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It is a little over two years since I started my role at CIPFA. One of my recent reflections has been that it is about time I wrote that piece on simplifying local authority accounts.
Local government financial reporting has earned its fair share of bad press and, in my view, justifiably so. I don’t need to be convinced of the case for change. Financial statements are notoriously long and complex. They are seen as inaccessible to the public, and even experienced accountants struggle to sort the wheat from the chaff.
Why is this?
Let's start with the interaction between accounting requirements and the statute book. Many regulations predate the establishment of the Code and smooth the impact of accounting on the taxpayer. Some have been used – or misused - to manage undesirable outcomes for the sector.
The use of the International Financial Reporting Standards is often cited as a reason for complexity. The needs of public sector account users differ from those of the private sector because the inherent purpose of the bodies themselves differs. While the standards are complex, they are applied in other parts of the public sector without similar difficulties.
Additionally, there’s the issue of capacity and capability within the sector. After a decade of sustained reductions in funding, fewer resources are available to manage the growing complexity. It’s no surprise that the public finance profession is facing challenges in attracting talent, and the whole accounting profession is in the same boat. With fewer professionals managing more intricate systems, the task has become more difficult.
Faced with all this complexity, the solution seems obvious – let’s just simplify the accounts! As someone who discusses the topic of accounts simplification on a sometimes-daily basis, it’s clear that ‘simplifying’ means different things to different people.
Some call for scrapping statutory overrides, others want less adaptation of IFRS, and some even suggest returning to cash accounting. There’s no consensus on what simplification should look like, and that’s part of the problem.
Allow me to offer a slight provocation – part of the complexity we face comes from the unrealistic expectations placed on our accounts. Even a “streamlined” and “simplified” set of financial statements would mean very little to most citizens. It’s naïve to assume the public will have the time or inclination to scrutinise local government finances. The army of armchair auditors envisioned by former communities secretary Eric Pickles has yet to muster, let alone march!
Perhaps we should rethink the very concept of statutory accounts. I am increasingly drawn to the idea of statutory accounts and audit, which apply suitably proportionately adapted standards and summary financial information. Indeed, Sir Tony Redmond’s review points to the possibility of proportionally adapted standards and summary financial information to strike a balance between clarity and comprehensiveness. This could help manage issues of funding and serve as a catalyst for public engagement.
A colleague of mine recently shared a quote that encapsulates the challenge: “Everything should be made as simple as possible, but not simpler.” She attributed this quote to Einstein and, ironically, it is a simplification of what he said. However, it is particularly pertinent when considering reforms to financial reporting.
We must strive for simplicity, but not at the cost of meaning. Otherwise, I worry that, in pursuit of an easy way out, we could devalue local authority accounts rather than improve them.
