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Annual accounts are fundamental for financial accountability to council taxpayers, service users, council members and members of parliament. They are also a vital part of the assurance necessary to support effective financial management.
An effective audit is crucial to ensure local authority financial management systems are operating efficiently and correctly. CIPFA is concerned about the delays in the local audit system, with only 9% of 2020-21 financial statements signed off by the statutory publication date. This is a significant failure, as timeliness is integral to audit quality.
This failure is why CIPFA LASAAC agreed to undertake an emergency consultation early in 2022, and, as a result, decided to delay the mandatory implementation of IFRS 16 leases until the 2024-25 financial year. Instead, it is now developing its strategic plan. But a frequent question that comes up is what should local authority accounts actually look like?
CIPFA LASAAC undertook its ‘telling the story’ review in 2015, whereby changes were implemented in the 2016-17 Accounting Code. An even more fundamental review of local authority accounts was then undertaken by Sir Tony Redmond.
In September 2020, Redmond concluded that IFRS-based accounts should be maintained for local authorities. He stated that it was ‘questionable’ for local authorities to go back to ‘near’ cash accounting as he reviewed the impact of statutory reversals – in other words, the adjustments to the amounts chargeable to local authority general funds in accordance with statutory prescriptions.
A move to cash accounting would be a backwards step. The accounting rules authorities use to manage their budgets may result in equitable outcomes for levels of council tax, but they are much less effective in measuring resources that have been used up in providing services.
This is especially true for the use of property, plant and equipment and the liabilities incurred.
It is difficult to make the case for why local authorities should operate on a different, less accountable basis than the rest of the public sector. Consistency across the whole of the government accounts is vital. So, how should local authorities communicate the key messages of financial statements?
Different stakeholders describe this process in various ways – as streamlining or simplification. But perhaps most important are the outcomes that need to be achieved. Is the objective to have a shorter set of accounts? Or is it to ensure that stakeholders understand the key aspects of financial performance and the impact on future services of movements in an authority’s assets and liabilities? Perhaps it is both.
The Code can and will do some of this. But local authorities also need to make their own decisions in this area. CIPFA has established a new Financial Reporting Hub, which will review best practice to support local authorities.
CIPFA LASAAC will examine areas where complexity might arise and ensure that messages are clearly and effectively presented. A focus might be on how best to present the statutory reversals and adjustments. There is also an opportunity to focus on how the narrative report might help communicate performance and the disposition of resources.
While a stable platform is absolutely necessary for the current local audit system, this should not prevent high-quality financial reporting. Making sure this reporting is communicated in a clear and consistent way is a priority.
