The government does not have sufficient oversight over struggling local authority finances, even though a perfect storm of factors means the risk of financial failure is rising, a report published today by the Public Accounts Committee warns. 

The public spending watchdog’s report on the Whole of Government Accounts (WGA) 2022-23 warns that government’s ability to effectively monitor financial pressure within local authorities has been undermined, at a time when some councils are already in poor financial health.

For the first time ever, the National Audit Office was unable to sign off government’s accounts for 2022-23 due to a number of reasons, including the local audit crisis: only 10% of 426 English local authorities submitted reliable data for the year, with 187 failing to submit any data at all. 

Lack of transparency

The PAC is concerned that the Ministry of Housing, Communities and Local Government (MHCLG) will not be able to foresee issues in local government finance and intervene where appropriate. A lack of financial transparency for local authorities coincides with ageing populations, higher demand on social care and lower council incomes. 

The overall impact of the missing data is estimated as net income being overstated in the WGA by £34.4bn, and net debt overstated by £31.7bn. 

Although the government told the PAC’s inquiry that there are other ways to check a council’s financial health, including informal conversations, other forms of published data, and auditors’ duty to issue reports on significant public interest matters, Barnet Council declared unlawful pensions spending in 2020, which only came to light in 2024. MHCLG was unaware of the issue before the council declared it. 

Plan of action

The PAC is calling on government to set out within six months how it will reduce the levels of missing data within the WGA in future years, noting uncertainties around current plans to try to fix the crisis in local authority audit arrangements. Government brought into law last year a series of backstop deadlines by which English council accounts must be completed, while committing to establish a Local Audit Office (LAO). 

It is not clear how the deadlines will be enforced, or what consequences there will be for councils that fail to meet them. The PAC’s report also warns of a lack of clarity over how the LAO will deliver its remit, in the context of existing issues with audit firms having limited capacity to do the work required.

Sir Geoffrey Clifton-Brown, Chair of the Public Accounts Committee, said owing to its missing data, the WGA highlighted the miserable state of local audit. “The government told our inquiry that it is confident it still has oversight of the local government finance landscape even without fully audited accounts, from the informal conversations it holds with councils and other sources. But the UK faces extreme uncertainty, both in the domestic fiscal situation and the foreign geopolitical situation. 

“To tackle this uncertainty with confidence, it becomes all the more important for the government to act to bring the WGA fully up to date as a basis for accurate and sound decision-making as soon as possible.” 

ICAEW written evidence

In its written evidence to the PAC’s enquiry, ICAEW warned that it supported the backstop process as a ‘least worst’ option to resetting the local audit system, but underlying fundamental issues still needed to be addressed. These include resolving the issues identified by the 2020 Redmond Review that recommended improving the oversight of local audit and the transparency of local authority financial reporting by addressing capacity issues in the local audit market and the ‘impenetrable’ nature of local authority financial statements.

ICAEW also suggested that incorporating draft numbers for local authorities would be far better than their omission. “The potential inaccuracy of incorporating numbers lacking audit assurance is several degrees of magnitude less significant than the definite inaccuracy caused by excluding them completely,” ICAEW said in its written evidence.

Alison Ring, ICAEW’s Director, Public Sector & Taxation, says: “The reduction in time taken to publish the Whole of Government Accounts is positive, but more than a year and a half is still much too long. The accounts are still not being used as effectively as they could be and the lack of data from some local authorities is disappointing.

“WGA are a vital tool for accountability to Parliament and to the public and for informing strategic decision-making by government. Despite the delays and other challenges, the publication of WGA each year has significantly improved the transparency of the public sector finances.”