CIPFA calls for early warning systems for councils

9 Jul 09
Audit processes for local authorities should include an early warning system that would alert them to an impending financial crisis, according to leading finance officers in Scotland.
By David Scott in Edinburgh

09 July 2009

Audit processes for local authorities should include an early warning system that would alert them to an impending financial crisis, according to leading finance officers in Scotland.

The proposal was put forward by CIPFA in Scotland in a paper submitted to the public finance watchdog, Audit Scotland, which is currently reviewing its Best Value audit scheme. It is similar to one advocated by academics from Granada University in Spain.

The Spanish academics argued that, by using a series of indicators, it would be possible to monitor and measure a council’s financial condition. They would take account of external social and economic factors and ‘sustainability’ – a council’s ability to meet its financial obligations.
The scheme would become part of the risk assessment process used by Audit Scotland. It would also enable the council itself to assess whether it was heading for financial trouble.

The head of CIPFA in Scotland, Angela Scott, told Public Finance: ‘One of the consequences of poor fiscal decision- making is the possibility that a future financial crisis may emerge.

‘The challenge is how to be alerted to that possible crisis and how to gauge its magnitude at any point in time. We think that any risk assessment should feature financial sustainability, which is even more pertinent at this time. We believe that an early alert system should be considered.’

In its submission, CIPFA said the Spanish model distinguished between short-run solvency and budgetary solvency – further sub-divided into flexibility, independence and sustainability.

The outcome was an assessed condition from five possibilities, which ranged from ‘excellent’ to ‘emergency’.

The paper added: ‘We recommend that the Accounts Commission [the body that audits local government in Scotland] review this model with a view to introducing it into the risk assessment.

‘If, however, it is not deemed fit for purpose, then a suitable alternative should be developed for introduction into the risk assessment and self-evaluation process for local authorities and the audit process.

‘This would form part of financial sustainability assessment within the assessment of the use of resources.’

The Spanish academics believe the development of their model in the UK could fill a gap in the creation of a financial alert system and ‘enable users to identify, in a clearer and more objective way, which local authorities are managing their finances poorly’.

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