National Audit Office report on Local authority governance

Tuesday, 15 January 2019 00:01

The government should improve its oversight of the local governance system to help local authorities cope with increasing financial and demand pressures, according to today’s report by the National Audit Office. Local authorities operate within governance frameworks of checks and balances to ensure that decision-making is lawful, informed by objective advice, transparent and consultative. Elements of these governance arrangements are defined locally, while others are overseen by...Request free trial

Local authorities operate within governance frameworks of checks and balances to ensure that decision-making is lawful, informed by objective advice, transparent and consultative. Elements of these governance arrangements are defined locally, while others are overseen by the Ministry of Housing, Communities and Local Government (the Department).

Since 2010, local authorities have faced significant challenges – funding has reduced, while demand for services has increased¹. For example, they have seen a real-terms reduction in spending power of 29% and a 15% increase in the number of children in care. These pressures raise the risk of authorities’ failing to remain financially sustainable and deliver services, increasing the importance of having good governance arrangements.

The way authorities have responded to these challenges have tested local governance arrangements. Many authorities have pursued large-scale transformations or commercial investments that carry a risk of failure or under-performance and add greater complexity to governance arrangements. Spending by authorities on resources to support governance also fell by 34% in real terms between 2010-11 and 2017-18, potentially increasing the risks faced by local bodies.

Each year, external auditors publish a conclusion on an authority’s arrangements to secure value for money, and can highlight weaknesses by ‘qualifying’ their conclusion. In 2017-18, auditors issued qualified conclusions for around one in five single tier and county councils. A survey, carried out by the NAO, of external auditors indicates that several authorities did not take appropriate steps to address these issues².

Some external auditors have raised concerns about the effectiveness of the internal checks and balances at the local authorities they audit, such as risk management, internal audit and scrutiny and overview. For example, 27% of auditors surveyed by the NAO do not agree that their authority’s audit committees provided sufficient assurance about the authorities’ governance arrangements. Auditors felt that many authorities are struggling in more than one aspect of governance, demonstrating the stress on governance at a local level.³

Some authorities have begun to question the contribution of external audit to providing assurance on their governance arrangements. 51% of chief finance officers from single tier and county councils responding to our survey indicated that there are aspects of external audit they would like to change.⁴ This includes a greater focus on the value for money element of the audit (26%). External auditors recognise this demand within certain local authorities. However, their work must conform to the auditing standards they are assessed against and any additional activity may have implications for the fee needed for the audit.

The Department is responsible for ensuring that the local governance framework contains the right checks and balances, that it works, and for changing the system if necessary. However, the Department does not systematically collect data on governance, meaning it can’t rigorously assess whether issues are isolated incidents or symptomatic of failings in aspects of the system. The Department can intervene both formally and informally in authorities where it has concerns about governance arrangements, but the process by which it does this is not always revealed publicly, meaning its scale and effectiveness is not open to scrutiny or challenge. The Department recognises that it needs to be more active in leading co-ordinated change across the local governance system.

The NAO recommends that the Department works with local authorities and other stakeholders to assess the implications of, and possible responses to, the various governance issues identified. It should examine ways of introducing greater transparency and openness to its formal and informal interventions in local authorities and should adopt a stronger leadership role in overseeing the network of organisations managing key aspects of the governance framework.

Amyas Morse, the head of the NAO, said today:

“Poor governance can make the difference between local authorities coping and not coping. Given the significant challenges these bodies face, the government needs to take the lead in addressing weaknesses in the local governance system to ensure that local arrangements function as intended and support local decision-making.”

Key facts

28.6%

real-terms reduction in local authorities’ spending power (government funding plus council tax), 2010-11 to 2017-18

£2.5bn

increase in local authority spending on acquiring land and existing buildings from 2015-16 to 2017-18, much of which is for commercial investment purposes

34.2%

real-terms decrease in spending on corporate and democratic support services by local authorities from 2010-11 to 2017-18

27%	of local authorities’ external auditors in our survey thought risk profiles had increased from 2016-17 to 2017-18
77%	of chief finance officers (section 151 officers) in our survey agreed that their finance function was sufficiently resourced
89%	of chief finance officers (section 151 officers) in our survey agreed that their finance function was sufficiently resourced
98%	of chief finance officers (section 151 officers) in our survey agreed or strongly agreed that they felt able to provide challenging information to elected members
32.7%	of local authorities’ audit committees have at least one independent member
48%	of external auditors in our survey agreed or strongly agreed that audit committee members in their authority were appropriately trained to deliver their role
18.5%	of local authorities’ whistleblowing policies published on their websites advised people to contact the Audit Commission, which was abolished in 2015
25%	of chief finance officers (section 151 officers) of single tier and county councils in our survey felt that their audit fee for 2017-18 was too low relative to the risk faced by the authority

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Notes for Editors

For more information about reduced funding for local government since 2010, see the NAO’s 2018 report: Financial sustainability of local authorities 2018
The NAO carried out an anonymous web survey of external auditors of English councils between July and October 2018. The survey was mailed to those operating at audit manager grade. It asked primarily structured questions about their opinions about their role and about other governance arrangements at each council they audit. The questions were informed by the formal expectations of these arrangements set out in CIPFA's Delivering good governance in local government framework. The NAO received responses covering 202 local authorities out of a possible 353. For more information see Appendix Two.
From our survey of external auditors, we selected six key internal checks and balances (audit committees, ethical standards for member behaviour, internal audit, risk management, overview and scrutiny, and statutory officers). In 50% of local authorities, auditors had no concerns about any of the six elements, and in 19% there was concern with only one element. However, auditors had concerns with two or more elements in 30% of authorities, including 9% with four or more.
The NAO carried out an anonymous web survey of section 151 officers (chief finance officers) at English councils. It asked primarily structured questions about their opinions about their role and about other governance arrangements at their council. The NAO received responses covering 144 local authorities out of a possible 353.