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English Devolution And Community Empowerment Act 2026

Contents

Part 4: Local audit

Section 89: Establishment of Local Audit Office

Background
  1. The Local Audit and Accountability Act 2014 (the 2014 Act) sets the key legislative framework for the local audit system. Within the previous framework established by the 2014 Act, responsibility for oversight and regulation was spread across several organisations.
Effect
  1. This section inserts new Part 1A into the 2014 Act, and introduces Schedule 34 of this Act which inserts new Schedule 1A into the 2014 Act. These provisions enable the establishment of a new public body, the Local Audit Office (LAO), to oversee the local audit system. These provisions set statutory objectives for the LAO and prescribe key elements of its governance processes and structures.
  2. The LAO will conduct its functions as set out in sections 89-93, which include setting fees, appointment of auditors to eligible bodies, setting the code of audit practice and overseeing a regulatory framework.
  3. Subsection (1) inserts new Part 1A into the 2014 Act. New section 1B sets out that the main objective of the LAO is to secure the effective operation of the audit system. Section 1C provides for financial matters and how the LAO will be funded, and section 1D provides for oversight and intervention by Secretary of State, whereby the LAO is required to exercise its functions in accordance with any direction or guidance issued to it by the Secretary of State.

Section 90: Local audit providers: registration and public provision

Background
  1. Schedule 5 to the Local Audit and Accountability Act 2014 (the 2014 Act) previously set out the arrangements for the eligibility and regulation of auditors in the local audit framework. Schedule 5 to the 2014 Act applies Part 42 of and Schedule 10 to the Companies Act 2006 (the 2006 Act), seeking largely to align the regulatory framework for local auditors with auditors of companies. Under the 2006 Act, eligibility for appointment as an auditor depends on membership of, and compliance with, the rules of a professional accountancy body that has been authorised (or "recognised") by the Secretary of State. In practice, the power to recognise supervisory bodies under the 2006 Act is delegated to the Financial Reporting Council.
Effect
  1. This section inserts Part 2A into the 2014 Act, and introduces Schedule 35 to this Act which inserts Schedules 1B, 1C, and 1D into the 2014 Act. Together, these provisions establish a new framework for the eligibility and regulation of local auditors.
  2. New section 6A gives the Local Audit Office (LAO) the power to keep a register of audit providers who are eligible to carry out audits itself, or otherwise to designate an external registration body to hold such a register. Section 6B sets out further details of how external registration body status may be granted or revoked.
  3. Section 6C requires the registration body to comply with the requirements of inserted Schedule 1C, which makes further provisions for the eligibility and regulation of local auditors.
  4. Section 6E provides for the LAO to be able to establish or support a firm which could act as a public provider of audit. Section 6F sets out that if the LAO itself decides to carry out audits its audit practice is also independently monitored, inspected and reported on.

Section 91: New appointment arrangements for non-NHS audits

Background
  1. Previously Part 3 of the Local Audit and Accountability Act 2014 (the 2014 Act), along with Schedules 3 and 4 to that Act, prescribed the framework in which relevant authorities (i.e. those listed or later added to Schedule 2 to that Act) may appoint their own auditor or have an auditor appointed on their behalf by an appointing person.
  2. Schedule 36 of this Act disapplies much of Part 3 of the 2014 Act in relation to relevant authorities that are not NHS bodies.
Effect
  1. This section inserts new Part 2B into the 2014 Act and sets new requirements regarding the appointment of auditors to relevant authorities that are not NHS bodies. New Section 6G specifies that the Local Audit Office (LAO) must appoint auditors to these authorities and that the appointed auditor may be either the LAO itself or a registered local audit provider.
  2. The further provisions in new Section 6H include requirements regarding the timeframe in which auditor appointments must be made. The provisions in new Section 6I set procedural requirements, including in relation to when and how information is published once an auditor has been appointed. New Section 6J establishes requirements in relation to the resignation or removal of an auditor, including that the LAO must make a new appointment as soon as practicable should this occur.
  3. Section 6K sets out new arrangements for auditor fees. It gives the LAO the power to charge local authorities a fee for the audit, and sets a requirement for the LAO to publish indicative fees, but not by any set date. It also gives the LAO the power to approve any additional work proposed and charge local authorities accordingly. As such, the LAO will be able to revise fees if more or less work is required, so that fees can more directly reflect the work involved.

Section 92: Audit providers to nominate lead partner

Background
  1. Previously audit firms eligible to deliver local audits were required to have a key audit partner who was responsible for local audits on behalf of the firm under paragraph 7A of Schedule 10 to the Companies Act 2006 – as modified by paragraph 28(5) of Schedule 5 to the Local Audit and Accountability Act 2014 (the 2014 Act). Key audit partners were required to be approved by a recognised supervisory body in accordance with statutory guidance issued by the Financial Reporting Council (as the delegate of the Secretary of State).
  2. Schedule 36 of this Act removes section 18 of and Schedule 5 to the 2014 Act.
Effect
  1. The removal of section 18 and Schedule 5 of the 2014 Act means the key audit partner requirements no longer apply. Inserted section 19A ensures that, whether the LAO or a firm is appointed auditor, a lead partner must be nominated by the provider. Paragraph 19A(3), 19A(6) and 19A(7) provide that lead partners are required to be approved as eligible by a registration body, but the requirement for these decisions to be compliant with statutory guidance is removed.

Section 93: Code of audit practice

Background
  1. Previously the Comptroller and Auditor General had responsibility for producing a code or codes of audit practice in accordance with section 19 of and Schedule 6 to the Local Audit and Accountability Act 2014 (the 2014 Act). The code sets out what auditors of relevant local public bodies are required to do to fulfil their statutory responsibilities under the 2014 Act. Relevant authorities are set out in schedule 2 of the Act and include local councils, fire authorities, and police and NHS bodies.
  2. Schedule 6 to the 2014 Act also includes various procedural safeguards, including consultation requirements, and stipulates that codes of audit practice must be laid in draft before Parliament. If either House, within a 40-day period, resolves not to adopt the code, it cannot be published. A similar procedure applies to any alteration or replacement code. A code cannot be in force for longer than five years.
Effect
  1. This section amends Schedule 6 to the 2014 Act so that responsibility for codes of audit practice passes from the Comptroller and Auditor General to the Local Audit Office (LAO).
  2. Paragraphs 65(2) and (4) refine existing language as to the purpose of the code of audit practice, and its ability to refer to documents outside the code itself (which is current practice but is formalised by this section).
  3. Paragraph 65(5) amends the list of bodies who must be consulted on a new code.
  4. Paragraphs 65(6) and 65(7) establish that codes of audit practice and statutory guidance already in place will continue to have effect until the LAO decides they should be replaced (or, specifically for guidance notes, revoked).

Section 94: Audit committees

Background
  1. The Local Audit and Accountability Act 2014 (the 2014 Act) sets the key legislative framework for the local audit system. The Act previously did require public bodies to establish audit committees. However, best practice guidance, such as that from CIPFA (Chartered Institute of Public Finance and Accountancy), strongly recommends local authorities have an independent and effective audit committee to support good financial management and governance.
Effect
  1. This section inserts new Part 33A into the 2014 Act. This states that a relevant authority other than a health service body must have an audit committee and arrange for the committee to exercise specific functions.
  2. Subsection (2) enables relevant authorities that have the legal power to set up committees to choose one of its existing committees to act as its audit committee. If the body does not have that legal power, it can exercise its responsibilities by appointing a group of individuals to serve as its audit committee instead.
  3. Subsection (3) outlines the audit committee functions. The functions involve the committee examining the authority’s financial matters, looking at how it manages risks and ensures good governance, checking how efficiently and effectively it uses its resources, and making reports and recommendations to the authority based on those reviews.
  4. Subsection (4) allows the Secretary of State to make rules so that a law which usually applies to a relevant authority or one of its committees can also apply to a group of people who have been appointed to carry out similar duties on the authority’s behalf.
  5. Subsection (5) allows the Secretary of State to issue regulations concerning the membership of an audit committee and the appointment and remuneration of its members.
  6. Subsection (6) directs that at least one member of an audit committee is an independent person.
  7. Subsection (7) asserts that the Secretary of State may issue regulations about the payment of allowances, expenses, gratuities and pensions to audit committee members.
  8. Subsection (10) requires that an authority must have regard to any guidance issued by the Secretary of State in relation to audit committees.
  9. Subsection (11) specifies that references to a "committee" apply to any sub-committee of an audit committee.

Section 95: Review of audit and reporting arrangements at Secretary of State’s request

Background
  1. The Local Audit and Accountability Act 2014 (the 2014 Act) and the Accounts and Audit Regulations 2015 (made under the 2014 Act) establish a number of duties for relevant authorities under the 2014 Act. These include responsibilities to ensure that an authority has an effective system of internal control; to undertake effective internal audits and annual governance reviews to prepare statements of accounts; to sign and approve these as true and fair; to hold public inspection periods; and to publish audited accounts. For NHS bodies, the 2015 regulations cover auditing requirements, but not financial reporting requirements.
  2. Under Section 20 of the 2014 Act, a local auditor must, by examination of an authority’s accounts, be satisfied that the accounts comply with the requirements of the enactments that apply to them; that proper practices have been observed in the preparation of the accounts; that the statement is a true and fair view; and that the authority has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources.
Effect
  1. This section provides the Secretary of State with the power to require the Local Audit Office (LAO) to conduct a review of a relevant authority’s audit and reporting arrangements, to report its findings to the Secretary of State and report to the authority itself. These arrangements are defined as the arrangements a body has (or recently had) for enabling it to discharge its functions under the 2014 Act, and for enabling a local auditor to discharge their functions in relation to the authority. A review of this kind could therefore encompass a wide range of issues that could potentially affect the timeliness and/or effectiveness of the audit process.
  2. Subsection (3) enables the Secretary of State to set conditions on the scope and timing of each review requested. Where the LAO’s rights of access to documents and information has been obstructed, it may apply to the High Court for an order to remedy the non-compliance.
  3. Subsection (7) requires the Secretary of State to publish a summary of any findings of a review reported to them by the LAO.

Section 96: Smaller authorities: change of terminology

Background
  1. Smaller authorities are subject to less extensive requirements in relation to their financial accounts than other relevant authorities subject to the principal audit regime. They are subject to a limited assurance review, rather than a full audit, in accordance with the code of audit practice, due to their size and level of risk.
  2. This Act repeals Schedule 5 to the 2014 Act, which sets out regulations through which financial thresholds for larger and smaller authorities’ audit regimes are set.
Effect
  1. Subsection (1) directs that in sections 5 and 6 of the 2014 Act, the word "smaller" is to be replaced with "category 2". Together with repealing Schedule 5 of the 2014 Act, this allows the Local Audit Office flexibility to set assurance and audit regimes for authorities which are proportionate and risk-based, rather than focussed solely on binary financial-based thresholds. The term "smaller" would otherwise suggest regimes will continue to be size-based.

Section 97: Power to provide for smaller authority treatment in previous years where audit outstanding

Background
  1. Smaller authorities are subject to less extensive requirements in relation to their financial accounts than other relevant authorities subject to the principal audit regime. They are subject to a limited assurance review, rather than a full audit, in accordance with the code of audit practice, due to their size and level of risk.
Effect
  1. This section provides the Secretary of State with the power to lay regulations to retrospectively treat a public body as a smaller authority for a particular financial year, even if it does not normally meet the criteria to be a smaller authority under the existing rules. This ensures that certain relevant authorities can undergo a limited assurance review where otherwise no audit or assurance review had been possible for financial years 2022/23, 2023/24 and 2024/25.
  2. Subsection (1) enables the Secretary of State to make regulations that apply to the situation described in subsection (2) and have the effect explained in subsection (3).
  3. Subsection (2) refers to a situation where a relevant authority, other than a smaller authority, has not yet had its accounts audited for one or all of the following financial years: the year ending on 31 March 2023, the year ending on 31 March 2024 and the year ending on 31 March 2025.
  4. Subsection (3) enables the authority to be treated like a smaller authority for the purpose of the audit. This means the audit, or anything related to it, can be done using the simpler limited assurance review, that applies to smaller authorities, making it easier to carry out the audit.
  5. Subsection (4) dictates that subsections (2) and (3) should be interpreted as if they were part of the 2014 Act. This interpretation applies specifically to the financial years in question, regardless of any changes or amendments to the Act over time.
  6. Subsection (5) dictates that regulations made under this section can change any deadlines, even if the original deadline has already passed.
  7. Subsection (6) states that the regulations under this section are subject to the negative resolution procedure. It means that they will automatically become law without debate unless either House of Parliament objects within a specified period, usually 40 days.

Section 98: Amendment paving way for separation of LGPS accounts

Background
  1. Section 20(3) of the Local Audit and Accountability 2014 (the 2014 Act) previously mandated that when a relevant local authority's statement of accounts includes both pension fund accounts and other accounts, the local auditor must give a separate opinion on the pension fund accounts. In England, administering authorities are required to keep their local government pension scheme fund in a separate, ring-fenced account, but for audit purposes this pension fund account forms part of the administering authority’s statement of accounts.
Effect
  1. This section substitutes section 20(3) of the 2014 Act to allow for future flexibility to enable the mandatory decoupling of pension fund accounts from administering authorities' accounts by removing the implied requirement in the former subsection to keep the pension fund accounts with the relevant administering authority’s other accounts.
  2. The amended section continues to align with requirements under the Public Service Pensions Act 2013, ensuring that local government pension schemes are audited distinctly from other accounts.

Section 99: Minor and consequential amendments

Effect
  1. This section introduces Schedule 36 of this Act, which makes consequential amendments to the Local Audit and Accountability Act 2014 in connection with Part 4 of this Act.

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