Local audit crisis deepens after council bankruptcy warning

Urgent reforms are needed for local authority audits as Leicester City Council faces financial turmoil, risking bankruptcy.

Photo of Leicester Town Hall by Risto Arnaudov

Leicester City Council recently warned it is "rapidly running out of options" to cut costs. Bankruptcy could become inevitable next year.

At the same time, the local audit – a crucial opportunity to scrutinise council finances and decision-making – is in a terrible state. 

The local audit is an annual check on council finances by an external, independent auditor to determine whether they comply with the law.

Each year, councils are supposed to publish a version of their accounts that has been audited. This is important because auditors may raise issues with the local authority's finances. 

Leicester City Council has yet to audit their accounts for 2022-23. The deadline for audited accounts was 30 September, and they are still in the draft stage. Recently, it has become rare for this to be done on time.

Earlier this year, the council said: "The Accounts and Audit Regulations 2015 require the council to publish its audited accounts and opinion by 30 September 2023. The audit of the draft statement of accounts for the year ended 31 March 2023 for the council has not yet been completed by the external auditors, Grant Thornton UK LLP.

"The delay has arisen due to a variety of issues, including ongoing work in relation to the valuation of assets held at depreciated replacement cost in the council's balance sheet.

"This has been reported to the Governance and Audit Committee on 27 September 2023 and the council is continuing to work closely with the audit team to complete this work.

"Once the audit is concluded and the auditor issues their final findings report, the council will then publish a final set of accounts as soon as reasonably practicable".

Residents have the right to scrutinise their council's spending under the 2014 Local Audit and Accountability Act by inspecting accounts and any related documents, asking questions to the council's external auditor and objecting to expenditure that is unlawful or not in the public interest. 

When objecting, a resident can request that the auditor issue a public interest report, which the council will have to discuss and publish or refer the issue to the high court to define its lawfulness. 

The Audit Commission, an independent body with oversight for local audits, was abolished by the 2014 Local Audit and Accountability Act. A privatised auditing system has since been introduced. Since the Audit Commission was abolished, the number of local audits completed on time has plummeted.

Research For Action reports serious accountability gaps under the new system, a significant role by private auditors in disempowering residents, and a concerning lack of accountability by local authorities. 

According to a 2023 report into the timeliness of local auditor reporting by the House of Commons Committee of Public Accounts:

"Delays to local audit reduce transparency over approximately £100 billion of local government spending for local taxpayers and their elected representatives, and impact on other areas of government spending, such as the NHS and central government. Delays also increase the risk of significant issues going undetected and unreported until too late".

The report also states: "There are no consequences for local government bodies or local auditors failing to deliver audited accounts on time".

In May, the Levelling Up, Housing and Communities (LUHC) Committee launched an inquiry into local audits. The report expresses an urgent need for consistent wholesale reform in how local authority audits are carried out and delivered. 

Financial woes at Leicester City Council

Earlier this month, City Mayor Sir Peter Soulsby wrote to the government to explain Leicester City Council's worsening financial situation.

Across England, the levels of funding from government grants to local councils fell by 40% in real terms, taking into account inflation, between 2010 and 2020. 

Overall, councils' spending power was reduced by 17.5% in this period despite local councils steadily increasing council tax levels, including in Leicester, where people saw their council tax bill increase by 3%.

While there was a temporary local government funding boost to help councils through the pandemic, the inflation crisis has worsened this crisis.

Last month, the Local Government Association (LGA) said that councils in England face a funding gap of £4 billion over the next two years if the government does not intervene. 

Despite the LGA sounding the alarm, this year's Autumn Statement did not announce significant new funding for local councils.

As well as rising costs due to inflation and cuts to funding, there are common trends around what is putting further strain on council spending. Adult social care and children's services are among Leicester City Council's biggest expenditures, with adult social care set to cost an additional £14 million between 2023-24.

Amid this crisis, a well-functioning system of scrutinising the finances of local councils could not be more needed.

Seeking solutions to the local audit crisis

For years, there have been various reports on how local audits are broken and need reforming. 

The Audit, Reporting and Governance Authority was first proposed as a new regulator in 2019 before detailed proposals were published in 2021. But this is yet to happen, and despite a cross-party group of MPs urging Prime Minister Rishi Sunak to stop delaying the much-needed reforms to local audits, there was no mention of these in the recent King's Speech. 

In a set of recommendations, campaigners are now calling for legislative reforms that expand the remit of local audits, improve regulation and oversight, and amend the Freedom of Information Act 2000 – which could let people request information from private companies delivering public contracts.

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