Graham Liddell wonders whether the crisis in local audit is being used as a smokescreen to avoid addressing issues with local authority accounting.
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In April 2017, the Commons Public Administration and Constitutional Affairs Committee was confident enough to boast that the UK public sector accounting was seen as an exemplar of best practice internationally. And some saw local authority accounting as an exemplar of best practice for the UK public sector. How things have changed.
Luckily, the Redmond Review provided official confirmation that it is the audit system that is broken and we have some convenient scapegoats: audit firms bidding for work that they couldn’t deliver, the Financial Reporting Council insisting that auditors follow auditing standards, and Eric Pickles abolishing the Audit Commission.
But with CIPFA/LASAAC’s preliminary decision to defer the implementation of IFRS I6 Leases to 2024/25, I am beginning to wonder whether we are using the local audit crisis as a smokescreen to prevent us addressing our own failings.
I have lost count of the number of times I have heard the Redmond Review being used to suggest that the accounting requirements for local authorities are too complex and the accounts impenetrable to the general public. Yes, of course we should streamline the accounts, and I welcome CIPFA/LASAAC taking a long, hard look at how the Code of Practice on Local Authority Accounting might be changed for future years. [Incidentally, if CIPFA/LASAAC is keen to make the accounts more accessible, perhaps it should also consider its funding model. CIPFA/LASAAC doesn’t receive funding to develop the code and recovers its costs by charging for it. Think about that for a second. How can we be happy with a system that places the financial reporting rules behind a pay wall?]
But we are in danger of missing the point. Local authorities are complex entities operating in a complex legal accounting framework. If we accept that good quality financial reporting is essential to hold local authorities to account, then we need to accept that our accounts will be complex. Financial reporting standards are written to produce accounts for readers with a decent level of accounting knowledge. If we also want to provide a financial summary for the general public, then we should publish a financial summary.
Local authorities are complex entities operating in a complex legal accounting framework. If we accept that good quality financial reporting is essential to hold local authorities to account, then we need to accept that our accounts will be complex.
Abdicating accounting responsibilities?
We can’t use the excuse that the accounts are complex to abdicate our responsibilities. We are professional accountants, and it is our job to prepare statements of accounts that are true and fair.
There are many chief financial officers who take their responsibilities seriously and take real ownership of the accounts. They provide the financial reporting team with adequate resources and training; they demonstrate leadership by making sure that the rest of the local authority supports the closedown process; they take time to understand how accounting estimates are derived; they challenge the assumptions made by their experts; and they put robust quality assurance processes in place.
But for some, it seems to be perfectly acceptable to limit their involvement to reading the narrative report and signing the statement of responsibilities and balance sheet. Imagine if they took such a laissez-faire role to their statutory duties for the budget.
And that brings us back to IFRS 16. It is a big and important standard. Implementing it requires leadership to secure resources and the commitment and support of service managers. But we are already three years behind the original timetable and many local authorities are nowhere near ready. If the proposal to defer IFRS 16 to 2024/25 goes ahead, that three years becomes five.
How can we blame the auditors, the Financial Reporting Council or Eric for failings in the audit of the statement of accounts, if we can’t be bothered with them ourselves?
Graham Liddell is managing director of LPFG Ltd, which provides financial reporting, governance and audit support for the public sector.
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