This report explores Section 114 notices as well as common trends and themes around financial management and governance in local authorities
Section 114 notices are the last resort for local authorities in financial trouble. Once rare, there have been several high-profile examples since 2018, with councils of different sizes and located across the country sending out a distress signal over their financial position. Although each situation is unique, there are some common trends and themes around financial management and governance issues, which will be explored in this report. By looking at what went wrong, we can identify preventative actions that will help improve and maintain resilience across the sector.
Over the past few years CIPFA has been engaged by numerous local authorities across the country to help put their organisations on a sounder financial footing. None of these authorities were identical, with differences in funding, culture leadership and geography, but they often shared common issues.
To complement our report on Section 114 notices Lessons learnt, we asked our advisors who have worked in these authorities for their observations, and we have drawn together some practical advice on how to improve resilience and what preventative action needs to take place. What was recognised was that with the current economic precarity in the UK it is vital that councils have the processes, knowledge and controls in place to keep their financial management in the best possible shape.
What we have seen
- The savings process should be effective and engaging, with budget holders actively involved in identifying and delivering savings.
Local authorities need more effective savings programmes. Savings plans can be fictitious – they exist on paper but are not delivered in practice. This is something CIPFA has helped to implement, increasing engagement by getting people more involved and more willing to take responsibility.
Top tip: Savings need to be identified by budget holders, who can then commit to delivering them.
- The risks around commercial activities must be clearly understood, with effective oversight of council-owned companies.
Commercialism is often pursued because local authorities don’t want to cut services or increase fees, so they become more commercial to plug budget gaps. Not enough attention is paid to risks and the complexity of commercial plans. Making money from this type of activity is difficult and even more so in a challenging economic market. Organisations also need to recognise the tightening of regulations such as recent Prudential Code changes reflecting the need to avoid unnecessary risk.
Top tip: Make sure the risks are understood and there is effective oversight.
- Elected members must receive training on financial matters, improving their understanding of complex issues.
Financial understanding among members can be limited – it is often variable and requires effort to improve it. If members are not informed enough to make decisions and challenge effectively, then they are more likely to take easy routes. They need to be engaged and financially literate to understand all aspects of the plans or issues that come before them. If there is no challenge, then they may not recognise how serious the situation is.
Top tip: Ensure that members understand enough about financial matters to realise the seriousness and implications of the decision they are making.
- Governance arrangements should be strengthened and include the ability to speak truth to power.
Governance arrangements are often weak, and frameworks can hamper the ability of statutory officers (the section 151 officer, monitoring officer or CEO) to provide professional challenge. Governance arrangements may need to be more supportive to enable effective debate. Independent input can be useful particularly when considering tough decisions. Politics has been known to override the prudent decision.
Top tip: An independent perspective can sometimes facilitate decision making.
- Internal audit should review the effectiveness of financial rules and processes, and knowledge of and compliance with financial regulations.
Internal oversight can be weak, including internal audit and internal controls. CIPFA’s recent report Internal audit: untapped potential highlights how the internal audit function supports strong governance and financial management, if it is operating to its full capacity and potential. A focus on financial processes can find those areas that need to be improved and ensure the authority is fully compliant with all relevant regulations.
Top tip: Review your financial regulations - use cause and example.
- The quality of financial management should be assessed, particularly for larger organisations.
Where problems have occurred, the organisation often has not maintained good enough financial management across the board. Issues were not identified, or if they were caught, they were not acted on. Good financial management needs to be embedded throughout the organisation and reinforced by a culture that encourages responsibility and transparency. Tools such as the Financial Management Model helps to assess the quality of finance departments.
Top tip: Understand where your financial management strengths and weaknesses are. The CIPFA FM Code is a good place to start.
- Independent assurance on the annual governance statement can ensure it is effective.
Local authorities may face delays in preparing and closing accounts if they are encountering financial difficulties, and therefore there will also be issues in preparing an annual governance statement. Section 25 statements are also likely to be weaker for local authorities in trouble. If the annual governance statement and section 25 report are not robust, this should act as a significant red flag.
Top tip: Challenge the robustness of these documents.
- A financial resilience review may be obtained.
Financial reviews can be a means of understanding the bigger picture. It is often someone new in their role as section 151 officer who will see problems more clearly and may request this type of support.
Top tip: Be very honest with the figures in your financial management review.
While not all these issues may exist at any one time, it is important that they are recognised as serious indicators of possible financial trouble. Dealing with them avoids the more serious and public repercussions that are associated with a Section 114 notice. Once a Section 114 notice is issued, there is a loss of autonomy as legislative processes dominate. A spotlight is shone, and the risk of intervention becomes a reality.
Tools and resources
Financial Resilience Index 2022