IFRS for local authorities: stop this madness now

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It's been announced that International Financial Reporting Standards are to be used by UK local authorities from 1 April 2010 for the preparation of their accounts.

Now, I'm not usually one of those who goes around suggesting the public sector is wasting money, largely because when all is said and done it seems to me no more prone to the frailty of human fallibility than the private sector, where I have witnessed waste on the most colossal scale. But on this occasion I'm going to, and I'm going to point a finger at those imposing the waste.

IFRS are completely and utterly inappropriate for use by local authorities. The reason is simply stated: IFRS are designed to produce what the IASB call 'decision useful information'. I question that, but for logical reason in this case. The IASB defines decision useful information as that needed by an investor to decided whether to buy or sell shares in an entity. They do not consider there to be any other reason for financial reporting. That is why the entire focus of IFRS shifted from that in the previous UK GAAP, which was on reporting profit, to one of reporting changes in balance sheet value.

This is no minor issue: UK GAAP was accruals accounting and sought to match transactions in a period to provide a measure of what had happened in that time scale. Balance sheets are a residual measure in that process. So this GAAP was about stewardship, financial performance, delivery of value for money, and action over time. IFRS on the other hand is about measuring value at a point of time and comparing that with value at another point of time. The difference is the result for the period. So the balance sheet is predominant and the profit and loss account secondary because it is assumed that the investor in the entity will have a short time scale for involvement (usually less than a year - the UK stock exchange changes hands entirely well over once a year now, on average) and is therefore wholly uninterested in stewardship, performance over time or even delivery of results. The IFRS belief is that the only issue of concern to the investors, who they believe to be the sole user of accounts, is in making a quick buck from dealing.

Now, let's get down to some basic facts here. No one invests in a local authority. They're not for sale. They do not provide an investment return. With rare exceptions (and I regret this) they do not even issue bonds to finance their capital projects. So the user of the financial statements that IFRS assume to exist are not present in the case of local authorities. There are no investors. And the use for which the financial statements that IFRS assumes to exist, being the decision to buy and sell shares does not exist in the case of local authorities. There is nothing to buy and sell.

This alone, at this most obvious and basic level, makes it abundantly obvious that IFRS is the wrong accounting system for local authorities (as it is for any unquoted company, incidentally, for much the same reason - an absence of any marketable security).

It's worse than that though: IFRS will not require accounting for stewardship of public funds entrusted, or for the supply of services, both of which are core to the management of local authorities. And we know that a failure to measure almost always means a failure to deliver in management terms. This means we have a potential disaster on our hands.

And whose fault is this? Well firstly, the IASB's. They do not act in the public interest, after all. They are a private cartel designed by and promoted for, in no small part, the benefit of their biggest sponsors - who are the Big 4 forms of accountants. Second, those firms have much to answer for. They have just made a fortune from the IFRS transition for first tier listed companies, now they're selling similar services to the secondary markets and after that there was a void. So they've persuaded the professional bodies (which they dominate) to move IASB into local authorities which will give their teams work for several more years. You can call that cynical if you like - but actually, it's just a statement of fact.

What I really hate is when people say the public sector is inefficient when the entire reason is that the public sector was sold a completely dud product by the private sector. That's true of most of the IT debacles, for example. It will be true here. Someone needs to wake up, smell the coffee and realise that UK local authorities are being sold a dud reporting system designed from the outset to be unfit for their needs. This project must be cancelled now before it is too late! This is not just a waste of money. This is a straightforward con.

I am angry. And so should all local authority tax payers in the UK. We're going to be taken for a ride unless we protest now.

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