Tag: #publicsectorfinancialreporting

Setting a new direction for local authority accounts

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: 

  1. To be a credible public record.
  2. Provide accountability for spending. 
  3. Enable conclusions to be reached on value for money.
  4. Provide information to run local authorities.
  5. 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.

PAC demands improvements in the Whole of Government Accounts

4 February 2021: The Public Accounts Committee has said production of the WGA should be speeded up and a better commentary is needed on the government’s financial position and exposure to forward-looking fiscal risks.

The Public Accounts Committee (PAC) recently issued a report on the Whole of Government Accounts (WGA). The PAC says that while the WGA is a world-leading document in helping the public understand both how government has used taxpayers’ money and what challenges face public finances in the future, the focus on the WGA being a backwards-looking document considerably hampers its usefulness as a tool for information, accountability and planning.

In 2018-19, the WGA reported public sector assets and liabilities of £2.1tn and £4.6tn respectively, equivalent to approximately £75,000 and £165,000 per household.

The PAC is particularly concerned about how the WGA sets out the Government’s financial position and its exposure to financial risks, including:

  • How income and expenditure are expected to change in the future and what this means for the sustainability of the public finances
  • How fiscal sustainability risks are being managed by HM Treasury, including from EU exit, covid-19 and other emerging risks
  • HM Treasury’s role in managing specific risks in the balance sheet, in particular the £152bn nuclear decommissioning obligation and the £85bn clinical negligence liability
  • What analysis and scenario planning has been done, for example, to address the impact that increases in interest rates might have on the economy and government spending
  • What HM Treasury is doing to address the fiscal sustainability of local authorities, particularly in the light of concerns over local authority investment in commercial property and the weaknesses in local audit and transparency of local authority financial reporting identified by the Redmond review.

The PAC was critical of the lack of more detailed disclosures in particular areas, such as the cost of exiting the EU where more information on the EU exit settlement and cross-government spending on preparations was needed. COVID-19 spending will need to be fully captured to assess both the true cost to the government and whether government can deliver.

The PAC acknowledges that improvements have been made in the quality of analysis in the WGA and work on better categorisation of expenditure across government to improve analysis is underway. In particular, there are plans to implement a new chart of accounts and a new financial consolidation system (OSCAR II) in 2021.

The 2018-19 WGA took 15 months to produce and the PAC highlights how pandemic-driven delays in producing departmental and local government financial statements last year will present significant challenges in producing the 2019-20 WGA in less than 14 months. 

The timetable remains significantly more than the two to three months typically taken for large multinational listed companies to produce audited financial statements, the five to six months taken by New Zealand, Canada and Australia, or the six to nine months that might be reasonably possible given the WGA incorporates local as well as central government.

The PAC concludes by commenting that the WGA still does not provide Parliament and the public with the information needed to understand the government’s financial position and exposure to fiscal risk. 

Using the annual report to give the reader an understanding of the development, performance and position of an organisation’s business, including a consideration of how forward-looking risk is managed, is standard practice across the private and public sector. The WGA falls significantly below this standard and is not meeting the needs of its users.

Martin Wheatcroft FCA, external advisor to ICAEW on public finances, commented: “The PAC is right to highlight how far HM Treasury still needs to go in improving the WGA to provide Parliament and the public with the comprehensive overview of financial performance, position and risks that a good quality annual report and financial statements can do. 

HM Treasury should be applauded for putting the UK at the forefront of international developments in public sector financial reporting when it introduced the WGA a decade ago. However, progress since then has been hampered by inadequate internal reporting systems and underinvestment in financial analysis. The WGA remains far behind best practice.

Speeding up production and improving the clarity and quality of analysis will not only make the WGA much more useful to Parliament and citizens, but it will help improve the decision-making within government that is needed to put the public finances onto a sustainable path.”