Magazine article Public Finance

Clear out the Clutter

Magazine article Public Finance

Clear out the Clutter

Article excerpt

the public sector is well advanced in producing high-quality, audited, accrual-based financial statements. However, an important question remains - is the information they contain being used as intended by the standard setters, to inform decision making and accountability?

In local government, the need to produce financial statements that address both accounting and legislative frameworks leads to complexity. Some items have to be accounted for in ways that do not reflect how the authority manages its budget. Timing differences in recognising expenditure and a service analysis that reflects national accounts requirements rather than how an authority is organised are just two examples of this. Decision makers often struggle to understand their own financial statements, and the valuable information they contain can be overlooked when policies and strategies are being considered.

Both CIPFA/LASAAC and the Treasury are aware of these problems and are reviewing howto simplify financial accounts across the public sector, but any changes will take time. However, there is much that individual organisations can do to improve their financial statements.

CIPFA published Financial statements: a good practice guide for local authorities in late 2013. This looks at how the presentation can be improved and clutter cut from the accounts.

Too often, organisations play safe by including every disclosure required by standards, in case an omission is questioned. And too often, auditors question the omission of non-material disclosures, encouraging this behaviour.

If financial statements are to reduce in size, everyone involved needs to take materiality seriously. So how can materiality to the reader of the accounts be used to drive improvements in clarity and brevity?

In considering materiality, a number of key factors can be found in the definition.

* First, an item is not material if omitting or misstating it would not influence the decisions that users might make. As the Accounting Code notes, materiality is an aspect of relevance so * omitting credit risk information that showed an authority had a significant proportion of its investments in highrisk institutions could influence the decision of a lender on whether to lend, or at what rate. …

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