The Audit Commission recently warned that public sector finance and accounting systems are woefully under-prepared for a change in their accounting procedures scheduled for the 2010-11 financial year.
Having adopted private sector-style accounting methods during the past decade, public sector finance departments will be required to shift the underlying generally accepted accounting principles from UK-based accounting standards to international financial reporting standards (IFRS) from April next year.
In its latest Countdown to International Financial Reporting Standards http://www.audit-commission.gov.uk/localgov/audit/auditmethodology/finan... survey of public sector organisations, the Audit Commission warned, “A failure to achieve successful transition to IFRS would cause significant reputational damage to individual local authorities and the local government sector as a whole.”
The survey uncovered “poor preparation” that will increase the risk of accounts being published late or being qualified by their auditors. “At a practical level, there is a risk that extra and unnecessary costs will be incurred,” the commission concluded.
The Chartered Institute of Public Finance and Administration (CIPFA) developed an IFRS implementation timetable for its members, but with several of the milestones already passed, many authorities are falling behind the schedule, the Audit Commission found:
• Overall, only 15% of authorities were rated as on track, 63% were rated as having minor issues, and 21% rated as not on track and having major issues.
• 65% of authorities had not set a budget for transition. In some cases, this is because the authorities have carried out an impact assessment and determined that they could meet the requirements with existing resources. However, the report added, “Usually auditors report that this is because authorities do not yet know what the impact will be and therefore do not know what resources will be required.”
• Just under half of authorities (46%) had not informed the audit committee of their transition plans; in 59% of authorities, the audit committee did not have a role in overseeing IFRS transition.
• 42% of authorities had not yet completed an initial impact assessment
• 35% had not established a budget for the transition in November 2009.
• Nearly a third of authorities had not discussed the IFRS transition with their auditor at the time of the survey.
The situation is not irretrievable, but the commission noted that private sector organisations that had planned early had been most successful in making the switch to IFRS. “There is a significant risk to value for money if there are delays in the transition. These will lead to extra, avoidable costs to achieve the fixed deadline for the preparation of the accounts,” it warned.
One of the main constraints on finance departments was the nature and quality of their existing systems, the commission report added. If they have not already done so, finance teams were urged to assess their reporting processes and systems
According to the survey, 63% of authorities are planning to employ external advisers to help with the IFRS transition. In these instances, the commission urged them to to work collaboratively rather than simply outsourcing the work. “We do not recommend wholesale externalisation of the IFRS implementation process, unless there is an effective transfer of knowledge between finance and any external consultants. This will lessen the learning curve and help ensure that IFRS reporting is repeatable once the initial change-over is completed,” the report advised.
“If authorities decide to use external consultants, they need to make arrangements sooner rather than later to avoid higher costs and to ensure proper arrangements for knowledge transfer can be put in place.”
