Stephen Sheen: Accounts simplification isn’t happening. What next?

An effort to reduce the accounts preparation burden on local authorities in the midst of coping with the Covid-19 crisis was recently abandoned. Stephen Sheen looks at the implications.

This article was supposed to be crammed full of top tips on how to get the most out of local authority accounts simplification for 2019-20. However, with hopes raised—then dashed within a week—that the accounts preparation burden would be lifted for these extraordinary times, I now need to talk instead about how to manage “business as usual”.

CIPFA/LASAAC had made clear that they were considering radical proposals to streamline the 2019-20 statement of accounts. It was not revealed what these proposals were, but if they were in line with the suggestions in my March article (here) the intention would have been to secure the sign-off of the minimum information needed for the effective financial management of the authority as soon as feasible.

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A solution is urgently needed to the challenge of preparing and having audited information that would confirm the resources available to an authority at 31 March 2020 so that 2020-21 budgets have a reliable foundation, And this while recognising that the availability of people to prepare that information might be severely restricted.

Progress

What have we got?

• Unaudited accounts to be published by 31 August.
• Audited accounts to be published by 30 November.
• Suspension of the fixed element of the public inspection period (timing is at an authority’s discretion, provided that the 30 working day period commences no later than 1 September).
• 2019/20 Accounting Code to be applied in full.

So, instead of an agile sprint to an assured position from which to move forward into the COVID-19 era of uncertain expenditure demands and vanishing income streams, we get a slow plod towards the stabling of the familiar, but unloved, behemoth. Plus a bit of free time to prepare for Christmas. If not the 2021-22 budget.

Who could have thought this was a good idea?

Decision

The CIPFA/LASAAC statement identifies regulators and auditors as being unaccepting of the proposals. How did the regulators decide that this approach was in the public interest? How exactly would the decision-making opportunities of readers of local authority accounts be compromised by a simplified set of accounts, where the key messages about the impact of COVID-19 could be presented without what will now almost certainly be distracting irrelevant clutter (no matter how useful it might be in calmer times)?

And what business of the auditors was it to seek to influence the accounting framework, provided that the basics of truth and fairness were secured?

The resulting ordering of priorities can best be described as curious.
Delay without simplification brings a number of problems:

• There will be some information that will be uncollectable if it has not been collected early. There may be some holes in the accounts that cannot be filled, no matter how long accountants are given;
• The later the accounts are published the less relevant the information they contain and the more obscured the key messages will be (although this does give some hope for increasing materiality cut-offs);
• The longer the accounts remain open, the more subsequent events have to be taken into consideration in amending, or supplementing, the financial statements;
• The auditor’s value for money opinion will be similarly delayed.

It also does not help that 31 March 2020 is one of the worst days to be taking a snapshot of an authority’s finances: Just as the lockdown was starting to bite but before it was clear how sharp its teeth could prove to be.

Accounts preparers, and their colleagues, will need to consider many tricky questions, some more crucial than others:

• Assessing the collectability of debtors: This could be the most important part of the closedown work; establishing expectations for possible levels of default now that historical experience cannot be relied upon.
• Valuing property: In the absence of market transactions around 31 March, valuers are probably going to have to caveat their reports, and these caveats will be imported into the financial statements where they represent material uncertainties. Will this honesty be sufficient to avoid an audit qualification?
• Five yearly revaluation cycle: There will be great pressure for all property to be revalued as at 31 March 2020, on the basis that values before this date cannot be relied upon. But if values as at this date are also not reliable (see previous bullet), what would be the point of updating them in the Balance Sheet?
• Valuation of financial instruments: Where these have quoted prices there should not be a problem, but other instruments will be difficult to value, such as shares in unlisted companies.
• IAS 19 pensions figures: Actuaries’ estimates will be open to change, and it may be best to defer their report until the latest reasonable moment.
• Group accounts: Are they really going to help?

The extended accounts and audit process in difficult circumstances therefore increases the likelihood of differences of views about the scope of work that an authority needs to do, the detail it provides about that work in the accounts and the extent to which it sets out the impact of material uncertainty.

More than in any other year, authorities need to ensure that their burden is not unnecessarily increased by auditors. It will be incumbent on auditors to demonstrate that the issues they are raising are truly potentially material and that they are being justifiably sceptical when challenging the good efforts of practitioners.

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.