UK local authority accounting no risk to investors, say experts

Experts have played down fears raised this week by ratings agency Fitch that accounting rules governing UK local authorities could put off investors.

In a release this week, Fitch said that the presentation of UK council accounts varies, and may leave out certain detailed cash flow data, such as employee costs, fees for charges and services, and the costs of supplies and services.

This, it said, meant that the finances of UK councils cannot be easily compared with those of their international peers.

“We think that the UK is one of the countries in Western Europe where it is the most time-consuming to extract complete financial information from the public accounts of local authorities,” Fitch said.

“This can make it difficult to compare local and regional governments’ budgetary execution and performance and their fiscal flexibility across countries.”

It said that the issue may become more relevant to investors “as the UK pursues plans for greater devolution, and as local authority debt rises”.

However, Suresh Patel, public services audit director at accountancy firm Mazars, said: “In many ways UK public sector accounting is more advanced than their European counterparts having been one of the first countries to adopt International Financial Reporting Standards (IFRS) in 2009. Indeed some of Europe still does not adopt accruals based accounting.”

Stephen Sheen, managing partner of Ichabod’s Industries, a consultancy providing technical support to local government, said: “To an extent, it is a badge of honour for local government accounts that they are not so easy to compare with their European peers.

“The UK has moved a longer way from cash accounting than any other European country in its adoption of full accruals accounting and the use of current value measures for assets and liabilities.”

He added that although many authorities have chosen not to use the “direct method” for their cash flow statement, where categories of operating cash flows are disclosed, they have the option to do so.

“If they were aware that a significant user of the accounts would find this information valuable, then the accounts could be prepared accordingly,” he said.

Alison Scott, ‎assistant director of local government and governance at the Chartered Institute of Public Finance and Accountancy, said: “We would expect ratings agencies and informed investors to understand IFRS accounts.

“Our main concern and focus is how to make accounts more accessible to the council taxpayer – investors are already well equipped to do that and can request more information from authorities if they need it.”

And Paul Dossett, head of local government at accountancy firm Grant Thornton, said that, in any case, local authority cash flow statements are not necessarily the best way of assessing the financial viability of councils.

He said: “The key factors in assessing a local authority’s financial viability are the strength of its general fund and other usable revenue reserves and of course its long term track record of delivering a balanced budget.”

However, Patel said that as UK local authorities gain more control over funding and attract the attention of international investors, “there will be more onus on ‎initiatives such as streamlining the accounts and the push for greater convergence in European financial reporting frameworks”.

Elsewhere in its statement, Fitch noted that despite the complications it identified, “efforts to ensure accountability do support financial transparency” because they are prepared in line with CIPFA codes of practice and UK law, and are approved by internal and external auditors.

Councils in the UK also enjoy a “predictable and supportive institutional framework”, the ratings agency said.

However, it added that reconciling published local authority accounts with Whole of Government Accounts published by central government can be complex.

Photo (cropped): Ken Teegardin, Flickr.