Draft Local Audit (Amendment of Definition of Smaller Authority) Regulations 2025
(Limited Text - Ministerial Extracts only)
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The Minister for Local Government and English Devolution (Jim McMahon)
I beg to move,
That the Committee has considered the draft Local Audit (Amendment of Definition of Smaller Authority) Regulations 2025.
It is a pleasure to serve under your chairmanship, Mr Stuart. The regulations were laid before Parliament on 16 June 2025. Local audit is vital for ensuring the proper use of taxpayers’ money and maintaining trust and confidence in local public services, but for too long it has been placed under significant pressure. That has left an unacceptable backlog, which we are determined to resolve so we can be assured that the sector is fit, legal and decent.
It is on that basis that the Government are committed to reforming the local audit system, including by addressing long-standing concerns around proportionality and capacity. Smaller authorities include bodies such as parish and town councils, internal drainage boards, port authorities and parish meetings. They deliver important local services, from maintaining local community halls and allotments to managing small ports and drainage systems, but they do not have the same financial reporting requirements or full audit processes as larger authorities.
Many of our reforms focus on the principal audit regime for larger authorities, which is, quite frankly, broken. However, we also need to ensure that the smaller authority audit system is sustainable and functioning well. A small element of the reforms, which includes the draft regulations, aims to ensure that the overall system is proportionate and responsive to concerns and feedback. We are not removing assurance and accountability for smaller authorities; that will continue to be provided through the annual governance and accountability return, which we have committed to reviewing. We aim to ensure that it remains fit for purpose by improving transparency and ensuring that administrative burdens on smaller authorities are proportionate while enhancing the effectiveness of local reporting, assurance and audit processes.
Uplifting the threshold for smaller authorities is primarily a pre-emptive measure that aims to avoid smaller authorities ending up in the principal audit regime, which would be disproportionate to their size and functions. Raising the threshold to £15 million is not about reducing accountability, but about ensuring that our regulatory framework is fair, proportionate and fit for purpose. Doing so will allow smaller authorities to focus their efforts on delivering much-needed local services, rather than navigating disproportionate reporting, assurance and audit processes.
The current threshold for smaller authorities has remained unchanged since its introduction in 2014. More than a decade has passed, and yet the threshold has not been adjusted to reflect the evolving financial landscape. What was once a reasonable level is now outdated, placing an unnecessary burden on smaller authorities whose financial activity has grown over time because of spikes in grant funding or other revenue, without any increase in risk or responsibilities. Smaller authorities, such as parish councils or drainage boards, are unlikely to have the equivalent range of service delivery, asset base or liabilities of even the smallest district council, and yet they are at risk of becoming subject to full financial audits at far greater resource levels and cost, as well as drawing on the limited capacity in the audit market for principal authorities.
The current threshold no longer reflects the principle of proportionality. In 2024-25, 12 bodies that were previously classed as smaller authorities had income or expenditure above the current £6.5 million threshold. These bodies are generally regarded as lower risk, and their exceeding the threshold simply reflected growth in activity or budget rather than an increase in risk profile. It is not proportionate for such smaller authorities to be subject to the same level of financial reporting, assurance and audit requirements as large organisations such as unitary and metropolitan councils, which have responsibility for a wider range of public services. Such smaller authorities have significantly lower risk profiles and more limited resources, and this has resulted in disproportionate financial reporting requirements and audit costs.
There have also been knock-on consequences for audit appointments. The appointing body, Public Sector Audit Appointments Ltd, has been unable to secure auditors for two bodies, Salisbury city council and Lindsey Marsh drainage board, meaning that they are without any external assurance. My Department has included measures in the English Devolution and Community Empowerment Bill to resolve this issue retrospectively in relation to the financial years when the two bodies were unable to get any external audit assurance. The audit of bodies that have recently exceeded the smaller authority threshold is considered unattractive to auditors, and has contributed to the struggle to appoint an auditor for Salisbury and Lindsey Marsh.
There is a significant difference in the complexity of financial reporting requirements between the preparation of accounts in the smaller authority limited assurance regime and the full accounts prepared by bodies in the principal audit regime. As a result, smaller authorities often find it difficult and more challenging to produce such accounts and there is currently no support framework for assisting smaller bodies in the transition to the principal audit regime. We have acknowledged in the local audit reform strategy the need for a different approach to audit regimes to reflect an organisation’s duties and complexity, not just its financial size. Subject to parliamentary approval, the Local Audit Office will work with the Department to take that work forward.
This statutory instrument raises the audit threshold for smaller authorities to £15 million. This change will apply from the 2025-26 financial year and aims to bring proportionality and efficiency to the system. It will reduce unnecessary financial reporting and audit requirements, help to free up capacity in the principal local audit market, and allow auditors to focus on areas where assurance is critical.
The regulations will be made, if Parliament approves, under the enabling provision in the Local Audit and Accountability Act 2014, and their provisions will come into force on the day after the day the regulations are made.
We published the local audit strategy in December 2024, which included consultation on these proposals. Over 230 responses were received, and on the specific question of uplifting the smaller authorities threshold, 85% of respondents were in favour of this change. The Government responded in April this year confirming our intention to implement the new increased threshold. The change will support smaller authorities by ensuring they are subject to the appropriate governance and accountability arrangements. It will also protect value for money, and it is part of our measures to ensure a more sustainable local audit system.
I am sure our discussion today will demonstrate that we are all committed to ensuring audit arrangements remain proportionate, so that local leaders can focus their time and resources on serving their communities effectively. I look forward to answering any questions raised in the course of the debate.
Jim McMahon
I thank the shadow Minister for his usual pragmatism and support in these matters. We all recognise the importance of Parliament having oversight of public money and making sure that it is spent fairly and appropriately, and that there are checks and balances—but it must be proportionate to the authorities that are bearing the cost. That is what we achieve with these measures.
These regulations deliver a clear benefit to smaller authorities by aligning audit requirements with the scale and risk of their operations, and they help to ensure that the local audit system is proportionate and effective. I commend the regulations to the Committee.
Question put and agreed to.