The current tough economic conditions and cuts in public expenditure will test to the limit local authorities’ ability to manage their money effectively. Good financial planning will therefore be crucial
Councils are facing a much tighter economic climate, not just this year but for the foreseeable future. Good financial planning will be critical if they are to balance reduced income with more demand for public services.
Councils are responsible for a quarter of all public spending — around £144bn a year, according to latest figures. As such, they are already under pressure to make 3% cashable efficiency savings between 2008 and 2011 to balance their books.
Most financial commentators predict that, by the time of the next Spending Review, there will be less national money available for local services, so resources are likely to be stretched every year for some time to come.
Good medium-term financial strategies, as a framework for evaluating the financial effects of different policy choices, will therefore be more important than ever.
If councils are to provide decision-makers with better information, they will need to understand better both what costs they incur in providing their services and activities and the drivers that influence these costs.
Our report, Summing up, published on April 23, is an overview of councils' progress in developing their financial management arrangements between 2005 and 2008. It draws on a range of data sources, including the commission’s ‘use of resources’ scores, returns from auditors, surveys of senior council officers and a review of annual accounts.
There has been a steady improvement in councils’ use of resources scores over the period. In 2008, over 75% of councils were performing consistently at, or well above, minimum requirements (scoring level 3 or 4), compared with less than half in 2005. In 2005, only eight councils (2%) assessed were performing strongly (level 4), but by 2008 this number had increased to 46 (12%).
Overall rates of improvement were similar across the different types of councils, but single tier and county councils were generally given higher scores than district councils. This isn’t explained by their smaller size. There was no relationship between scale and performance within any of the different types of council. So the relatively smaller capacity of districts should not have prevented them improving their performance and achieving higher scores.
Rates of improvement also varied. The biggest improvement has been in internal control, where almost three-quarters of councils were performing well or strongly in 2008 compared with only a quarter in 2008. This might reflect adoption of the strengthened guidance set out in the framework on corporate governance from CIPFA and the Society of Local Authority Chief Executives and Senior Managers. There was also significant improvement in financial management and financial standing.
Progress on financial reporting is slower. In 2005, half of councils performed consistently or well above minimum requirements and this had increased to almost two-thirds in 2008. But one in ten councils was still performing below requirements.
Over the period, the deadline for producing accounts had been brought forward significantly and councils had been grappling with complex accounting requirements. But this was a common challenge across the public sector, so the lack of improvement was disappointing.
Accounts presented for audit too often contained significant and material errors that required adjustments. In 2008, poor quality accounts were highlighted as a particular weakness in 29% of councils. Between 2007 and 2008, the percentage of auditors reporting non-compliance with the Statement of Recommended Practice from CIPFA and the Local Authorities (Scotland) Accounts Advisory Committee increased from 30% to 42%. Material audit adjustments to the accounts were required at half of councils in 2008, the same level as in 2007. In the poorer performing councils, there were also examples of poor basic planning and management.
The introduction of International Financial Reporting Standards from 2010/11 will place even more of a premium on financial reporting processes, so councils must tackle the quality and timeliness of final accounts preparation.
There is currently no comparative database of local authority accounts. In preparing its report, the commission has undertaken a review of the accounts published by single tier and county councils on their websites.
Summing up includes an analysis of aspects of those accounts, using standard accounting ratios. A web tool containing the ratios for individual councils and enabling them to compare their performance with that of others will be published on the commission’s website. The commission would welcome feedback on the usefulness of this exercise.
Underpinning all of this will be the continuing need for effective financial reporting to decision-makers and external accountability to the public through published annual accounts and reports.
Martin Evans is managing director, audit, at the Audit Commission
