Draft Guidance on Local Authority Reserves and Balances
Comments from the Association of Chartered Certified Accountants
November 2002
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the Draft Guidance on Local Authority Reserves and Balances (the Draft Guidance). These comments have been prepared in consultation with members of the ACCA's Public Sector Technical Committee, a group of experienced accountants working in the public sector.
The Government's Code of Practice on Written Consultation states that, "Twelve weeks should be the standard minimum period for a consultation". Thus we are disappointed that respondents were given only just over eight weeks. In addition, ACCA was not sent an invitation to comment and I have just returned after being abroad for two weeks. As a result, this response is being sent slightly after the date you requested.
ACCA is particularly pleased with the views expressed in paragraphs 4.2 and 4.3 of the Draft Guidance. These include that local authorities, on the advice of their finance directors, should make their own judgements on the level of reserves they should hold and that the case for introducing a statutory minimum level of reserves has not been made.
We do not agree, however, with the view expressed at the end of paragraph 7.1, that the finance director should have responsibility for ensuring that an authority has put in place effective arrangements for internal audit.
The guidance included in section 7 of the Draft Guidance should be extended to include consideration of the extent to which future pension liabilities will be funded by the authority and the authority's treasury management policies. Recent falls in the value of shares and the introduction of the requirements of FRS17 have led to a significant liability being recognised in the accounts of many local authorities. In addition, for example, Shetland Islands Council has recently suffered a large diminution in the value of its reserves due to the fall in share prices and several years ago the Western Isles suffered a significant financial loss from the collapse of BCCI.
We are concerned with the second recommendation in paragraph 8.3 which suggests that the finance director should produce a formal statement on the adequacy of the authority's general reserves and provisions in respect of the forthcoming financial year and the authority’s medium term financial strategy. Comprehensive guidance would be needed to assist with the implementation of such a recommendation. In addition, such statements are bound to create problems if a finance director were to disagree with the authority's financial strategy. The statement could amount to a public announcement of fundamental disagreements between the finance director and the chief executive, mayor, cabinet or council of an authority which could leave the finance director in a very difficult position.