Local authorities must maintain governance, audit and assurance
15 May 2019
Government has not done enough to ensure that, at a time when local authority budgets are under extreme pressure, governance systems are improved.
Local authority governance is critically important in this era of financial pressure and rapid change. Local governance arrangements are being stretched and tested as local authorities take on more risks and look for innovative ways to deal with funding pressures and growing demand for services. As we reported in February 2019, many councils are overspending on social care and reducing spending on other key services. They are also, for example, pursuing shared services, expanding outsourcing and taking on commercial activities, at the same time as making a significant reduction in the resources available to support corporate activities like governance. Council spending power fell by 29% in real terms between 2010-11 and 2017-18.
Local authorities' governance arrangements are generally robust. However, this is not universal and in some authorities, governance is under strain: audit committees that do not provide sufficient assurance, ineffective internal audit, weak arrangements for the management of risk in local authorities' commercial investments, and inadequate oversight and scrutiny. This is not acceptable in the more risky, complex and fast-moving environment in which local authorities now operate.
The Department's oversight of local authority governance has been reactive and ill-informed, but it has now recognised the lack of leadership needed to drive improvement. Encouragingly, the Department has now committed to enhancing its oversight role and producing a proactive work programme to deliver this change. We urge the Department to ensure that this activity leads to concrete actions and outcomes on a timely basis. When a local authority fails this has a significant impact on local people and the Department has a responsibility to work with local government to ensure that problems are caught early and that it can pinpoint at-risk councils.
“On the rare occasions a local authority fails, the impact on local citizens is severe. Residents facing decimated services get no comfort from being told that their council's dire finances were “an open secret”.
“We have seen examples of local authorities which have had inadequate governance arrangements and been unable to provide assurance that hard pressed budgets are being properly spent.
“The Government needs to recognise the extra pressure that squeezed budgets and increased commercial risks are having on local government and make sure it is monitoring the risks effectively so that it can be alert to the impact of changes on local government.
Conclusions and recommendations
The Department is not yet providing effective leadership of the local governance system. Local authority governance arrangements have, in general, coped effectively with the significant challenges the sector has faced since 2010-11. However, there is still significant room for improvement. Existing weaknesses need to be addressed, and the framework's effectiveness needs to be maintained in the context of the rapidly changing local governance landscape. We are particularly concerned about the gap between substantial intervention powers of the Secretary of State and the daily operation of a largely unregulated sector. Rather than simply waiting until things have gone wrong locally and resorting to statutory intervention, the Department should be a system leader to ensure that the whole system is effective and that the key organisations involved in the framework are working in an effective and co-ordinated manner. The Department acknowledges that it has been too reactive in its oversight and leadership role. We therefore welcome the Department's commitment to improve its oversight and leadership of the local governance system. However, meaningful change must be delivered by the Department rather than just warm words. The Department still makes confusing statements that do not express clearly enough its overall ownership of the governance system. It needs to assure Parliament and the public that the promised local governance panel will be more than a talking shop. We are yet to be convinced: the Department has been unable to describe any new concrete actions that will flow from its new approach.
Recommendation: The Department should write us within the next six months, setting out:
- its overall plan for improving its oversights
- its progress in working more effectively with other government departments to understand overall pressures on service sustainability
- its objectives for the promised local governance panel and the means by which the panel's effectiveness will be assessed;
- progress in setting up the new panel, including its work programme, the concrete actions the panel will take; the timetable and intended outcomes the panel will be working towards.
The Department does not know why some local authorities are raising concerns that external audit is not meeting their needs. The Department places great reliance on the work of external auditors, particularly in relation to value for money arrangements. It recognises that the importance of this work is heightened as council activities become more varied, complicated and commercial. However, a number of key representative organisations and councils told us that they had concerns about external audit. For instance, a quarter of finance directors at councils with responsibility for social care services for vulnerable people would like more value for money work from external audit, and the same proportion feel that audit fees are too low relative to the risk faced by their local authority. The Department believes the focus of external audit on whether arrangements are in place means that some local authorities are concerned that they no longer have sufficient assurance that their organisations are working effectively or that value for money decisions are being made. It has committed to addressing this ‘expectations gap' as part of its review of external audit. The Department has not yet decided whether this will be an independent review or carried out by the Department itself.
Recommendation: The Department's proposed review of the work of independent auditors should be conducted independently and should ensure that concerns from some local authorities over current fee levels and the contribution of external audit are examined fully and rigorously. The review should make an assessment of whether external audit is providing an effective service and meeting the needs of local authorities.
Recommendation: If the review identifies an ‘expectation gap' as a factor underlying local authorities' concerns with external audit, then the Department should identify how these unmet expectations can be met.
The Department lacks reliable information on key governance risks, or relies on weak sources of information, meaning it has no way of pinpointing the at-risk councils. The Department does not systematically collect detailed information on how well local governance is working. This is a remarkable oversight. Of the monitoring it does carry out, we were unimpressed with the Department's description of the information it holds on weaknesses and risks within local government governance. We are not confident that the current arrangements are enough to identify struggling councils that try to keep their problems to themselves, or to spot emerging wider weaknesses across the sector. The Department acknowledges that statutory officers play a vital role in local governance but does not collect or otherwise have access to information about the status and capacity of statutory officers across the sector. The Department is open about its reliance on ‘soft intelligence' for information on the ways in which authorities may be seeking to circumvent rules, for instance through the creation of innovative delivery and investment vehicles. It accepts, however, that to some extent this information is akin to gossip. The Department also relies on journalism to identify issues, although the Government has recently said that it accepts that local newspapers can often struggle to dedicate journalists to investigative work. We welcome the Department's new commitment to ‘thematic health checks' but need assurance about what this will mean in practice.
Recommendation: The Department should assess the governance evidence base available to it currently and write to us by November 2019 setting out how it will address gaps it has identified.
The Department's monitoring is not focused on long-term risks to council finances and therefore to services. The Local Government Association told us that reductions in central government funding to local authorities has meant that they need to increase their income and have taken on more risky commercial activities as a result. Some councils are borrowing very large amounts to fund commercial investment, creating long-term financial risks if investments do not deliver as expected. Councils need sound finances, now and in the future, to ensure they are able to deliver the services that local people expect. Our previous work has repeatedly shown that demand for local authority services is increasing, particularly within the adult social care and children's services sector, putting local authority finances under strain. The Department's risk monitoring is primarily aimed at identifying immediate financial concerns rather than the longer-term exposure of councils to financial risk. The Department's data on council debt levels does not allow it to assess the level of risk councils are exposed to as a result of that debt. The Department does not formally monitor council's commercial activities or non-traditional operating models.
Recommendation: The Department should assess and monitor the scale of long-term risk that authorities might have exposed themselves to through their commercial investments and ventures.
There is a complete lack of transparency over both the Department's informal interventions in local authorities with financial or governance problems and the results of its formal interventions. Residents and taxpayers have a right to know if there are serious problems, but current arrangements mean that if there is a problem with the finances of a local authority or how it is being run, then that information may not be available on a timely basis. We were told that the scale of Northamptonshire County Council's recent problems was ‘an open secret' within the sector. But awareness only for those ‘in the know' is not good enough. Peer reviews are an important source of information for the Department but these do not have to be published, unlike Ofsted reports, reducing the transparency about local authorities' performance to the public. We accept that there may be short critical periods where transparency is not appropriate but much more can be done than is at present. This is particularly true in instances where the Department itself has felt the need to engage informally with a particular authority. The Department accepts that greater transparency is desirable and is exploring options for enhancing it. However, the Department has previously said that it would explore publishing lessons from formal interventions but has yet to commit to doing so.
Recommendation: The Department should set out how it will improve transparency over its engagement on governance issues with individual local authorities, including:
- a review of the information the LGA is required to publish under its sector-led improvement work funded by the Department.
- the steps the Department will take to publish information and learning following formal interventions.