Stephen Sheen: Something to be celebrated

Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing technical accounting support to local government. This article was be published in the fourth issue of Room151 Quarterly. 

In the last issue of Room151 magazine we looked at the future of local government audit and what it might mean for the relationship between authorities and their auditors.  All indications are that audit will continue to move away from being a public good and closer to a service provided exclusively to the authority.
If this is the case then authorities should be positioning themselves to ensure this service is provided as effectively as possible.  As we approach the end of the 2013/14 audit round, a timely area for focus will be maximising the benefit to the authority of auditor reporting.
The absence of any substantial readership for the Statement of Accounts of most authorities usually means that the audit opinion itself is not given much regard.  However, it is an item of great value.  It confirms that an independent and expert team has taken on your financial systems and accounting staff with sceptical intent and found them capable of producing a set of accounts that gives a true and fair view and complies with proper practices.  Something to be celebrated.
Even if the opinion is qualified, this is not necessarily bad news.  Most qualifications arise because of legitimate differences of view about accounting treatments, estimates or judgements.  The auditors disagree with you, but you may still have a defensible position.  Other qualifications can arise from lost accounting records, perhaps in a transfer to a new system, that having happened once will not happen again.  Currently a trip to the Audit Commission naughty step follows a qualification, via a mention in the annual Auditing the Accounts report.  But this is a relatively secluded spot which promises no great scandal.
Public interest reports?  These are the wolves that once prowled this land; legendarily savage but now seldom seen.  According to the Audit Commission website, only two PIRs have been issued to principal authorities in the last two years.  This is despite a statutory duty for auditors to consider whether they should report on any matter coming to their notice in the course of the audit so that it can be brought to the attention of the public.  Perhaps the auditors consider that Private Eye’s Rotten Boroughs column does a sufficiently insightful and objective job of informing the public about the probity of their local authorities?
The risk of being on the receiving end of a public interest report is consequently remote; a fact that should calm the fears of those concerned that auditors might lose their fearlessness if self-appointed by authorities.
Effective reporting for most authorities will then focus on the reports required by auditing standards on deficiencies in internal control and audit findings.
With regard to internal controls, auditing standards require auditors to report all deficiencies identified in the course of their work to management, and inform those charged with governance of the most significant deficiencies.  Reports have the tendency to look like a bad school report, scheduling out everything that has gone wrong.
But you should expect reports to be as constructive as possible.  Does it detail the scope of work where deficiencies were not found?  And are the deficiencies identified placed informatively within a description of the context in which they were found, an explanation of their possible practical consequences and an actionable recommendation as to how they might be addressed?
Reports of audit findings largely focus on errors and omissions in the Statement of Accounts and if not prepared carefully can look like a listing of the failings of the accountancy staff.  However, this is not what was intended by auditing standards.  Auditors are required to report any misstatements that they find and do have to request that management correct them.  Management is free to decline the request, but auditors then have to report uncorrected misstatements to those charged with governance.
The purpose of this, however, is to make members aware of the position, just in case they wish to disagree with management and the auditors that corrections are not needed for a true and fair view or can read some wider importance into the findings from their own knowledge and experience of the authority.  The report should therefore be nicely co-operative, making it clear that members are being asked for a third opinion on the uncorrected misstatements and not for expressions of regret at the failings of the finance function.  The report should be drafted to encourage a harmonious outcome, especially as the list is likely to lengthen as more and more immaterial disclosures are omitted as authorities cut clutter.