What to do about external audit in the NHS?

by Emma Knowles

28 October 2020


All is not well in the world of local public sector audit. Those NHS organisations that have not tried to appoint new external auditors recently may be blissfully unaware of the issues that are unfolding and which look likely to get worse before they get better.

For the 2019/20 audits there were three NHS organisations that were unable to appoint an external auditor following the required audit appointment process. Auditors were eventually appointed after input from the national bodies and presumably money helped to resolve the situation. Other NHS bodies have reported only one audit firm submitting a bid for work and with much higher audit fees than previous years. There are similar, but different, issues being reported in local government. But what is causing the problem? 

We need to go back 10 years, when the then new coalition government made the announcement that the Audit Commission was to be abolished. The Audit Commission’s purpose was to appoint auditors to local public sector bodies, set fees, produce the Code of audit practice, undertake quality reviews and carry out national studies. Audit Commission auditors carried out around 70% of the audits, with the remainder being carried out by audit firms.  

Fast forward to 2020 and we have NHS clinical commissioning groups, NHS trusts, NHS foundation trusts and local authorities appointing their own external auditors. The audits are carried out in line with professional auditing standards and the National Audit Office’s Code of audit practice. Some NHS organisations have undertaken joint procurement exercises to reduce the burden and 98% of local government, fire and police bodies have signed up to the Public Sector Audit Appointments Ltd (PSAA) regime. PSAA appoints auditors to organisations who opt into the scheme and NHS organisations are not eligible.  

Some of the problems can be linked to the absence of a central body overseeing external audit arrangements, but not all of them. There are many complex intertwined causes: 

  • Despite the recent reports of fee increases, since the creation of NHS foundation trusts, audit fees have reduced significantly. Put simply, NHS audits are not as profitable for the firms as they used to be. 
  • Audit regulation has increased and firms are generally becoming more risk averse. In recent years there have been a number of high profile cases of audit failures and a raft of reviews of the UK audit market (such as Kingman1,Brydon2, Competition and Markets Authority3 and the Redmond review4). Although these reviews did not specifically look at NHS audits, they inform the context for audits and any resulting changes in audit regulation, auditing standards, audit firms or audit services will almost inevitably have an impact. While the long-term implications arising from these reviews are not yet clear, there has already been significantly greater regulatory pressure on audit firms to deliver higher quality audits that demonstrate much greater professional scepticism.  
  • Auditors report that in some cases bidding for NHS audits can be extremely challenging. Examples cited are poor quality tenders with incorrect documentation being used and also extremely tight timescales for tender submission. 
  • The deadlines for NHS and local government audits are much tighter than for private sector organisations and there are capacity issues, with most firms using the same staff to carry out both NHS and local government audits. We are also hearing that auditors are not finding the public sector as attractive as other audit work, with it being perceived as challenging with little benefit career wise.   
  • There are an increasing numbers of NHS subsidiaries and engaging an auditor for this additional work is an additional challenge. 

In order to get a clearer understanding of the scale of the issue, we are asking finance directors to complete a short survey, which can be found here. We will produce a briefing later this year setting out in more detail the background to the issue with views from the NHS and auditors.  

It is clear that it is going to take some sorting as there is not one clear solution that will solve the problems. It will likely take a combination of an increase in audit fees, extended deadlines, perhaps a more significant role for the NAO, an improved understanding of the value of audit and independent scrutiny and most importantly a reinvigoration of the benefits of being a public sector auditor.  

It is not going to be easy to resolve the issues and it won’t happen overnight.  


DBEIS and FRC, Financial Reporting Council: review 2018, December 2018
DBEIS, The quality and effectiveness of audit independent review, December 2019
CMA, Statutory audit market study, April 2019
Ministry of Housing, Communities and Local Government, Local authority financial reporting and external audit: independent review, September 2020

Click here to access the HFMA survey on external audit appointments