Regular emergency consultations on proposals to temporarily lower financial reporting standards are not the best approach to resolving the crisis in local audit and reporting, ICAEW has stated in its response to a consultation on proposed temporary amendments to the CIPFA LASAAC Local Authority Accounting Code (‘the Code’).

The consultation follows CIPFA establishing a ‘task and finish group’ to develop a solution to issues with the reporting of infrastructure assets that was raised by auditors in March 2022.

Historic information deficits, compounded by inappropriate existing practices, have resulted in cumulative overstatements of the gross historical cost and accumulated depreciation of infrastructure assets reported in local authority accounts. In addition, the lack of granularity of asset records has hampered the ability of auditors to obtain sufficient assurance over the net book values of infrastructure assets, despite the seemingly simple valuation basis of historic cost.

Auditors report that this issue is causing delays to the completion of the majority of the 52% of audits of local authority 2020/21 accounts that are still outstanding. The deadline for the publication of 2020/21 audited accounts was 30 September 2021.

ICAEW’s response expresses agreement with CIPFA LASAAC that further audit delays are not in the public interest if they can be avoided and, therefore, a temporary solution to this infrastructure reporting issue is required. ICAEW has recommended more affirmative wording to the proposed amendments to reduce the risk of differences in interpretation.

The response stresses ICAEW’s significant reluctance about temporary reductions in accounting standards as a method of seeking to address audit delays. ICAEW warns that emergency consultations of this nature do not resolve the underlying issues and risk sending the wrong message about the importance of accounts.

The response states that ICAEW would not support the lowering of accounting standards becoming a permanent feature. Information about infrastructure assets is important for prudent calculation of the minimum revenue provision and for spending decisions relating to asset maintenance or replacement.

ICAEW’s response expresses a belief that, despite the challenges from historic information deficits, it is possible to develop a long-term solution that focuses on helping local authorities improve their record keeping and financial reporting of infrastructure assets.

Oliver Simms, Manager, Public Sector Audit and Assurance at ICAEW, says: “We welcome the leadership that CIPFA LASAAC has shown in seeking to mitigate the delays to local authority audits caused by the infrastructure asset reporting issues. ICAEW does not support the temporary lowering of reporting standards but accepts that it is preferable to the alternatives of extensive delays or widespread qualifications in these circumstances.”

The response recommends that the Audit, Reporting and Governance Authority (ARGA), as the new system leader, is best placed to develop this ‘whole system’ solution. However, it warns that ARGA may find this difficult without the same powers over local authority financial statement preparation as the government intends for ARGA to have over financial statement preparation in the private sector.

“However, ICAEW would strongly oppose the temporary amendments becoming permanent,” says Simms, adding: “We believe that ARGA is best placed to develop a long-term solution, but that its effectiveness could be hampered by insufficient powers over financial reporting. We urge the government to grant ARGA powers over local authority financial statement preparation to ensure it can take the lead in resolving issues like this and be an effective system leader for local audit.”

Read ICAEW’s urgent consultation on temporary changes to the local authority accounting code.