Council accounts and audits
LEGAL MATTERS
Many local councillors do not fully appreciate the requirements and the complexity of the accounting and audit responsibilities of a local council. It is important that these are understood by councillors because the local council, as a corporate body, is responsible for ensuring that its financial management is adequate and effective and that it has a sound and robust system of internal control and record keeping. That includes arrangements for the management of risk to the council and an effective system of internal audit.
This article outlines the principles involved, which can be shared with councillors to assist them with their understanding.
Every local council is required by the provisions of the Local Audit and Accountability Act 2014, (the 2014 Act) and the Accounts and Audit Regulations 2015 to make arrangements for the proper administration of its financial affairs. The officer appointed by the council to undertake this responsibility is known as the Responsible Financial Officer (RFO) and, in most cases of small and medium-sized councils, is also employed as the clerk to the council.
The RFO, while acting under the policy direction of the council, administers the financial affairs of the council in accordance with all statutory requirements and proper practices. They also determine, on behalf of the council, its accounting records and control systems and ensure that all accounting control systems are observed and up to date. They also have to produce adequate financial management information to the council and seek economy, efficiency and effectiveness in the use of council resources.
Approving accounting statements
Responsibility for setting out the final budget of the council or setting the amount of the precept cannot be delegated by the council to the RFO. The council must also deal with approving accounting statements and the annual governance statement.
In England the Practitioners’ Guide (the Guide) published by the Joint Panel on Accountability and Governance sets out in some detail “proper practice” for the purpose of local council accounting. In Wales the Guide refers to the publication entitled the Governance and Accountability for Local Councils in Wales. In 2024 the National Association of Local Councils (NALC) published Model Financial Regulations based on the requirements of the Guide.
The council must conduct a review of its system of internal control at least once a year. The results of the review must be considered by the full council, which must approve an Annual Governance statement in accordance with proper practice.
It is the responsibility of the RFO to maintain the accounts and supporting documentation in accordance with the principles of proper practice. The records maintained by the RFO must be sufficient to explain the transactions undertaken by the council and be able to disclose the financial position of the council. Payments should only be made after prior authorisation by the council. The amount of any power of payment delegated to the RFO should be commensurate with the income and budget of the council.
Record of receipts and payments
An annual return, including an income and expenditure account and a statement of balances held by the council, has to be made in the form specified in the Guide. Accounts are made up to 31 March in each year. Where the local council’s gross income or expenditure (whichever is the higher) was not more than £200,000 for the financial year, or either of the previous two years, the local council may instead prepare a record of receipts and payments, again in the form specified in the Guide.
There are special, and more complicated, requirements for local councils whose income and expenditure exceeds £6.5 million for three consecutive years. Such councils are outside the Smaller Authority finances set out in the Guide
Following completion of the accounting statements in the Annual Return, the RFO must sign and date them to certify that the income and expenditure statements, and if applicable, the statement of balances, fairly represent the council’s financial position and that the receipts and payments are properly presented.
The Annual Governance Statement requires the council to confirm that the nine assertions set out in the draft form have been complied with and that there is sufficient evidence available to support the confirmation. The assertions relate to effective financial management, adequate internal control, compliance with all laws and regulations. They also require the council to effect proper practices and that electors have been able to exercise their rights by the publication of the Annual Governance and Accountability Return and the Auditors Report.
Councils must have carried out a risk assessment, have an adequate system of internal audit, and have taken action on any matters revealed by the internal or external audit. It is also necessary to consider whether there are any events that have happened that could impact on the current financial position. These assertions are set out in detail in the Guide.
In accordance with charity law
Assertion number 9 also reminds local councils that where they act as Managing or Custodian Trustee of a Charity, they are acting as a Trust Corporation and not as a local authority and financial matters have to be dealt with in accordance with charity law. This will involve the Trustee having a bank account which is separate from that of the local authority
The Annual Governance Statement and the Annual Accounting Statements must be approved at a meeting of the full council by 30 June following the end of the financial year. The Annual Governance Statement must be approved before the approval of the Annual Accounting Statements and both statements should also be signed and dated by the person chairing the meeting at which they are approved
The RFO must publish the unaudited Annual Return on a freely accessible website no later than 2 July following the end of the financial year
Unless either the gross receipts or the gross payments of the council are less than £25,000, the Accounts are subject to external audit.
If a council does not qualify for an external audit, it must certify itself as being exempt from external audit. The council must still complete, approve and sign the Annual Return and publish it on a freely accessible website. The council must advise the external auditor who will take no further action unless there is an objection from an elector during the inspection period, and even then, their only power is to investigate the objection.
The external audit of Local Council Accounts in England is governed by the 2014 Act. External auditors are appointed after a Government tender process for every local council.
In Wales, audit is based on the Public Audit (Wales) Act 2004 (the 2004 Act) and audits are carried out through the Auditor General for Wales. Audits in Wales are carried out on a three-year cycle of two limited procedure audits and a transaction-based audit. These are carried out in accordance with a Code of Practice promulgated by the Auditor General for Wales.
Under section 26 of the 2014 Act, relating to England, the accounts are subject to an inspection period appointed by the RFO. This period must be a period of 30 consecutive working days (ie excluding Saturday, Sunday and bank holidays) and must include the first 10 working days in July. The notice of the inspection period and how rights of inspection may be exercised must be publicised on a freely accessible website. In Wales the period is 14 days.
During the inspection period any person interested and any journalist may inspect the accounting records for the financial year and all books, deeds, contracts, vouchers, receipts and other documents relating to those records. These rights do not extend to personal information relating to a member of staff or to information protected on the grounds of commercial confidentiality. Local Government electors also have the right to question the external auditor about the accounting records (section 26 of the 2014 Act).
As soon as is reasonably possible after the conclusion of the audit the local council should publish a notice on a freely accessible website stating that the audit has been completed and that the relevant accounting statements have been published.
A local government elector may make objections to the accounts as to any matter on which the external auditor may make a report or apply to the Court. Such objection must be in writing and a copy must be sent to the local council (section 27 of the 2014 Act). The external auditor has power to charge the local council with the cost of dealing with objections to the accounts.
If an item of account appears to the auditor to be unlawful, they may issue an advisory notice under section 29 of the 2014 Act. The auditor may, under section 31 of the 2014 Act, apply for judicial review of any decision of the council, or any failure to act which would have an effect on the accounts.
An auditor in Wales may apply to the court for a declaration that an item of expenditure is unlawful.
An item of expenditure may be unlawful if the local council cannot rely on an express statutory power to incur the expenditure. This is known as the ‘ultra vires’ doctrine. Councillors have the ultimate responsibility for ensuring that the expenditure of the council is lawful. The responsibility of the clerk and the RFO is only to advise the council.
Prohibition against an action
If the council, in England under the provisions of the Localism Act 2011, or in Wales under the Local Government and Elections Act 2021, satisfies the criteria laid down in respect of the adoption of the General Power of Competence, it has the power to do anything which generally individuals of full age can do acting rationally and within the law. If there is a prohibition against an action within the existing law, the General Power does not override the prohibition. Therefore, the council does not have power to specifically mortgage or charge a property belonging to it and the Power does not permit the council to undertake general commercial or trading activities as a local authority, but may do so by the formation of a separate company to undertake such activities. This company would normally be controlled by the council.
If the General Power does not apply, under section 111 of the Local Government Act 1972 councils have ancillary powers to anything which is calculated to facilitate or be conducive or incidental to any discharge of their functions. Expenditure under this power must be ancillary to the function of the local council as conferred by a statutory provision.
A local council that does not have the General Power of Competence has discretion under s137 of the Local Government Act 1972 to spend up to an amount based on the number of registered electors and an amount that is prescribed annually by the Government (currently £10.81 per registered elector), for the benefit of the inhabitants of its area or a part of it. This is the main power used to make grants to local and community organisations, which the council considers are of benefit to the community, or a section of the community.
Roger Taylor is a consultant solicitor with the firm of Wellers Hedleys, based in Surrey. The firm has considerable experience, gained over many years, in acting for local councils throughout England and Wales. The firm has a team of lawyers experienced in acting for local councils and provides a legal advice service for SLCC and a number of County Associations. Training is also provided in specialised areas, such as charities and commonland and village greens, allotments and burial grounds. Roger is the editor of Arnold Baker on Local Council Administration and The Clerks’ Manual. www.wellerslawgroup.com
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Written by Roger Taylor, consultant solicitor, Wellers Hedleys
As appeared in Clerks & Councils Direct, September 2024
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