Transforming Local Authority Financial Statements: A New Direction

Local authority financial statements have a reputation for being notoriously complex – but their accuracy is key. Each year, local authorities spend around £100 billion on services that are vital for communities across the UK…but how is this money really being spent?

Local authority stakeholders and members of the public want to be certain that local authority funds are being used properly. This understanding comes primarily from the publication of local authority accounts each year, which are required to be audited by an independent auditor.

However, with a small number of councils having declared themselves bankrupt – and with auditing delays of up to a year for some local authorities – things need to change. In late November 2023, the Levelling Up, Housing and Communities Committee published a new report – Financial Reporting and Audit in Local Authorities. The report follows an enquiry into “the purpose, understanding and impact of financial reporting and audit in local authorities” to establish “the extent to which accounts provide a clear picture of the financial sustainability and resilience of a local authority”.

Here, we take a look at this report, how it could bring transformative changes to local authority financial statements, and the implications of these changes.

Impact of the Levelling Up, Housing and Communities Committee’s Report

According to the report, “fundamental weaknesses” highlight the need for local authority transformation. One key issue that the report highlights is how impenetrable these statements are, leaving stakeholders unable to find the information they need. As a result, many simply avoid using the published accounts, meaning that local authorities are failing to offer adequate accountability.

The report states that this lack of transparency can also lead to issues of trust. If stakeholders and members of the public cannot understand a local authority’s published accounts, they may believe them to be untrustworthy.

The authors say part of the confusion stems from the unclear audience for these accounts. As a result, local authorities are producing reports with no clear focus and no target audience, making them overly complex.

The Levelling Up, Housing and Communities Committee has suggested new directions in financial reporting for local authorities that could resolve some of these issues. As a starting point, they have suggested five purposes of reporting that local authorities should fulfil to meet accounting requirements, support democracy and be accountable:

• To be a credible public record.
• Provide accountability for spending.
• Enable conclusions to be reached on value for money.
• Provide information to run local authorities.
• Alert stakeholders of actual and potential issues.

The Committee hopes that this will lead to local authorities’ financial transformation by promoting accountability and transparency.

The full report includes a range of more specific recommendations, such as decoupling pension statements from local authority accounts, the addition of a standardised statement of costs and service information, and a requirement for auditors to draw conclusions on the value for money that local authorities have achieved.

The Levelling Up Committee’s impact could also be felt in terms of revised legislation. They have called for legislation that dictates the format and content of local authority accounts to be revised in order to align with the five purposes of reporting that they have decided.

Challenges and Opportunities in the New Financial Reporting Landscape

With local authorities’ reporting in such disarray, many are likely to welcome new directions in financial reporting. However, the Levelling Up Committee’s suggested new approach could face potential hurdles.

The first is an existing challenge that a new way of reporting is unlikely to change. According to the ICAEW, there are just 101 people in the UK who are qualified enough to audit local authority accounts, which accounts, in part, for the current auditing backlog. As with any change in legislation or reporting standards, it will take time to get to grips with new processes and formats – but the hope is that the process could become easier down the line and that similar backlogs could be avoided as a result.

Local authority financial transformation would also make accounts more accessible to the public and stakeholders, rebuilding trust and establishing clarity. The process should be simplified and made more transparent for all involved to avoid adding unnecessary information to accounts.

Best Practices for Adapting to New Reporting Standards

While the new directions in financial reporting for local authorities are still in the making, reporting standards in a variety of areas are constantly changing. Effective adaptation to any new local authority standards can be achieved with the same types of strategies as accountancy practices are likely to be using already.

The first priority is to ensure that you remain up-to-date with new changes, including what they involve, how they impact you, and when they come into effect. This information should be shared with your team as standard practice, and formal strategies should be put into place within your organisation to enable you to adopt new standards with ease.

The government may offer new tools and resources to aid with compliance but don’t forget about other sources of information and support, like your ICPA membership.

Why Join ICPA: Navigating Changes with Expert Support

Navigating industry changes isn’t easy at the best of times, but it’s even more challenging when you’re trying to do it alongside an already hectic workload. Not only do you need to take it all in, but you also need to communicate these changes accurately to your team so that everybody in your organisation is on board.

We know that it’s not easy, which is why we’re here to help. ICPA members benefit from extensive support in adapting to industry changes, which take various forms.

Our resources include access to advice lines staffed by industry experts, where ICPA members can obtain support and advice on all aspects of accountancy – including new industry standards and legislation. We offer training courses designed around hot topics in the industry and access to a community of like-minded professionals whom our members can turn to for additional support, advice, inspiration and ideas.

Sound good? Find out more about our full range of member benefits, or contact us to learn how ICPA membership could benefit you and your accountancy practice.