So, HM Treasury finally published the audited version of its 2010 Whole of Government Accounts, with only a month to spare before the clock ran out. And, as expected, they were qualified. Now, this was the easiest bet in the world - they were always going to be qualified, given their size and complexity. Yet, even so, it's intriguing to see just what they got qualified for. And here's the answer:
Qualification arising from disagreements on the definition and application of the Account boundary
The Government Resources and Accounts Act 2000 (the Act) requires HM Treasury to produce a set of accounts for a group of bodies which appears to HM Treasury to exercise functions of a public nature, or to be entirely or substantially funded from public money. The Act also states that the Accounts should present a true and fair view and conform to generally accepted accounting practice subject to such adaptations as are necessary in the context. HM Treasury has adopted a framework for these Accounts which is based on International Financial Reporting Standards adapted for the public sector context.
However, in Note 1.21.1 to these Accounts, HM Treasury defines the accounting boundary for the Account by reference to those bodies classified as being in the public sector by the Office for National Statistics. I consider that it would be more appropriate to assess the accounting boundary with reference to the accounting standards. By applying such accounting standards, I consider that the Account should include Network Rail.
I also consider that HM Treasury’s accounting policy has not been applied consistently in 2009-10 as a number of significant bodies have not been included in the Accounts, even though they are classified by Office for National Statistics as being in the public sector and which I also consider should be included in the Accounts in line with applicable accounting standards.
Although I cannot quantify the effect of these omissions on the Accounts with certainty as I do not have information needed to identify the transactions that would have to be eliminated to provide a consolidated view, the most significant impact could be on the Account’s Statement of Financial Position. The exclusion of the following categories of bodies could affect this Statement. To illustrate the potential impact:
• Network Rail which has gross assets of £41.7 billion and gross liabilities of £35.7 billion;
• Publicly-owned banks which have gross assets of £2,862.1 billion and gross liabilities of £2,720.9 billion; and
• Other bodies, such as the Bank of England, which have estimated gross assets of £263.3 billion and gross liabilities of £250.1 billion.
Basically speaking, government screwed up by failing to consolidated a bunch of entities which the auditor thought ought to have been consolidated. These include Network Rail, the publicly owned banks and the Bank of England. Now, Network Rail is simply wrong on policy grounds. Government doesn't want to consolidate it, but there's no good reason not to. This has been raised by several critics before, including - interestingly - the ICAEW. The argument could possibly be made that the publicly owned banks are being held for resale. But they're included in the public accounts as being in the public sector, so the auditor thinks they should be consolidated in WGA.
Qualification arising from disagreement relating to inconsistent application of accounting policies
HM Treasury’s accounting policies state that the Accounts are prepared on an International Financial Reporting Standards (IFRS) basis, as adapted or interpreted for the public sector context. A number of bodies consolidated in these Accounts do not adopt the same framework under which these Accounts are prepared. These bodies fall under the following categories:
• Bodies in the local government sector follow the Local Government Statement of Recommended Practice (SORP) for 2009-10, which is based on UK Generally Accepted Accounting Practice (UK GAAP); and
• Bodies that do not apply the Government Financial Reporting Manual but do apply IFRS, UK GAAP, the Charities SORP or NHS Manuals, where appropriate.
Accounting standards require that, where the effect of such inconsistent accounting policies are material, adjustments should be made on consolidation. HM Treasury has not been able to fully quantify the impact of the different accounting frameworks or accounting policies on the Accounts but it is material in some areas. An example of the use of different accounting policies is where infrastructure assets included in the Accounts are not valued on a consistent basis. Assets held by local government bodies are valued at historic cost, whereas those held by central government bodies are valued at depreciated replacement cost. HM Treasury’s estimate of the understatement of assets due to the differences in valuation between historic cost and depreciated replacement cost for local government assets could be at least £200 billion (Note 14.1 to the Accounts).
This is also a bad qualification. Basically government hasn't been able to get its own entities to apply its accounting standards. And the situation is so bad that the auditor can't really unpick the impact, so he's had to qualify the accounts.
Qualification arising from limitation in audit scope due to lack of evidence supporting the completeness of the elimination of intra-government transactions and balances
Accounting standards require that balances and transactions held and made between bodies consolidated into these Accounts shall be eliminated in full. HM Treasury has a process in place to identify intra-government balances and transactions between bodies consolidated into the Accounts, and most balances and transactions have been eliminated.
However, there remains material values of intra-government transactions and balances which have not been eliminated and the effect of not adjusting for these could lead to a potential overstatement of up to £17.0 billion in gross income and expenditure and up to £6.8 billion in gross assets and liabilities.
I have reviewed the impact of this uncertainty and have assessed that the maximum uncertainty resides within the gross figures in the individual primary statements rather than on the net deficit or net liabilities. The totals reported for the net deficit and the net liabilities are subject to a maximum uncertainty of some £3.2 billion. There is also uncertainty about whether there are amounts which both bodies involved in a relationship have not declared, leading to further overstatement.
This is truly appalling. Basically the government's intercompany balances - the amounts that government departments owe to each other - don't balance. The imbalance is £17bn on the income/expenditure side and £7bn on the assets/liability side. This really is noddy accounting: complex private sector organisations manage it. So why can't government (other than because it's never had to have the discipline in the past)?
Qualification arising from disagreement in the accounting for 3G licences
In April 2000, the government issued licences to access the 3G telecommunications spectrum. Each licence was awarded for 20 years and the total raised was £22.5 billion. This was recognised as £22.5 billion income in 2000-01. I consider that it would be more appropriate to recognise this income in the Accounts over the life of the licences as the licence holders have the right to access the spectrum for 20 years and the government has an ongoing obligation to ensure that the spectrum remains available to licence holders. The impact of this difference is that income would be £1.1 billion greater; liabilities would be £11.4 billion greater; and the value of the general fund would be £11.4 billion less.
When Tony and Gordon flogged a big section of the airwaves to mobile phone companies, they pocketed the income there and then. The auditor sensibly suggests that a more proper accounting treatment would have been to spread this income over the lifetime of the lease.
Qualification arising from disagreement and limitation in audit scope from underlying statutory audits of
bodies falling within the Accounts
The external auditors of the financial statements of a number of bodies that are consolidated into these Accounts qualified their audit opinion. Of material significance to these Accounts, I qualified the Ministry of Defence’s Resource Accounts on two grounds. Firstly, the Ministry has not complied with the Financial Reporting Framework as it has not accounted for the expenditure, assets and liabilities arising from certain contracts in accordance with International Accounting Standard 17 Leases as interpreted by International Financial Reporting Interpretations Committee 4 Determining whether an Arrangement Contains a Lease. Consequently, the Ministry has omitted a material value of assets and liabilities from its Consolidated Statement of Financial Position as at 31 March 2010. This has also led to a consequential misstatement of the Consolidated Statement of Revenue and Expenditure for 2009-10. I am unable to quantify the impact on the financial statements because the Ministry has not maintained the records or obtained the information required to comply with the relevant accounting standards in this respect.
Secondly, I was unable to obtain sufficient, appropriate audit evidence to support the existence and valuation of certain Ministry inventory and non-current assets which are recorded in the accounts at £6.3 billion and the accuracy and completeness of the associated transactions in the Consolidated Statement of Revenue and Expenditure because the evidence available to me was limited due to a failure to maintain adequate accounting records and supporting evidence to operate adequate stocktaking and asset verification procedures.
Yeah, er, basically the MoD keeps shitty records, so the auditor can't verify everything he needs to. This is also A Bad Thing.
So, all in all, these are a pretty troubling set of qualifications. Failing to consolidated properly, unable to eliminate intercompany transactions and failing to keep proper records are a serious set of problems. However, we should give government some credit, for at least attempting to put together such a complex set of financial statements. No other country has managed what the UK has done so far, but we can be sure that more will now try now that the UK has shown the way forward.
Filed under: Accounting, Politics with tags banks, consolidation, ministry of defence, qualified accounts, whole of government accounts
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