Weakened financial governance combined with the growing complexity of finance-raising schemes have produced huge challenges in local government. Grant Thornton’s Paul Dossett says that investing in finance leaders – both in councils and at audit firms – has to be the starting point for a turnaround.
The last decade has been immensely challenging for the local government sector. Several years of austerity have been followed by the eruption of a global pandemic, arguably the biggest challenge for local government and its communities since World War 2. While the sector has had to cope with significant financial challenges in this period, the commendable desire to protect front-line services has, at times, come at a cost to public stewardship and accountability.
Reducing budgets and ongoing external challenges have resulted in the weakening of three of the strongest bulwarks supporting sound financial governance in local authorities:
- Strong finance departments: council finance departments have suffered from years of underinvestment. There are now significant weaknesses in succession planning, in understanding the financial accounting implications of new and innovative schemes, and in the production of financial statements, which have grown significantly more complex in recent years.
- Robust internal audit functions: internal audit has also often faced challenges in reduced capacity, recruitment, getting a voice within councils’ audit committees and ensuring their recommendations are appropriately considered by management.
- System leadership: since the abolition of the Audit Commission, external audit in the local government sector has changed. It has lacked a system leader to provide a critical voice and focus on key sector issues – the statutory remit of Public Sector Audit Appointments (PSAA) was not set out to replicate this role. Local audit is a very specialist job role, and the sector has suffered in both attracting and retaining talent to a job that is demanding, has suffered reduced fees and is under intense scrutiny. For a long period, audit in the local government sector has been viewed as a commodity that needed to be priced as low as possible.
I would argue that the significant challenges we have seen at an increasing number of local authorities may have been mitigated if these three key pillars of financial stewardship had been at their strongest, both in terms of capacity and scope.
Local authority companies have grown exponentially, and more innovative ways of raising finance and driving investment returns have been entered in to. While many of these have been a success, some schemes have been hit with poor financial advice and scrutiny and suffered from lack of advice or challenge from internal and external audit functions.
22 March 2022
The Marriott Hotel, Leeds
LATIF North
Lead sponsor: CCLA
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Growing complexity of council schemes
The Localism Act 2011 has lots of merits and has paved the way for more innovation and creativity in the sector. Local authority companies, in particular, have grown exponentially, and more innovative ways of raising finance and driving investment returns have been entered in to, of varying size and capacity.
While many of these have been a success and of reasonable scope and ambition, some schemes have been hit with poor financial advice and scrutiny and suffered from lack of advice or challenge from the internal and external audit functions. It has taken some councils to a dangerous place where significant burdens have been placed on future taxpayers and poor decisions have been made worse.
Member challenge and scrutiny of complex schemes can also sometimes be weak, and some councils lack the experience and understanding of the new specialist areas they’re looking to invest in. It is really important that, in all council dealings, the “tone from the top” is based on sound governance, accountability and a willingness to be open to scrutiny.
In my view, the governance around significant financial decisions is not always adhering to the key starting point of the Nolan Principles – the importance of “selflessness in public office”.
Investing in future finance leaders
So how can we improve this challenging position? The starting point must be investing in future finance leaders. There are some local authorities that have already invested heavily in AAT and CIPFA training, while others have not. While training may be expensive, a strong finance function is essential to ensuring wise deployment and safeguarding of taxpayers’ funds.
The CIPFA Financial Management Code also comes into full force on April 1, 2022, after a shadow year. Members and corporate management teams should take responsibility in ensuring its requirements are met and deploy extra resources where necessary – including ensuring that all major schemes are subject to external accounting, legal and other advice as necessary.
There also needs to be significant investment made into internal audit and counter-fraud activity. This should go alongside strengthening audit committees, ensuring that any issues brought to them are properly elevated to cabinet, appropriate committees and even full council as needed. Officers whose departments do not implement the agreed recommendations should be held to account in person by audit committees.
The head of counter-fraud activity should also prepare a report for the audit committee to provide assurance on the adequacy of the council’s arrangements to address fraud and corruption with recommendations as necessary.
A significant reduction in audit fees has been pursued which means they are still now, on average, less than half what they were in 2011 – at a time when the audit of financial statements has become more complicated following the introduction of new financial reporting and new auditing standards.
Perception of local audit
The value of external audit in local government also appears to have been forgotten by some. The abolition of the Audit Commission was seen as a chance to push back on what they saw as overly fussy and interfering regulators. But re-setting the sector’s relationship with audit involves a myriad of stakeholders from the Department for Levelling Up, Housing and Communities (DLUHC) to PSAA, to audit firms themselves.
Capacity in the sector has been an ongoing challenge and there are now only five firms providing external audit to local government. Competition in the market is severely lacking and, until things change, it will be extremely difficult to attract other firms to enter. A significant reduction in audit fees has been pursued which means they are still now, on average, less than half what they were in 2011 – at a time when the audit of financial statements has become more complicated following the introduction of new financial reporting and new auditing standards.
But this critical challenge has been fully recognised by both PSAA and DLUHC and extra investment has been made to support the cost of additional audit fees.
Tight audit deadlines have also been recognised by DLUHC with an extension for 2021/22 to 30 November. Council accounts have become extremely complex and lengthy – often 150-200 pages long. It is now very difficult for anyone, other than technical specialists, to understand them; making it both difficult to ensure transparency with the public taxpayer and critical that new, young auditors are being trained in this specialist area.
Audit firms themselves have a critical role to play in investment and training. The recent support for increased fees is very helpful in that respect. Firms need to make local audit a long-term, attractive career for those who join them. It’s clearly easier to sell this narrative if the learning experience of those joining is a positive one and they feel respected in their roles by audited bodies.
The weakening of financial checks and balances has led to some of the challenges we face in the sector. There are a broad range of stakeholders responsible for restoring sound financial management and governance in the sector and we need to see action.
Paul Dossett is head of local government at Grant Thornton UK LLP. He will be speaking at the Room151 Local Authority Treasurers Investment Forum (LATIF) North conference on 22 March in Leeds.
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