Councils ‘risk missing deadline for rules switch’

They could have been the words of a headmaster whose patience had finally run out.

Local authorities have been accused of being ill-prepared to make the swap from current accounting rules to a set of international standards.

The government’s Audit Commission warned local authorities they risk missing the deadline to make the accounting switch in June 2011.

“Local authorities are falling behind,” the commission said. “A failure to achieve successful transition… would cause sig­nificant reputational damage to individual local authorities and the local government sector as a whole.”

You didn’t need to read between the lines of the 12-page briefing paper to understand the thrust of it.

“Local authorities need to make urgent progress, now.”

Few could blame the commission. It found only one in seven transition plans were on track, one in five was having serious difficulties, 46% had not talked to the audit committee and nearly a third had failed to discuss transition issues with their auditor.

Ninety-five per cent had not developed skeleton accounts.

The story was somewhat better for the NHS, according to an earlier commission report. But it still found that 14% of NHS bodies materially mis-stated their figures, seemingly lost in translation between the old and new rules.

Overall, the paper found, NHS bodies “have made significant progress…but there is still work to do”.

NHS, with its wheel and spoke structure, is able to roll out accounting changes more efficiently compared with local authorities where, in the words of one senior accountant, it’s “every man for himself”.

There’s a sense among some advisers that local authorities, in particular, have failed to grasp the magnitude of the change required by new accounting rules, that this was not just a change in book keeping.

“It fundamentally changes the way a public bodies recognises assets and liabilities and changes they account for transactions,” said Amin Mawji, partner with Ernst & Young’s financial accounting advisory service and an expert in public finances.

He uses the example of a care home which must have its finances topped up each year. The local authority would write down the value of the asset in its books because it earns a negative income.

“It means there is more risk on the balance sheet value,” said Mawji.

Central to the commission’s concerns is the issue of private finance initiatives – PFIs.

The new rules don’t have a specific rule for PFIs but it does have one for leases.

Under the new accounting rules a lease often has to be placed on to the balance sheet as a liability. When you consider schools, housing street lighting and waste along with a myriad of other public functions – one council alone had 600 leases or PFIs – the challenge becomes clear.

The changes are not just skin deep but may change the how public bodies manage funds by effectively lowering their borrowing limits.

Borrowing limits are tied to asset and liability levels. Suddenly, with new liabilities on their books, councils may find their ability to borrow diminished.

Andy Ka, senior director of the local government group at accountants Grant Thornton, believes it may lead to financial soul searching from some councils when public bodies consider PFIs in the future.

“It will definitely make them think twice,” said Ka.
He has been advising councils on how to make the transition. He said many of the issues are not originating from London councils and believes the delays are due to the large amounts of data which needs to be collected.
In this area, the commission’s paper carries a warning: “Experience

suggests that if the transition is not supported by senior management and an organisation-wide approach is not taken, IFRS implementation will be disjointed, take longer than necessary and be more expensive.”

IN OUR VIEW

It seems ridiculous that the government is requiring public authorities to remove debt, incurred by PFIs, off the balance sheet for public purposes but leave it on the balance sheet for internal calculations. It’s dual accounting. Not only does it create unnecessary work for our stretched public sector, it presents a censored view of public finances for public consumption.

Further reading:

audit-commission.gov.uk