Community accounts: embracing complexity
Graham Liddell wonders whether the local audit crisis is being used as a smokescreen to avoid tackling local government accounting issues.
In April 2017, the House of Commons Public Administration and Constitutional Affairs Committee was confident enough to boast that UK public sector accounting was seen as an example of best practice internationally. And some saw local authority accounting as an example of best practice for the UK public sector. How things have changed.
Fortunately, the Redmond Review has provided official confirmation that it’s the audit system that’s failing, and we have some convenient scapegoats: audit firms bidding on work they can’t deliver, Financial Reporting Council insists that auditors follow auditing standards, and Eric Pickles the abolition of the Audit Commission.
But with the preliminary decision of CIPFA/LASAAC to postpone the implementation of IFRS I6 Leases At 2024/25, I’m beginning to wonder if we’re not using the local audit crisis as a smokescreen to prevent us from addressing our own failings.
I have lost count of the number of times I have heard the Redmond Review used to suggest that local authority accounting requirements are too complex and the accounts impenetrable to the general public. Yes, of course we should streamline the accounts, and I am glad that CIPFA/LASAAC is looking long and hard at how the Local Authority Accounting Code of Practice might be amended for years to come. [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 risk missing the point. Local authorities are complex entities operating within a complex legal accounting framework. If we accept that good quality financial information is essential to hold local authorities to account, then we must 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 to the general public, we should publish a financial summary.
Local authorities are complex entities operating within a complex legal accounting framework. If we accept that good quality financial information is essential to hold local authorities to account, then we must accept that our accounts will be complex.
Abdicate accounting responsibilities?
We cannot use the excuse that the accounts are complex to abdicate our responsibilities. We are professional accountants, and it is our job to prepare account statements that are true and fair.
Many CFOs take their responsibilities seriously and actually take ownership of the accounts. They provide the financial reporting team with adequate resources and training; they show leadership by ensuring that the rest of the local authority supports the closure process; they take time to understand how accounting estimates are derived; they dispute the assumptions made by their experts; and they have strong quality assurance processes in place.
But for some, it seems perfectly acceptable to limit their involvement to reading the narrative report and signing the statement of responsibilities and the balance sheet. Imagine if they took on such a laissez-faire role in their statutory duties for the budget.
And that brings us back to IFRS 16. It’s an important and important standard. Its implementation requires leadership to secure resources as well as the commitment and support of service managers. But we are already three years behind schedule and many local authorities are far from ready. If the proposal to defer IFRS 16 to 2024/25 goes ahead, these three years become five.
How can we blame the auditors, the Financial Reporting Council or Eric for failures in auditing the state of the accounts, if we can’t care about it ourselves?
Graham Liddell is managing director of LPFG Ltd, which provides financial reporting, governance and audit assistance for the public sector.
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