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Index opposition should not end independent scrutiny debate

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LGC’s essential daily briefing.

When Chartered Institute of Public Finance & Accountancy chief executive Rob Whiteman said “the status quo is not an option” it was a sentiment many in local government would have struggled to disagree with.

As austerity’s bite sinks deeper, the absence of the reassurance that could be provided by thorough, independent external reviews of council finances, such as those previously carried out by the Audit Commission, has added, for some at least, to a general sense of risk, uncertainty, and trepidation.

This is compounded by a number of factors, including a continued squeeze on external auditor fees which has led to fewer resources being allocated by firms during accelerated timescales for closing accounts.

Management structures have also been stripped back or dismantled, finance and internal audit teams reduced, and governance arrangements ‘streamlined’ in the name of efficiency.

These factors contribute to a sense that if local government is not yet quite engulfed by a perfect storm, it is in the midst of an eerie stillness before dark clouds form and lightning strikes again.

While the Ministry of Housing, Communities & Local Government insist there is no immediate risk of another council following Northamptonshire into financial meltdown, many in the sector may be surprised ministers can be so sure.

Cipfa’s proposed resilience index is an admirable attempt to provide an early warning of what many believe is inevitable in the not-too-distant future. Mr Whiteman’s challenge to the status quo is a bold and necessary bid to focus minds and provide support in troubled times.

One of the criticisms of the index, though, is that there is no focus on governance - regarded by many as a crucial factor in creating and maintaining financial resilience, and a key failing in Northamptonshire.

As one finance director told LGC, a council can go from being very healthy financially to being very unhealthy just because councillors do not go through a proper governance process to set a budget. Also, bogus budget savings can also be built in to plans to simply get through an election period, or accounts can be “topped up” and auditors fail to react.

These behaviours might not be common but they have happened and could happen again, with potentially devastating consequences.

Cipfa has said it will always have a collaborative approach so work is likely to be done to build in qualitative evidence around governance to compliment the quantitative.

There will no doubt be more suggestions about how Cipfa’s index can be improved. One finance director told LGC a “simple acid test” could be introduced by setting a target for councils to maintain a minimum proportion of annual turnover to be attributed to unearmarked reserves – the general fund balance. This is because the balance enables a cushion to “resist unforeseen events, slippage in plans and to provide a platform for recovery”.

The concern over a league table is understandable, with the potential for reputational damage and fears that it will create a false sense of security for councils at the top and discord for those at the bottom when harmony is most needed.

However, the debate the index has sparked is an important one and opposition to the proposed methodology should not end discussions on the benefits to local government of objective, independent scrutiny.

Jon Bunn, senior reporter

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