By Bharat Shah
18 February 2010
Councils should now be approaching the final straight in their preparations for International Financial Reporting Standards. But many are falling behind and must speed up, says Bharat Shah
In the 2007 Budget report, then chancellor Gordon Brown announced that all public bodies would have to prepare their accounts in accordance with International Financial Reporting Standards from 2008/09.
Subsequently, the timetable for central government, including the NHS, was deferred for a year.
In local government, the CIPFA/Local Authority Scotland Accounts Advisory Committee Joint Committee, the relevant standard setter, announced that local government would move to IFRS from 2010/11. This was to allow time to ensure there would be no effect on council tax.
The fact that the local government timetable is a year behind other parts of the public sector gives it the opportunity to learn from their experience.
A comparison of IFRS with current UK standards suggests that, in many cases, the two are not that far apart. This is not surprising as standard setters have, where appropriate, based UK financial reporting standards as closely as possible on the equivalent international standards since September 1998, when Financial Reporting Standard 12: provisions, contingent liabilities and contingent assets in the UK was introduced.
Local government has already successfully implemented perhaps the most complex IFRS, those relating to financial instruments. From 2009/10, it is due to apply Ifric 12, from the International Financial Reporting Interpretations Committee, which relates to Private Finance Initiative schemes, public-private partnerships and other service concessions. Despite this convergence, local government should be aware that preparatory work and the associated resource implications are potentially significant. There is a need to consider systems, processes and management information, not just what is required for year-end financial reporting.
This represents a real test for professional self-regulation in local government. The Department for Communities and Local Government does not have a direct performance management function in relation to local government financial reporting, and the CIPFA/Lasaac role is focused on developing the IFRS-based code, rather than monitoring implementation. Even where there has been a more structured approach, individual bodies have experienced problems and unanticipated technical issues. For example, for the NHS, the Department of Health is more involved in the process and set a series of trigger points for the production of restated accounts. Despite this, unforeseen issues such as legal charges have cropped up.
In March 2009, CIPFA published its Local Authority Accounting Panel Bulletin 80: Implementation of IFRS – outline project plan. This drew on lessons from other sectors and identified the steps for councils to achieve transition, with suggested dates for completion.
It’s worth noting what auditors have reported on progress. In November 2009 the Audit Commission surveyed auditors of all local, police and fire and rescue authorities. We found that most authorities were not meeting the indicative milestones suggested by CIPFA. Only one in seven authorities was on track overall, and one in five had major issues that threatened successful implementation. Although the rest were reported as facing minor issues, these also needed to take steps to get back on track. Hopefully, progress has been made since November.
The main IFRS drivers for change should come from an initial analysis of how each standard will affect the authority: its systems, structures, people and internal or external financial reporting and service reporting requirements. CIPFA recommended an initial high-level assessment should be completed by June 1, 2009, but auditors found that almost two-thirds of authorities had not met this deadline. By November 2009, almost half still had not.
Weaknesses in governance must be addressed – a detailed project plan needs to establish the basis for project governance. The survey found more than three-quarters of authorities had a plan, but more than three-quarters of these did not include the basic details one would expect, such as a budget and a resource plan. Again, audit committees are a major component of corporate governance, and yet almost a half of authorities had not liaised with their audit committee, or the authority’s equivalent.
If authorities do not prepare adequately, they could fail to publish accounts on time, or prepare accounts that do not meet the requirements. And this will increase the risk of qualifications of auditors’ opinions. Forty-three local authorities (11%) did not meet the statutory deadline for publishing their accounts for the past financial year. This not only reflects poorly on authorities’ financial management arrangements, but also represents a fundamental failure of governance.
After completing the audits of accounts based on Generally Accepted Accounting Practice for 2008/09, almost a quarter of local authority auditors expressed concerns to the Audit Commission about the quality or timeliness of financial information provided for audit. Too often, the production of end-of-year accounts is seen as a one-off exercise. Local government does have a reputation for meeting deadlines despite the odds. But under IFRS for 2009/10, and 2010/11 in particular, such an approach will carry much more risk.
If local authorities do not meet the requirements and attract a qualified auditor’s opinion, or are published late, they will be named in the Audit Commission’s annual report to the secretary of state. This would cause significant reputational damage to individual local authorities and the local government sector as a whole.
At a practical level, there is a risk that extra, and unnecessary, costs will be incurred. In November, we found almost two-thirds of authorities were using, or planning to use, external consultants to help in the transition to IFRS. But this figure could rise sharply if authorities leave preparations to the last minute. Late appointment of consultants or temporary staff could result in higher charges. And collaborative arrangements to ensure knowledge transfer are more likely to be unfeasible.
So, the clock is ticking. The Audit Commission will be publishing a series of briefing papers to support local government transition, but it is crucial that many individual authorities hear the alarm bells now.
The commission will be writing to all chief executives and directors of finance to alert them to the findings of our survey. Local auditors will be talking to them about what they mean for individual bodies, so that the corporate management team can ask the right questions and satisfy itself that proper arrangements are in place to manage this project and that the project is on track. We will all follow up progress over the coming months and will report again in the summer. We hope by then to be able to draw more positive conclusions.
Bharat Shah is deputy chair of the Audit Commission
18 February 2010
Councils should now be approaching the final straight in their preparations for International Financial Reporting Standards. But many are falling behind and must speed up, says Bharat Shah
In the 2007 Budget report, then chancellor Gordon Brown announced that all public bodies would have to prepare their accounts in accordance with International Financial Reporting Standards from 2008/09.
Subsequently, the timetable for central government, including the NHS, was deferred for a year.
In local government, the CIPFA/Local Authority Scotland Accounts Advisory Committee Joint Committee, the relevant standard setter, announced that local government would move to IFRS from 2010/11. This was to allow time to ensure there would be no effect on council tax.
The fact that the local government timetable is a year behind other parts of the public sector gives it the opportunity to learn from their experience.
A comparison of IFRS with current UK standards suggests that, in many cases, the two are not that far apart. This is not surprising as standard setters have, where appropriate, based UK financial reporting standards as closely as possible on the equivalent international standards since September 1998, when Financial Reporting Standard 12: provisions, contingent liabilities and contingent assets in the UK was introduced.
Local government has already successfully implemented perhaps the most complex IFRS, those relating to financial instruments. From 2009/10, it is due to apply Ifric 12, from the International Financial Reporting Interpretations Committee, which relates to Private Finance Initiative schemes, public-private partnerships and other service concessions. Despite this convergence, local government should be aware that preparatory work and the associated resource implications are potentially significant. There is a need to consider systems, processes and management information, not just what is required for year-end financial reporting.
This represents a real test for professional self-regulation in local government. The Department for Communities and Local Government does not have a direct performance management function in relation to local government financial reporting, and the CIPFA/Lasaac role is focused on developing the IFRS-based code, rather than monitoring implementation. Even where there has been a more structured approach, individual bodies have experienced problems and unanticipated technical issues. For example, for the NHS, the Department of Health is more involved in the process and set a series of trigger points for the production of restated accounts. Despite this, unforeseen issues such as legal charges have cropped up.
In March 2009, CIPFA published its Local Authority Accounting Panel Bulletin 80: Implementation of IFRS – outline project plan. This drew on lessons from other sectors and identified the steps for councils to achieve transition, with suggested dates for completion.
It’s worth noting what auditors have reported on progress. In November 2009 the Audit Commission surveyed auditors of all local, police and fire and rescue authorities. We found that most authorities were not meeting the indicative milestones suggested by CIPFA. Only one in seven authorities was on track overall, and one in five had major issues that threatened successful implementation. Although the rest were reported as facing minor issues, these also needed to take steps to get back on track. Hopefully, progress has been made since November.
The main IFRS drivers for change should come from an initial analysis of how each standard will affect the authority: its systems, structures, people and internal or external financial reporting and service reporting requirements. CIPFA recommended an initial high-level assessment should be completed by June 1, 2009, but auditors found that almost two-thirds of authorities had not met this deadline. By November 2009, almost half still had not.
Weaknesses in governance must be addressed – a detailed project plan needs to establish the basis for project governance. The survey found more than three-quarters of authorities had a plan, but more than three-quarters of these did not include the basic details one would expect, such as a budget and a resource plan. Again, audit committees are a major component of corporate governance, and yet almost a half of authorities had not liaised with their audit committee, or the authority’s equivalent.
If authorities do not prepare adequately, they could fail to publish accounts on time, or prepare accounts that do not meet the requirements. And this will increase the risk of qualifications of auditors’ opinions. Forty-three local authorities (11%) did not meet the statutory deadline for publishing their accounts for the past financial year. This not only reflects poorly on authorities’ financial management arrangements, but also represents a fundamental failure of governance.
After completing the audits of accounts based on Generally Accepted Accounting Practice for 2008/09, almost a quarter of local authority auditors expressed concerns to the Audit Commission about the quality or timeliness of financial information provided for audit. Too often, the production of end-of-year accounts is seen as a one-off exercise. Local government does have a reputation for meeting deadlines despite the odds. But under IFRS for 2009/10, and 2010/11 in particular, such an approach will carry much more risk.
If local authorities do not meet the requirements and attract a qualified auditor’s opinion, or are published late, they will be named in the Audit Commission’s annual report to the secretary of state. This would cause significant reputational damage to individual local authorities and the local government sector as a whole.
At a practical level, there is a risk that extra, and unnecessary, costs will be incurred. In November, we found almost two-thirds of authorities were using, or planning to use, external consultants to help in the transition to IFRS. But this figure could rise sharply if authorities leave preparations to the last minute. Late appointment of consultants or temporary staff could result in higher charges. And collaborative arrangements to ensure knowledge transfer are more likely to be unfeasible.
So, the clock is ticking. The Audit Commission will be publishing a series of briefing papers to support local government transition, but it is crucial that many individual authorities hear the alarm bells now.
The commission will be writing to all chief executives and directors of finance to alert them to the findings of our survey. Local auditors will be talking to them about what they mean for individual bodies, so that the corporate management team can ask the right questions and satisfy itself that proper arrangements are in place to manage this project and that the project is on track. We will all follow up progress over the coming months and will report again in the summer. We hope by then to be able to draw more positive conclusions.
Bharat Shah is deputy chair of the Audit Commission
