Most public sector audits by Grant Thornton fall below standard, watchdog finds

Five out of six major public sector audits by Grant Thornton were not up to scratch last year, according to a leaked review by the accounting regulator seen by The Telegraph.

The firm was singled out by the Financial Reporting Council watchdog (FRC) after it probed 15 major audits of health authorities and councils carried out by the industry's seven biggest players - and found 60pc of these fell short of the standard expected.

Local audits - meant to be health checks which ensure that public money is properly spent - are facing a crisis as councils battle major funding cuts and force auditors to accept lower fees.

At the same time, many public sector audits have become more complex as cash-strapped councils experiment with complex financial techniques such as the sale and leaseback of properties.

Grant Thornton is the largest player in the local audit market but other firms also scored poorly in the review, which is due to be published on Friday.

The sample reviewed by the FRC included two audits by challenger firm Mazars, the third-biggest player in the market, both of which required significant improvements.

All three audits carried out by EY and reviewed by the FRC were deemed to be up to the required standard.

One senior auditor said that the local audit market was “broken”.

Huge cost pressure has made it very difficult to attract specialist staff to work on “really difficult” public sector audits and major firms are likely to abandon the sector entirely, the auditor said.

“Public sector procurement squeezes audit firms into cutting corners,” the auditor claimed, adding that this resulted in further reputational damage for accounting firms.

The audit sector has faced intense scrutiny over its failure to raise red flags ahead of major corporate collapses at the likes of Patisserie Valerie, Carillion and Thomas Cook.

There is growing alarm in the sector that lower profile public sector audits could face similar problems.

The Local Government Association warned as far back as 2014 about constraints on resources for councils and auditors. Sir Tony Redmond delivered a review to the Government last month on how to address problems in the sector.

Spokesmen for Grant Thornton and Mazars said both firms had already taken action to address the FRC's findings.