The Levelling Up, Housing and Communities Committee has delivered a landmark report that will transform local authority financial statements, says ICAEW’s Alison Ring.
While the focus for many of us at the moment is on a rather depressing English roulette game of guessing which local authority will be the next to issue a section 114 ‘bankruptcy’ notice, you may be forgiven for having missed the landmark nature of the House of Commons Levelling Up, Housing and Communities Committee report ‘Financial Reporting and Audit in Local Authorities’.
Admirably concise (for such reports) at 45 pages, the report has quite rightly attracted headlines for the elements focused on the local audit crisis in England – and the increasingly urgent actions that are needed to resolve it. We at ICAEW are equally frustrated at the slow pace of the response and continue to urge the government to prioritise getting local authority audits back on track as quickly as possible.
So far, so expected. The Committee adds to the chorus of voices already calling for the government to address and reduce the backlog of audited accounts, as well as to take action in the longer term to prevent backlogs from happening again. The report highlights delays in putting the new system leader for local audit onto a statutory basis and calls for enabling legislation to be brought forward as soon as possible.
What makes this report so important is that it has not stopped there, instead going under the hood of the local authority financial reporting and audit system to come up with transformational recommendations on how local authority accounts can be improved to properly support democracy and accountability in a way that they aren’t doing now.
Fundamental weaknesses
The principal focus of the report is on addressing: “… fundamental weaknesses in the accounts themselves that are hampering the efforts of members of the public and other stakeholders to use them in holding local authorities to account”.
The Committee highlights the impenetrability of local authority financial statements as being a core issue, commenting that stakeholders who might want to use the information in the accounts encounter significant challenges in finding and understanding the information they need. As a result, many stakeholders do not use the accounts at all. Local authority accounts and audit are therefore not adequately fulfilling their role in supporting local democracy and accountability.
The Committee also quotes Rob Whiteman, Chief Executive of the Chartered Institute of Public Finance and Accountancy (CIPFA), who commented in his evidence to the inquiry that if people do not understand the accounts, they may also believe the accounts to be opaque and untrustworthy. My boss Iain Wright, Managing Director for Reputation and Influence at ICAEW, also gave evidence to the inquiry in which he stated that council taxpayers want to know how their money is being spent, and ultimately local authority accounts are the best way of being able to distil that.
Five purposes of accounts
One of the key issues identified by the Committee is a lack of clarity around the purpose of accounts, with the report quoting evidence from Alison Scott, Shared Director of Finance for Three Rivers District Council and Watford Borough Council, who stated: “At the moment, the statement of accounts tries to be all things to all people and, in doing that, gains lots of complexity. It almost loses its focus as to who it is supposed to be being produced for and who its focus is on.”
The Committee answers that by setting out five purposes that it believes accounts should fulfil to adequately support local democracy and accountability:
- To be a credible public record.
- Provide accountability for spending.
- Enable conclusions to be reached on value for money.
- Provide information to run local authorities.
- Alert stakeholders of actual and potential issues.
The Committee believes these purposes will ultimately focus local authority accounts on their role as vital tools for upholding local democracy and accountability.
ICAEW concurs in the need for clarity around the purposes of the accounts and believes these proposals will provide much needed clarity to government, standard setters, preparers and regulators in how financial statements should be designed and presented. A new foundation that will be critical in helping users understand what is going on so that stakeholders can read and use the accounts to hold local authorities to account.
The Committee makes some specific recommendations to align local authority accounts with the five purposes, including introducing a standardised statement of service information and costs (as recommended by the Redmond Review); decoupling pension statements from the accounts; ensuring that auditors consider and conclude on the value for money achieved by local authorities; and encouraging more consistent use of auditors’ existing powers to sound early warnings. It also called for the government to work with CIPFA to make the Accounting Code freely available to all possible users.
A much more significant recommendation is the Committee’s call for the Department of Levelling Up, Housing and Communities to undertake an immediate review into existing legislation that places requirements on the contents and format of local authority accounts (including statutory overrides), with a view to ensuring they align with the five purposes as set out above.
The report comments that not a single stakeholder, witness or piece of written evidence expressed to the inquiry that one of the purposes of the accounts was to provide a baseline for the council tax calculation. The Committee did not consider council tax setting to be one of the main purposes of the accounts, questioning whether this could be better done outside of the accounts as part of a separate process.
A landmark report
I believe this report marks a decisive turn in what local authority annual financial reports should look like and how they can be used much more effectively to hold local authorities to account, improve decision-making and governance, and ensure value for money provided by local and national taxpayers.
We can only hope that it will be as effective as the Public Administration and Constitutional Affairs Committee’s report ‘Accounting for Democracy’ was to making central government accounts much more accessible to parliamentarians and other users.
If I have one (or is that two?) quibble(s) it is that the report does not sufficiently emphasise the role of councillors in holding local authorities to account and the role of finance teams in helping them to do so effectively.
Despite that small caveat, this is a landmark report that sets a new direction for local authority accounts and audit to support local democracy and accountability. By establishing clarity around the purpose of accounts the Committee has provided a foundation on which the whole system can be rebuilt.
Alison Ring is Director Public Sector and Taxation, ICAEW.
This article was written by Martin Wheatcroft (on behalf of ICAEW) together with Alison Ring, and was originally published in Room 151 and subsequently by ICAEW.