29.09.15
Investment in devolution and debt may be hindered by complex council accounts
Pursuing devolution plans and slashing debt may be hindered due to poor handling of financial information by local authorities, a credit agency has found.
Fitch Ratings said local authorities cannot easily compare their finances with those of international councils because of variance in presentation and omission of certain details from their cash flow statements.
The agency said this will become more relevant to investors as 38 councils seek greater devolution over public spending processes. Their debt is also on the rise, with recent DCLG data showing local authority external debt soaring to £100bn in 2014-15.
Despite a transparent financial framework and a “predictable and supportive” institutional framework, the UK has one of the most time-consuming financial information extraction processes concerning public accounts of local authorities.
This can hamper the comparison of local and regional government’s budgetary executive and performance and their fiscal flexibility across countries.
Format changes since 2010-11 also resulted in differences in the way local authorities present their accounts, comprised of a comprehensive income and expenditure statement (I&E), a balance sheet and cash flow statement.
Cash flow statements are now compiled using the indirect method instead of the direct, and some data – including employee costs, fees for charges and services, and the costs of supplies and services – are no longer published in the I&E statement. The statement is intended to present gross expenditure and income according to the services it is spent on, including housing, education and social care.
Despite these challenges, councils’ efforts to “ensure accountability” support financial transparency, and their annual accounts are prepared according to the Chartered Institute of Public Finance and Accountancy (CIPFA) code of practice.
Councils provide the DCLG with more detailed information, with the department collecting unpublished returns from them to prepare financial accounts for the entire UK public sector in order to aid scrutiny and spending. Only part of these returns are published by the DCLG.
Responding to the findings, Alison Scott, assistant director for local government and governance at CIPFA, said: “UK local government leads the way in compiling its accounts in line with international financial reporting standards allowing direct comparison globally.
“However, because of the way local authorities are funded it is then necessary to adjust the comprehensive income and expenditure statement and balance sheet to reflect the funding position, mainly in relation to pensions liabilities and capital financing. These adjustments are all set out within a single statement in their accounts – the Movement in Reserves Statement.”
But she said CIPFA also holds concerns about the “complexity” of local accounts and is consulting on changes to make them more accessible.
Scott added: “The institute is committed to accounts that give a true and fair view of local authorities’ financial position whilst remaining as accessible as possible to all readers.”