Local government governance failures provide insights for councils and their audit committees

Grant Thornton last week published a short but useful report on the lessons from recent public interest reports issued by local auditors since August 2020, the first such reports since 2016.

Under the Local Audit and Accountability Act 2014, an external auditor must issue a formal public interest report when it identifies significant matters that it needs to bring to the attention of the public body concerned and the public. These reports are published and local authorities are required to hold a meeting within one month to decide what action to take.

The three recent public interest reports issued by local auditors are:

• Grant Thornton’s public interest report on Nottingham City Council’s governance failures in the establishment and running of Robin Hood Energy, a wholly-owned subsidiary energy company. Intended to provide competition to the major energy companies and reduce fuel poverty in Nottingham, it failed with £34.4m in accumulated losses at 31 March 2019 and net liabilities for the council of £59.6m at 31 March 2020.
• KPMG’s public interest report on Northampton Borough Council’s governance failures in the award and management of a £10.25m loan in 2013 to the town’s football club.
• Grant Thornton’s public interest report on governance failures by the London Borough of Croydon and its deteriorating financial position, including £545m of borrowing in the past 3 years. The report highlights persistent overspends in social care, inappropriate accounting treatments to mask overspending, and a failure to respond adequately to audit recommendations.

These three public interest reports all emphasise significant weaknesses in governance and scrutiny. Grant Thornton believes there are important lessons for all local authorities.

Grant Thorton states that while most councils have appropriate governance arrangements in place in theory, in practice these often do not operate as they should. Culture is particularly important, with Grant Thornton commenting: “In councils where public interest reports were issued, auditors identified aspects of political culture that were not receptive to challenge, scrutiny or different perspectives. This meant that ill-thought-out proposals, personal projects and poor stewardship of public funds were able to go unchecked”.

A key feature of effective governance is a robust, impartial audit committee that provides challenge to both management and the auditors. However, in contrast to central government, the majority of local government audit committee members are elected representatives rather than those selected because of their expertise. Audit committee chairs are often from the ruling political group.

Both the Grant Thornton report and the Redmond Review into the oversight of local audit raised concerns about the partisan nature of some audit committees. The latter highlights that only about 40% of audit committees in local government contain an independent member. ICAEW supports Sir Tony Redmond’s recommendation that all local government audit committees include at least one suitably qualified independent member.

Lack of effective scrutiny and challenge by local authority audit committees was a common feature in all three councils. Grant Thornton states “it is difficult to identify any outcomes from scrutiny that changed the approach or the path to the public interest reports”. 

For example, Nottingham City Council’s audit committee had concerns about Robin Hood Energy but did not pursue them. Grant Thornton concluded that “the governance arrangements were overshadowed by the council’s determination that the company should be a success, and this led to institutional blindness within the council as a whole to the escalating risks involved”. A more independent committee might have flagged these concerns more effectively.

In the case of Croydon Council, Grant Thornton raised concerns from 2017-18, made a series of recommendations, and issued an adverse opinion on value for money in October 2019. Their public interest report explicitly criticises Croydon for not acting on their recommendations as this would have put the council in a better position to withstand the financial pressures of COVID-19. 

While council leadership must take primary responsibility for financial mismanagement, Grant Thornton suggests the audit committee did not provide sufficient challenge nor take action to highlight the significance of the issues to the wider council. The committee failed in one of its key responsibilities, which was to ensure that auditor findings and recommendations are acted upon. 

Oliver Simms, Manager, Public Sector Audit and Assurance for ICAEW, commented: “The failures that led to local auditors issuing public interest reports provide lessons for all local authorities on the importance of good governance and strong financial management to ensure councils remain financially viable and secure value for money for taxpayers. It is particularly worrying when significant concerns raised by auditors are not addressed.

“Local authorities face significant financial challenges as they emerge from the COVID-19 pandemic. A better understanding of financial risk, financial sustainability and the need for proper due diligence, combined with an open culture that looks for opportunities to learn, is essential if council leaders, officers, audit committees and councils are to ensure they use their resources effectively.”