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The Government has not done enough to ensure that governance systems in local authorities are suitable for an ‘era of financial pressure and rapid change,' MPs have warned.

A new report from the Public Accounts Committee said that local governance arrangements were being ‘stretched and tested' as cash-strapped councils take more risks to meet increasing service demands.

The report said local authorities were pursuing shared services, expanding outsourcing and taking on commercial activities at the same time as cutting funding for corporate activities like governance.

While the report acknowledged that governance arrangements were ‘generally robust' it did find that in some councils there were audit committees that do not provide sufficient assurance.

The committee also found ineffective internal audit arrangements in a number of local authorities and weak arrangements for the management of risk in commercial investments.

‘This is not acceptable in the more risky, complex and fast-moving environment in which local authorities now operate,' the report concluded.

The committee's report was also critical of the Ministry of Housing, Communities, and Local Government's (MHCLG) oversight of local authority governance, describing it as ‘reactive and ill-informed'.

Committee chair Meg Hillier said: ‘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.

‘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.'

Chief executive officer of the Chartered Institute of Public Finance and Accountancy, Rob Whiteman, said: 'At a time when councils are dealing with fewer resources, governance needs to be strengthened rather than weakened.'

Mr Whiteman's comments are in marked contrast to the views of the Local Government Association, which has previously said that 'with funding from central Government continuing to be reduced, there is an argument for less rather than more oversight from central government'.

An MHCLG spokesman said: 'We are pleased the committee welcomes the Government's commitment to improve oversight of the accountability system for local government.'