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Citizens Advice auditor resigns over accounting treatment of pension hole

Finance | Tania Mason | 15 Sep 2011

Baker Tilly has quit as auditor for Citizens Advice because it disagrees with the way the charity accounts for its pension deficit, estimated to be just under £19m.

The firm has held the audit account for the past four years but announced at the charity’s AGM this week that it would not stand for reappointment. The charity’s new treasurer, Mike Weaver, a former president of the Chartered Institute of Public Finance and Accountancy, has also quit despite only taking up the role on 1 May.

For the last three financial years Baker Tilly has qualified Citizens Advice’s accounts because the charity does not include its pension liability on its balance sheet. It is expected to insert the same qualification in the latest accounts, due to be signed off any day.

Growing pension deficit

The disagreement relates to the charity’s defined benefit pension scheme which was closed to new members in 2008. It is a multi-employer scheme, operated by the National Association of Citizens Advice Bureaux, and has a growing pension deficit.  In 2006 an independent actuary assessed the deficit at £19.4m and this had increased to nearly £36.5m by 31 March 2010. Citizens Advice, which had income of £65.2m in 2009/10, is the “principal employer” in the scheme.

In the notes to its 2009/10 accounts, the charity states: “The scheme’s actuary has advised the assets and liabilities are not able to be segregated for each contributing employer. Hence it is not possible to separately identify the assets and liabilities relating to Citizens Advice.”  The charity says it does not believe it can establish a reliable estimate of the year-end liability under the scheme, “hence Citizens Advice is not able to make a provision under FRS12”.

Disagreement over accounting treatment

But Baker Tilly disagrees with this approach. In last year’s accounts, under the headline “Qualified opinion arising from disagreement over accounting treatment” the auditor wrote:  “Following advice from the pension scheme actuary the charity, as the principal employer, had a formal agreement in place to make annual payments of £700,000 over 20 years to fund the deficit in the scheme that existed at 31 March 2008. As part of this agreement the total sponsoring employer annual payments amounted to £800,000 over the same period.

“Since 31 March 2010 the sponsoring employers have agreed to increase their annual payments to £1,200,000 over the next 18 years. This liability has been disclosed as a contingent liability and no provision for the liability payable under the arrangement has been included in the balance sheet at 31 March 2010.

It concludes: "Based on a discount rate used in the actuarial valuation and the last agreed contribution to the total annual payments by Citizens Advice a provision should be made at 31 March 2010 of £8,305,000."

Civilsociety.co.uk calculates that if Citizens Advice is responsible for seven-eighths of the liability, and the total liability is £1.2m over 18 years, then the charity’s share of the deficit works out at £18.9m.

Citizens Advice: 'Lots of charities in the same boat'

A spokesman for Citizens Advice confirmed to civilsociety.co.uk yesterday that Baker Tilly has declined to be considered for reappointment to the audit account, which was worth £34,000 in 2009/10.

However, he said the latest set of accounts was yet to be signed off and so couldn’t say yet whether they would contain the same qualification as previously.

“We are still in discussion with the auditors about the accounts,” he said. “There is a technical issue over the treatment of our pension liability but lots of charities have a similar issue. We are confident the accounts will be signed off by the auditor in the normal way.

“The reason they were not signed off at the AGM was one of timing only.”

Asked whether the resignation of the new treasurer was connected to the disagreement over the accounts, the spokesman would only say that Mike Weaver left “for personal reasons, a few weeks ago”.

Sudhir Singh, partner at Baker Tilly, declined to say whether the auditors would qualify the accounts again this year, citing client confidentiality, but did say he was unaware of any change in the law that would necessitate a change of opinion.

Emotions running high

In the June edition of Charity Finance, the charity’s head of finance, Alistair Gibbons, wrote an article outlining the reasons that Citizens Advice does not believe the deficit should be recognised on the balance sheet.  

He wrote: “We did not consider the annual deficit payment a reliable estimate as it was prone to actuarial valuations, and in fact has increased by 50 per cent since…We were also concerned that a weaker balance sheet would affect our credit rating and have an adverse impact on pension protection levy calculations.”

In this article Gibbons admitted “it is not always easy to remove the emotion” in such situations and added: “We had several difficult discussions with our auditors, but we still enjoy a strong working relationship with them.”

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Who's Who: Sudhir Singh