Councils ‘risk missing deadline for rules switch’

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

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

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

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.”



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:

Related reading