Paul Dossett from Grant Thornton outlines the results of the firm’s recent report on councils’ annual accounts, highlighting the areas where authorities can make improvements to mitigate the growing sector challenges ahead.
Our latest analysis finds that there are growing weaknesses in councils’ financial sustainability arrangements, as well as across financial governance, internal control, performance management and procurement. The report, based on our review of 92 auditors’ annual reports (AARs) produced by Grant Thornton (representing approximately 30% of councils in England), finds that, with statutory, key and improvement recommendations combined – the AARs included over 700 suggestions for improvement across a significant number of councils.
There being just six statutory recommendations included in our review is testament to the underlying resilience of the local government sector and the dedication of the staff working within it. However, the sector is facing a growing funding gap driven by rising inflation, higher employee costs and spiralling demand for some key services, which we forecast could reach £3bn by 2028/29.
Significant challenges lie ahead for the sector and a proactive approach from the new government may make a difference to how well councils respond. Our report also identifies five common areas for improvement, and careful action now, on the issues highlighted here, may leave councils better placed to take advantage of potential opportunities in the future.
Savings and transformation plans
Our research found that councils who were slow to react to rising costs and to developing effective savings plans had to draw heavily on their reserves in 2022/23, whilst those that did develop plans often struggled to deliver the planned savings. The importance of starting savings plans early was highlighted by a council where we found that good financial results in prior years meant savings were not at the forefront of councillors’ minds when they were preparing the budget for 2022/23. The council planned to draw £27m from reserves during the year but had not fully developed its savings plans at the time the budget was set. As inflation took hold, the council could not contain costs or introduce new savings initiatives as quickly as needed. The actual draw on reserves ended up being more than double the planned amount and, by the end of the year, its reserves had depleted by 44%, leaving it with the lowest reserves of all metropolitan districts in England.
The dedicated schools grant
Key recommendations for 2022/23 show that councils have been challenged by the continued demand for education and health care plans, which has made it difficult for them to reduce their Dedicated Schools Grant (DSG) deficit. With the current statutory override due to end in 2026, our AARs for 2022/23 show that those councils affected will need to work more closely with school forums and parent groups to manage demand, if they are going to protect their reserves balances in the coming years. We identified councils across England that had DSG safety valve agreements in place with the Department for Education (DfE) for reducing their dedicated schools grant deficit but were failing to reach their year one targets.
Financial governance and internal control
Four of the six statutory recommendations raised for 2022/23 related to poor financial governance – including accounts not being prepared because of weak underlying financial systems or lack of appropriate capacity and skills; and wider weaknesses in financial planning and monitoring arrangements. At the same time, the most common area covered by key recommendations on governance related to falling standards of internal control and/or falling standards of IT and data security. Often, this was linked to headcount reductions, vacant posts and a reliance on contractors. For example, in one council, external consultants concluded that its internal controls were not fit for purpose after resources for the management accounting function had been reduced year on year for three years. The council was employing around 500 more people than is common for an organisation of its size, yet its finance function had a c.30% vacancy rate.
Performance management and procurement
During the Covid-19 pandemic, many councils delayed their operational performance reporting, but several years have now passed since reporting could reasonably have been re-introduced. A common observation across the AARs reviewed was that without effective performance reporting, councils did not know where to make savings effectively and could not tell what impact the savings they were making were having on service standards. Key recommendations relating to procurement and contract management were also common and, in many cases, had already been raised the year before. Typically, the concerns for 2022/23 surrounded legal compliance; sufficiency of procurement resources; and the effectiveness of procurement oversight. Similar improvement recommendations on procurement and contract management were so common in our AARs for 2021/22 that we published a national report setting out lessons learned in December 2021. That they feature again in 2022/23 AARs as more serious key recommendations is an example of how issues can escalate if left unaddressed.
Housing Revenue Account
In recent years, although there has been a strong focus from councils on arrangements relating to the general fund, Housing Revenue Accounts (HRAs) have also come under increasing pressure. This includes inflationary cost increases and new regulatory costs outstripping increases in rental income; difficulties servicing debt; slippages in repairs and maintenance compromising safety; and delays to the implementation of the planned capital programme. London boroughs, estimated to manage around 390,000 social homes, are particularly exposed. For one borough, the AAR highlighted that 13% of its housing stock was suffering from damp or disrepair. For another borough, rental income for the HRA is expected to reduce by around £1.2m per annum, for an estimated two years, because of delays in the planned building of new homes. But these issues are not just confined to the capital, councils across England that have this responsibility need to take a more strategic approach towards managing their HRA. With new housing consumer standards being mandated from April 2024, any short-term savings in repairs and maintenance now could lead to very high costs in the future.
With over 600 improvement recommendations raised in the AARs reviewed, it’s important that the councils concerned do not allow these issues to escalate. A general tendency to delay acting on the prior year’s improvement recommendations could be seen in many of the AARs reviewed, often because staff had left the council or because new issues had emerged. But to prevent issues escalating further, it’s important that any issues raised are actioned promptly.
Paul Dossett is the head of local government at Grant Thornton UK.
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