawfully.
18Local audit firms should notify the FRC through the ERF where an issue previously raised has subsequently been resolved.
19Any information received which contains personal data will be processed by the FRC in accordance with the UK General Data Protection Regulations (UK GDPR). Please read the FRC's Regulatory Privacy Notice2 prior to providing any information to the FRC under the ERF.
Information sharing
20The FRC may consider it necessary to share information received through the ERF with external third parties to allow it to convene an appropriate system response to issues raised. Such third parties may include, but are not limited to MHCLG, the NAO, PSAA or CIPFA.
21The ERF will operate subject to a rebuttable assumption that information shared by firms will not be disclosed outside the FRC's Local Audit team either within or outside the FRC, without the firm's consent or unless the FRC is required by law to do so. The ERF will be operated by the FRC in its role as system leader, as distinct from its role as a regulator.
22The presumption against sharing information may be rebutted where:
- The disclosure is deemed by the FRC to be in the public interest;
- The disclosure is to an external third party for the purposes of enabling a system partner to take action in response to an issue raised, or coordinating an appropriate system-wide response to an issue raised;
- The information falls within the regulatory or oversight remit of a system partner; or
- The information is appropriately anonymised.
23Public interest decisions will be made with regard to the General principles for considering the public interest in our work, published by the FRC in November 2022.
24Notwithstanding the rebuttable presumption above, where the information received under the ERF has been obtained by a local auditor under or by virtue of the Local Audit and Accountability Act 2014 (LAAA 2014) or in the course of an audit under the LAAA 2014, the FRC may require the local auditor's consent to onward share that information, in accordance with Schedule 11 of the LAAA 2014.
25Where such consent is required, the FRC's Local Audit team will write to the local auditor and seek to obtain the necessary consent in accordance with Schedule 11 of the LAAA 2014.
Acting on information received
26The FRC will act on information received through the ERF only where the Local Audit team consider it to meet the principles for referring an issue through the ERF, as set out in this letter, and that it is possible to convene system partners to mitigate the risks identified.
27It is not the role of the FRC to fix and solve individual issues raised. As a result, submitting information to the Local Audit team via the ERF does not establish an obligation on the FRC to act on all information received. Instances where the FRC may not act on information received may include, but is not limited to, where the FRC or other system partners do not have the power to resolve the issue raised, or where the issue in substance is a request, or need, for mediation between individual auditors and local bodies.
Exemption from liability
28For the avoidance of doubt, the FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of using the ERF (or otherwise from using this document or arising from any omission from it).
Financial Reporting Council September 2024
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