Two years' worth of financial accounts belonging to Middlesbrough Council are to be written off without a proper audit opinion being given on them.
The council’s accounts for the 2021/22 and 2022/23 financial years, which have only been published in draft form to date, remain open to audit by Ernst & Young, although they will still be issued in a final form.
The company has been replaced as the council’s external auditor by Forvis Mazars which was given a five year contract starting from the 2023/24 period.
Ernst & Young confirmed the intention was to “disclaim” financial statements in 2021/22 and 2022/23, taking into consideration dates for completion which had been communicated to it.
Ideally auditors should issue a “clean” opinion on accounts, thereby providing full assurance as to their content and accuracy.
But they can also issue a modified opinion or simply disclaim accounts, insufficient work having been done to formulate any sort of opinion, the worst case scenario.
The Government has described a “significant and unacceptable backlog” of unaudited local council accounts and recently announced its intention to introduce “backstop” dates via new legislation – effectively lines in the sand by which audit work for any given financial year will have to stop and an attempt at an opinion then be given if possible.
A recent letter to council chiefs from Housing Minister Jim McMahon said the first backstop date for the 2022/23 financial year will be December 13 this year while the 2023/24 financial year backstop will be February 28, 2025.
The knock on effect of the backlog and the Government action means the 2023/24 Middlesbrough Council accounts, which were due to be shortly made available to Forvis Mazars for audit, could also end up with a disclaimer or, at best, a modified opinion.
The Government also said for the financial years 2024/25 to 2027/28 local councils should publish draft unaudited accounts by June 30 following the financial year to which they related.
Interim chief financial officer Debbie Middleton told a meeting of the council’s audit committee financial accounts were “really technical documents” and there were underlying issues causing the problems, including the recruitment and retention of suitably qualified individuals.
She said: “Implementing a system of backstops means auditors and local authorities will have a period of time to get as much work done as they possibly can in the timescale allowed, but a line will be drawn.
“Auditors will either be in position to issue a clean opinion, a modified opinion, or if they have not done nearly enough work to issue a disclaimed opinion.”
She added: “We are likely to see disclaimed and modified audit opinions, that possibly will include 2023/24 or even 2024/25.”
Councillor David Coupe said: “We have to have a set of accounts that not only the councillors, but the public out there can believe.”
Committee chairwoman Councillor Jill Ewan said: “We are in the same boat as many other local authorities, but it is unhelpful to have three years worth of accounts not yet properly audited through no fault of our own.”
A representative of Ernst & Young said: “This isn’t the outcome anyone wanted, but recognising where we are across the sector something has to be done to get back on track and we support the proposals put forward by the minister.”
He confirmed the intention was to disclaim the 2021/22 and 2022/23 financial statements because of timescales and available capacity, and audit work still to be done, adding: “We have worked on can we do it by the dates that have been communicated and the answer is no we don’t think we can.”
The council would still have to produce final accounts, incorporating any relevant changes from the draft position, but Ernst & Young would not be auditing them, he said.
Cllr Coupe made reference at the meeting to an “impossible task”, but later told the Local Democracy Reporting Service he was “appalled” and “disappointed” at Ernst & Young’s failure to complete the audit of the accounts it had been tasked with, especially for a multi-national company of its stature.
Mr McMahon’s letter said: “Effective local audit ensures transparency and accountability for public money spent on vital services and builds public confidence.
“The Government inherited a broken local audit system in England with a significant and unacceptable backlog of unaudited accounts, which will likely rise again to around a thousand this year.
Mr McMahon acknowledged that due to time constraints caused by the backstops, auditors were likely to issue “disclaimed” audit opinions, meaning no assurance on many accounts, which in the short-term would cause additional concern.
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But he said: “Given the scale of the failure in the local audit system the Government inherited meant that we have had to take this difficult decision to proceed.
“Without this action audits would continue to be delayed and the system will move even further away from timely assurance.”
The minister added that auditors would be expected to clearly set out the reason for issuing disclaimed or modified opinions to “mitigate the potential reputational risk” for councils.
In March last year former Middlesbrough South and East Cleveland MP Simon Clarke wrote to Middlesbrough Council asking for answers as to why accounts were not being published in a timely fashion, suggesting it was an outlier when compared to other councils in the region.
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