Message from the Director of Public Sector

Thank you for your membership in 2022; we value your continued engagement and trust you have found being a member worthwhile. It is hard to believe that at the beginning of last year we were still very much restricted by COVID-19, and 2022 has proven to be a bumpy ride to say the least with further headwinds expected this year.

2022 has been challenging for different reasons compared to the COVID-19 period, with the war in Ukraine, staff shortages, soaring inflation and the political turmoil being some of the key disrupters. Things are perhaps starting to look slightly more promising with the latest inflation figures showing a decline but 2023 still looks to be a difficult year with a recession widely forecast.

We are pleased to welcome you back as Public Sector Community members in 2023 as we use our content to help you successfully navigate public sector financial reporting, fiscal and audit challenges.

The UK local government financial reporting and audit environment is not looking healthy, with only 12% of audited 2021-22 financial statements being published by the 30 November deadline. Public sector audit is vital for transparency and accountability, and we share the concern of others about the consequences for the sector.

ICAEW’s public sector team has been active in this area, working with a wide variety of stakeholders to find solutions. We advocate a ‘whole-system’ approach that tackles the many contributory factors, including the perceived unattractiveness of the local audit sector, the governance failures and the complexity of local authority financial reporting. One of our successful outcomes in the year was to persuade the government to legislate for all local authorities in England to have an audit committee with independent members.

The crisis in local audit comes at a time when an increasing number of local authorities are finding themselves in financial difficulty. Governance failures have become all too common and have a real impact on the lives of residents. We have raised the profile of this issue by publishing articles, writing to ministers, highlighting at speaking opportunities and drafting consultation responses and PAC submissions of evidence to stress the importance of investing in public sector finance teams. We made governance the focus for the ICAEW Public Sector Conference 2022 that featured keynote addresses from Dame Meg Hillier MP, Chair of the Public Accounts Committee, and Gareth Davies, Comptroller and Auditor General and Head of the National Audit Office.

We were expecting the public finances to get back on track in 2023 following the eyewatering sums of public money that have been spent to keep the economy on life-support during COVID.

However, as a result of global inflationary pressures combined with the economic turmoil created by the mini budget, interest rates have increased dramatically from their historic lows. Higher inflation means that more money needs to be spent to have the same impact as originally budgeted whilst higher interest rates increases borrowing costs resulting in public sector net debt to soar to £3.0tn by 2028. Many of our stream of Insights this year have been on the state of the public finances and our regular charts of the week have covered a range of economic and fiscal topics across the year too.

The Autumn Statement was the Chancellor’s attempt to bring stability back to the public finances following the eventful mini budget. We strongly support the need for a long-term fiscal strategy to put the UK finances onto a sustainable path, having argued that sustainable public finances are a prerequisite for macroeconomic stability. The ‘deep freeze’ budget was more about freezing tax thresholds than direct tax rises but it nevertheless suggests a prolonged period of pain.

Sustainability reporting keeps moving at pace, more so in the private than the public sector. Nevertheless, the public sector has a huge role to play in tackling climate change, directly via the management of their work force, real estate and supply chains and indirectly via regulation, tax and spending. In early 2022 we provided you with an overview of the sustainability reporting landscape and how it applies to the UK public sector, which you may find useful.

In May last year, ICAEW’s corporate reporting team shared their views on the International Sustainability Standards Board’s (ISSB) consultation, where we acknowledged its limitations for application in the public sector due to its focus on financial materiality and enterprise value.

However, there are always lessons to be learnt from what private sector companies are doing in this space and our involvement as judges for PwC’s Building Public Trust Awards gives us a first row seat for all the latest ESG developments and how these could apply in the public sector.

We are also conscious of government’s role in wider societal developments and interviewed a number of key stakeholders, particularly from local government, to get their views on SDG reporting in the public sector.

The economic outlook is not looking very positive for 2023 and spending pressures, including the cost-of-living crisis, will be challenging this year. Public finances will come under increasing strain with higher interest costs and further energy relief packages adding significantly to public sector debt. It would not be unreasonable to expect further tax increases should public sector pay rise significantly across multiple areas such as the NHS, education and transport.

We will work with all key stakeholders to help make progress in local government financial reporting and auditing. We are also enthusiastic about encouraging greater use and understanding of public sector financial reports and will look to get a better understanding of who the users are and what barriers are in place that prevent better use of financial data, be it for internal decision making or for external reporting purposes.

Another key topic for us is climate and sustainability reporting. We will be discussing this issue with HM Treasury and other key stakeholders and will share the latest updates with you throughout 2023. We will also take a look at the practical steps local governments can take in reporting on climate given the capacity constraints currently being experienced by the finance teams.

It leaves me now to say many thanks again for supporting our Public Sector Community. We hope you will find our content helpful and supportive. If you have any topics you think we should cover, please contact us at communities@icaew.com.

With best wishes,

Alison Ring OBE FCA