Update: English Devolution and Community Empowerment Bill published

The Ministry of Housing, Communities and Local Government published yesterday afternoon the English Devolution and Community Empowerment Bill, which in Part 4 provides the detail of the Government’s long-awaited proposals for the reform of local audit. 

Much will be discussed and debated on whether the changes will deliver the changes required to address the problems in the system identified in recent years, and the Bill may well be subject to amendment on its journey through Parliament. Below, we look at six immediate key takeaways on how the framework for local audit is set to change. 

This Bill does mark a profound change to the local audit system, introducing much needed reforms to help rebuild assurance and provision in the external audit market. Some might say it’s deja vu in that it introduces a new non-departmental body, the Local Audit Office (the LAO), which has some of the hallmarks of the former Audit Commission. The LAO however will be a different beast – importantly it will not have the wider powers that the Audit Commission had (e.g. comprehensive area assessments) but it will take on greater roles with regard to standard setting, registration of local auditors and potentially enforcement. One stand out point is that the LAO may in the future, if the Bill is enacted, carry out its own audits. 

These changes are achieved by way of amendments to existing legislation. The vast majority of the provisions will, if enacted, amend the Local Audit and Accountability Act 2014, which will remain the primary legislation for the purposes of local audit. The method of reform is therefore not wholly to start again from scratch, but to amend the existing framework in order to shift functions, increase central oversight, and allow flexibility for future changes or adaptations to the new system.

The Government’s response to the consultation on Local Audit Reform published in April promised there would be no return to the ‘bloated’ Audit Commission, but committed to introduce the new LAO in order to simplify and streamline the currently fragmented system. Of particular note is the LAO’s ‘Main Objective’, which will act as a guiding principle as to how the LAO must exercise its new functions. This provides:

1. The main objective of the Local Audit Office in performing its functions is to secure the effective operation of the system of audit established by this Act, with a view to meeting the needs of users of the audited accounts.
2. That includes, in particular, securing:
   1. that audits under this Act are carried out to a high standard, and
   2. that there is a suitable range of persons able and willing to carry out such audits.

The Bill confirms that the LAO’s functions will include:

• Appointing auditors to all principal authorities other than health service bodies. This is currently a function performed by PSAA as the specified person under the Local Audit (Appointing Person) Regulations 2015, and includes responsibility for setting audit fees and paying audit providers.
• The LAO will have the option to audit the accounts of those authorities directly. Where it does this, it must establish an independent monitoring system to ensure quality, and inspection reports will be received by the Secretary of State.
• The LAO will take over responsibility for the Code of Audit Practice, and the suite of other statutory guidance notes for auditors, currently produced by the NAO.
• Maintaining the register of auditors eligible to audit relevant authorities.
• Monitoring audit performance by audit providers, including inspection, and enforcement for any breaches.

There are various clauses in the Bill which appear to be aimed at setting up the LAO effectively, and ensuring it has the means to exercise its functions from day one, in particular by working with other bodies. The LAO will be able to designate a body as an external registration body (ERB), with that body’s consent, if the LAO is satisfied that:

• the body is able and willing to co-operate with the Office in pursuit of the [main] objective set out in section 1B,
• the body is able and willing to promote and maintain high standards of integrity in the conduct of audits under this Act, and
• the rules and arrangements of the body that will have effect in relation to registered local audit providers and lead partners will be fair, reasonable, and fit for purpose.

Where the LAO has designated an ERB to carry out the functions of registration and monitoring/enforcement, the body will have direct statutory functions under the Bill, and as such will likely be subject to the control of public law in the exercise of its functions. The LAO will also have the power to make directions to the ERB. 

The designation of an ERB may well be an arrangement that the LAO will need to make at the outset, to ensure continuity in the system, while it builds its internal capacity and capability to take over the registration functions. However, there is no time requirement in the Bill, so the LAO could at any time take steps to set up or revoke a designation.

The Bill outlines the qualification and eligibility requirements for registered auditors and providers (i.e. firms) for local audit, to be elaborated on through the registration rules. While this constitutes an amendment from the existing framework, which incorporates with modifications Part 42 of the Companies Act 2006, the new provisions replicate a roughly equivalent system. The Secretary of State will have power to authorise a professional accountancy qualification as an ‘appropriate qualification’ via regulations, or to make a ‘recognition order’ upon application by a qualifying body, whose qualifications will then automatically be recognised as an appropriate qualification.

The existing term of a ‘Key Audit Partner’ will be replaced with a ‘Lead Partner’. The independence requirement remains equivalent and will apply to both the firm and the individual appointed to audit the authority’s accounts.

The Bill introduces a new statutory requirement on all relevant authorities, other than health service bodies, to have an audit committee which exercises the following functions:

(a)    reviewing and scrutinising the authority’s financial affairs,
(b)    reviewing and assessing the authority’s risk management, internal control and corporate governance arrangements,
(c)    reviewing and assessing the economy, efficiency and effectiveness with which resources have been used in discharging the authority’s functions, and
(d)    making reports and recommendations to the authority in relation to reviews conducted under paragraphs (a), (b) and (c).

This is already commonplace, of course, in most of the larger local authorities, but for some smaller authorities and other relevant authorities which are not local authorities in scope of the 2014 Act, this may well be something that will need to be established. The required membership of the committee is not addressed in the Bill, other than there being provision for future regulations to address this.

Smaller authorities are not addressed in detail in the Bill, but there are two changes of note. The new appointment arrangements through the LAO are not expected to apply to smaller authorities, but that carveout is not written into the Bill. It might be expected then that the smaller authorities regulations will be amended to disapply the new arrangements when they come into force.

Prior to the publication of the Bill, the Government had already laid secondary legislation to raise the financial threshold for smaller authorities to £15m in a separate Statutory Instrument laid before Parliament on 16 June 2025, the Local Audit (Amendment of Definition of Smaller Authority) Regulations 2025. The Bill now builds on those changes and makes two further significant changes in the smaller authority regime:

• The Secretary of State will be able to issue regulations to permit a relevant authority to be audited via a limited assurance review (i.e. be classed as a smaller authority) for the years 2022/23 to 2024/25, regardless of its turnover in those years. This will go some way to addressing an issue which has arisen during the audit backlog in which certain smaller authorities require a full audit, but have not been able to have an auditor appointed.
• The Bill also removes all references to “Smaller Authorities” in audit legislation and regulations, recognising that there may come a time when the financial turnover of the authority is not the only demarcation from principal authorities. This may be the case if certain categories of authority are determined to be more suited to the limited assurance review, rather than full audit. The Bill changes the existing references to “Category 2” authorities, reflecting the terms already used in the Accounts and Audit Regulations 2015. The Bill however does not make any changes of a general nature to which authorities currently sit within this category at this stage.

The guidance published alongside the Bill confirms that the 16 commitments made in the Government’s consultation response are still proposed to be delivered in full, meaning the points not covered in the Bill will be taken forward separately, likely through secondary legislation.

If you would like further advice on how these changes might impact you and your work, please contact Melanie Carter or Jacob Howell-Jones.