The Auditor General for Wales (AGW) has qualified his opinion on the Welsh Government’s Consolidated Annual Accounts for the first time.
The Accounts for 2019-20 (PDF, 1 MB) were qualified because they omitted £739 million of expenditure relating to the Welsh Government’s Coronavirus response. The Accounts were laid before the Senedd on Monday 9 November.
What is a qualified audit opinion?
Auditors are required to provide an opinion on the accounts on completion of their work.
An unqualified audit opinion is commonly referred as a ‘clean’ or ‘clear’ audit opinion. This is because it is given where the auditor considers that the accounts give a true and fair view of an organisation’s financial position and its income and expenditure for the year.
A ‘true and fair’ view is one in which the auditor has not identified any errors of such significance that the reader of the accounts would be misled by information included in them. Such errors are known as ‘material misstatements’.
Where this is not the case (i.e. the accounts do not give a true and fair view), the auditor will issue a modified audit report. The type of modified report is determined by the nature and severity of the auditor’s findings.
If the findings affect, or potentially affect, multiple parts of the accounts, the auditor could judge those accounts to be unreliable in representing the organisation’s financial position. If the finding is also material (i.e. significant), the auditor would not be able to say the accounts provide a ‘true and fair view’. The auditor is then required to place an adverse opinion on them. This is the most serious form of modified audit opinion since it says that the accounts are not accurate or reliable.
However, where the auditor has identified a material issue which relates to only specific parts of the accounts, the auditor may judge them to provide a true and fair view ‘except for’ the matter identified. In such cases, auditors are required to place a qualified opinion on them.
This is what has happened with the Welsh Government Accounts for 2019-20.
The auditor’s opinion is included in the accounts of the audited body. You can see the AGW’s opinion on page 99 of the Welsh Government Accounts for 2019-20.
What is a ‘regularity opinion’?
For some bodies, the AGW is also required to provide a ‘regularity opinion’. In doing so, the AGW is required to conclude in two areas. Firstly, whether the expenditure and income in the accounts have been used for the purposes intended by the Senedd, which approves the Welsh Government’s budget. Secondly, that the financial transactions recorded in the accounts ‘conform to the authorities which govern them’.
In other words, the AGW gives his view that the organisation has followed the policies, rules, principles and legal requirements governing its operation.
What happened in 2019-20?
The AGW has qualified his ‘true and fair’ opinion (PDF, 1 MB) because the Welsh Government did not include the cost of some of its Coronavirus emergency interventions in its Accounts for 2019-20. Specifically, grants linked to Non-Domestic Rates for small businesses and those in the retail, leisure and hospitality sectors.
The Welsh Government reports (PDF, 1 MB) it conducted an assessment against accounting standards (specifically, International Accounting Standard (IAS) 37, Provisions, Contingent Liabilities and Contingent Assets) as to whether any liability for these grant schemes should be included in its 2019-20 Accounts.
It states (PDF, 1 MB) its interpretation of the accounting standard was that ‘there is no further legal or constructive obligation at 31 March 2020’.
A ‘constructive obligation’ is defined as follows:
A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities.
Accounting standards require the cost of ‘constructive obligations’ to be included in the accounts as soon as they arise.
The AGW took a different view. He reported (PDF, 1 MB):
In my view, the announcements and actions taken prior to 31 March 2020 in response to the coronavirus pandemic to ensure that cash was paid out to businesses as soon as possible created a constructive obligation under International Accounting Standard 37, Provisions, Contingent Liabilities and Contingent Assets, and the related costs should have been included in the 2019-20 financial statements.
In the Welsh Government Accounts for 2019-20, the Permanent Secretary (the head of the Welsh Government Civil Service) says (PDF, 1 MB):
Wales Audit Office disagree with the Welsh Government IAS 37 assessment … It is unusual for there to be such a divergence of opinion between officials and the relevant audit authorities and, therefore, the Welsh Government has asked the Financial Reporting Advisory Board to consider the matter and issue clear guidelines.
The AGW reported (PDF, 1 MB) the costs of the schemes to be £739 million.
Since the costs of the schemes were omitted, the AGW qualified his true and fair opinion on the Welsh Government’s Accounts for 2019-20. He concluded that ‘except for’ the omission of those costs, the accounts provided a ‘true and fair’ view.
The AGW has also qualified his regularity opinion and this links to the reasons outlined above.
The Welsh Government Accounts for 2019-20 report a net underspend of £436 million against its budget, which was approved by the Senedd. Had the Welsh Government included the cost of the business support schemes in its Accounts (£739 million), this would have turned its underspend into an overspend of £303 million for the 2019-20 financial year.
Any overspend by the Welsh Government is irregular and hence the AGW is required to qualify his regularity opinion.
Has the AGW qualified his opinion on any other accounts?
It is very rare for the AGW to qualify his true and fair opinion.
However, he has qualified his regularity opinion more frequently. For example, the AGW qualified his regularity opinion on the 2001-02 accounts of ELWa - The National Council for Education and Training for Wales (PDF, 771 KB). More recently, the AGW has qualified his regularity opinion on accounts of the Welsh Consolidated Fund for 2016-17 (PDF, 278 KB) and the accounts each year since 2015-16 of Natural Resources Wales (NRW).
The regularity opinions on these accounts were as a result of those bodies not complying with policies, rules, principles or legal requirements governing their operation. For example, the AGW provided a qualified regularity opinion on 2015-16 Annual Report and Accounts of NRW (PDF, 1 MB) because of the way it had awarded contracts for timber sales.
This is different to the AGW’s qualified regularity opinion on the Welsh Government’s 2019-20 accounts. The AGW is not commenting on how these grants have been awarded or whether they provide value for money. His conclusions are solely about the costs of the schemes not being included in the Welsh Government’s Accounts for 2019-20. Had the costs been included, the Welsh Government would have exceeded its budget for 2019-20 and hence, the AGW was required to qualify his regularity opinion.
The Senedd’s Public Accounts Committee will be scrutinising the Welsh Government Accounts for 2019-20 at its meetings on 23 November and 7 December 2020. You can watch the proceedings live on Senedd TV.
Article by Joanne McCarthy, Senedd Research, Welsh Parliament