Andrew Hardingham examines calls for a new early warning system for section 114s notices and finds there are already many mechanisms in place, if only they were used properly and heeded.
Meg Hillier MP, chair of the House of Commons public accounts committee, wants a new mechanism to provide the government and public with an early warning system prior to the publishing of section 114 notices.
As readers will know, section 151 of the Local Government Act 1972 requires councils to make arrangements for the proper administration of their financial affairs, to appoint a section 151 officer, also known as a chief financial officer (CFO), to have responsibility for those arrangements.
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As such, the CFO must lead on a local authority’s financial functions to ensure they are fit for purpose. CFOs must be professionally qualified and suitably experienced (how you get the experience before you become the CFO is not the subject of this debate).
151 officer
The Local Government Finance Act 1988, section 114 (3) dictates that: “The CFO of a relevant authority shall make a report under this section if it appears to him/her that the expenditure of the authority incurred (including expenditure it proposes to incur) in a financial year is likely to exceed the resources (including sums borrowed) available to it to meet that expenditure”.
In general terms, this means that, for local government, it is the CFO (section 151 officer) who has the role under law of being the most senior financial adviser to the wider council’s leadership on its financial plans. CIPFA argues that the CFO should be part of a council’s officer leadership group. Uniquely across the public sector, however, the CFO also has the power and responsibility to legally suspend spending for a period of time if they judge the council does not have a balanced budget or the imminent prospect of one.
To be clear, it is only the section 151 officer that can issue a notice under section 114.
A “council” cannot. A council receives the notice and has to act on it. Of course, there would be a series of events that lead up to this point but, when issued, it means that no new expenditure is permitted, probably only with the exception of funding statutory services including safeguarding vulnerable people and honouring existing commitments and contracts.
Let us also not forget that the CFO also has a duty under section 25 of the Local Government Finance Act 2003 that stipulates when a council is agreeing its annual budget and the council tax precept, the CFO must report to it on the following matters:
• The robustness of the estimates made for the purposes of the council tax requirement calculations;
• The adequacy of the proposed financial reserves.
Evidence
In determining the opinion, the CFO would have considered financial management arrangements and control frameworks in place, underlying budget assumptions, adequacy of the business planning process, financial risks and the level of reserves.
The council would be required to have due regard to this report when making decisions on the budget.
However, how can that be evidenced? How can we ensure sure that the CFO’s message is heard?
Throughout the year, does not the CFO have a “duty” to report financial performance on a regular basis to the administration? Would that be enough of an early warning system?
Meg Hillier claims that councils’ structures mean that often section 151 officers are left off senior committees making it harder for financial concerns to be raised. CIPFA’s voice is not being heard with some of us asking if this is just a few isolated cases within the system or, more seriously, whether the current mechanisms in which the CFO operates are failing.
Indeed, what is the system now and who is calling the shots?
Local government has a statuary appointment heading up the finance departments. We have constitutional frameworks including financial regulations within which elected members and officers operate. We have an audit system: internal and external. We have audit committees and an executive held to account through a scrutiny system. We have other inspection regimes including Ofsted, CQC, HMRC, Ombudsman. We have a central government departmental oversight including MHCLG. We have CIPFA, the Local Government Association, the Financial Reporting Council and Public Section Audit Appointments.
Surely, this is enough oversight to detect potential concern or failure. Or is it? More pertinently, are these “oversighters”, or supervisors, asking the right questions or even looking at the right things?
Impenetrable
There has been a range of views expressed since the publication in September 2020 of the Redmond Review looking at local government audit and financial reporting. In introducing his report Sir Tony writes: “This Review has examined the effectiveness of local audit and its ability to demonstrate accountability for audit performance to the public. It has also considered whether the current means of reporting the authority’s annual accounts enables the public to understand this financial information and receive the appropriate assurance that the finances of the authority are sound.”
The findings of the review, and the response, have been well documented so we will not rehearse them in this article suffice to ask if audit is failing those charged with governance—and also those who elect those charged with governance?
Sir Tony did find that current local audit arrangements did not meet the policy objectives underpinning the Local Audit and Accountability Act 2014 and, in particular, he identified weaknesses in the functioning and value of local audit, the timeliness of its findings and how these are considered and managed.
He also highlighted that the statutory accounts prepared by local authorities are widely agreed to be “impenetrable to the public” limiting how effectively taxpayers can judge the performance of their authority.
Rear view mirror
However, the annual statement of cccounts, and the audit thereof, is a backward looking process. Meg Hillier claimed that changes to local audit proposed under the Redmond Review, most notably the publishing of annual reports on the sector, will be vital in giving early warnings over council positions.
Although it is helpful to know when driving a car what is behind, or where you have come from, you don’t drive the car looking through the rear view mirror—you look forward.
But isn’t that where the “value for money” opinion is important? After all, a value for money audit is a risk-based examination by an independent person to enable a view to be formed whether an authority has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources.
The revised guidance issued by the National Audit Office requires an auditor to delve more deeply into governance and financial sustainability alongside the three “Es” and then make a judgement to be issued in the auditors annual report. One could argue it would useful if, a) it was delivered in a timely fashion and, b) focused on the right things.
So, do we need a new mechanism? Or, should current mechanisms in the system get the message out and heard?
Andrew Hardingham is the former service director for finance, Plymouth City Council.
Photo by Cristi Goia on Unsplash
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