The final reckoning

Paul Cook is an independent consultant who has run
social services finance at five major authorities. He is the author
of the Chartered Institute of Public Finance and Accountancy’s
finance guides on housing, housing benefit, Supporting People and
partnerships. He has also been director of finance at Westminster
Council and chief executive of Daventry Council.   

What could be easier than closing the accounts? This routine
might seem as straightforward as making a cup of cocoa, but it’s
not. Too often, closing the accounts leads to the unexpected.
Mishaps are so prevalent that the dreaded year-end overspend has
become common in social services accounting.

Councils have a financial year that runs from 1 April to 31 March.
The purpose of closing the accounts is to finalise income and
expenditure for the year and produce a balance sheet.

Final accounts are used for calculating unit costs, which feed into
social services performance ratings. They are also instrumental in
setting future budgets, claiming government grants and seeing
whether a social services department has stayed within its
budget.

The balance sheet is not so important. Essentially, it is a
mathematical check on the validity of the final accounts. However,
it must correctly state the value of any land and building used in
the service, and the value of any debts owed by or to the
council.

The social services accounts need to be closed simultaneously with
the accounts of all other council services. Each service’s final
accounts feed into the council’s overall accounts.

Government policy is that councils should close their accounts
quickly. For the 2005-6 financial year, councils will need to close
by the end of June. It is a demanding timetable.

The council’s finalised accounts (the “statement of accounts”), go
to external auditors. Finance directors aim for an unqualified
audit opinion by negotiating with the auditors, amending the
accounts to avoid any crunch issues that might oblige the auditors
to qualify the accounts.

The rules for preparing the accounts and calculating the figures
are set out in two key documents published by the Chartered
Institute of Public Finance and Accountancy. The documents are huge
and leave very little latitude to finance directors. The key
closing stages are year-end accruals, reconciliation, provisions
and grant claims.

• Year-end accruals cover adjustments in expenditure to reflect
  services received in the financial year but which have not yet been
  paid for. Likewise, income is adjusted for services supplied or
  fees due for the year not yet billed.
• Reconciliation means checking that figures in the accounts are
  consistent with other systems. For example, the figure for debt
  owed by the primary care trust should be the same as the total of
  individual PCT debts on the income system.
• Provisions cover the potential downgrading of sums owed to the
  council: some unpaid debts are very old, or unlikely ever to be
  collected.
• Added to the accounts as income are grant claims, which are a
  fair estimate of the various government grant entitlements.

The impression of a complicated but dull process is, however,
deceptive. Fall into one of the traps lying in wait for the unwary
and you will have major problems.

Year-end accruals
Most directorates still monitor their spend against budget by
watching expenditure to date and extrapolating. So if three months’
invoices for utilities total £50,000, their full-year forecast
is £200,000. This is a strategy that can unwind badly at
year-end.

The notorious “invoices in drawers syndrome” leads to unexpected
overspend when big volumes of payments that were sitting in a
backlog suddenly hit the books. Or invoices do not come in quickly
enough to be scored in the old year under those tight closing
timetables, resulting in unexpected underspend in one year and a
ready-made overspend welcoming in the new financial year when the
invoices are finally paid.

In other words, do not rely on payments alone to forecast and
control spending: cross-check with other sources. Also, organise
suppliers to bill up to date in the lead-in to year-end, and verify
that colleagues are not sitting on invoices. If you are unsure
whether invoices are up to date, check how old the latest payments
in the accounts are.

Similar problems can arise with income due. Failure to include a
full year’s income in accounts could produce an unexpected
overspend. So plan the year’s last billing run well ahead so that
it comes within closing deadlines. As billing often depends on
service teams putting new client data on to systems, ensure there
is no backlog here.

Reconciliation
Even accountants find reconciliation tedious. But the reason why
reconciliations are important in closing is that auditors like to
make cross-checks between systems. If systems disagree, auditors
may expect the accounts to be adjusted to the lower figure. With an
income area, that could cause a closing blip. Avoid this
embarrassment by bearing in mind the following:

• Do a monthly reconciliation to the accounts for major systems
  for collecting residential or fairer charges – don’t wait for
  year-end.
• Beware systems you know are struggling – the ones where billing
  runs are delayed or cannot implement regulation changes
  promptly.
• If reconciling local systems is a problem, you may be able to
  make checks with counterparties. Is your list of PCT contributions
  for packages the same list as they expect to pay?

Provisions
Councils reflect income in their accounts as soon as it is billed.
But income sources, such as client residential accommodation
charges or Supporting People charges, are complex to administer and
collect. But if charges are not being paid, directorates generally
cannot withdraw services, which makes for limited debt recovery
potential. This is not the case with other council services.

In the final accounts, figures for debts owed to the council need
to be modified by setting up provisions for the likely level of
non-collection. Any additions to these provisions must be paid for
by service accounts.

Bringing provisions to a realistic level can sour year-end income
figures. Avoid this by planning ahead. Anticipate year-end changes
to provisions by monitoring income month by month. Ensure any debts
known to be irrecoverable are written out of the accounts promptly.
If you do not do this, you may balance the books in the short term,
but face financial disaster in the long term.

During the year, check for income anomalies that are bound to need
adjustment later – for example, individual clients with negative
values of debt owed, debt without enough detail for it to be
collected, accounts with no movement over long periods, and so
on.

Grant claims
In closing the accounts, you will need to include income items for
government grants. This will not cause problems if you can claim
grant at the level assumed in in-year forecasts. For many grants
this is no longer a big closing issue, because they are
formula-specific payments without conditions or certification of
claims.

But, for ring-fenced grants, you need to ensure your assumptions
about entitlements hold good. To avoid year-end surprises, produce
regular updates against grant plans during the year. And get your
internal audit to do a limited audit of the claim in advance of
external auditor certification.

That, then, is closing the accounts. You will know when you have
got it right because it will be monotonous and uneventful. Just
like painting by numbers or making a cup of cocoa.

Abstract

This article explains the process of closing local authority
social services accounts. It also highlights where and why major
problems are likely to arise and looks at how you can avoid getting
into a mess.

The rest of the series

• 17 June: Unit costs have a big influence on star ratings – so
  how can you keep them under control? 
• 24 June: Grants are a big portion of social services income but
  they are complex beasts to administer. A look at how to keep track
  of your grant income. 
• 1 July: Weak forecasting and monitoring are the main financial
  danger areas for social services managers. How can you avoid
  disaster?

Further information   

Contact: Paul Cook at dagnallcottage@ukonline.co.uk