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Comments from the Association of Chartered Certified Accountants
December 2001

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the Code of Practice on Local Authority Accounting in the United Kingdom - a Statement of Recommended Practice 2002. These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Committee, a group of experienced accountants working in the public sector.

ACCA recognises that the CIPFA/LASAAC Joint Committee has attempted to find a way in which the full provisions of FRS 17 can be adopted by local authorities without leading directly to a rise in Council Tax. We believe, however, that the proposals may still lead to pressure, in some local authorities, to increase Council Tax or to reduce expenditure. For this reason we recommend that local authorities should be required to include a clear reference in the explanatory foreword to their financial statements where the implementation of FRS 17 has had a significant effect on the overall level of the authority's revenue reserves. This should not just be restricted to the situation where there is an aggregate deficit in the overall reserves.

ACCA also believes that a case could be made to the Government to fund at least part of any deficit in local authority pension funds as, it could be argued, these arose from past underfunding of local authorities.

Listed companies, central government departments and NHS bodies are all now required to report on their wider systems of internal control. We believe that local authorities should also produce statements on internal control, without a transitional phase of reporting on just internal financial control.

General Matters

Impact of the proposals to implement FRS 17 - Retirement Benefits

1. We note the following statement from the CIPFA/LASAAC Joint Committee regarding the implementation of Financial Reporting Standard 17 - Retirement Benefits:

The pensions reserve will not have a fiscal impact. However, it may have a significant effect on overall revenue reserves. The CIPFA/LASAAC Joint Committee is considering how this effect can be emphasised for users of the financial statements. One possible approach is to include a reference to the overall level of revenue reserves in the explanatory foreword, when as a result of the position on the pension reserve, there is an aggregate deficit in the overall position.

2. We believe that the proposed changes will have a significant effect on the overall revenue reserves of many authorities. We also believe that in many authorities this will add to pressure for additional increases in Council Tax or reductions in planned expenditure. Especially as the recent White Paper proposed: 'to reinforce the role of members, creating new duties to maintain adequate reserves'.

3. In this situation it is important that appropriate action is taken promptly. We agree that, as the Treasury is committed to adopting FRS 17 in the Whole of Government Accounts, this will mean local authorities will also have to adopt the standard. In this situation, ACCA believes that a case could be made for the Government to fund at least a part of the deficit in local authority pension funds as, it could be argued, these arose from past underfunding of local authorities.

4. As a first step, we believe that the proposed SORP should be amended so that the effects of implementing FRS 17 are clearly reported in the financial statements of each local authority. We also believe that a clear reference should be included in the explanatory foreword if the implementation of FRS 17 has a significant effect on the overall level of an authority's revenue reserves. This should not just be restricted to the case 'when, as a result of the position on the pensions reserve, there is an aggregate deficit in the overall position'.

Clarity of proposed amendments

5. In the consultation exposure draft, it is stated that "paragraph references are to those in the 2000 SORP" and that "deletions are not highlighted". This can cause problems with the numbering of paragraphs and could reduce the clarity of the proposals. We believe that this is particularly the case with Chapter 3 and to a lesser extent with Chapter 4. We recommend that, in future, there should be greater clarity with regard to the proposed amendments. We consider that, whenever significant changes are proposed, whole chapters should be reproduced showing the sections which are to be deleted, new sections and any consequent re-numbering of paragraphs.

Deletion of paragraph 1 from the Preface

6. We believe that the first paragraph of the SORP 2000 should be retained. The Preface should state the basis on which the SORP has been prepared; the reader should not have to rely on the statement from the Accounting Standards Board for this information.

Using the SORP to market other CIPFA material

7. On pages 3 and 4 of the 2000 SORP, reference is made to three CIPFA publications. These paragraphs are not subject to proposed amendments. We do not consider it appropriate for CIPFA to use the SORP to market its publications. We believe that, as far as is practically possible, the SORP should not refer to other CIPFA publications.

Use of the term 'Great Britain'

8. The SORP uses the term 'Great Britain' to refer to England, Wales and Scotland. We believe that it would add clarity, especially now that Scotland has its own Parliament and Wales its own Assembly, if each of these countries were referred to by name rather than using the generic term 'Great Britain'.

Specific Questions

We have only provided answers below to questions in the consultation document where we have substantive comments.

Statement on the system of internal financial control

Q15: Do you agree with the proposal that authorities should report on their systems of internal financial control?

9. We welcome the proposal to require local authorities to prepare statements of controls assurance. We note, however, that listed companies, central government departments and NHS bodies are all now required to report on their wider systems of internal control. We believe that suitable approaches to reporting on internal control have been developed over the last few years. This experience should enable local authorities to produce statements on internal control without the need for a transitional phase of restricting such statements to internal financial control.

Q16: Do you agree with the proposed content of the statement on internal financial control?

10. We believe that the proposed statement is ambiguous with regard to whether responsibility for internal financial control in an authority lies with the chief financial officer or the authority itself. Under Section 151 of the Local Government Act, 1972 and Section 114 of the Local Government Finance Act, 1988, the Chief Financial Officer is responsible for the proper administration of the Council's financial affairs. One of the objectives of such statements is to define responsibility for internal financial control. We believe that the statement will lack clarity if it is both a report from the Chief Financial Officer to the Council and from the authority on its overall responsibility for internal financial control. We believe that the statement should be from the Chief Financial Officer to the Council on the exercise of his/her responsibilities for the proper administration of the Council's financial affairs.

11. We do not consider that a key objective of internal financial control is to ensure "that transactions are authorised". We believe that paragraph 2 of the statement should follow more closely the accepted definition of internal financial control from the Cadbury Report:

"The internal controls established in order to provide reasonable assurance of:

(a) the safeguarding of assets against unauthorised use or disposition;

and

(b) the maintenance of proper accounting records and the reliability of financial information used within the business or for publication".

12. We also believe that paragraph 3 of the illustrative statement should include some reference to the authority's risk management processes.

Q17: Do you agree with the proposal to allow authorities which prepare a wider statement of controls assurance to include this within the required statement?

13. We agree that authorities should move directly to reporting on internal control (see paragraph 9 above). We think, however, that, if this is not accepted, authorities should be encouraged to prepare a wider statement of controls assurance and to include this within the required statement.

Q18: Do you agree with the proposal that the Chief Financial Officer should sign the statement on the system of internal financial control and that authorities should also be allowed to have the statement signed by the chief executive and a leading member(s)?

14. We note that, in most other sectors, two directors are required to sign the statement on internal control, usually the chief executive and the chairman (or the chairman of the audit committee). We believe that, in the case of local authorities, the statement on internal control should be signed by the Chief Executive and the Chief Financial Officer. During any transitional period until full reporting on internal control is introduced, we believe that the statement on internal financial control should be signed by the Chief Financial Officer rather than the Chief Executive.

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