Covid-19 places a strain on producing accounts

Its the time of year when finance teams focus on their statement of accounts. Stephen Sheen argues that pushing back the deadline for audited accounts is not enough.

There is a small chance that section 151 officers will not currently have the preparation of the 2019-20 statement of accounts at the top of their agenda for dealing with the impact of the corona virus. However, there will be at least one member of their staff for whom the prospects for the next few months are distinctly worrying: Chief accountants, or those occpying the role.

It was announced this week that the date for publication of the audited statement of accounts is to be moved back two months to 30 September. This isn’t particularly helpful as the 31 July date is only a target, and one that many audit teams had already indicated that they would not be able to honour.

More significant is the statutory duty to publish unaudited accounts by 31 May, in a form that the section 151 officer can confirm is true and fair. This is an absolute deadline.

MHCLG has announced that the deadline will be moved back to 30 June. But even this date is one that accounts preparers are starting to realise may be unachievable. Unpredictable absences of key staff and contributors of information from across the authority through illness or isolation will make even the most confident plans unreliable.

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An audited statement of accounts is a valuable document. Not because of the clamour from the local populace for accountability via the printed word. Concerned persons will be more interested in learning how the authority is planning to cope with the financial challenges of the next few months than checking back over the niceties of 2019-20.

Instead, a statement of accounts is important because it confirms the balances of resources which the authority is taking into 2020-21 and on which all budgets are founded.

I would not, therefore, lobby for the cancellation of the accounts and audit process for 2019-20. However, there are some steps that could be taken to secure the preparation of reliable audited accounts.

Cancellation of the requirement to publish audited accounts

Rather than move the 30 June date further back for the publication of unaudited accounts, it would be sensible to cancel the requirement.

It is a relatively new initiative that has served little practical purpose. It is also based on an unrealistic expectation that section 151 officers can confirm that the draft is true and fair before having the benefit of an external audit.

The rapid changes in the financial environment and the need to take into consideration events after the balance sheet date also mean that audited accounts are likely to be substantially different from any draft accounts prepared a couple of months previously.

A small downside of cancellation would be that the draft contains some information that would be protected from Freedom of Interest (FoI) requests (particularly senior officers’ remuneration), meaning that this detail would be protected from electors’ objections, unless the period for objections was extended to cover up to the date of publication of the audited accounts.

An emergency Code of Accounting Practice

The Code of Accounting Practice as currently drafted requires the production of a chunky statement of accounts, whose primary value to a population in crisis would be something to stand on to help to reach that last packet of pasta hidden at the back of the supermarket shelf.

An emergency code would allow expectations of authorities to be reduced to those that contribute directly to confirming the balances of resources that are being carried into 2020-21. A focused narrative report, the main financial statements, and a handful of key disclosure notes.

Areas that could be compromised include:

• A moratorium on fresh valuations unless it can be demonstrated that they are absolutely necessary;
• A reliance on information provided by the LGPS triennial valuations rather than IAS 19 for information about pensions;
• No group accounts;
• No schools consolidation.

Where people wish for more information to support aspects of the accounts, authorities should be able to facilitate this through FoI.

Removing the undue influence of the Financial Reporting Council

This would also be a good time to remove the undue influence that the FRC Audit Quality Review team is having on local government audit. Its insistence that local government audits should be judged using the same agenda as those in the commercial sector has caused huge amounts of over-auditing and diversion of auditor attention away from issues that should take priority (see article from August 2019).

The circumstances seemed likely to worsen in 2019-20 as auditors prepare to escalate the “war on experts”, in the cause of the FRC’s call for more scepticism.

Scepticism about audit evidence is a necessary part of the auditor’s character, but it has the easy potential to be misapplied as disbelief. And when the areas that auditors are being encouraged by the FRC to be sceptical about are matters that have little operational importance to an authority (such as non-investment property valuations and IAS 19 pensions figures), it leads to unnecessary questioning of professional judgement.

There is a lack of appreciation that local government valuers and actuaries are under none of the influences to manipulate their calculations that might be present in the commercial sector, and their work is almost certainly capable of being relied upon.

Can someone please explain to the FRC that their inability to adapt their work to the demands of local government is a matter of embarrassment to an organisation whose purpose is to judge the professional agility of others?

Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing a technical accounting support service to local authorities.  He was previously the senior technical manager for local government at PricewaterhouseCoopers.

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