Birmingham city council’s bankruptcy highlights the worrying state of local government finances
Since the collapse of Carillion in 2018, I put the running tally on efforts to improve UK audit at two reviews, one competition inquiry and a white paper, totalling some 700 pages.
This list, however, is incomplete. Mea culpa. It did not include the 2020 review by Sir Tony Redmond of local government audit, another 85 pages examining perhaps the biggest mess of all.
The figures defy belief, even given a pandemic. In the 2020-21 year, just 9 per cent of England’s local authorities managed to get an audit opinion on their accounts by the September deadline.
The following year, and with an extended deadline, only 12 per cent of audits were finalised, a figure that minister Lee Rowley said in July had reached 27 per cent, leaving a backlog of 520 sets of accounts stretching back to 2015-16.
This market failure, which has been worsening for five years, eliminates a vital check and warning system on the £100bn that local authorities spend each year.
This would be bad at the best of times, which these aren’t. Woking went into emergency financial measures in June after loading up on debt to invest in commercial property. It followed Croydon and Thurrock, which last year issued so-called section 114 notices that block non-essential spending, after risky investments and poor governance.
The financial health of England’s local authorities is increasingly dire. Birmingham city council issued its own section 114 this week, plunging the country’s largest authority into emergency measures that tend to mean in-year cuts and steep rises in council tax.
Cuts to central government grants, inflation, high energy costs and rising demand for services such as adult social care and homelessness support are biting in many parts of the country.
Sigoma, a grouping of 47 large urban authorities, last month warned a third of its membership could declare effective bankruptcy this financial year or next. The Local Government Association estimates that English councils face a funding gap of £3bn over the next two years just to maintain services.
To some extent, this is all interlinked. As central government funding has dropped, some councils sought more commercial opportunities or took more risk, increasing the complexity of their accounts. To preserve front-line services, finance departments may also have suffered cuts, slowing account preparation.
Then there is a shortage of capacity in local government audit: after local government accounts started being entirely audited by private accountancy firms from 2015, downward pressure on fees discouraged new entrants and investment.
The public accounts committee said there were fewer than 100 “key” audit partners — auditors sufficiently senior to sign off local authority accounts — most of whom are over 50. The body that procures public sector auditing services struggled to find the capacity needed in its last round, with big firms such as BDO and Deloitte opting not to participate while KPMG re-entered the market.
The government is trying to clear the logjam. But the solution is unpalatable. It said in July that local authorities and auditors must finalise overdue accounts by next September but will be given a pass on their quality: regulator the Financial Reporting Council will drop its audit inspections up to the 2021-22 year. It will inspect only where there is a clear “public interest”, presumably the most extreme cases.
There remains some doubt that this will translate into lasting improvements.
Despite the blizzard of reports and urgent recommendations after Carillion’s demise, much-needed audit reforms seem likely to be shelved again.
The FRC is still awaiting the legislation that will hand it more powers, as the Audit, Reporting and Governance Authority (Arga). The government, rather than creating a new body as suggested by Redmond, in 2020 proposed making Arga the “system leader” for local audit, coordinating a fragmented and troubled market. Given Arga’s non-existence, the FRC is becoming “shadow system leader” but without the full range of powers required. In fact, it is still awaiting its shadow remit from the government.
The result appears to be an ad hoc regulatory set up, trying to right a failing audit market, overseeing strained local government finances, attempting to deliver some absolutely crucial services. A mess indeed.
