Last week, Reading Borough Council’s (RBC) interim finance director Rachel Musson warned of the inadequacy of the council’s reserves and the need to take urgent action to reduce spending in 2018/19 and 2019/20. If steps were not taken by the deadline set, she would be required to issue an ‘s114’ report; a serious process which prevents all but RBC’s finance director from authorising new council commitments. A ‘written recommendation’ from the auditors to the council has been published this week.
This is not just another letter from the council’s auditors Ernst & Young (E&Y), although the friendly ‘dear Simon’ (Simon Warren, RBC interim managing director) and ‘dear Maria’ (Maria Grindley, E&Y executive director) greetings may suggest otherwise.
Local government legislation requires that the ‘written recommendation‘ from an auditor must be considered by a council meeting [ref 1]. It has also been sent to the Secretary of State for Communities and Local Government and the PSAA, the body responsible for appointing the auditors of local authorities.
E&Y’s ‘dear Simon’ and subsequent ‘dear Maria’ letters have been appended to the end of the 2017-20 budget report which will be discussed at the full council meeting on 21 February. The budget report itself was briefly discussed by Policy Committee on 13 February and approved for consideration by Council.
In their letter, the auditors set out urgent recommendations for the council.
The auditor’s recommendations
The auditors issued an adverse ‘value for money’ opinion in their report for the year ended 31 March 2016. This was not issued until 17 November 2016 because of delays during the course of the audit. Planning for the current year’s (2016/17) audit has allowed E&Y to consider if sufficient progress has been made in the areas they highlighted as problems during the previous year.
Dear Simon, dated 2 February 2017
The letter states (our emphasis in bold):
We need to see improvement against all the areas we raised in our December audit results report, however more importantly the Council’s current financial position needs more immediate attention.
Urgent action is needed in three areas:
- sustainable resource deployment,
- maintaining a sound system of internal control,
- children’s services.
Sustainable resource deployment
The eight recommendations made about sustainable resource deployment include recommendation 2:
The unfunded savings required to balance the 2017/18 budget (£1.6m) must be identified before the budget is approved on 21 February 2017.
This recommendation is now out of date as the budget gap has been closed by using reserves. However, as set out in the budget report [para 5.4], RBC’s chief finance officer considers that level of reserves is now inadequate.
Further recommendations in this section relate to the identification of and monitoring of the achievement of savings.
Maintaining a sound system of internal control
Reading Borough Council is still not up to date with its bank and other reconciliations which is fundamental to a sound system of internal control. At the time of completion of the 2015/16 audit, E&Y stated that there was a £35k unreconciled difference.
The Head of Finance has been advised that officers have been able to reconcile all transactions that went through the bank account in November and December with the Council’s own financial records, and officers have subsequently been working through earlier months, in order to identify the unreconciled immaterial historic difference that it would be uneconomic to pursue earlier than the transfer to Lloyds.
Ofsted, the goverment office for education standards, issued a report on Reading children’s services in August 2016 that included four recommendations requiring the council’s financial position to be sustainable. E&Y state the obvious; these recommendations can only be implemented if resources are allocated.
Reading Borough Council’s response
Dear Maria, dated 13 February 2017
RBC’s interim managing director Simon Warren replied to the E&Y recommendations and said that some of the figures quoted in their letter had been updated in the budget report going to the Council meeting on 21 February.
Most recommendations were agreed, but two were ‘partly agreed’ or ‘agreed in principle’.
Sustainable resource deployment
E&Y’s recommendation 5 was:
Savings included in the 2017/18 budget must be fully supported by detailed savings plans that are profiled across the financial year. One off, non-recurrent, solutions should be avoided.
The management response to this comment is ‘partly agreed’ and the detailed response states:
… the level of detail of savings plans does vary, as does the use of profiling of budgets. Regarding one off solutions, it is agreed that these should be avoided wherever possible (though in the short term as indicated above that is not possible).
Future improvements in these processes are promised, however the Whitley Pump considers that the above statements about detail and profiling are concerning as they indicate that the current system of budget management and planning is deficient.
E&Y recommendation 8 stated:
Regular reports on savings achieved against profile should be produced to enable trends to be identified.
This is only ‘agreed in principle’ by management in the mystifying response (our emphasis in bold):
When budget savings are agreed at Council/Policy Committee, they are incorporated in budgets (as well as savings to be delivered being captured in the processes outlined above) (assumption: this is the process of review by directors, corporate management team and lead members explained under recommendation 5). We will strengthen this process to ensure that budget monitoring and RAG [ref 2] savings reviews are consistently reporting the same information.
Maintaining a sound system of internal control
The interim managing director responded that a deadline of 31 March 2017 had been set for the bank account reconciliation to be brought up to date and completed on a monthly basis with brought forward unreconciled items cleared.
In relation to this area of uncertainty, the responses set out that additional resources have been allocated for 2017/18, and goes on to promise more improvements (our emphasis in bold):
It is expected that children’s services will need to redesign services to ensure maximum efficiency, with which corporate support will assist and therefore we would expect the required resources from 2018/19 to reduce so we become more aligned to statistical neighbours [ref 3]. However further work is required to achieve this through the Change Programme which is due to launch in March 2017.
The heralded ‘change programme’ suggests a continuing unsettled period ahead.
And finally, more costs
The sting in the tail from the auditors is they can charge for producing these recommendations, so more money will be flowing out of RBC’s coffers. The relevant legislation states (our emphasis in bold):
(4) A local auditor may recover from a relevant authority—
(a) the reasonable costs of determining whether to make a recommendation relating to the authority or an entity connected with it, and
(b) the reasonable costs of making a recommendation relating to the authority or an entity connected with it.
(5) Sub-paragraph (4)(a) applies regardless of whether the recommendation is in fact made.
- Section 24 Schedule 7(2) of the Local Audit and Accountability Act 2014
- ‘RAG’ = Red, Amber, Green. Savings are classified according to a traffic light system where Red is at risk of not being achieved.
- ‘Statistical neighbours’ is a methodology developed by the Chartered Institute of Public Finance and Accountancy (CIPFA) for comparative and benchmarking exercises between local authorities. See Value for Money Profiles on the Public Sector Audit Appointments (PSAA) website.
- 2017-20 Budget Report for Council meeting 21 February 2017
- Alarm bells are ringing for Council Finances
- Department for Communities and Local Government
- Auditors finally deliver report on council finances
- Audit and Governance Committee 17 November 2016 – papers
- Audit Results Report
- Audit & Governance committee 26 January 2017