The financial pressures facing many councils are driving “escalating rates” of significant weaknesses in council arrangements for financial sustainability, financial governance and internal controls, warns a report by Grant Thornton.

The report, Lessons from recent auditor’s annual reports, reviewed 92 auditors’ annual reports (AAR) produced by Grant Thornton in 2022/23 for local government audited bodies, representing approximately 30% of councils in England. 

An AAR is an annual report relating to value for money work completed by the council’s auditor and provides three types of recommendations – statutory, key and improvement. 

A statutory recommendation relates to a significant weakness and requires a written published response from a council. A key recommendation relates to a significant weakness, but doesn’t require a written response. Meanwhile, an improvement recommendation refers to something that should improve the arrangements in place at a council, but is not a result of an identified significant weakness.

While only six statutory recommendations were raised across the reports Grant Thornton reviewed, 120 key recommendations and a notable 600 improvement recommendations were made. More concerningly, there has been a remarkable increase in the number of key recommendations issued in 2022/23, more than double the 55 issued in 2021/22. 

Alarmingly, there has been a vast 258% increase in key recommendations relating specifically to weaknesses in arrangements for financial sustainability – from 12 in 2021/22 to 43 in 2022/23.

However, the report comes against a backdrop of substantial financial pressures and gaps in financial reporting and accountability across local government; seven councils have issued s114 bankruptcy notices since 2020, and the local audit backlog is forecast to reach 1,000 by the end of September 2024. 

Financial sustainability

These financial pressures at local authorities are undoubtedly hindering performance, with Grant Thornton forecasting that the sector-wide gap between expenditure and income could reach £3bn by 2028/29. The increase in key recommendations issued in 2022/23 relating to significant weaknesses in arrangements for financial sustainability is, therefore, not surprising.

Ensuring sufficient arrangements are in place to manage financial sustainability can help to reduce such pressures. The report notes, however, that “councils that were slow to react to rising costs and to develop effective savings plans had to draw heavily on their reserves in 2022/23”, as well as highlighting that even those with plans “often struggled to deliver the planned savings”.

In the current financial situation, developing detailed, realistic and achievable savings and transformation plans at an early stage is therefore essential. However, councils need to remain relentless in managing their medium-term finances, Grant Thornton warns, as relying on plans alone will not necessarily alleviate financial pressures.

Governance and improving efficiency, economy and effectiveness

Of the six statutory recommendations issued to councils, four related to poor financial governance, with the recommendations being made due to “accounts not being prepared because of weak underlying finance systems”,’ there being a “lack of appropriate capacity and skills” and “weaknesses in financial planning and monitoring arrangements” being identified.

Recruitment and staffing numbers were also cited as a key issue for councils. Most key recommendations related to falling standards of internal control or data security, often being linked to headcount reductions, vacant posts and a reliance on temporary staff. The report highlights the case of one council, which had a vacancy rate of up to 30% for the finance function despite employing 500 employees – more than is typical for a similar-sized organisation.

The impacts of these issues on council performance are paramount – with Grant Thornton highlighting that such weaknesses “impact on substantive service standards achieved as well as the governance over those standards”. 

Jack Bower, ICAEW Public Sector Audit and Assurance Manager, comments: “It is concerning that rates of significant weaknesses across councils’ arrangements for financial sustainability and governance have escalated significantly in 2022/23. 

“Such fragilities have a detrimental impact on the local communities the councils serve, with the report noting examples of reduced service standards across children’s services and homecare arrangements as a result. Councils must therefore ensure that they address these recommendations in a timely manner and not allow these issues to escalate further.”