That local government financial reporting is broken has been widely reported in the press, including in AB (‘Reforming broken audits‘). Audit opinions have been disclaimed (ie the auditor provides no assurance about the accuracy or reliability of the financial statements) on around half of all English local authorities’ 2023/24 accounts.
There is no single reason for this crisis, but the length and complexity of local authority accounts is a significant contributory factor. As a district council finance director, I prepare accounts that are simpler than those of many local authorities, but our most recent statement of accounts runs to 93 pages.
Organisational change alone will not deliver simplification
Apart from the burden placed on accounts preparers and auditors, this does not help the users of these accounts. Over 90% of users surveyed by Tony Redmond for his 2020 report on local audit said that the accounts didn’t allow them to understand the authority’s financial performance or resilience. A 2023 Select Committee review of local authority financial reporting described their accounts as being ‘impenetrable to most readers’.
Accounts reform
Central government agrees there is a problem. Its local audit reform strategy, launched in December 2024, proposes a number of reforms, including the creation of a new Local Audit Office. But organisational change alone will not deliver simplification. As many responses to the government’s consultation have pointed out, accounts reform needs to be prioritised ahead of the establishment of the LAO.
If it is agreed that accounts reform must be progressed urgently, what in practice would this look like?
Local authority financial reporting incorporates the same key elements as financial reporting in the private sector and the rest of the public sector: a narrative report, the core financial statements, and explanatory notes and supplementary statements.
Local authority narrative reports currently vary widely in quality and content
The narrative report is intended to provide context and a broader understanding of the authority’s performance and financial position, thus giving a useful entry point to the reader. However, local authority narrative reports currently vary widely in quality and content.
Redmond proposed a different way of introducing the accounts to the reader. He envisaged a ‘summary statement’, which would provide information about local authority service expenditure, compared with budgets, accompanied by a brief narrative. There would be a standardised framework for presenting this information and a reconciliation to the underlying financial accounts.
Essential figures
As with any organisation, a local authority’s core financial statements are at the heart of the accounts and contain the essential information required by the user. For example, comparing reserves as shown in the balance sheet with net expenditure as shown in the comprehensive income and expenditure statement gives a straightforward metric for assessing the financial resilience of a local authority.
Since 2010, the core financial statements have been prepared using the IFRS framework. This gives local authority accounts the authority that derives from a widely used set of standards and the benefits of the corpus of literature and research that accompanies IFRS Accounting Standards.
If properly explained and understood, and given greater prominence by stripping the accounts of extraneous material, the core financial statements provide users with the information they need about a local authority’s performance and financial position.
What creates most confusion is the requirement to report both on an IFRS and a statutory basis
The bulk of local authority accounts is contained in the notes. Whereas the notes in the model accounts for a central government department run to just 38 pages, the notes to my accounts at Maidstone Council extend to 67 pages.
One of the biggest elements in the notes, and the one that creates most confusion for the reader, arises from the current requirement to report both on an IFRS basis and a statutory basis. This harks back to the pre-2010 accounting regime, in which the focus of the accounts was whether the budget had been balanced, according to statutory definitions. The notes to my accounts contain no less than 12 pages comparing the IFRS accounts with the figures used for statutory purposes.
It would be simpler to show how the authority has performed against its budget and to provide a high-level reconciliation to the IFRS accounts as part of the narrative report, as proposed by Redmond.
Pensions
Another significant contributor to the bulk and complexity of the notes is pensions accounting, which occupies nine pages of notes in my accounts.
Local authority pension funds typically administer pensions for a number of authorities. Each authority has a set of notes dealing with its share of the pension fund, with much of the same information reproduced across different sets of accounts. If pension fund accounts were prepared separately, with individual authorities charging pension costs in their income and expenditure account in the same way as central government departments, the pension fund notes could be largely dispensed with.
Reform could begin with a standardised narrative report offering information of genuine use
Many of the notes and supplementary statements contained within local authority accounts are not required by IFRS Accounting Standards and are not material to the overall performance and financial position of a council. In central government, HM Treasury does not require departments to produce notes where the information is immaterial to the user. This principle could usefully be applied in local authorities, thus reducing the volume of notes. Together with simplification of accounting for statutory adjustments and pension costs, the notes to my accounts could be reduced from the present 67 pages to less than half that number.
Government and key stakeholders agree that accounts reform must be progressed urgently. This could be done by introducing a standardised narrative report with information of genuine use to the reader, reducing the volume of notes, and giving the core financial statements the primacy they deserve. Now is the time to start putting these measures in place.
The views expressed in this article are personal
