Rebecca Keene writes that local government audit has become distracted by valuations and cash flow projections.
As we reach the end of July and what would be, pre-pandemic, the deadline for local authorities to publish a set of signed and fully audited accounts, I don’t think that it will take much more than the fingers on one hand to count how many audits of 2020-21 accounts have started, let alone finished.
The local authority accounts audit system is broken and the pandemic only served to widen the cracks that were already appearing. Expecting the few public sector specialist auditors in existence, to audit NHS and local government accounts in a four-month window, was never going to have a happy ending.
However, I don’t think that the issues are just about timing and resourcing. In my view, the whole focus of local government audits is wrong.
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Focus
The move to International Financial Reporting Standards (IFRS) was sensible, after all they represent the definitive approach to reporting an organisation’s financial position and, as councils have become more commercial, it is right that the way they report their finances should reflect that. Yes, it does mean that the accounts aren’t a particularly easy read, but a bit of imagination and a willingness to not dogmatically follow the layout and sequencing of CIPFA’s guidance notes can mitigate that (if only a little).
However, while I can accept the use of IFRS, the insistence of audit firms (and I know, to be fair, that much of their work is done at the behest of the Financial Reporting Council) on applying private sector principles to the audit public sector accounts bemuses and frustrates me in equal measure.
If I want to understand the financial health of a local authority, I want to assess the sustainability of income streams, levels of expenditure and the level of reserves and viability of any plans to use or replenish them. Alternatively, as a reader of the accounts, interested in knowing that public funds are being used appropriately, I want to know how the numbers shown and decisions may impact on council tax.
However, open any local government audit plan, or audit report, and you will see that two of the main risks identified are the valuation of assets and going concern.
Let’s start with going concern. The CIPFA code clearly states that “…an authority shall prepare its financial statements on a going concern basis…” and the notes go further setting out the reasons why it would not be appropriate for local authority accounts to be provided on anything other than a going concern basis.
Why then, do auditors need to spend so much time forensically studying cash flow projections to check that cash balances and liquidity are sustainable, with their technical teams insisting that the private sector going concern principles and tests are met regardless of any wider knowledge of the particular authority or even local government as a sector?
I can see the argument that going concern is just another way of assessing the financial health of an organisation, but is cash liquidity really that much of an indicator for a local authority with easy access to low cost short-term borrowing?
Pertinent questions
The obsession with private sector principles gets worse when the audit moves onto asset valuations. I understand that, for the private sector, the overstatement of the value of assets is a serious issue with such false accounting being used to obtain additional financing or inflate the share price, but what is the risk for a local authority of an asset’s value being either a little under or over stated?
I am not for one minute saying that valuations should not be checked but the additional time and expense incurred as a result of asset valuations having to be reviewed by specialist audit teams who challenge every assumption means that local authorities are essentially paying twice to get their assets valued. This seems to me a waste of public resources.
The movement in the value of an asset, be it up or down, does not impact on a council’s financial position, at least not in the context of its ability to continue to deliver services or its use of the public purse. There is a statutory override in place which means that the changes in value do not go into the general fund and have no impact on council tax.
Not only that, the fact that the valuation of assets gets pride of place as one of the big risks in the audit report means that the gaze of those charged with governance is drawn to the changes in value rather than asking the more pertinent questions.
Assuming these are investment properties, is the income being reported accurate? Is it sustainable? Do we understand the timing and impact of rent reviews? These are the factors that will impact on the long-term financial health of the authority, not annual fluctuations in value.
Yes, if a new asset has been purchased during the year questions should absolutely be asked of the value and whether the purchase was appropriate and due diligence undertaken properly but this check gets lost in a paragraph about value for money half way through the audit report.
If local government audits are going to get back on track and properly fulfil the role they need to play in providing reassurance on the financial health of authorities and identifying where there are causes for concern, audit teams need to be allowed to move away from the shackles the FRC is placing on them.
There is no need to adhere to the private sector auditing approach; ticking those boxes is taking time and resources away from reviewing all those things that makes the public sector what it is, even if that means a return to proper value for money assessments.
Rebecca Keene is deputy section officer at Broxbourne Council.
Photo by Gabrielle Henderson on Unsplash
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