The Reluctant Armchair Auditor

Sorting spending fact from fiction

The less than 1% club

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Here’s a list of councils that look to be losing less than 1% of their ‘spending power’

Poole -0.97%
Hampshire -0.95%
West Sussex -0.65%
Wokingham -0.63%
Richmond upon Thames -0.61%
Buckinghamshire -0.60%
Surrey -0.31%
Isles of Scilly -0.14%
Dorset 0.25%

Written by reluctantarmchairauditor

December 13, 2010 at 5:15 pm

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What the BBC could have asked

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Like many in the public sector (or dependent on it to make a living) I tuned into today’s Politics Show on the BBC to hear the Secretary of State questioned about the Localism Bill whose gestation is almost at an end. I also thought they would apply a bit of a squeeze on the local government settlement also due tomorrow.

I was disappointed on both counts. The Secretary of State was offered a series of easy leg-side full tosses which he had no compunction about heaving over the boundary rope. When a little bit of leg theory was applied – how would state intervention work in an individual’s disposal of his or her assets – you could hear the thump of aspiration into the too solid flesh of reality.

Too much time was spent on the Secretary of State’s views on the frequency of bin emptying. (I never knew that disposing of a person’s left-over chicken tikka was a fundamental human right – outside of Armstrong and Miller, of course.) Blow me down we also had a mention of Winterval again.

Winterval! It is an ex-story. It has ceased to be. It has shuffled off this mortal coil. It is as dead as the parrot. Instead, with the BBC (and others) it seems it is merely resting. True the story exposes the limits of the authoritarian localism of some leading politicians but every time it’s repeated it merely bolsters its credibility.

I would have far preferred the BBC to have tested out how and by whom the tab for all the new localism will be picked up. How can any community exercise a right to do something without the finance? The fact that I have a right to go to Wimbledon does not mean much if I cannot afford the ticket or have the means to get to SW19 in June. Of course I’m a finance wallah so I would obsess about this but money is important.

Another area of interest is around the practicalities of binding referenda on council tax increases. This is going to make life between budget setting and raising council tax bills pretty interesting. How will the question be put in the referendum? Presumably you only want the issue tested once? You don;t want an endless series of ‘higher’, ‘lower’ plebescites? How about – in the interests of equity – giving electors the right to veto a budget with a council tax increase they believe is too small?

Of course I am tempted to wonder if this is a universal principle why it shouldn’t be applied to our national budget as well? Obviously I know why. I know too that some of those objections have equal force locally. Should a local administration elected on a platform have to resubmit its programme to the electorate on the off-chance it might have changed its mind? Will councils be able to spend money to fund a campaign to support their argument? Will anti-rise campaigns have their costs met from the public purse too.

Armchair auditors will have some interesting digging around to do in establishing the costs of all this localism.

Written by reluctantarmchairauditor

December 12, 2010 at 4:37 pm

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The council reserves we should be worried about

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Public sector finance professionals were treated to some ‘encouragement’ from the Secretary of State over at the Department of Communities and Local Government last week.

The object of ministerial ire this time was the amount of money councils and other local public sector organisations were keeping locked up in reserves. The full news release is here but it’s worth repeating the quote from the minister.

Good financial planning is about putting a little extra away when the sun is shining so you have some cover during the rainy days.

But building up reserves isn’t simply about turning town hall vaults into Fort Knox. These untapped funds exist to ensure councils can respond to unexpected situations like the pressing need to tackle the nation’s unprecedented level of debt.

Just like any household facing challenging times, all good councils should be considering the merits of temporarily dipping into the money they have set aside as part of their plans to address immediate financial challenges, with a view to building up their reserves again in the sunnier days to come.

Of course, the jaded among us will be wondering whether the spat between the department and the Local Government Association would have had anything to do the issue of balances being raised. Surely not.

My colleagues have been rolling their eyes though at yet another example of governmental selective localism. Council chief financial officers are under a legal duty to annually report on the adequacy of reserves when budgets are set. Criticism of reserve levels from Whitehall looks strongly like second guessing of local judgements made by finance professionals and the councillors for whom they work.

Some of the levels of balances identified in the data release from government do look pretty generous though. But there are no hard and fast rules on what minimum or maximum levels of balances should be and it is impossible to tell at a global level whether individual council holdings make sense. That can only happen locally. The annual wrangle with the auditor is something council CFOs and auditors generally look forward to. Higher? Lower? Just right?

General reserves are there to meet events like the costs of unexpectedly harsh winter weather. I am sure I am not the only one who is sceptical that a government policy decision over the speed of deficit reduction quite falls within that definition. Besides which if lower government spending is to be a permanent feature in the lives of finance professionals using reserves to prop up spending creates a ‘double-whammy’.

You spend the money now that you will need later to make the cuts you should have made anyway. The delays in the announcement of the local government settlement create practical problems too for making considered spending reductions that will have a full year effect in 2011/12.

Attention in the ruckus over the Fort Knox Reserves affair focused on councils with loadsamoney. Of more concern to me after looking through the spreadsheet were the councils that fall into the buggerallmoney category. (Please accept my apologies for using technical accountancy terms there.)

There’s Waveney District Council in Suffolk for example where the Council’s General Fund is in deficit (see page 22 of the Auditor’s Annual Governance Report) or Trafford MBC which has £5 million of reserves while spending £350 million each year. There are eighteen or so organisations with reserves of 3% or less of their annual spend. How resilient will they be in the face of the local government finance settlement that will be with us shortly?

Now that is a question worth armchair auditors thinking about instead of the minutiae of the monthly payments over £500.

Written by reluctantarmchairauditor

December 9, 2010 at 12:58 pm

Hutton debunks a myth

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A slew of cancelled client meetings because of the weather leaves me free to catch up with the news. My eye has been particularly taken by what he has to say about using the Prime Minister’s pay as a benchmark.

You will probably be familiar with the figure of £142,500. It’s been used as a useful cricket bat to thwack evil public servants. Here’s a typical example from Daily Mail. Ministers have enjoyed themselves with this too.

Those of us with a passing understanding of how to work out the total value of a remuneration package have treated the benchmark with the derision, sorry professional scepticism, it deserves.  About the only thing it had going for it was simplicity. But in my experience simplicity is often simply an excuse for crass reductionism.

Senior public sector managers with whom I come into contact have been grinding their teeth over the PM salary benchmark for ages. For perfectly sensible reasons none of them broke cover. Trying to defend yourself risks getting the treatment that John Ransford got on BBC’s Newsnight. A week later and Mr Ransford got a haircut of over £140,000 on his base salary.

For people like me who like numbers to be materially accurate Hutton has done us all a profound service. Have a look at Box 2E on page 56 of the Interim Report for the detail of the debunking. Suffice it to say he identifies the two flaws with the benchmark.

First, it nowhere near reflects the total value of the PM’s remuneration package. If you add in the salary the PM has chosen – and been able to forego – with the value of his pension, accommodation and so on by any calculation the package is worth more than £500,000. That’s probably right but it’s a rather different benchmark isn’t it?

The second flaw is, of course, that the PM’s remuneration package is not determined in a labour market but rather in a political stock exchange. PMs take a punt on low income yields during their time in office correctly calculating that simply by holding the office they hugely increase their worth. Capital growth of a sort. If you doubt that look at the before and after shots of Mr Blair’s London homes.

Thank you then Mr Hutton but I do not think we should hold our breath for the thundering headline that says, ‘Almost all public sector workers paid less than the PM.’

Reluctantly back to the armchair I must go.

Written by reluctantarmchairauditor

December 1, 2010 at 10:09 am

My twitching audit nose

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By means of excellent client management I had the chance to read the OBR Forecast and see the Chancellor’s Autumn Statement today.

I have to own up to being a bit bemused. My audit nose is twitching. What caught my eye are the claims about public sector jobs. There’s something odd going on here. The largest fiscal consolidation since goodness knows when with lower levels of public sector job losses than we have seen in other recessions?

Neat if you can pull it off. But even my friends over at the Institute of Directors are uncertain about the claim,

The really interesting story from the OBR is the slashing in public sector job losses from 490,000 to 330,000. This means that the projected public-sector employment losses are almost half those seen in the 1990s. The peak-to-trough reduction in public spending in the 1990s was 7.4 per cent of GDP. The comparable reduction now is 7.9 per cent of GDP by 2015-16. So the spending squeeze is on a par with the 1990s but the employment shake-out is far less. This is puzzling, even when we allow for a greater burden of the cuts falling on welfare spending this time around. [Source: Guardian Politics Blog at 2.04pm]

That’s this evening’s reading sorted out then.

Written by reluctantarmchairauditor

November 29, 2010 at 4:42 pm

The EU piles into the audit debate too

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In October the EU launched a little heralded consultation. Inside the audit profession it grabbed a lot of attention. If anything like the proposals it contains is implemented I would be staggered. It is a sign of the times though that some of them are even being mentioned by our friends in Brussels and Strasbourg.

Headlines from the paper dealing with the governance of audit firms include:

  • taking audit appointments out of the hands of the directors and shareholders giving it instead to an independent body;
  • requiring audit appointments to be time limited;
  • restricting the amount of non-audit work audit firms can undertake;
  • capping the amount of fees that an audit firm can earn from a single client;
  • asking national public sector audit organisations to audit the accounts of audit firms;
  • changing the ownership structures of audit firms; and,
  • beefing up the role of auditors of group accounts.

The EU is concerned that audit arrangements are not robust enough to help ensure we avoid future financial meltdowns like the one brought to us by the banking crisis.

These are ‘courageous’ proposals. That’s shorthand for ‘you must be joking’. I imagine that the accountancy big guns have lengthy submissions in the system that boil down to, ‘don’t do it’.

All of this is interesting to us armchair auditors because of the changes to the English audit arrangements for local public bodies. The abolition of the Audit Commission – which does the independent appointment of auditors envisaged by the EU – is meant to herald an era of councils appointing their own auditors.

So as EU policy heads in one direction England’s heads in another. Not something that worries our government too much I suspect. However, I can’t help but think that the sorts of issues that worry the EU are no different in character to ones that will come over the horizon if the changes in English audit arrangements are not properly thought through. Strangely enough some of the accountancy profession may agree with me on that.

Fingers crossed then.

Written by reluctantarmchairauditor

November 28, 2010 at 10:42 am

Going concern or concerned about going?

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Big wigs from the big accountancy firms appeared on 23 November before the House of Lords Economic Affairs Committee. It was not a meeting of minds.

Their Lordships wanted to know about how accountancy firms had dealt with the issue of ‘going concern’  in forming their opinions on the banks’  financial statements ahead of the recent crisis. This may seem like an esoteric accountancy issue but it isn’t. The banks’  business models gave rise to what were in their accounts and landed each of us taxpayers with a hefty bill.

For us pro- and semi-pro auditors their Lordships’ inquiry into the performance of auditors in the run up to the crisis and the concentration of power in the UK audit market is spectacularly interesting.

The auditing profession is regulated by the Financial Reporting Council (FRC) which had some interesting things to say in its submission to the House of Lords’ Inquiry. In essence it said too few auditors were involved in the audit of the UK’s largest companies and this was unhealthy for all sorts of reasons. It also said this,

 2.8 In considering behaviour and culture within the firms, the AIU [the FRC’s unit that audits the auditors on quality] has identified a number of instances of firms failing to apply sufficient professional scepticism in relation to key audit judgements. This lack of scepticism may manifest itself in a number of ways: over-reliance on management representations; failure to investigate conflicting explanations; failure to obtain appropriate third party confirmations; or seeking to obtain evidence that corroborates, rather than challenges, judgements made by client management.

Scepticism was at the heart of the questioning about ‘going concern’ by the Noble Lords. ‘Going concern’ is a cornerstone of financial reporting but all it means is that the business will continue trading for the forseeable future.  Directors should regularly assess if their business is a going concern and financial statements should be prepared on that basis. Unless of course the answer to the assessment is that the business isn’t a going concern.

 Accountancy Age reported what went on in the Lords’ Committee and it makes fascinating reading. Essentially any worries that auditors may have had about banks’  liquidity – a vital component of the idea of going concern – were allayed by conversations with government about the likelihood of support being available. The exchanges took me straight back to the FRC submission to the inquiry.

Why does any of this matter for us armchair auditors? I wrote before about the problems of reliable systems providing good data to support our work. I would also say that reliable robust audit opinions based on healthy scepticism – like I was taught as an audit nipper – on financial statements are a sine qua non.

Whether or not the changes in the shape of the audit market for the public sector in England will hep or hinder my profession in doing that work remains to be seen. What is clear is that armchair auditors, however good they may be, cannot do this work.

Written by reluctantarmchairauditor

November 26, 2010 at 5:56 pm