• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

Stephen Sheen: Expanding your property portfolio? Prepare for the auditors

0
  • by Stephen Sheen
  • in 151 News · Development · Technical
  • — 19 Jun, 2017

If you’re spending on property expect auditors to take a close look asking questions about legal powers, the propriety of borrowing and value for money.

Photo: stevepb/pixabay

Are these the magic money trees? The office blocks, shopping centres and petrol stations currently filling up the local government property portfolio with their promise of a harvest abundant enough to keep the fruit bowl full for years to come?  Quite possibly, with a good soil for rooting, plenty of sunshine and lots of green-fingered attention.   But also quite possibly not.  Which is why you can expect a visit from your auditors, once they have remembered where they put their wellies.

It is a common scenario for auditors to have no knowledge of a substantial and risky project until it is too late for them to have any influence over it.  Commercial sensitivities often lead to projects being run on a “need to know” basis, with external auditors joining internal auditors, scrutiny committees and sometimes even the section 151 officer on the other side of a firmly locked door.

The auditor may only find out about a project when the ink is drying on the contract, when there doesn’t seem much more to do than offer a sheet of blotting paper.

However, there is still a lot that the auditor can do that would be of benefit, even if there is nothing to be critical about.

For instance, the Spelthorne Borough Council £360m purchase of the BP campus with new borrowings of £377m against a budget requirement of around £13m is such a huge transaction that its mere existence surely justifies a public interest report from the auditors to reassure the local population that their new role as BP’s landlords will not weigh heavy upon them.  There is no reason why public interest reports have to be reserved for bad news.

Unfortunately, auditors are not particularly keen on bringing good news.  The best you will get is “negative assurance”: a declaration that, based on the investigations carried out, there is nothing that provokes the need for criticism. But this would still be a valuable contribution and is arguably what is required by the reporting duties in Schedule 7 of the Local Audit and Accountability Act 2014.

The least that we can expect is that auditors will eventually say enough to manage their reputation risk – limiting the possibility that someone at some point in the future could ask “where were the auditors?”.  A couple of paragraphs in the audit letter affirming that it is an authority’s responsibility to make its own investment decisions and summarising the less reliable judgements by which those decisions have been taken.

So what will the auditors be particularly interested in?

Legal Powers

Since the introduction of the general power of competence, people seem more relaxed about identifying the legal powers supporting a decision.  However, it is still important to know what powers are being exercised, particularly in understanding the implications of the limitations on those powers for a particular proposal.

For instance, the general power comes with restrictions on charging other than to recover costs and requires commercial activity to be run via a company.  And the investment powers in the Local Government Act 2003 only extend to purposes relevant to an authority’s functions or the prudent management of its financial affairs.  Advice confirming legality will be expected.

It is sometimes forgotten, by those without a legal background, that even if a power can be identified, then that power has to be exercised reasonably under the Wednesbury rules.  Auditors will look for legal advice being properly grounded.

If an authority is borrowing to fund its purchases, there may also be questions about the propriety of borrowing to invest.  Not so long ago this is something that would have rung alarm bells across the audit community.  Judging by their appearance before the Public Accounts Committee in 2016, though, it does not seem a matter that DCLG and the Treasury are overly concerned by.

Finally, how are these projects integrated into the Prudential Framework?  Arguments can be put that asset prices will rise to more than cover the cost of acquiring property and making good its depreciation, such that Minimum Revenue Provision (MRP) is not needed.  But this is risking a potentially major funding problem if the value/cost relationship shifts adversely in the future.  How can an authority demonstrate its legal duty to act prudently?

Value for Money

Auditors will be concerned to examine all the significant judgements, estimates and projections involved in a decision to invest.  They will also review accounting treatments to ensure they align costs and benefits appropriately and look critically at funding and financing arrangements.

Exit strategies will also be relevant, particularly noting that if rental income falls sale of a property will only generate a capital receipt rather than revenue income that might fill the gap in the budget.

Any reporting in this area will be restricted to the adequacy of the arrangements put in place by the authority to achieve value for money and will not provide any comfort that it has actually been achieved.

Decision Making

Auditors will check that the authority has complied with its democratic framework and schemes of delegation, particularly if the proposal has proceeded on a “need to know” basis.

So, if you are in the process of bulking up your property portfolio, prepare for the muddy tread of your auditors as they come to gaze sceptically upon your magic money tree.

Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing technical accounting support to local government.

Get the Room151 Newsletter

Photo: stevepb/pixabay

Share

You may also like...

  • Jonathan Bunt: Give councils real power to build new homes Jonathan Bunt: Give councils real power to build new homes 3 Jul, 2017
  • News Roundup: Settlement leads to ‘grave concerns’, auditing report, LGPS funds buy into Anglian Water, procurement framework saves £88m News Roundup: Settlement leads to ‘grave concerns’, auditing report, LGPS funds buy into Anglian Water, procurement framework saves £88m 20 Dec, 2017
  • HRA lift isn’t magic fix for housebuilding, say councils HRA lift isn’t magic fix for housebuilding, say councils 15 Jul, 2019
  • Council predicts £5.5m budget overspend after a single month Council predicts £5.5m budget overspend after a single month 27 Jun, 2019

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 2 days ago

    How can local government ‘build back better’?: Beverley Gower-Jones looks at the options for driving small business entrepreneurship in clean technologies. Innovation is essential for local authorities to save money and reduce emissions, it is the… dlvr.it/RtT3nS pic.twitter.com/bSMB6OG70t

    Room151 2 days ago

    Helen Randall: Spelthorne report places spotlight on ‘controls’: Fresh criticism of Spelthorne Council raises the question of what “good” controls look like when negotiating a property deal. Spelthorne Council’s continuing debacle over property… dlvr.it/RtSPhy pic.twitter.com/9uCOJgBcH6

    Room151 2 days ago

    Step-out strategies: Hitting the sweet spot between liquidity and ultra-short duration: Sponsored article: Jemma Clee describes how an ultra-short duration strategy can help local authorities enhance returns. Despite the expectation of a low, and… dlvr.it/RtSPZb pic.twitter.com/pdXPpv5lcN

    Room151 3 days ago

    What role will climate change have on the pricing of government bonds?: Sponsored article: Kerry Duffain finds that “vulnerability and resilience to climate change” have a significant impact on the cost of government borrowing. Ardea Investment… dlvr.it/RtNKv7 pic.twitter.com/wDjT31x4Yt

    Room151 4 days ago

    ESGenius: Slashing emissions will fuel green growth for decades: Sponsored article: Velislava Dimitrova argues that a big enough investment could mean transition to a low, or no, carbon economy can become a reality. The world needs to slash carbon[...] dlvr.it/RtKZJp pic.twitter.com/cd8S3ijERl

    Room151 4 days ago

    Prudential code: “Not perfect, but its heart is in the right place”: The new Prudential Code offers revised rules for borrowing. Nikki Bishop is sceptical it will work while Gary Fielding offers his support. Nikki Bishop I have been asked to give[...] dlvr.it/RtKZFh pic.twitter.com/OriN28lXcb

    Room151 5 days ago

    Tremendous report from @MarkSandford3 citing @room_151 no fewer than six times (despite what the @lgcplus fact checking/counting dept might tell you) #localgov commonslibrary.parliament.uk/research-brief… 1/5

    Room151 2 weeks ago

    Dan Bates: Capitalisation directions are not the only tool for rebuilding finances: Dan Bates argues deep seated problems are contributing to a rush for capitalisation directions. For some time now we have been reading that a number of councils are in… dlvr.it/RspKff pic.twitter.com/xRRsgVim9u

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Record inflation level prompts concern for treasury returns
  • Next story Bob Swarup: The corrosive impact of inflation 

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.