In its management paper, Getting the Groundwork Right, the commission reports how local authorities should approach the financial management of trading units under best value. The paper highlights the lessons learnt from the final years of CCT when a number of authorities experienced severe difficulties with their Direct Labour Organisations (DLOs) and Direct Service Organisations (DSOs) - in 1997/98 one in eight DLOs and DSOs in England failed to meet their statutory duty to break even, while one in six DLOs and DSOs in Wales failed to do so.
The commission points out that the removal of the statutory accounting and reporting provisions of the CCT legislation could lead to a weakening of financial discipline for trading units. One of the principles - or '4 Cs' - of best value is competitiveness. So it remains important that sound disciplines continue to be maintained and embrace services that were previously outside the scope of CCT. Under best value 55 per cent of authorities expect the number of trading units that they operate to increase. Therefore the maintenance of core financial disciplines and good reporting and monitoring systems is more relevant than ever before.
The main findings of the paper are:
These plans should add real value by addressing resource requirements and activity levels, and providing key performance criteria and budgets on a profiled basis.
- The reliability and timeliness of in-year accounting and performance data is at the core of sound financial arrangements for all services.
Unless a council can be assured about the robustness of core financial and performance data, operational managers may be unable to identify problems and take prompt remedial action. In addition, members and key officers may not be properly aware of problems that can have an adverse impact on corporate financial health. Reporting frameworks that are not underpinned by sound in-year accounting arrangements may give false levels of assurance.
- The finance director has a key role in ensuring the stewardship of a local authority's financial affairs. Finance directors must understand the commercial imperatives that drive trading units but they must not allow themselves to become distanced from the financial management of trading units.
- Financial reporting requires clarity about who receives what and when. Both officers and members need to receive information that highlights problems rather than conveying unnecessary detail. Too much information can be almost as much of a risk as too little.
Andrew Foster, controller of the Audit Commission, said:
'With so much change in local government it is essential that core financial disciplines are maintained for trading units. An active effort will be needed to ensure that reliable financial and performance information is produced. Best value requires a greater focus on in-year accounting, rather than waiting till the year-end for the full financial picture to emerge.
'This paper reinforces the key aspects of financial administration that are so essential to the financial management of trading units under best value.'