1. Using IFRS Based Financial Statements In Corporate Governance Gareth Davies Local Authority (Scotland) Accounts Advisory Committee secretary CIPFA Policy & Technical Officer

2. Overview  What is LASAAC?  Corporate Governance – A Reminder  Current Environment  IFRS Implementation  Advocating practical use of Financial Statements  The Challenge to You

3. LASAAC Objectives “To continuously strive to improve the quality and relevance of local government financial statements as a source of valuable information to all local authority stakeholders”

4. TAG Remit to undertake responsibility for Health Boards in Scotland, ensuring that the (Accounts) manual conforms to the requirements of International Reporting Standards (IFRS) as adapted by the IFReM..” Work Plan Development of TAG paper explaining role& purpose of increasingly complex NHS financial statements

5. Good Governance Standard for Public Services “The function of governance is to ensure that an organisation or partnership fulfils its overall purpose, achieves its intended outcomes for citizens and service users, and operates in an effective, efficient and ethical manner.” “The necessary skills [for governance] include the ability to scrutinise and challenge information received from the executive, including skills in financial management ”

6. Accountability Fundamental basis of accountancy Data Transparency Agenda Board Members -> Electorate Service Users & Tax Payers Government Health Professionals -> Advice to non-exec board members Elections to Health Boards?

7. Economic Environment: Financial Management Significant change High uncertainty => Increased Risk Focus on financial sustainability and stability Planning: service delivery -> resource transactions (eg cash flows) -> balance sheet assets and liabilities Importance of good governance, especially financial management

8. Audit Scotland Overview 2009/10 “a very important role for boards is the scrutiny of risk, financial management and performance…boards are not consistently good at doing this”

9. Balance Sheet Focus Comment re UK central government departments: “However, active management of cash flows and the balance sheet remains generally inadequate across government” [NAO - ‘Progress in improving financial management in government’ March 2011] Audit Scotland – introduction of ratio analysis in the annual audit reports for local authorities. Joint working group with directors formed for further refinement. Extension of ratios to Health?

10. Implementation of IFRS in Health Boards Opportunity Step back and think How should the financial statements be used? Challenge How do we explain IFRS statements?

11. Advocating Practical Use of Financial Statements “Holding To Account” – consultation document Primarily aimed at elected members, especially relevant for those with Audit Committee responsibilities Useful for other users of the financial statements Two key aspects: Using the accounts for governance Explaining the IFRS-based financial statements

12. Use for Governance Role of financial statements in governance and supporting accountability Basis for constructive scrutiny and challenge Three key areas for scrutiny identified: Stewardship of public resources Risk to public resources Financial sustainability of public service delivery Example questions for each of the three areas are included, accompanied by explanatory text as to the response that may be expected

13. Example Question- Stewardship Query: Why did the net cost of social work services increase by 6.5% when general inflation was 2.5%? A response could refer to: Change in service demand Specific price inflation (eg price of care home placements) Impact of new employment terms & conditions Lower income from falling service demand Increases in exemptions for fees or charges

14. Example Question- Risk Query: What risks are the Land & Building assets of the authority exposed to, and how are the risks managed? A response could refer to: Maintenance of a ‘risk register’ identifying key risks (eg flood, fire, vandalism) and the impact on public service delivery Risk management could include: prevention, insurance cover, self-insurance and risk acceptance Self-insurance requires that funds are set aside in an Insurance Fund Regularity of review of the risk register

15. Example Question - Financial Sustainability Query: Pension liabilities for the LGPS scheme are £160m which contributes to a situation where liabilities exceed the assets the council has. Is the authority still a going concern? A response could refer to: The long-term nature (eg up to 80 years) of the pension liabilities which can mean that there is not a short-term ‘going concern’ issue The long-term sustainability of the pension arrangements The uncertainty of assumptions (eg life expectancy, future pay awards, inflation etc) involved in estimating pension liabilities Recognition that changes in assumptions can lead to annual volatility The triennial funding reviews when employer contributions will normally be amended to ensure an appropriate funding level for pension liabilities

16. The Challenge for Us Watch the developing TAG agenda Be an advocate for the use of financial statements

17. Contact Details Consultation Document: http://www.cipfa.org.uk/scotland/news_details.cfm?news_id= 61308 LASAAC lasaac@cipfa.org.uk Gareth Davies gareth.davies@cipfa.org.uk 0131 550 7534