Tackling the auditor shortage: is progress being made?

Lee Cartwright, partner at auditing firm Beever and Struthers, says he believes the problems are most acute for the largest HAs, which need to appoint a big firm but may be unable to, and for the very small HAs.

He says: “The problem for the very small housing associations is that an audit will inevitably be complex because they are a registered provider, and yet the audit fee [they are offering] may be disproportionately small given the complexity of the audit and the risk involved. 

“So, trying to find an auditor with experience of the sector and that can provide the service at the right price can be tricky.”

Reasons behind the shortage

There are several reasons for the auditor shortage in the sector. The majority of HAs share the same March year end so resources are focused at the same time.

Social housing is seen as a specialist sector that requires new entrants to train their staff – and, when tendering, some providers may have been unrealistic about the fees offered for auditors.

Many audit firms are struggling for capacity while facing a huge demand so can pick and choose their contracts, so some have left the sector in favour of more lucrative work, or opted to provide other services to associations.

Furthermore, there has been a regulatory shake-up following collapses such as construction and services giant Carillion. The Financial Reporting Council (FRC), the regulator for auditors, has increased the scrutiny and accounting requirements for auditors, leading to an increase in the time taken for audits and the costs involved.

In addition, as they have listed debt, many HAs are classified as public interest entities (PIEs), which have increased audit requirements and auditor scrutiny. There are new rules being introduced that require partners of audit firms to register in order to conduct PIE audits. Therefore, some auditors may see HAs as higher risk and less attractive.

“Across the whole economy there’s a shortage of skilled people,” says Mr Cartwright. “And if you couple that with audit reform, increased audit regulation and so on, it’s created a perfect storm.”

Guy Flynn, financial reporting director at Hyde Group, who spent 18 years as an auditor and was a director at PwC, says that some audit firms have exited the sector due to a number of contributory factors.

These include the increased complexities of the larger housing associations, increased audit regulations particularly impacting housing associations with listed debt, and the need for each audit to be financially sustainable. This has meant audit firms have needed to exit certain audits to focus their resources accordingly.

He says that there is a shortage of audit staff in firms because of the challenges and pressure faced from the higher audit regulations, which includes exposure to personal risk.

Mr Flynn says alongside tightened audit regulations, there was a more than 10-year period in which the sector was price-driven when tendering for auditors, rather than quality-driven.

He says: “Audit firms have made losses in social housing, in particular when having to retender every five years.”

Progress

The NHF has been addressing the shortage head on, by engaging with auditors outside the sector to attract them into auditing social housing providers.

John Butler, policy leader at the NHF, says that since starting these talks around this time last year, the trade body has brought about 20 auditors into the sector. The NHF has grown its member-only list of auditors in the sector, which is published on its website, from around 10 to about 30.

Almost all of those firms on the list reported that they are keen to come into the sector and have the resources to be a part of the list, Mr Butler says.

“We’re really pleased that some of these firms have been signed up,” he adds.

He observes that the NHF is already starting to see some traction, with two HAs – Flagship Housing Association and Watford Community Housing Association – having engaged two of the audit firms that the trade body has brought into the sector.

Paul Richmond, deputy chief executive at Watford Community Housing, says: “Due to circumstances outside our control, we were required to undertake a short-form tender in February 2023 to appoint external auditors for the 2022-23 financial year.

“We were able to use the NHF auditor list to invite a range of auditors to engage with us, both those existing and new to the sector. We appointed Buzzacott to conduct our audit and while noting they are new to the sector, we were encouraged by their commitment to entering the sector and their broader not-for-profit experience.”

In addition, six or seven audit firms came to the NHF’s Finance Conference in Liverpool to discuss their organisations with social landlords. The trade body hosted two meet-and-greet sessions at the conference, which Mr Butler says were “very popular”. The NHF also carried out a training day for 13 audit firms in October.

Mr Butler says “the more important work” now is to persuade the sector to engage with the new entrants.

Meanwhile, Mr Benz says the G15 has been trying to engage productively with auditors on this in a “two-way conversation”. He says the shortage is a shared problem that can only be fixed with a shared solution, which will require flexibility on both sides.

Mr Benz says the G15 is reflective on HAs’ own tendencies, for example, that they should provide longer planning horizons for procurement exercises and ensure that working papers required for auditors are prepared to an acceptable level of quality.

He says that while the group is willing to be reflective, the G15 also wants to “productively and proactively” challenge auditors to find a way to solve this issue.

Mr Benz adds that the next step is ongoing engagement with auditors. “From talking to auditors, we’ve found the intentions are there,” he says. “What we now need to do is to find practicable, executable ways forward to within a reasonably short period of time have more participants in the markets.

“That will require flexibility from both sides. It will require a fundamental rethink about how we engage with the external audit market, but also how the external audit market engages with us.”

Mr Butler says that addressing the auditor shortage is a priority. He says: “Last year, there was a sense housing associations were not getting the auditors needed and also, when you go to tender and don’t get any submissions, any bids, that in itself is a significant problem. So, this couldn’t happen soon enough. But audits only take place once a year. And in that year, we have done quite a lot of work.”

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