Preparing the accounts
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As local authorities start to complete their latest financial statements, I think it’s worth taking a step back from all the number crunching and rule interpreting to remember the purpose of this massive annual exercise in the first place. The casual observer, hearing comments like “we know that figure’s wrong, but the auditor never spots it,” might think that the purpose of the accounts is to get a clean bill of health from the auditor. Or maybe we just do it to keep CIPFA happy, or to keep all us accountants in jobs!
In the private sector, the main purpose of the annual report and accounts is to provide useful information about the company’s financial performance and position to its investors, i.e. the lenders and shareholders. In the public sector, we don’t have many investors as such, but we do have a wide range of funding providers, including local taxpayers and central government, as well as service users. CIPFA’s Code of Practice reminds us that it is these stakeholders who are the main users of the accounts, and it is their needs that should be borne in mind when producing the financial statements.
Arlingclose is also a user of local authority financial statements, for three distinct purposes. Firstly, a properly constructed statement of accounts provides a wealth of useful information on our clients’ financial positions. Except in the smallest authorities, the person with responsibility for preparing the accounts is not the person responsible for managing the authority’s cash. So we interpret the figures to answer treasury managers’ questions such as “why do our investments keep growing each year?” and “when do we need to borrow again?”
Secondly, as a supplier to local authorities, we review the accounts of potential clients to gather information on their complexity, which is useful in pricing our services. A poorly constructed document with glaring errors or inconsistencies can signal that one part of the organisation doesn’t know what other parts are doing, potentially creating extra work for the adviser.
Finally, a number of our clients lend to other local authorities, and we are increasingly performing credit analysis on potential local authority borrowers, especially for long-term loans. The most recent statement of accounts is a key input into our analysis of the publicly available information.
So as one of the users of the accounts, what am I looking for when reading the annual report? One key thing is for figures in the primary financial statements to be the same as the totals in the explanatory notes. If the balance sheet shows you with £125m of debt, and the disclosure note divides this into £70m from the PWLB and £40m in LOBOs, it generates more questions than answers. It’s not normally a mistake, and there’s usually a sensible explanation for the difference, but if you don’t say what it is, then you’re not providing useful information to the reader.
Another common trap to fall into is following a template too closely. If you’re not careful, you can end up describing things that haven’t happened, copied from the examples provided, but ignoring some of the important things that have gone on. Even the Code of Practice needn’t be followed to the letter, as disclosures can be omitted if the information is not material. On the other hand, some data can be useful to include even though there is no formal requirement to do so, such as adding the HRA CFR to the note on HRA capital expenditure, for example.
Some of the things I like to see are just presentational, like using a sensible font size and colour. Six point in light grey is never welcome. And searchable online documents are much preferable than bad scans of printed pages – you’d be surprised at the quality of some accounts on the internet.
Overall, the aim should be to get everything broadly correct rather than precisely wrong. Accounts presented to the nearest pound (or in one case to the penny) always worry me that the focus is on exactly reporting the contents of the accounting computer system rather than the true financial position of the authority.
David Green is Client Director at Arlingclose Limited. This is the writer’s personal opinion and does not constitute investment advice.
