The government’s entire public sector financial accounts are not fit for purpose, the official audit watchdog has said after the collapse of the “red flag” system that scrutinises billions of pounds of spending in local government.
The National Audit Office (NAO) said it was impossible to sign off the government’s latest public spending figures as accurate because of the unreliability of financial data relating to hundreds of councils and police and fire authorities.
The NAO’s unprecedented decision to “disclaim” the government’s accounts comes amid warnings that the chronic inadequacy of the council audit system – seen as an “early warning” indicator of financial failure or wrongdoing – could result in more councils going bust.
Just one in 10 local authorities submitted reliable formal accounts of their spending in 2022-23. Of the remaining 90%, half failed to submit any financial data at all and half submitted accounts that had not been audited, the NAO said.
Sir Geoffrey Clifton-Brown, the chair of the Commons public accounts committee, said it was “deeply unsatisfactory” the NAO was unable to pass the accounts. “If these issues are not addressed, it will become increasingly difficult to hold local leaders to account and more horror stories of failing councils will follow,” he said.
The NAO said the shortcomings in council financial data were caused by lengthy backlogs in council audit, with many councils having failed for years to submit accounts, or submitted unaudited accounts, covering tens of billions of pounds of spending and investment decisions.
The 129 English councils which hadn’t submitted any accounts for the last two financial years include Woking borough council, and Spelthorne. Birmingham was among 58 further councils failed to submit data for 2022-23.
Separate figures show seven local authorities have failed to audit their accounts for five or more years, including Slough council, which declared effective bankruptcy in 2021, and was later found to have serious and long-embedded failings in financial management and scrutiny.
Spelthorne council in Surrey, which has controversially borrowed more than £1bn to invest in commercial property, has also failed to submit five or more years of financial data. When Woking council went bust in 2023 with £2bn of debts after a wild borrowing spree it emerged it had failed to submit audit figures for four years.
Ministers say England’s broken local audit system was inherited from the Tory government. It is pushing ahead with plans to reset the audit system by in effect allowing councils to push through audited pre-2022-23 accounts without formal signoff, and giving them more time to audit future years’ accounts.
Although this move may enable local authority audit to be rebuilt over time, it is unlikely to satisfy the NAO, which is likely to continue to refuse to ratify the “whole of government accounts”, the consolidated set of financial statements for the UK public sector, because of the lack of assurance around council finances.
Ministers are also expected to abolish the Office for Local Government (Oflog), a body belatedly set up 18 months ago by the former local government secretary, Michael Gove, to scrutinise councils. Ministers believe Oflog is inefficient and ineffective.
The roots of the audit crisis – described by one expert as a “public administration disaster” – date back to the former local government secretary Eric Pickles’s 2015 abolition of the Audit Commission, which provided oversight of council finances and audit, and create a private market in auditing local authority accounts.
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Pickles’ decision – driven by a desire to cut red tape and save money – is now widely seen as a failure. Big accountancy firms see audit work as unprofitable and there are chronic staff shortages. There are just 106 people in England qualified to work in a market that requires annual audits of hundreds of public bodies.
The whole of government accounts are intended to provide an accurate picture of the nation’s finances. They cover hundreds of billions of pounds in about 10,000 public organisations, from the NHS and councils to government departments, museums, quangos and holdings in private banks.
Clifton-Brown added: “The government should press forward with its plans to permanently resolve the local audit crisis. The whole of government accounts must be made fit for purpose again.”
Gareth Davies, the head of the NAO said: “It is clearly not acceptable that delays in audited accounts for English local authorities have made it impossible for me to provide assurance on the whole of government accounts for 2022-23. It is essential that the steps being taken by government to restore timely and robust local authority audited accounts are effective.”
A Treasury spokesperson said: “The whole of government accounts remains a valuable and reliable source of information for a wide range of stakeholders.
“We are working with local authorities to improve reporting and transparency and ensure the accounts are as detailed as possible, while making significant additional disclosures to the National Audit Office to address any missing data.”