In the private sector, going concern is one of the key areas of interest to users of the accounts, as shareholders and lenders want to know that a business will continue before making investment decisions.
The Department for Business, Energy and Industrial Strategy’s White Paper Restoring Trust in Audit and Corporate Governance proposed that all public interest entities include a resilience statement in response to questions over the disclosures and audit of going concern following high-profile corporate collapses. ICAEW’s response agreed, stating that “more needs to be done” on going concern because “societal expectations are high”.
The concept of going concern in the public sector is very different. After all, most public bodies, whether government departments, devolved administrations, local authorities or NHS trusts have a statutory existence that makes technical insolvency almost impossible.
Apart from a relatively small number of trading businesses owned by the state (such as Channel 4 or the British Council) that are funded by external income, public bodies are not going to go bust except by a deliberate choice of ministers or Parliament.
Despite that, stakeholders in public bodies still have an interest in knowing whether they are financially sustainable. What are the risks that my local authority will issue a section 141 bankruptcy notice and freeze all non-statutory activities? Are a quango’s activities required by statute and hence must be funded by the public purse, or are they discretionary and so subject to whims of ministers and HM Treasury?
Is there a multi-year commitment or just an expectation that funding will continue? What will happen if external income falls – will Treasury make up the difference, or will services be cut back? What are the risks that a budgetary freeze (say) could put the ability of a public body to meet its statutory obligations at stake?
The statutory nature of most public bodies means that going concern disclosures tend to be much more limited than those in the private sector, while auditors, who under auditing standards still have to consider the appropriateness of the going concern concept in reaching their opinion, rarely refer to doubts about going concern in their audit reports.
One recent exception was the British Council’s 2020/21 financial statements, which disclosed material uncertainties over going concern because of the impact of COVID-19 on its commercial income and financial position, and uncertainty over future government support should it be required.
The Financial Reporting Manual for central government states that “the anticipated continuation of the provision of a service in the future” is normally sufficient evidence of going concern. In other words, even when the government has made a decision to abolish a particular body, it remains a going concern if a different public body will still deliver its services.
For example, the Department for International Development’s 2019/20 financial statements were prepared on a going concern basis even though the department had been abolished before the accounts were certified. This is because the government’s intention was that the Foreign and Commonwealth Office (now the Foreign, Commonwealth and Development Office) would assume responsibility for international development.
The CIPFA LASAAC Code of Practice on Local Authorities makes a similar assertion, stating that “an authority should prepare its financial statements on a going concern basis unless there is an intention by government that the services provided by the authority will no longer be provided”.
As local authorities have statutory duties to deliver essential services, this means in practice that no local authority accounts will disclose material uncertainties over going concern. Indeed, 87% of respondents to Sir Tony Redmond’s independent review into the oversight of local audit and the transparency of local authority financial reporting thought that the going concern assumption was “meaningless” in a local authority context.
The presumption of going concern in the public sector financial reporting frameworks means there is no formal requirement to report on financial viability or sustainability, even where this might be of real importance to readers of financial statements.
This is particularly the case for local authorities, with Meg Hillier MP, Chair of the Public Accounts Committee, calling last year for an early warning system for local authority section 114 notices, given the dramatic effect this can have on the operations of a local council. The Redmond Review warned of an expectations gap in the requirements of auditors over financial resilience.
A formal resilience statement might be one way to address this gap and provide an early warning where a public body is at risk of getting into financial trouble.
ICAEW suggested this in a letter to HM Treasury on the public sector implications of the proposals in Restoring Trust in Audit and Corporate Governance. In the letter, Alison Ring, ICAEW’s Director of Public Sector and Taxation, says: “A resilience statement tailored to the entity that avoids boilerplate wording could provide further transparency by requiring public sector bodies to demonstrate their active consideration of financial sustainability, including the impact of climate change.”
Of course, it is important that any resilience statement is tailored appropriately to the public sector. It would not be useful for central government departments to devote large sections of their annual report to trying to predict the exact funding they will receive in the next spending review, especially as the Financial Reporting Manual identifies Parliament (the provider of that funding) as the primary user of the accounts.
However, there is a strong case for a public body disclosing where it expects a settlement that is likely to be insufficient to fund the delivery of public services, where it might have to scale back its activities to a material extent or where there is a significant risk that it might need to go back to HM Treasury or Parliament to ask for more money.
For public bodies that deliver statutory services, such as local authorities and NHS trusts, a resilience statement could provide a valuable early warning about whether current funding arrangements are sustainable and inform those making decisions about how to allocate resources across the public sector.
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