Earlier this year we reviewed just under 100 auditors' annual reports (AARs) produced for our local government audit clients for the 2022-23 audit year. AARs are the key annual deliverable relating to our value for money (VfM) audit work, and this sample represents approximately 30% of all councils in England.
In total, the AARs we reviewed identified more than 700 areas for improvement and highlighted significant weaknesses in some councils' financial sustainability arrangements. The reports also showed increased weaknesses in arrangements for financial governance, internal control, performance management, and procurement.
Our report highlights five key areas where local government is facing increased challenges.
Transformation/savings plans
Transformation and savings plans have been a feature of local government for many years, and our VfM work highlighted weaknesses in medium-term financial planning arrangements at some councils.
The years 2022-23 and 2023-24 were a period where inflation and the cost of living crisis had a significant impact on council finances, and some councils were slow to react in developing effective savings plans and had to draw heavily on their reserves during 2022-23. Those councils that did develop plans also often struggled to deliver the planned savings to timescale.
Key lessons identified from these examples are to start planning early, avoid optimism bias, and maintain detailed records of planned and actual savings to allow for effective monitoring.
The Dedicated Schools Grant
Many councils with responsibility for children's services continue to be significantly challenged by demand for education and health care plans, which has made it difficult for them to reduce their Dedicated Schools Grant (DSG) deficit, where this exists.
Many councils facing a DSG deficit are part of the Government's safety valve programme, or delivering better value programme, but continue to face financial sustainability challenges over the medium term. With the current statutory override due to end in 2026, and until such time as the Government confirms that the override will be extended again, councils should budget on the basis that any deficit in DSG operating activity from 2026-27 onwards will impact on the General Fund.
The councils affected are going to have to work more closely with schools' forums and parent groups to manage demand if they are going to protect their general fund reserves over the medium term.
Financial governance and internal control
Four of the six statutory recommendations raised for 2022-23 in our sample of AARs related to poor financial governance, including accounts not being prepared because of weak underlying finance systems or lack of appropriate capacity and skills, along with wider weaknesses in financial planning and monitoring arrangements.
At the same time, the most common single area covered by key recommendations around governance for 2022-23 related to falling standards of internal control and/or falling standards of IT and data security. This was often linked to headcount reductions or vacant posts in key areas of finance, along with a reliance on contractors and lack of corporate memory.
Performance management and procurement
During the Covid-19 pandemic many councils delayed or abridged their operational performance reporting, but some have still not reverted to their pre-pandemic arrangements.
A common observation across the AARs we reviewed was that, without effective performance reporting, councils did not know where to make savings effectively and could not tell what impact the savings they had made were having on service standards.
Key recommendations relating to procurement were also common and typically related to compliance with contract regulations, sufficiency of resources, and the effectiveness of oversight. We made many similar recommendations in our AARs for 2021-22, which we highlighted in a report at the time, and in 2022-23 there was an escalation in the severity of our procurement and contract management recommendations at some councils.
Housing Revenue Account
When considering councils with responsibility for a Housing Revenue Account (HRA) our review identified that delaying capital investment in one year has led to increased need for high-cost emergency repairs and maintenance work at some councils in the following years. This included responding to poor quality housing conditions impacting on the health and safety of its tenants.
With new housing consumer standards being mandated from April, any short-term savings in repairs and maintenance now could lead to very high costs in the future. Similarly, at some councils, savings on rent collection and landlord costs in one year have led to reduced income in another year, impacting on the financial sustainability of the HRA.
Overall, we are seeing a trend of escalating areas of weakness which, if the VfM improvement recommendations are not addressed, could result in more significant challenges for those councils to resolve in the future.
Guy Clifton is director, local government value for money, at Grant Thornton
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