The chair of the CIPFA/LASAAC Code Board reflects on the decision to delay implementation of IFRS 16 and suggests that now is the time to address anomalies in the application of IFRS to the UK local authority sector.
As the dust has just about settled on the recent CIPFA/LASAAC extraordinary Code consultation, it seems an appropriate moment to pause and reflect.
It will only be a moment. All of us will be deeply caught up in the usual year-end closedown activity as well as the preparation for elections; not just running them, vital though that is to our democracy, but anticipating possible changes in political control and the natural cycle of change that brings.
But we are always busy, and just because we are busy now doesn’t mean we shouldn’t review what we have just done.
The outcome of the consultation was for a further two-year deferral of the implementation of IFRS 16, with the very important caveat that CIPFA/LASAAC absolutely endorses it as the gold standard for lease accounting and encourages early adoption.
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A finely balanced decision
I won’t rehearse the arguments made for and against the various options, save to comment that CIPFA/LASAAC was closely divided on the issue, as was HM Treasury’s Financial Reporting Advisory Board (FRAB), into which we report. As was apparent from the outset, there were very good arguments on each side of the debate, and it was a finely balanced decision.
But what have we learned from going through the process?
Well, firstly, I would like to extend my thanks to all of the members of CIPFA/LASAAC and FRAB for their careful consideration. All the positions are voluntary and unremunerated, and time spent on these issues is time away from the office that, let’s be honest, we generally end up making up in the evenings.
I also want to extend my thanks to everyone who contributed to the consultation. I realise that putting out a controversial consultation shortly before the year-end is perhaps necessarily going to elicit a greater response rate than usual. That said, we had many more responses than usual, and very carefully thought-out ones at that, and I would like to thank everyone for that. I also think we had the right approach to consultation, and, in future, the webinars should become a much bigger feature of our process, to complement the formal written responses that will always be needed as a matter of record.
There is much dissatisfaction with various aspects of the local authority accounting and auditing framework, not all of it well-informed.
Dissatisfaction with the accounting framework
Whatever you think of the outcome, though, the process has thrown into even sharper relief a problem that has been around for years. There is much dissatisfaction with various aspects of the local authority accounting and auditing framework, not all of it well-informed. The consultation and the fantastic response to that has really helped to improve understanding in the sector of the constraints we work within.
In saying that, I want to add that there is much to commend in the existing framework as well. IFRS is the gold-plated framework for showing the true economic cost of decisions and we could all do more to promote the many benefits that adopting it has brought.
But there are some anomalies too, not in IFRS per se but its application to the UK local authority sector. The consultation has helped to raise awareness of how all of us – regulators, standard-setters, auditors and practitioners – need to work together to change some of those.
For me, in particular, I hope it has demonstrated the importance of the standard-setting regime and the value of engagement with that from the outset. Otherwise, we get trapped back in the cycle where regulators regulate to the standards, so the auditors audit to them and practitioners prepare to them, despite widespread acknowledgement that in some cases (valuations of certain types of property would be an obvious example) the results are probably disproportionate.
There are some anomalies in the application of IFRS to the UK local authority sector. The consultation has helped to raise awareness of how all of us – regulators, standard-setters, auditors and practitioners – need to work together to change some of those.
Making the case for a shift in focus
Local authorities cannot solve those issues and nor can the audit firms or Public Sector Audit Appointments, not acting alone anyway. But, collectively, we have a fantastic opportunity, following the announcement of the appointment of the new director of local audit, to really make the collective case for a shift in the focus, while remaining firmly within the IFRS framework.
I can’t help pointing out also that the delays in the accounting and audit cycle that led to the consultation are very much an English problem. It would be interesting to see the response from other policy makers as to why performance in the devolved administrations was so much better.
We will have to acknowledge now that performance for the 2021/22 accounts and audits is unlikely to be better than last year.
None of these issues is straightforward to resolve and I suppose we will have to acknowledge now that performance for the 2021/22 accounts and audits is unlikely to be better than last year. But I firmly believe that we are better placed now to introduce structural changes that may start to change that, and that the consultation process has helped with that.
I hope so anyway, because, if not, we had also better acknowledge that at the moment local authority financial reporting and auditing (in England at any rate) is lagging behind the rest of the UK public and private sectors. That is not a situation any of us should be prepared to tolerate for much longer.
Conrad Hall is chair of the CIPFA/LASAAC Code Board and director of resources at the London Borough of Newham.
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