Graham Liddell: The Importance of Being Earnest (about accounts and LOBOs)

A short trivial play in three acts for chief finance officers with references to LOBOs and accounting.

Here’s a thing: I get quite excited looking through a set of local government accounts.

I enjoy picking out the story they tell and believe them to be fundamental to public sector accountability. Accounts and accountability, you see, the clue is in the name.

But I do understand that not everybody shares my enthusiasm. All too often I hear comments that the accounts are at best a necessary evil and at worst an irrelevant waste of time.

So, how best to bring a sceptical audience round to my way of thinking? One avenue of attack came to me when I was reflecting on three recent experiences:

• Listening to senior finance officers talking about accounts and colour schemes.
• Attending the CIPFA accounting conference and discussing LOBOs, embedded derivatives and the complexity of IFRS 9, Financial Instruments.
• A rambling conversation with a commuting friend on the Victoria to Littlehampton train (via Worthing) about lost property, handbags and the power of storytelling as a management technique.

---

Room151’s Annual Conference – September 20th, 2018, London Stock Exchange
Local Authority Treasurers’ Investment Forum and FDs’ Summit

“…invaluable in broadening my understanding of some key investment issues and opportunities. It was also a very welcoming, friendly and enjoyable event. Principal Finance Officer, Rotherham Metropolitan Borough Council

---

Inspired by these experiences, and with fulsome apologies to Oscar Wilde, here is a script for a play.

Act 1. “We need to change the colour scheme”

(23 May 2018: towards the end of a one-to-one meeting between the treasurer and her deputy).

Deputy treasurer: And finally, the statutory accounts are just about done. I’m really pleased with the way Jenny has led the team. It’s her first year and she’s done a cracking job. A couple of QA checks and we can release them to the auditors. Here, have a look.

(Deputy hands a copy of the draft accounts to Treasurer who silently leafs through).

Treasurer: Yes, they do look good. Trouble is I don’t really understand them.

Deputy treasurer: Nor me, they’re way too complicated. The only people who understand what is going on are the people who prepare them and the auditors. And I have doubts about the auditors.

Treasurer: I’m glad you said that. I had a look through my local district council accounts last year and I couldn’t understand what the hell was going on.

(A further period of silence as the Treasurer continues leafing through).

Treasurer: I don’t like the colour scheme though — far too garish.

Deputy treasurer: Thanks, you’re dead right there. These are only draft, I’ll get them changed. We’ve got to add value somewhere.

Act 2. “I presume there’s no impact on the general fund?”

(25 June: Deputy pops his read round the door to speak to the treasurer).

Deputy treaurer: Did you see my email about the audit. It’s all gone pretty well and the colours are better. Just one issue to resolve. The auditors have been muttering about needing to account for embedded derivatives in our LOBOs.

Treasurer: (Laughs) Embedded derivatives in the LOBOs sounds painful. Happy to leave this to you. Bear in mind, though, that the auditors have got to justify their fee, even if they find something that they signed off last year.

My general approach is to humour them as far as possible, and don’t give them any excuse to charge extra. I presume that there’s no impact on the general fund?

Act 3. “I don’t think the team can be blamed.”

(Move forward to 6 July 2018 and the agenda preparation meeting for the audit committee).

Chair of the audit committee: So, the auditors have found a liability embedded in our LOBOs, that we didn’t know we had, and say we should make a £4m charge to the general fund?

Treasurer: I wouldn’t put it quite like that. We’ve known for some time that there has been a potential for higher costs as part of our LOBO contracts. But to my mind, that’s not the same as a real liability that needs charging to the general fund.

Chair of the audit committee: So, we’ve known about the £4m for several years, but didn’t think we needed to include it in the accounts?

Treasurer: That’s a fair summary. In the old days we would have just put a note in the accounts to say we had a contingent liability and that would have been the end of the matter. But, evidently, it’s a financial instrument and can’t be a contingent liability.

The trouble is that the financial instrument accounting rules are now incredibly complex. I really wouldn’t want any of my team to be unduly criticised at committee for not knowing them inside out.

Chair of the audit committee: Well, that’s one thing we can agree on. I don’t think the team can be blamed.

(Awkward pause…).

Chair of the audit committee: There is one thing I will need to ask at committee, though. I get that the accounting rules for financial instruments are complicated. But, if you’ve known about this £4m risk, why isn’t there any mention of it in the accounts? Aren’t they supposed to give a true and fair view of our financial position?

Treasurer: With the benefit of hindsight, I guess we could have included an extra note. But like I said, it would be against the accounting rules to put it in as a contingent liability, so we might have had trouble getting this through our auditors.

Chair of the committee: Really? Tell me about that long section that sets out all the risks associated with our financial instruments? Why didn’t we say anything about the risks there?

(Pause for dramatic effect).

And while we are at it, I see that our accounts say that we estimate the fair value of our PFI liability to be the same as the book value. How can that be?

Didn’t we take out that PFI deal when interest rates were way higher than they are today? Wouldn’t that mean that we are now paying through the nose for the loan element of that deal and effectively we owe much more than the book value? Why don’t we say anything about that?

Treasurer: Er…

Chair of the audit committee: Nice colour scheme, though.

**

Graham Liddell is head of finance (technology and process improvement) for the Orbis Partnership.

Get the Room151 Newsletter