‘Major issue’ leading to delays in signing off council accounts

Photo: Shutterstock

Further delays to the audits of 2020/21 local authority accounts have been attributed to issues over the valuation of infrastructure assets that are affecting a significant number of upper-tier councils.

Chris Tambini, president of the Society of County Treasurers (SCT), told Room151 that this was “potentially a major issue for all upper-tier local authorities”. It is currently affecting those authorities that have not already had their 2020/21 accounts signed off and is likely to impact a larger number of councils for their 2021/22 accounts.

CIPFA has established a “task and finish” group to address what it admits is a “complex and serious” issue impacting infrastructure assets. It is expected that the group will make recommendations for amending the code of practice that governs local government accounting, which will then be reviewed as part of an “exceptional” four-week consultation in May.

“There is a risk that accounts will be qualified for a number of local authorities dependent on the outcome of the current work. Alternatively, upper-tier councils would need to invest a lot of time and effort in ensuring accounting records are up to scratch, if that is actually possible,” Tambini, who is also director of corporate resources at Leicestershire County Council, said.

“The SCT is concerned about this issue given we believe that the vast majority of councils will not have the accounting records to meet requirements as currently interpreted. We are engaging with CIPFA, and hope CIPFA and key stakeholders DLUHC and the Financial Reporting Council (FRC) can work through this issue in a timely manner and agree a pragmatic and proportionate approach.”

The Society of County Treasurers is concerned about this issue given we believe that the vast majority of councils will not have the accounting records to meet requirements as currently interpreted.

Room151’s Monthly Online Treasury Briefing
April 29 2022
Online
Public sector delegates – register here

Upper-tier audits on hold

It is not just county councils that are affected by the issue. There is an effective hold on all audits for upper-tier authorities that have infrastructure assets, including London boroughs, metropolitan authorities, unitaries and some districts.

Only 9% of 2020/21 local authority audits were completed by the deadline of 30 September 2021. This figure had risen to 52% by the end of March 2022, but any further progress has now been halted by audit firms seeking more information on the valuation of infrastructure assets.

According to Paul Dossett, head of local government at Grant Thornton, the infrastructure assets issue will “likely slow the progress further until after June 2022, and will also impact the preparation of the 2021/22 accounts”.

We need a solution that resets the position on accounting for infrastructure assets and allows councils to prepare accounts that are materially correct in that respect. The issues identified by auditors date back many years so there is no ‘light touch’ solution.

Grant Thornton is estimated to have 40% of the local government audit market, followed by EY (30%), Mazars (18%), Deloitte (5%) and BDO (5%).

“Given the significant issues identified, we need a solution that resets the position on accounting for infrastructure assets and allows councils to prepare accounts that are materially correct in that respect. The issues identified by auditors date back many years so there is no ‘light touch’ solution,” Dossett told Room151.

Infrastructure information unavailable

For some authorities, the valuation of infrastructure assets is the only outstanding issue on their accounts, but they do not have the detailed information being requested.

Essex County Council is one of the authorities in this position. Executive director of corporate resources Nicole Wood recently produced a report for Essex’s Audit, Governance and Standards Committee that provided some context to BDO’s 2020/21 Audit Completion Report for the council.

“The report is marked as ‘draft’ because of a residual issue relating to the carrying value of infrastructure assets. BDO cannot finalise the audit until this matter is resolved. This is a national issue impacting on all highway authorities,” she wrote.

In turn, BDO’s Audit Completion Report stated: “Essex records, and holds records on, spend on infrastructure on a project basis rather than at a granular separable asset or specific location basis. This position means that when assets are replaced/refurbished and/or wholly taken out of use, it is not possible to identify the relevant cost or accumulated depreciation of the assets that should be de-recognised.”

The amounts in question are not insignificant. BDO’s Audit Completion Report for Essex shows the gross costs of infrastructure assets at £1.73bn and accumulated depreciation of £499m, producing a net book value of £1.23bn.

Regulatory challenge

The reason that audit firms are scrutinising this area more fully is thought to stem from the £250,000 fine issued by the FRC to Mazars in January for its audit of an unnamed local authority.

According to the FRC: “The most significant failing was in respect of the PPE [property, plant and equipment] valuation, where there was insufficient and undocumented challenge of the accounting treatment for refurbishment costs in the valuation of the authority’s dwellings which could indicate a material overvaluation.”

Having seen the likelihood of regulatory challenge in this area, auditors are seeking more information from local authorities.

—————

FREE weekly newsletters
Subscribe to Room151 Newsletters

Room151 LinkedIn Community
Join here

Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address

Room151 Webinars
Visit the Room151 channel