More than one-third (35%) of chief internal auditors surveyed by the Chartered Institute of Internal Auditors (Chartered IIA) said that their local authority is likely to face severe financial difficulties in the 2024/25 financial year. This would significantly impact the delivery of essential statutory services.

What is more, one in 10 (11%) predict their council might issue a Section 114 notice and face bankruptcy within the next two years. This would add to the six councils that have declared bankruptcy since 2021.

Even more worrying, 88% of those local authority internal audit functions that responded said they have been unable to complete their internal audit plan for the 2023/24 financial year. The upshot may be that local authorities do not get adequate independent assurance on their major risks.

The Chartered IIA’s report, An Evaluation of the Health of Internal Audit in Local Authorities is based on a survey of 168 Chief Internal Auditors from local authorities across the UK and Northern Ireland, reflecting the views of 44% of all local authority internal audit functions.

The aim of the research is to educate policymakers and increase their understanding of the vital role of internal auditors in local authorities in providing independent and objective assurance.

The Chartered IIA’s next steps are to use the findings of this report to advocate on behalf of the internal audit profession in local government on the importance of their work with relevant UK Government departments, agencies and regulators. Some of these will include His Majesty’s Treasury, the Financial Reporting Council, Office for Local Government and Local Government Association.

Anne Kiem OBE, Chief Executive of the Chartered Institute of Internal Auditors, says: “Our research underscores the potentially colossal financial challenges currently facing local authorities across the country, with many Chief Internal Auditors warning us of severe impacts to the delivery of essential local services.”

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, adds: “This report makes for a rather worrying read, and not just because of the fragile financial position of many local authorities that we already knew about. Much more concerning are the extremely high proportion of internal audit functions unable to complete their internal audit plans for 2023/24 and the under-resourcing of such a critical area at a time when local authorities are under significant financial stress.”

She continues: “Internal audit is an important component of the governance infrastructure of local authorities, checking up on how well they are being managed both operationally and financially, on the effectiveness of governance and risk management processes, and whether internal financial controls are operating as designed.”

Ring adds a word of warning: “Internal auditors must be free to look under rocks and identify where things are going wrong. They should not be afraid to speak out for fear of being fired, as is highlighted by the Chartered IIA report. Audit committees also need to be clear on the purpose and benefits of internal audit, and sufficiently strong to ensure that they can support their internal audit teams in making sure that no areas are off limits.”