Local authority investments - Communities and Local Government Committee Contents


5  Scrutiny of the treasury management function

57. People decide to enter local politics for many and varied reasons, but the scrutiny of treasury management is probably not at the top of many councillors' lists or, indeed, a primary concern of voters. However, the proper monitoring of local authorities' treasury management functions is one of the most difficult and most important of a council's overview and scrutiny responsibilities. Much evidence in this area was given by Howard Knight, co-author of the booklet Treasure your Assets, published by the Centre for Public Scrutiny, which aims to give a jargon-free guide to the scrutiny of local authority financial investments. In written evidence, Howard Knight sums up the effects of the rules and regulations surrounding treasury management:

Implicitly, by addressing those recommendations and requirements, a public body should be addressing explicitly the issue of whether it has in place the ability and capacity to be an efficient, effective and responsive client for treasury management.[73]

58. Before giving oral evidence to us, Mr Knight carried out a survey among a number, though not a representative sample, of authorities, talking to relevant councillors—leader, cabinet member for resources, Chair of the Audit Committee, and Chair of Resources, Overview and Scrutiny Committee—about their role in the oversight of treasury management practices. That survey found that many councillors were not scrutinising effectively the treasury management policies and performance of their authorities:

In most authorities, TM strategy and policy papers have received what I would describe as relatively perfunctory scrutiny […] In most councils (and the Audit Commission) it appears that TM was treated rather mundanely, with the legislative requirement to approve the TM strategy and policy seen as a necessary hurdle to be leaped rather than an opportunity for significant challenge.[74]

59. This point had already been recognised by the Minister before he came to give evidence to us. Giving evidence, he said:

    The question […] is: is the scrutiny sufficient and is the capacity of members, and actually the capacity of some senior officers, sufficient to scrutinise these decisions? There may well be a case for a couple of things in this area and these are matters that we are considering at the moment. There may well be a case for better support and training for certain members in relation to this sort of function. There may well be a case for encouraging all local authorities to have audit committees, an arrangement that some do, that the system of Audit Commission's comprehensive performance assessment and use of resources judgment tends to encourage but it is by no means uniform and universal.[75]

60. According to the CIPFA Toolkit for Audit Committees, there is no statutory obligation for a local authority to establish an audit committee. It describes the benefits of having an audit committee:

Effective audit committees help raise the profile of internal control, risk management and financial reporting issues within an organisation, as well as providing a forum for the discussion of issues raised by internal and external auditors.[76]

Some local authorities have audit committees as part of their scrutiny structures, but CIPFA writes about the distinction between auditing and scrutiny:

The role of scrutiny is to review policy and challenge whether the executive has made the right decisions to deliver policy goals. This is different from the role of the audit committee which exists to provide independent assurance that there are adequate controls in place to mitigate key risks and to provide assurance that the authority, including the scrutiny function, is operating effectively. [77]

The Toolkit also states that it is perfectly legitimate to co-opt somebody other than a member to be a member of the audit committee.[78] It also points out that the Audit Commission has supported the introduction of audit committees in local government, and published a paper in 1996 called "Called to account—the role of audit committees in local government".

Training

61. CIPFA, in written evidence, cites developments to improve professional financial management skills for staff employed by local authorities, but does not mention improving training for elected members. Mr Antill, Director of Resources at Tewkesbury Borough Council and representing the Society of District Council Treasurers as a member of its Executive Committee, told us that:

we need to make sure members are properly briefed and trained because some of these transactions are very complex and I think it is our responsibility as finance people to make sure that our members get adequate training as well.[79]

62. Councillor Cockell, Chairman of London Councils, also told us about the need for elected members to be better trained because

there is a lack of knowledge by elected members, particularly, I think, younger members coming in. In the past we had a lot of members who perhaps were accountants, who had a City background, a financial background. I see that becoming more difficult, even in the centre of London, to recruit those sorts of people, so certainly I think we should be looking at being able to, not turn out councillors who are experts in the City and can out-expert the experts we are paying for and the treasury teams but, shall we say, know the right questions to ask.[80]

63. The results of Howard Knight's survey tend to reinforce Mr Antill and Cllr Cockell's point. They show that, in relation to training, only a minority of the relevant members had had additional training and development in treasury management.[81] Mr Knight commented on the fact that councillors have to undertake specialist training before they become members of Planning and Licensing Committees, but no such requirement is needed in order to become members of the relevant committees concerned with treasury management.[82] He cites the best training courses being provided by outside organisations, such as CIPFA or Local Government Futures, which "[give] elected members the confidence, knowledge and skills to ask the awkward and challenging questions".[83]

64. Howard Knight suggests that a requirement for elected member development and training should be incorporated into CIPFA's Treasury Management Code of Practice, and such development and training should be monitored by local authorities' Audit Committees. The Code, he proposes, should have explicit guidance, including benchmarking and checklists "in relation to the necessity of securing sufficient client capacity."[84]

The Annual Investment Strategy

65. The focus of elected members' scrutiny of the treasury management function is the Annual Investment Strategy (AIS). As explained above, the AIS concentrates on the security and liquidity of investments, containing a list of approved counterparties and the upper limits of investments with any single counterparty, details of how the authority plans to use credit ratings, and its policy in relation to the management of investments. The AIS must be approved and, if necessary, amended by the full council.[85]

66. In relation to the Annual Investment Strategy, CLG's written evidence states that "the system allows elected members to decide just how much detailed scrutiny they wish to undertake."[86] As we have already seen, often that has been not much—though in the light of the Iceland experience, that may change. Sterling's written evidence states that

[…] the Annual Investment Strategy is only one of a growing number of financial matters to be approved by the Council before the start of each financial year, and it is often relegated to an appendix of the report which sets the budget and Council Tax for the coming year. Elected members are naturally more interested in budget allocations and Council Tax, arguably leading to a rather more limited scrutiny of matters such as the Annual Investment Strategy. This area is clearly likely to receive additional attention and debate this year, and a number of Councils have now promoted the Annual Investment Strategy to a report of its own.[87]

67. The particular question arose during our inquiry of the infrequency of councillors' review of the annual investment strategy. Of special concern was the fact that officials working in the finance office of a local authority could make decisions during the course of the year, within the wide limits set by the annual investment strategy, which would not be scrutinised by councillors for at least 12 months. The problem, and a possible solution, are summed up in the exchange below with the Minister:

Mr Hands: I certainly think there is a strong case for making the frequency of reporting far more frequent. At the moment […] the council will take an investment decision at the beginning of a financial year which will not then ultimately be reported to members, and there is nothing in the rules it has to be reported to members until perhaps as much as 14 months afterwards when it comes before the annual council meeting which is reviewing the investment strategy of the previous year. I think there is all kinds of room there [for irregularities to occur]: anything from rogue officers who are making unauthorised investments […] [to] local authority officers taking a position on an Icelandic bank, or whatever it might be, […] without anybody knowing about it. I think there is scope for more frequent reporting to members than an annual review which will typically be lagging by over three months anyway.

John Healey: In terms of more frequent monitoring and reporting, perhaps systematic end of year scrutiny, probably you have a strong point there.[88]

Conclusion

68. We endorse the Minister's suggestion and recommendations by CIPFA and the Audit Commission that all local authorities should have an Audit Committee with specific responsibility for the scrutiny of the treasury management function. Guidance to local authorities to that effect should be given through appropriate amendment to the CIPFA Codes.

69. Members of audit committees need to take their responsibilities for that scrutiny seriously and need to ensure that they are properly trained. The CIPFA Treasury Management Code of Practice should make explicit the need for specific training in treasury management to be undertaken by those councillors with responsibility for overseeing treasury management arrangements, and the Audit Committee should be charged with ensuring that it is available and with monitoring its adequacy.

70. Guidance from CIPFA also notes that it is open to an authority to appoint someone other than an elected member and from outside the authority either to serve on or to chair the audit committee.[89] The co-option of external members to audit committees in this manner offers an additional opportunity to local authorities to enhance the expertise available to the authority in the scrutiny of its treasury management function, and we encourage all local authorities to consider taking advantage of it.

71. Meanwhile, whether a local authority has an Audit Committee or not, elected members should ensure that they pay proper attention to scrutiny of the Annual Investment Strategy (AIS), and of the decisions which are taken under it. We recommend that CIPFA, in reviewing its Codes, consider what further guidance is necessary to local authorities to ensure that elected members are given—and take—appropriate opportunities to scrutinise their AIS. We also recommend that CIPFA develop and include in its revised Codes more rigorous requirements for reporting to elected members on decisions taken by officials under the AIS.


73   Ev 129 Back

74   Ev 126 Back

75   Q 332 Back

76   CIPFA, A toolkit for local authority audit committees, 2006, p 4. Back

77   Ibid, p 4. Back

78   Ibid, p 16. Back

79   Q 82 Back

80   Q216 Back

81   Ev 124 Back

82   Ev 125 Back

83   Ibid Back

84   Ev 129 Back

85   CIPFA, Treasury Management in the public services : Guidance notes for local authorities including police authorities and fire authorities, p 10. Back

86   Ev 113 Back

87   Ev 146 Back

88   Q334 Back

89   CIPFA, A toolkit for local authority audit committees, 2006. Back


 
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Prepared 11 June 2009