It’s a busy year in prospect for audit and accounting. Stephen Sheen works through a schedule that includes auditor appointments, the new accelerated closedown, expenditure and funding analysis, highways and financial instruments.
For my first column of 2017, herewith a summary of the major developments in auditing and accounting that are likely to be of interest over the next eleven and a bit months.
Auditor Appointment
By the end of 2017, you will have appointed your own local auditors or had them appointed for you by Public Sector Audit Appointments (PSAA).
The PSAA route will be more straightforward. This will probably be the cheaper option in the shorter term — you will not have to establish and maintain an auditor panel and you will share the costs of what is intended to be a procurement process with substantial economies of scale. However, you will have no choice in which firm is appointed and the successful firms will work to the terms set by PSAA.
To date, more than 40% of eligible authorities have signed up, including more than half of the counties and districts. But if you want to follow this route, PSAA’s invitation to opt-in is only open until 9 March.
Going it alone or in consortium with other authorities will give you more control over the appointment, although much of the specification is pre-determined by the statutory and professional definitions of a local audit. However, there will be scope to negotiate fees and to secure guarantees about who will do the work, when and how: that might not be available under PSAA.
NHS bodies completed their local audit procurement at the end of 2016, so there is national and local experience of implementing the Local Audit and Accountability Act 2014 requirements.
One of the key things will be to establish what interest you will be able to generate from the firms, given the commitment they have made to the NHS and in view of the meaty chunks that will be dangled in front of them by PSAA. The ICAEW maintains a list of all those auditors that have secured the necessary place on the Local Auditors Register.
Accelerated closedown
2016/17 is the last year before the accounts preparation and audit sign-off deadlines come forward to 31 May and 31 July respectively.
PSAA’s Report on the Results of Auditors’ Work for 2015/16 recorded that only 10% of authorities are currently being signed off by the 31 July date. The great majority of authorities will therefore need to do some work to increase the efficiency of their accounts and audit procedures, not all of which should be left to 2017/18.
The acceleration may be a bigger issue for your auditors than yourselves. Their work is being collapsed down into a very narrow period, and expert and experienced auditors are likely to be a scarce resource (and growing scarcer over time as less experience is available). One of the interesting aspects of the local audit appointment process will be the scrabble to secure commitments from auditors as to how they propose to work effectively to the 31 July date.
The expenditure and funding analysis
The statement of accounts will be having a substantial makeover in 2016/17. The presentation of performance information will now be aligned with the operational structure of the authority, rather than the nationally-imposed service expenditure analysis. Income and expenditure will be shown for each of the authority’s spending units, however they have been identified in budget monitoring reports.
An expenditure and funding analysis will be required, which provides a reconciliation between what the spending units were reported to have spent in the outturn reports and the resources they actually used as measured by proper accounting practices.
The mechanics of remodelling the statement of accounts are not particularly complicated. The costs of using property, plant and equipment accruals for the future pensions benefits earned by employees will need to be allocated to spending units and the accounts template will need to be overhauled to include the expenditure and funding analysis.
The greater impact, though, may be the opportunity for tricky questions to be asked if someone spots that the analysis shows a service consumed considerably more resources in the year than it was accountable for in the budget outturn. Or, that it spent considerably less than claimed in the outturn.
Highways network asset
The valuation of the Highways network sset at depreciated replacement cost had been planned for the 2016/17 statement of accounts but has been postponed until 2017/18 due to the unavailability of central rates for estimating road values. The addition of £1trn to the local government balance sheet will have to wait for another twelve months.
This will only be of benefit to you if your authority was behind in its preparations. But it does give the auditors another year to resolve the implications for their traditional models for materiality, which will otherwise leave them auditing little more than the highways network asset, senior officers’ salaries and members’ expenses.
Financial instruments and leases
New accounting rules will not come into force in 2017 for financial instruments and leases, but proposed accounting treatments will be a focus for much attention. In each case, the adoption of new IFRSs may have potentially significant resourcing implications.
For financial instruments, the risk is that gains and losses on investments that have previously been accumulated on the balance sheet and posted as a net gain/loss to revenue on sale or maturity may have to be charged as they arise. New arrangements for allowances for doubtful debts might also result in impairments having to be recognised earlier.
For leases, all property of any significant value leased by an authority will be brought onto the balance sheet, measuring the authority’s right of use of the asset. The previous operating v finance lease distinction will disappear. The effect will be that all leases will now become capital transactions, to be managed under the Prudential Framework.
In both cases, it can be predicted that the government will legislate to lessen the effects of the forthcoming accounting changes, particularly for transactions entered into before the transition date. However, you are recommended to spend 2017 building an appreciation of the changes, how they might impact your authority’s decision-making and how ameliorating legislation might help you.
Stephen Sheen is the managing director Ichabod’s Industries, a consultancy providing technical accounting support to local government.
