"Government flying blind on struggling council finances amid unprecedented local audit crisis" says Public Accounts Committee

The Government does not have sufficient oversight over worsening local authority finances. In its report published today on the Whole of Government Accounts (WGA) 2022-23, the Public Accounts Committee warns that Government's ability to effectively monitor financial pressure within local authorities has been undermined, at a time when some councils are already in poor financial health. 

For the first time ever, the National Audit Office was unable to sign off Government's accounts for 2022-23. This was due to the local audit crisis, whereby only 10% of 426 English local authorities submitted reliable data for the year, with 187 failing to submit at all. The PAC is concerned that the Ministry of Housing, Communities and Local Government (MHCLG) will not be able to foresee issues in local government finance and intervene where appropriate. The report warns of a lack of financial transparency for local authorities, at the same time as they face rising populations, higher demand on social care and lower council incomes.  

The overall impact of the missing data is estimated as net income being overstated in the WGA by £34.4bn, and net debt overstated by £31.7bn. Government told the PAC's inquiry that it is aware of what is going on in the local authority area, and that there are other ways to check a council's financial health, including informal conversations, other forms of published data, and auditors' duty to issue reports on significant public interest matters. However, the PAC's report notes the case of Barnet Council declaring effective bankruptcy following unlawful pensions spending in 2020. This only came to light in 2024, with MHCLG unaware of the issue before the council declared it.  

The PAC is calling on Government to set out within six months how it will reduce the levels of missing data within the WGA in future years, noting uncertainties around current plans to try and fix the crisis in local authority audit arrangements. Government brought into law last year a series of backstop deadlines by which English council accounts must be completed, while committing to establish a Local Audit Office (LAO). It is not clear how the deadlines will be enforced, or what consequences there will be for councils who fail to meet them. The PAC's report also warns of a lack of clarity over how the LAO will deliver its remit, in the context of existing issues with audit firms having limited capacity to do the work required. 

Sir Geoffrey Clifton-Brown, Chair of the Public Accounts Committee, said: “The Whole of Government Accounts should provide an accurate picture of the UK's public finances for Parliament and the wider public. But for the first time in the WGA's history, the National Audit Office has been unable to sign them off. The unreliability of its data hinders transparency for the taxpayer's pound, and it is currently wide of the mark in its assessment of net debt and income by tens of billions of pounds. For accounting purposes, the UK public finances are virtually a closed book when viewed through the WGA. 

“In its missing data, however, the WGA does in its way provide a helpful snapshot - of the miserable state of local audit. The Government told our inquiry that it is confident it still has oversight of the local government finance landscape even without fully audited accounts, from the informal conversations it holds with councils and other sources. But the UK faces extreme uncertainty, both in the domestic fiscal situation and the foreign geopolitical situation. To tackle this uncertainty with confidence, it becomes all the more important for the Government to act to bring the WGA fully up to date as a basis for accurate and sound decision-making as soon as possible.”  

PAC report conclusions and recommendations    

Missing and unaudited data have led to a disclaimed opinion on WGA 2022-23, for the first time in 14 years.  In respect of the most recent WGA, the Comptroller and Auditor General (C&AG) has taken the unprecedented step of disclaiming his audit opinion due to the level of unaudited data used in the accounts and the level of data that is missing. This means that the C&AG has been unable to obtain sufficient, appropriate audit evidence upon which to form an opinion, and that it is possible that the impact is both material and pervasive to the financial statements. Both issues would have individually led to a disclaimed opinion, and it is important that HM Treasury (the Treasury) addresses both with equal urgency. The C&AG first qualified his opinion relating to the inclusion of unaudited data in the 2019-20 WGA, and relating to the volume of missing data in the 2020-21 WGA, with the relevant missing and unaudited bodies being primarily English Local Authorities. In his 2021-22 WGA Report on Accounts he warned that without corrective action his qualification may worsen, as did the previous Public Accounts Committee after its subsequent evidence session. Since then, the volume of both missing and unaudited data has increased, primarily driven by continued issues in the English local authority sector. For 2022-23 only 10% (43) of the 426 English Local Authority accounts are included in the WGA based on audited data, and 187 failed to submit any data at all.  

Recommendation 1: The Treasury should write to the Committee within six months setting out its approach to and progress in reducing the level of missing and unaudited data within the WGA in future years. 

The Treasury and MHCLG have plans to try and fix the crisis in local authority audit arrangements, but it has taken too long to put these plans in place.  The number of missing and unaudited bodies had increased consistently since 2019-20. The Kingman review in 2018 and the Redmond review in 2020 concluded that local authority audit arrangements needed to be rethought and the previous Public Accounts Committee raised concerns several times in recent years about the state of local authority audit arrangements. To address the issue the government legislated on 9 September 2024 to implement a series of statutory deadlines, or backstop dates, by which the audits of English Local Authority accounts must be complete. The first backstop date to complete audits of accounts relating to the 2022-23 financial year was set at 13 December 2024, with a further five dates covering audits up to the 2027-28 financial year.  Furthermore, MHCLG published its strategy for overhauling the local audit system in England in December 2024. This committed to a series of measures to fix the crisis in local audit, including the establishment of a statutory and independent Local Audit Office (LAO) to consolidate fragmented powers and responsibilities into one body to support the sector. It is not clear whether there will be sufficient private sector audit capacity to deliver the remit of the LAO, whether public sector involvement is being considered or how the strategy will address how local authorities should apply international financial reporting and audit standards. Following a previous recommendation of this Committee in 2024, the Treasury is conducting a pilot, due to complete this year, to test an approach to aligning financial year-end dates for academies and further education colleges in order to avoid further qualifications.  

Recommendation 2: Alongside the Treasury Minute response to this report, MHCLG should write to the Committee setting out key dates relating to resolution of the local audit crisis and how the department will achieve these dates, including how the department will ensure that the LAO is able to achieve its objectives.  

a) The Treasury should write to the Committee within three months with an update on its work to align financial year-end dates for academies for WGA purposes. 

We are concerned that MHCLG does not have sufficient oversight of local government to foresee issues and intervene where appropriate. Government's ability to effectively monitor financial pressure within local authorities is inevitably undermined while authorities are not producing audited accounts, or while their accounts are subject to disclaimed or heavily qualified audit opinions. This lack of transparency and assurance over local authority matters is occurring at a time of worsening financial health for some local authorities. It is not clear how the statutory audit backstop will be enforced or what consequences there will be for local authorities who fail to have their accounts audited by the backstop date.  

Recommendation 3:  

a) Alongside the Treasury Minute response to this report, MHCLG should write to the committee explaining its approach to identifying local authorities that are under financial pressure and submit their latest risk assessment analysis.  

b) MHCLG should also, within six months, set out the consequences for local authorities failing to meet the backstop deadline. 

The Treasury has made some improvements to the accessibility of WGA and the information it contains, but there is still more work to do. We recognise the efforts the Treasury has made to make the WGA more accessible. These measures include additional disclosure within the annual report, a new accounting spotlight section that addresses key areas such as consolidation, new accounting standards and discount rates, alongside teach-in sessions delivered as part of the new MP induction programme. However, there is still work to be done to improve the structure of the WGA to allow readers to find information more easily. It remains difficult to find all relevant information within the WGA on a single topic such as pensions liabilities, as this is spread across multiple notes to the accounts. Consideration should be given to better consolidation of individual subjects.  

Recommendation 4:  

a) The Treasury should continue to improve the accessibility of the WGA and consider producing a ‘pocket handbook' or similar to help people understand and navigate the document.  

b) The Treasury should also set out its plans for digitisation of the accounts and how this will achieve greater accessibility. 

The impact of discount rate changes is obscuring the ability to identify meaningful trends in large public sector financial liabilities within the WGA. The discount rate is the rate of return used to discount future cash flows when calculating a liability's present value. The WGA includes several large liabilities which are heavily impacted by changes in the discount rate. For example, the provision in WGA for future decommissioning of nuclear facilities decreased by £126.2 billion from £273.1 billion in 2021-22 to £146.9 billion in 2022-23, with the discount rate decreasing the provision by £131.8 billion. But the forecast cost to the taxpayer actually increased by £11.7 billion in the year 2022-23 and has increased again by a further £10.3 billion in 2023-24. We looked at this further as part of the Committee's visit to Sellafield in February and will are due to hold our subsequent evidence session at the end of March. The net public sector pension liability also reduced from £2,639 billion at the end of 2021-22, to £1,415 at 31 March 2023 due to changes in underlying actuarial assumptions, including the changes to the discount rate. However, it is not possible to separately see the impact of the discount rate from other actuarial assumptions (such as life expectancy of future retirees) that change each year, and real changes in cash flows are obscured.  

Recommendation 5:  

a) The Treasury should include additional information within the 2023-24 WGA to demonstrate the undiscounted position of significant liabilities and provide trend analysis and narrative to explain the changes to these discounted figures over time. This narrative should include information on how the Treasury and Departments are actively managing these liabilities. 

b) The Treasury should also increase disclosure on actuarial assumptions other than the discount rate and how they impact government liabilities. 

The WGA is not sufficiently focused on long-term financial risk. One purpose of the WGA is to provide a comprehensive picture of the UK's public sector finances and inform more effective management of fiscal risks. The WGA 2022-23 includes narrative on the fiscal risks published in the OBR's Fiscal Risks and Sustainability report. In particular, it highlights risks posed by climate change, rising health spending, and geopolitical tensions which are projected to increase pressures on the public finances. The OBR's report also notes that public sector net debt is expected to almost treble over the next 50 years if current trends continue. However, the WGA does not put this challenge into the context of the current government spending, liabilities and commitments reporting in the WGA or provide the information necessary to allow stakeholders to understand the extent of financial challenges for the UK.  

Recommendation 6: The Treasury should outline how the WGA disclosures will be updated to ensure the long-term financial risks are more transparent and how the information in the WGA will be used to make such improvements.