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ICAEW: local authority accounts must be more understandable

Author: ICAEW Insights

Published: 12 May 2023

ICAEW evidence to a parliamentary inquiry says local authority financial statements and audit are vital to delivering value for money, but that weaknesses hamper effective governance.

The House of Commons’ Levelling Up, Housing and Communities Committee has recently published ICAEW’s evidence submission to its inquiry into financial reporting and external audit in local authorities. 

The Committee’s inquiry comes at a time when the local authority audit and reporting system in England is in crisis, a point made in many of the 24 published written evidence submissions. Data submitted to the Committee by Public Sector Audit Appointments, the body that organises the appointment of auditors to most local authorities, shows that 74% of 2021/22 audited accounts had still not been published by 31 March 2023 despite a deadline of 30 November 2022. 

ICAEW’s evidence warns that these delays are undermining the usefulness of audited financial statements. The submission also highlights overcomplicated accounts that are insufficiently read or understood as being a key reason why local authority accounts and audit are not currently being used effectively in local authority accountability and democracy. It warns that these weaknesses are hampering effective governance and the identification of risks.

ICAEW says this situation must be addressed as a matter of priority because “high-quality financial statements and audit are vital to delivering value for money”. Many of the responses to the inquiry echoed a similar sentiment about the importance of audited financial statements, including those by CIPFA, the Local Government Association (LGA) and the Department for Levelling Up, Housing and Communities.

ICAEW’s submission expresses a desire for “steps taken to make the accounts a more central part of local authority decision-making and scrutiny”. ICAEW recommends a new requirement for Chief Executives and Section 151 officers (ie, finance directors) to make an annual results presentation to full council and for the government to use the accounts in their monitoring in place of additional returns. 

ICAEW is not alone in calling for greater use of local authority accounts. Campaigning research organisation Research for Action states in its submission that “more of the public and local journalists using local authority accounts would enable better scrutiny and accountability in the sector”. The submission by Dr Laurence Ferry and Dr Henry Midgely of Durham University suggests consideration is given to the idea of local public accounts committees to strengthen local accountability.

Most responses also agree with the view in ICAEW’s submission that more understandable accounts are required in order to encourage more people and organisations to use the accounts. Horsham District Council’s submission, for example, stating a “clearer and shorter format would make council accounts less impenetrable to the average reader”. Similarly, EY’s submission states that “the length and complexity of local authority accounts makes them difficult to navigate”.

However, the responses express mixed views about how clearer and shorter financial statements might be achieved. Some, including those from ICAEW, are calling for a reduction in the statutory overrides from IFRS that “make it difficult for users to understand which numbers in the accounts are relevant to the final outturn against budget”. On the other hand, the LGA’s response calls for consideration of whether there is “a case for wider use of overrides in the interests of clearer reporting”.

Oliver Simms, ICAEW’s Manager for Public Sector Audit and Assurance and one of the authors of ICAEW’s submission, says: “The shared view is that local authority accounts are insufficiently understood, but the varied solutions put forward by respondents highlight why this inquiry is so important. It provides an opportunity to develop a consensus that will help ensure that local authority accounts and audit fulfil their vital function in our local democracy.”

In its submission, ICAEW highlights the inquiry into central government accounts, ‘Accounting for Democracy’ by the Public Administration and Constitutional Affairs Committee, and says it hopes this latest inquiry has a similar positive impact by improving the quality of public sector financial reporting.

The submission of evidence is the first stage of the inquiry and the Levelling Up, Housing and Communities Committee will shortly start holding formal hearings to explore the issues in more detail, before issuing a report later this year.

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