Financial collapses and major stresses in local government finances have led the government to undertake a major rewrite of the applicable statutory guidance, in effect establishing a corporate governance code for local authorities in England.

ICAEW has formally responded to welcome the proposed new guidance, while also making some recommendations for improvements.

The government is introducing the new guidance in response to a series of high-profile collapses of local authorities in England in which governance failures were identified as a common feature, as well as an increasing number of local authorities reporting that they are in financial difficulty or at risk of being so.

Local authorities in Thurrock, Woking and Croydon are together estimated to have lost local and national taxpayers in excess of £1bn, with their communities adversely affected by significant cuts to local public services and higher council tax bills. Central government has also stepped in to provide additional funding and loans, some of which are unlikely ever to be repaid.

The proposed guidance technically relates to the ‘best value duty’, a legal obligation placed on specified public sector bodies, including local authorities, to have arrangements in place to secure continual improvement in how they carry out their work. Relevant public bodies are required to have regard to any statutory guidance issued by the government in deciding how they comply with this duty.

As the proposed guidance acknowledges, meeting the best value duty will only be possible if councils have adequate governance arrangements in place. It goes on to set out a series of characteristics of well-functioning authorities, as well as indicators of potential failure, covering continuous improvement, leadership, governance arrangements, culture, use of resources, service delivery, and partnerships and community engagement.

Accountability is not accidental

ICAEW has suggested a need for accountability events. These should include a formal presentation on financial performance and position each year by leaders and officers to councillors within the four months of the end of the financial year, and proper consideration and adoption by full council of the annual financial report once the external audit is completed. The latter should cover the financial statements and accompanying narrative reports on financial performance and position, audit reports, and statements on governance arrangements; regard for the statutory guidance on best value duty; and responsibilities for the preparation of the financial statements and internal financial control.

ICAEW has recommended a ‘comply or explain’ approach when local authorities report on how they have had regard to the guidance. This would provide clarity on how local authorities have set about applying the guidance, where they have chosen to diverge, and where they have been unable to comply.

A feature of recent failures has been inadequate accountability, with councillors not being properly equipped to hold leaders and officers to account for unwise debt-leveraged investment strategies, poor individual financial decisions, and inadequate governance arrangements. In most cases councillors were not fully aware or did not fully understand the scale of the risks that were being assumed and the consequent financial implications for their local communities. ICAEW’s response stresses that councillors need sufficient training, information and support to undertake this role.

ICAEW has separately submitted evidence to the House of Commons Levelling Up, Housing and Communities Select Committee on how local authority financial statements must be understandable if they are to provide the information councillors need to hold their local authorities to account and to be used effectively in governance and risk management processes.

Good governance is critical

The proposed guidance stresses the importance of good governance and strong financial management, providing a useful framework for local authorities in how they set about ensuring they have appropriate governance arrangements in place.

However, the proposed guidance does not make it clear that performance management should include monitoring and management of the balance sheet and financial risks, a feature that was missing in recent local authority failures that saw debt-leveraged investments significantly increase balance sheet risk.

ICAEW’s response also highlights the role that internal audit can play in assuring governance arrangements are in place, while noting that local councillor codes of conduct will need to be updated to reflect the new guidance.

The role of the audit committee is extremely important to an effective system of governance, and ICAEW calls for the government to legislate, as promised, to require independent members of local authority audit committees.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, comments:

“We are very pleased that the government has recognised the need for a corporate governance code for local government in the form of new statutory guidance on the best value duty. This is particularly welcome in the light of recent financial collapses at Thurrock, Woking and Croydon that together have cost local and national taxpayers in excess of £1bn, as well as increasing levels of financial stress on local authorities across England.

“We believe that accountability does not happen by accident. There is a need for regular accountability events covering financial performance and the annual financial report as well as budgets, for a ‘comply or explain’ approach to reporting on how the best value duty guidance has been implemented, and for councillors to be properly equipped with the training, information and support they need to hold leaders and officers to account.

“Good governance is essential if local authorities in the UK are to ensure they obtain value for the more than £200bn of public money they spend each year on our behalf.”

Read our response to the consultation here.