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The importance of good governance

In the current financial climate, maintaining good governance has never been more important. Guy Clifton, Paul Dossett, and Sarah Ironmonger explain why local authorities need to respond to trends in auditor interventions. 

In recent years we have seen an increase in external auditors using their statutory powers, such as Public Interest Reports and statutory recommendations, to highlight significant weaknesses in governance arrangements.

These interventions have identified several key themes, each with lessons to be learned for local authorities.

Leadership and culture

The importance of effective leadership, including setting the right organisational culture, from those navigating a course through new and ongoing challenges is critical. 

Recent auditor interventions have identified intimidation, failure to adequately support whistleblowers, circumventing governance procedures, poor quality review of, or secrecy surrounding, major decisions.

A culture of transparency should be prioritised, where staff are actively encouraged to flag concerns. Those providing scrutiny should ensure they have received appropriate and independent training to enable scrutiny and audit committees to effectively consider key decisions.

Ineffective relationships between those in leadership roles

Deteriorating senior officer and member relationships over a number of years has been a theme in the latest tranche of auditor interventions. In some councils, a significant amount of time and resources have been spent responding to internal allegations and complaints. The cost of legal advice alone at one council has been in excess of £1m.

In some cases, this has involved a failure to involve elected members in good time, occasions when members have used Freedom of Information requests to obtain information to which they were already entitled. In other cases, statutory officers have tried to stand up for what was right which has resulted in a breakdown of relationships between members and officers. In a number of cases, there have been unlawful or ill-advised payments to former Chief Executives.

Senior leadership, both officers and members, must demonstrate that they can continue to work together effectively, that they operate in line with their council’s values, codes, policies and procedures, and that there is a zero-tolerance approach to inappropriate behaviours.

Financial capacity and capability

Many council finance departments suffered from underinvestment, as back-office services were impacted during austerity, with councils attempting to protect front line services. This has impacted on skills and capacity and there are now significant weaknesses in succession planning. At some councils there has been a prevalence of interim and acting up arrangements in senior finance officer roles and this has resulted in capacity challenges for many finance teams, alongside confusion over key roles and responsibilities.

Impacts can include late and poor-quality financial statements, a lack of an effective medium-term financial planning, and in some cases, reserves have been unacceptably run down.

Capacity constraints and training needs within teams should be identified and recruitment to fill key posts prioritized.

Management of risks associated with local authority companies

A decade of austerity led many councils (encouraged by the Localism Act 2011) to alter their risk appetite to become more innovative and seek to generate additional sources of commercial income, including via the creation of arm’s length council companies.

The accounting implications of financial transactions between a council and its companies can represent are often poorly understood by key council decision makers. Some councils have chosen to continue to fund companies rather than face the reputational damage of winding up a loss-making organisation. Indeed, some have been seen as ‘too big to fail’. This is poor governance.

If entering into complex or large company arrangements, councils should focus on accessing the right financial and legal advice from a suitably qualified and independent party, company directors should have appropriate skills and experience (including understanding Company Act requirements) and Member oversight is essential to protect the council as shareholder.

Local government has responded well to recent challenges, including austerity, Brexit and the COVID-19 pandemic – though challenges around volatility, complexity and uncertainty remain.

Whilst such auditor interventions noted here relate to only a minority of councils, the numbers are increasing, and it is a reminder that things can go wrong anywhere, and the risks are potentially significant.

We believe a governance reset is urgently required.