The report of the Associate Director is attached.
Contact: Jonathan Meek

The Committee received the report of the Associate Director which provided a summary of the work undertaken for Shropshire Council during 2023/24 as the appointed external auditor.

The Associate Director introduced his report and explained that the annual report was the conclusion of their value for money work for 2023/24 and also reflected on activity that had happened since the end of March 2024.  He drew attention to the three key areas looked at, which were, financial sustainability, governance, and economy, efficiency, and effectiveness (a summary of the findings for each area was set out on pages 5 to 7 of the report).

In terms of financial sustainability, the Associate Director reported that a significant weakness had been raised in relation to the Council’s arrangements for value for money and it was noted that over the last three financial years there had been consistent overspends that had put pressure on the level of reserves, which stood at 38.8m at the end of 2023/24 and, given that there was currently a forecast overspend for 2024/25 of £35.1m, there was a risk that this could deplete the reserves to £3.7m which posed a threat to the financial sustainability of the Council. 

However, work was ongoing, and the Council were seeking to address these challenges throughout 2024/25 including engaging PWC as a strategic partner and developing a financial dashboard which he commended as a very useful tool for monitoring savings and the financial challenges facing the Council and therefore felt that the Council had a good grip of the financial challenge notwithstanding that it was a particularly challenging outlook.  The 2024/25 forecast overspend and challenges for 2025/26 poses significant financial risk to the Council. 

Of the £90m of savings needed to be delivered in 2024/25, at the time of reporting, only 41% of savings had been delivered but what he was most concerned about was the 42% that had not yet been planned.  It was noted that the Council had established a Savings Delivery Group and was exploring a range of options with MHLGC with regards to addressing the financial challenges.  It was also noted that there were a number of one-off items that were required to balance the budget, and he was concerned that these did not address the long-term structural deficit and was not a sustainable approach to financial management.

The Associate Director informed the Committee that the precarious nature of the Council’s finances had been echoed in both the LGA Financial Challenge and the recent CIPFA report and on that basis felt that the risk of the Council having to issue a section 114 notice was significant.  They had therefore rolled forward a key recommendation from last year around the financial sustainability arrangements.  He explained that as some of the issues had been addressed in the previous year, they had slightly reworded their key recommendation to focus on two key areas (as set out on page 17 of his report).

Turning to governance, the Associate Director drew attention to page 7 of his report which showed that in 2022/23 this area had been rated as amber and only an improvement recommendation had been issued, however, since then there had been a deterioration in their judgment for 2023/24 specifically in relation to the governance arrangements of the North West Relief Road (NWRR) and a potential risk of significant weakness was identified. As a result, External Audit undertook a specific piece of work to review the governance arrangements (detailed in Appendix D of the report).  The review identified a number of weaknesses in the governance arrangements, particularly in relation to funding of the project and the Associate Director highlighted some of the weaknesses including the lack of a formal Executive Board, the Executive Board had not including standing Members (such as the Section 151 Officer and the Council Leader), exceeding delegated budgets, no detail around the DFT funding, unsatisfactory reporting around the increased costs between the Outline Business Case and Full Business Case and no reference in the risk register to the costs of aborting the project.  Therefore, with regard to the value for money view, a significant weakness had been identified in the Council’s governance arrangements and a key recommendation has been raised addressing those issues.

Two other key areas of weakness had been identified and although not significant, improvement recommendations had been raised and these were around addressing issues from the internal audit report on risk management including addressing the minor control issues around the operational risk registers and in relation to the limited assurance given by the Head of Internal Audit over the last 5 years.  The Associate Director informed the meeting that if steps were not taken to address these issues, they could become significant weaknesses.

Finally, looking at improving economy, efficiency and effectiveness, three improvement recommendations had been identified in relation to the deterioration in the quality of social care practice for children subject to child protection plans raised following the recent Ofsted inspection, contract register not fit for purpose and did not allow for tracking and monitoring of contracts and finally, the use of waivers in tendering and procurement activity with no way of identifying them on the contracts register and not being reported to Audit Committee.  It was noted however that the Council operated effectively with its partners and had a strong performance management framework.

In conclusion, the Associate Director stated that the report highlighted the significant financial challenges facing the Council, whose position was precarious, and there was a real risk that the Council would need to issue a Section 114 notice unless the issues contained in the report were addressed.  However, the Council were taking steps to try and avert this from happening and had a clear grasp on the scale of the challenge, which was also well understood across the Council and was being transparently reported.

The Chairman acknowledged that it was a very concerning report and assured the Associate Director that it was being taken very seriously by the Committee. 

In terms of financial sustainability, a query was raised as to the statement in the report that the situation was ‘precarious but not catastrophic’ as, from what had been said by the Associate Director, the situation sounded catastrophic.  In response, the Associate Director clarified that precarious meant ‘teetering on the edge’ however there were other Councils that were treading closer to the edge and in a much more difficult position.  The Council were taking steps to address the issues whereas catastrophic would be if the Council were not taking those steps. 

It was felt that the report reconfirmed the Committees’ concern around the seriousness with which audit and governance were taken by management and indeed that recommendations made by the Audit Committee appeared not to have been addressed. As a Committee, they needed assurance that senior management were taking audit and governance seriously because it did not seem like it from reading the report and it was suggested that they attend a meeting and/or present a report to address in particular the Committee’s recommendations and why these had not been looked at.

In response to Member comments, the Executive Director of Resources (Section 151 Officer) explained that, in relation to the precarious/catastrophic question, the LGA peer review had expected the situation to be difficult and were given assurances, however, as they were only assurances, that was why they said the situation was precarious because the Council was close to that edge.  There were other authorities who were closer to that edge, including 19 that were given exceptional financial support, the Council was not one of them and he therefore felt that assurance could be taken from that.

In terms of the NWRR specifically, a number of conversations had been had at Audit Committee over the last 12-18 months around that and the Committee had been given management assurances that those things would change and was always based on a point in time in which external audit have reviewed that information but he pointed back to the management assurances that had been given by the relevant Executive Director around the acceptance of those recommendations and the changes that had been made on the back of that.  He informed the Committee that Internal Audit would be reviewing that again and once done the Committee would have direct assurance about whether those things had happened or not.  At the moment however, all the Committee had to rely on was the management assurances that had been provided.

The Committee felt that they continually got management assurances that things were happening, but it appeared that a specific recommendation made by the Audit Committee had not been addressed.  In response the Executive Director of Resources (Section 151 Officer) explained that when reviewed by Internal Audit, they would see the evidence and would provide independent assurance to the Committee.

A brief discussion ensued in relation to the NWRR.  Councillor Evans expressed his utter dismay at the information contained in Appendix D and referred to the assurances received by the Committee that members would be updated about the NWRR in October and that a special meeting of Full Council would be held in November, neither of which had happened. The information contained within this report had been asked for previously and had been refused.  He was therefore not prepared to wait for an internal audit report and requested that officers be summoned to attend this meeting to respond to questions about this report as he felt that the Council had been placed at severe risk by the way in which the NWRR had been managed.

The Chairman stated that he had been assured that the NWRR would be on the agenda for the next Full Council meeting in December.  This came as a surprise to some members as it had been stated at the last meeting that there would be a special meeting of the Council in November in order to discuss the Full Business Case before it went to the DFT for decision prior to Purdah.

In response to a comment, the Executive Director of Resources (Section 151 Officer) agreed to check whether the CIPFA report had been circulated and if not would ensure that it was circulated to all Members.

In response to a query, the Associate Director explained that the report did also have a forward look as to where the Council was currently, and he reported that the comments in the summary of the report stood that the Council was facing a significant financial challenge and the 2024/25 materialisation of the potential overspend would be critical. With regard to the other areas, it could be seen from the management responses contained within the report that work was already ongoing in some of those areas.

In relation to the NWRR and in response to the suggestion that the Executive Director for Place attend the December meeting to answer questions as to why the Audit Committee’s recommendations had not been carried out and to provide assurance around the financial aspects of the project.  Concern was raised that if these issues were ignored, what was the point of having an Audit Committee.  In response, the Committee was reminded that the Executive Director for Place had attended the last meeting, and that Internal Audit needed time to go back in and report back to the Committee.  The Internal Audit Manager explained the timeline for looking at this again and felt that they would not have enough time to complete the audit and give assurance in time for the February meeting, but the Committee could ask the Executive Director and project lead to come back to the December or February meeting.  The Committee could also ask the Portfolio Holder to attend or escalate it to the Chief Executive.

A brief discussion ensued about whether to request that the relevant officers attend the December or February meeting.  The Chairman expressed his preference for the update to come to the February meeting after the Full Business Case had been presented to Council. Councillor Evans proposed that the appropriate officers be asked to attend the additional meeting of Audit Committee in December.  This was seconded by Councillor Halliday however, upon being put to the vote, the proposal fell.  The Chairman resolved that the Executive Director of Place would be invited to the February Audit Committee meeting to provide an update regarding the actions taken to address both Internal and External Audit’s recommendations.

The Chairman proposed that the Committee note the report and concerns about its content, and although this proposal was not agreed by the whole Committee, upon being put to the vote, the proposal stood.

RESOLVED:

To note the report and concerns about its content.

To invite the Executive Director of Place to the February Audit Committee meeting to provide an update regarding the actions taken to address both Internal and External Audit’s recommendations.