One in three Scottish councils improve financial reporting

Scottish councils have made ‘some improvement’ to transparency in financial reporting, Audit Scotland report shows

Nine of the 32 Scotland councils reported an improvement in the quality of their management commentary, but this was not reconciled to the financial performance in the accounts which showed high levels of debt, according to Audit Scotland’s Local government in Scotland financial overview for 2018-19.

This narrative is critical to the understanding of a council’s performance against budget and how this translates into the use of the overall funding reported in the accounts.

The latest report found that basic expectations of transparency were being met by more councils after last year’s proposed improvements, with one in three councils showing improvements in the last 12 months.

In 2018-19, Scottish council revenue income totalled £17.7bn, an increase from 2017-18 (£17.3bn) with Scottish government revenue funding remaining the most significant source of income.

The councils’ net debt on 31 March 2019 was £15.4bn compared with £15.1bn for the previous year, showing little signs of improvement.

One of the problems with the financial management commentary was that it was difficult to see how councils had performed against budget and how this was reconciled to the accounts.

Another improvement was that nearly all councils reported their year-end expenditure, but five councils did not provide explanations for significant variances from budget.

Only Western Isles Council and the Highland Council included all of these key aspects of transparency in their management commentaries, and 10 councils reported progress against agreed savings in this year’s report.

Audit Scotland warned that ‘medium-term financial plans should be at the core of strategic planning and decision-making. In order to ensure these decisions are made with the most current and accurate information, medium-term financial plans should be reviewed and refreshed annually and maintained as a rolling three- to five-year plan’.

These developments were prompted by Audit Scotland in their previous report, which highlighted three key aspects to their assessment of whether financial reporting is transparent in the management commentaries.

Audit Scotland was looking for a number of improvements in council financial reporting, particularly more clarity on whether the outturn against the budget position for the year was clearly shown with reasons for significant variances, the outturn reported in the narrative reconciled to the movement in the general fund contained in the financial statements, and progress against agreed savings.

A majority of Integration Joint Boards struggled to achieve break-even in 2018-19, either recording a deficit or relying on additional funding from partners and a third did not finalise their budgets with their partners for the start of the 2019-20 financial year.

Graham Sharp, chair of the accounts commission at Audit Scotland said: ‘Integration Joint Boards (IJBs) continue to face very significant challenges and they need to do much more to address their financial sustainability.

‘The Commission also notes that two-thirds of councils have reduced their general fund reserves over the last three years rather than maintaining or building their reserves.

‘I encourage councils and Integration Joint Boards to continue to improve the transparency and clarity of management commentaries and wider financial information provided to councillors and the public.’

There is also an issue around staff retention at councils as over a third of IJB senior staff have changed during 2018-19. ‘I continue to be concerned about the significant turnover in senior staff in IJBs. This instability inevitably impacts on leadership capacity and the pace of progress,’ said Sharp.

Local government in Scotland Financial overview 2018-19

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