Targeting sustainable external audit

by Emma Knowles

02 March 2021


A solution is needed to address continuing worries about a broken external audit model in the NHS. But there are steps NHS bodies and auditors can take in the meantime.

Concerns are continuing to escalate about the future of local audit. Last week the HFMA published a briefing on the problems being experienced in the NHS external audit market. During the research we were told several times that ‘the NHS external audit market is broken’ by both NHS organisations and auditors themselves.

To illustrate this, in 2019/20 three NHS organisations were unable to appoint an external auditor and several reported that they only received one bid for external audit. Higher audit fees are being charged than in previous years and some 75% of finance directors responding to our survey reported that they had concerns about their organisation’s ability to appoint an external auditor in the future.

There are many complex interlinked factors leading to the current issues in the NHS external audit market, with similar issues being reported in local government.

Following the abolition of the Audit Commission local public bodies are required to appoint their own auditor. The need to take part in a procurement exercise for each audit increases costs for audit firms, but not all of the problems can be linked to the absence of a central body overseeing external audit arrangements.

For many auditors, the issues centre around low audit fees, combined with NHS organisations seemingly uninterested in their auditor’s work indicating that public sector audit has become commoditised and is not valued as highly as it used to be. This, combined with increased auditor regulation and audit scope, means that the market is no longer as attractive as it once was. A full exploration of the issues can be found in our report The NHS external audit market: current issues and possible solutions.

These issues come at a time when it is perhaps more important than ever that we have a robust and transparent audit process to provide assurance over how taxpayers’ money is being spent to meet the health needs of the population – including the money spent on Covid-19.

But what is the solution? Making changes so that the NHS external audit market is sustainable won’t be easy and will take time. It will require action from a number of national organisations and a cross-sectoral approach.

In the meantime, there are some actions NHS organisations can take to make the audit as smooth as possible within the current framework. They are worth considering as NHS bodies move into the 2020/21 year-end and have the most contact with their external audit colleagues.

Arguably the most important factor is understanding and accommodating the competing pressures faced by all parties involved. A common comment made during our research was that ‘communication is critical’. We heard examples of levels of audit work, and therefore fee, increasing without clear reasons being given or the benefits being understood. This is likely to be a particular issue in 2020/21 as it is the first year that auditors are required to give a narrative disclosure in their value-for-money conclusion and members are reporting that auditors are mentioning fee increases. We were also told that auditors do not all understand the pressures facing their NHS colleagues.

Establishing clear arrangements to ensure effective working relationships throughout the audit, including agreed working papers and communications will help. HFMA’s briefing, The external audit – best practice in working well together, shares examples to help the audit of the financial statements go as smoothly as possible.

It is important to spend time planning for future audit procurements. For instance, ensure that tenders are issued in a timely manner (ideally more than a year before the start of the audit year and with at least a four-week timeframe to respond). And don’t issue tenders during peak audit times, including local authority deadlines.

Audit firms need time to plan for the workforce implications and so it is helpful to give them as much lead-in time as possible. It also makes sense to establish contact in advance of the procurement and consider pre-tender supplier days to feed into the specification to determine what might suit the local market such as length and size of contract.

When it comes to the tender, ensure that senior finance executives and audit committee members are involved in the specification to ensure it is high quality and focuses on what is of most relevance to the organisation.

Finally valuing the work of the auditor is paramount. Organisations – including non-executives – who take time to understand and appreciate the work of external auditors are likely to have a smoother appointment process and a more fruitful relationship once they have been appointed.