Report of: the internal auditor BDO.

Purpose of report: to inform the Committee on progress against the 2020/21 audit plan; the assessments of systems reviewed in this quarter; and the Local Government Sector update.

Recommendation: to discuss and note the report.

The Committee considered a report setting out progress against the 2020/21 audit plan; the assessments of systems reviewed in this quarter; and the Local Government Sector update. Greg Rubins (BDO internal auditor) introduced the report and he, Nigel Kennedy (Head of Financial Services), and Anita Bradley (Head of Law and Governance) answered questions.

The Committee considered the sector update and also noted the Redmond report into the effectiveness of external audit and transparency of financial reporting in local authorities published on 8 September.

1.    In considering the update, the Committee asked about the recent report reviewing governance at Nottingham City Council following the collapse of its wholly owned energy company. The report concluded that the council didn’t grasp the warning signs in the energy markets that may have led it to sell the company earlier as a going concern. The governance and challenge by the council, and communications between different sections, were not sufficiently robust.

2.    The Committee also asked about the similar review of Croydon Borough Council following financial problems within their wholly-owned company.  A public interest report had been issued. This noted previous concerns about the soundness and sustainability of their budgets; auditors’ recommendations were not implemented; there was a collective blindness to the growing problems where senior councillors were not focused on the key issues; and a lack of understanding of the interplay between the company’s and the council’s finances.

3.    The Committee noted that a senior officers had considered a report on key lessons.

4.    The Committee noted that the financial pressures arising from Covid meant that the 2021/22 budget would draw strongly on reserves.

5.    The Committee considered whether a special capitalisation (to charge revenue losses arising from COVID 19 to capital in order to finance these losses over a longer period of time) would release revenue funding  to support much needed services, but noted it was unlikely that the council would get government’s approval for this. This is likely to be reserved for councils in very serious financial straits and the council would be expected to use its available revenue reserves and cut services before seeking a special capitalisation.

6.    The Committee noted the challenge around keeping adequate reserves against risk of large changes in income: large reserves only last a short time in face of large budget pressures.

7.    The Committee noted officers’ advice that it had a key role in taking an overview and understanding of the finances, functions and governance of the companies as they related to the council’s finances; in examining the effectiveness of the interactions between councillors, shareholders, officers, and company staff; and to challenge and test both information and gaps.

The Committee:

1.    Recommended offering training on the councils’ finances including the interaction with its companies, budget setting and monitoring to allow councillors to understand the financial complexities, companies’ relationship to, and the ambitions of the council.

2.    Asked to consider at the January meeting a briefing paper on the relevant recommendations from the Redmond Review and the lessons for the Committee from the reviews of Nottingham City and Croydon Borough Council.

The Committee noted the report.