Overview of the local authority audits 2004

Prepared for the Accounts Commission
March 2005

The Accounts Commission
The Accounts Commission is a statutory, independent body which, through the audit process, assists local authorities in Scotland to achieve the highest standards of financial stewardship and the economic, efficient and effective use of their resources. The Commission has four main responsibilities:
• securing the external audit, including the audit of Best Value and Community Planning
• following-up issues of concern identified through the audit, to ensure satisfactory resolutions
• carrying out national performance studies to improve economy, efficiency and effectiveness in local government
• issuing an annual direction to local authorities which sets out the range of performance information they are required to publish.
The Commission secures the audit of 32 councils and 35 joint boards (including police and fire services). Local authorities spend over £13 billion of public funds a year.

Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts Commission. Together they ensure that the Scottish Executive and public sector bodies in Scotland are held to account for the proper, efficient and effective use of public funds.

Accounts Commission’s findings

We welcome the maintenance of sound financial stewardship in councils, but the report reveals some areas in a number of councils which are of growing concern.

1. We welcome the maintenance of sound financial stewardship in councils. The accounts of all local authorities were submitted on time and they were also certified on time.  

2. We are pleased that council tax collection rates increased for the fifth consecutive year. 

3. The report reveals some areas in a number of councils which are of growing concern to the Commission:

• Weaknesses in financial planning.

• Limited use of risk management to drive performance.

• Insufficient evidence of control and accountability of some councils’ funding of external organisations.

• Failure to address fully the Commission’s previous concerns about effective audit committees, budgetary control and monitoring, and the need for councils to have a clear policy on reserves and balances.

• Insufficient development of good performance management arrangements to enable elected members and officers to focus early enough on intervention and improvement.

4. These concerns can most effectively be met by following the principles of sound  governance which include:

• a sound financial strategy

• tightening internal controls, including internal audit, where needed

• full implementation of Audit Committee principles.

5. We are encouraged by the progress in these areas made by some councils and we look forward to working with councils on the risk-based audit and the Best Value programme to deliver greater improvement.
 
Controller of Audit’s report

Summary

Introduction

1. Local government in Scotland comprises of 32 councils and 35 related local authority organisations which provide a wide range of public services. These include education, social work, housing, and police and fire services. Overall expenditure has increased significantly in recent years to about £13.8 billion in 2003/04. The largest increase is in social work services, reflecting pressures from an ageing population and growing concern about child protection and youth justice. 

2. Audit provides powerful support for effective democratic scrutiny of how public money is spent and, working with inspectorates, of the performance of public services. This report provides an overview of the main issues arising from local authority audits in 2004. It highlights themes drawn from the year’s audit work arranged under three broad headings; governance, financial stewardship and service performance.

Key findings

3. On governance:

• Elected members are becoming increasingly involved in Best Value and Community Planning but they need more training and support in their scrutiny role.

• Councils have been slow to develop systematic performance management arrangements which provide a comprehensive picture of performance across all services. Public performance reporting requires significant improvement.

• Policies and strategies for developing Community Planning, equal opportunities and sustainable development are in place but implementation at operational level is at an early stage.

• All councils have audit committees but there is still work to be done to ensure that best practice principles are applied in all cases, particularly in relation to risk management and the oversight of internal audit.

4. On financial stewardship:

• Financial stewardship in councils is generally sound; accounts and audits are mostly completed on time and only one of the 32 councils’ accounts was qualified. 

• More needs to be done to improve the timing and quality of financial information provided to elected members to enable them to monitor service performance and the overall financial position.

• Reserves and balances continued to rise; the overall total at 31 March 2004 was over £1 billion. Councils have plans to apply general fund balances but need to set out clear strategies for managing their reserves which reflect the local financial context.

• Councils have taken varying approaches to their new responsibilities for trading accounts, and results for the first year suggest that some trading activities may have difficulty in achieving the rolling break-even target in future years.

5. Key findings about services from the statutory performance indicators and performance studies include:

• Councils and the NHS need to improve planning, organisation and delivery of equipment and adaptation services to support people living in their homes, especially older people; and national guidance on the respective responsibilities of councils and health services should be revised.

• Councils need better information to help them plan for predicted increases in demand for services for older people.

• Councils need to take action to prevent roads from deteriorating to the point where they are unsafe or need expensive reconstruction.

• Councils recycled and composted 12.3% of waste in 2003/04, 2.7% more than in the previous year.

Future audit work

6. Sound governance arrangements must underpin local authority financial and service performance, and will continue to be a principal focus for auditors. The programme of audits of Best Value and Community Planning will look at how councils are organised to deliver services, with specific attention to performance management and scrutiny. Audit Scotland will combine the findings from these audits with the findings from other work to provide an overall picture of progress in the 2005 overview report. 

Part 1. Setting the scene

Introduction

1. This report provides an overview of the main issues arising from the audit of local authorities in 2004. It is organised into three main parts: 

• Part 1 provides context by outlining how local government in Scotland is structured and funded. 

• Part 2 reports on governance, financial stewardship and service performance.

• Part 3 looks ahead, highlighting emerging issues and the focus for future work. 

Local government in Scotland

2. Local government in Scotland comprises 32 councils and 35 related organisations, such as police, fire and road bridge joint boards. Councils vary widely in terms of geography, culture and political composition. They range in size from Orkney Islands, with a population of around 19,000 and an annual spend of £83 million, to Glasgow City which provides services for 577,000 people and spends over £2,000 million. Large, sparsely populated areas such as that covered by Highland Council contrast with small, densely populated areas such as Aberdeen City.

3. Councils are responsible for providing a wide range of public services including education, social work, housing, roads, refuse collection and leisure services. Councils also undertake other functions including Community Planning and regulatory activities, such as building control, planning and environmental health.

4. Police and fire services are governed by joint boards, except in Dumfries & Galloway and Fife where the council is also the police and fire authority.

Expenditure and funding 
5. In 2003/04, total expenditure on services was £13.8 billion. This was offset by service specific government grants, and fees and charges from service users. The net cost of services of £8.6 billion was financed by central government grants, in the form of revenue support grant (RSG) of £5 billion and redistributed non-domestic rate income (NDRI) of £1.8 billion, and by council tax of £1.8 billion.

6. Local authority expenditure and government funding has increased steadily over the last five years.

7. Overall, expenditure has increased by 20% over the past five years. The largest increase is in social work (43%), reflecting pressures from an ageing population and growing concern about child protection and youth justice. Expenditure on housing fell because of housing stock transfers.

8. Total general fund capital expenditure in 2003/04 was £881 million. This was funded mainly from borrowing, which allows costs to be spread over future years. Housing capital expenditure amounted to £322 million, most of which was funded from the sale of council houses.

9. Looking ahead, the amount of mainstream central government support for local government is set to increase to about £8.5 billion in 2007/08. Taking account of inflation, this should amount to real growth in 2005/06 and 2006/07. The increase between 2006/07 and 2007/08 is less than the predicted inflation rate.  By then, however, central government anticipates annual Efficient Government savings of at least £745 million across the public sector. This includes £325 million from local government through improvements in internal organisation and management; improved procurement practices; and sharing and rationalising services.

The audit approach

10. The Accounts Commission is responsible for the audit of Scottish local authorities and holds councils to account using audit to:

• give assurance on probity, stewardship and financial management

• support continuous improvement through the audit of Best Value and Community Planning

• secure the fair presentation of financial and performance information

• promote the economic, efficient and effective use of resources, through a programme of performance studies.

11. Each year the Commission calls for a report on the main issues arising from the audits. This report relates to 2004 and covers the 2003/04 audits. Information has been brought together from a range of sources, including the public reports prepared by auditors at the conclusion of their work. Extracts from auditors’ reports have been used to inform exhibits and case studies. 

12. The public expects the quality and availability of public services to improve as spending rises. Local authorities are accountable to their constituents and must demonstrate to them that additional funding is leading to improved performance. Public audit provides powerful support for effective democratic scrutiny of how public money is spent and, working with inspectorates, of the performance of public services.

13. Local authority audit in Scotland comprises the financial and governance audit, statutory performance indicators (SPIs), the programme of national performance audit studies and the audit of Best Value and Community Planning, which provides important new information about council performance. Taken together, these ensure a strategic and integrated approach to audit and reporting, to the Accounts Commission and the public (stakeholders) and to local authorities (clients), which is risk-based and proportionate.

14. Audit Scotland works with other scrutiny bodies to maximise the impact of audit and minimise costs. This means developing a shared understanding of how scrutiny contributes to improvement, being clear about the respective responsibilities of audit and inspection, and streamlining working practices to minimise the workload for local services. In practice this includes collaboration on performance audit studies and joint working on inspections. Best Value audit reports draw on inspectorates’ findings to provide a rounded picture of council performance. 

Part 2. Key messages

15. This part of the report comments on:

• governance, including Best Value and Community Planning

• financial stewardship

• service performance, based on the statutory performance indicators and performance audit reports published in 2004.

Governance

16. Corporate governance is about how councils set priorities, conduct their business and relate to the communities they serve. Auditors review and report on councils’ governance arrangements as part of their annual audits. Sound governance is central to Best Value and auditors’ work contributes to the overall view of councils provided in Best Value audit reports.

17. This section looks at councils’ approach to Best Value and how they engage with their communities. It also considers how councils scrutinise performance and monitor corporate controls.

Approach to Best Value
18. Councils now have a statutory duty to deliver Best Value and Community Planning and they are beginning to consider the detailed changes needed to the systems and procedures that underpin service performance. There is evidence that councils are taking a more corporate approach to Best Value, with elected members increasingly committed to and involved in the process.

19. Senior managers in most councils are aware of the priority areas, such as performance management and Community Planning, and are developing plans to respond. It is important that this ‘process’ phase of Best Value is completed as soon as possible to allow the emphasis to shift to improving the performance of services experienced by users and the community in general. 

20. COSLA has produced an advisory note1 which stresses the key strategic role for elected members in ensuring that their councils achieve Best Value. Councils have provided training for their elected members but more needs to be done to build on this.  

21. Councils are required to address equal opportunities and sustainable development as part of their approach to Best Value. There is still much to be done here – most councils have established policies and strategy statements, but implementation at an operational level is patchy. In particular, equal opportunities and sustainable development need to be embedded in service activities. Improved monitoring systems are also required.

Performance management 
22. The central requirement of Best Value is that councils can demonstrate continuous improvement in the performance of their services. This means that they need to know how services are performing and how they are improving over time. The statutory guidance on Best Value sets out the key features of an effective performance management system. 

23. Early findings from Best Value audits indicate that councils have been slow to develop systematic performance management arrangements. They continue to rely heavily on statutory performance indicators when reporting their performance. However, these cover a limited amount of activity and the evidence so far suggests that providing a comprehensive picture of performance across all services will be a common difficulty for councils.
 
24. More comparative analysis and use of benchmarking would help councils to demonstrate how well services are performing and identify new approaches that might benefit service users. Overall, councils’ systems have a long way to go to meet the characteristics set out in Exhibit 3.

Engaging with communities

Community Planning
25. Local government legislation requires councils to develop Community Planning processes to deliver better, more responsive public services. This involves councils working with a wide range of organisations in areas such as community care and economic development. Early audit work indicates a strong commitment to Community Planning, with councils engaging with local partners and putting plans and structures in place.
 
26. There are varying approaches to developing community plans across Scotland and there is limited information available on how well Community Planning partnerships are delivering demonstrable benefits to local people and communities. To complement the examination of these issues through the audit of Best Value and Community Planning at individual councils, Audit Scotland is undertaking a national study to assess the effectiveness of arrangements for joint working with partner bodies. 

Public performance reporting
27. Public performance reporting continues to be an aspect of councils’ governance where significant improvement is required. There has been some progress at a corporate level but there is often a lack of balance in the information reported. Material is heavily weighted towards good news. There is much less about areas in need of improvement. There is also limited evidence of councils reporting clearly their targets for future performance.

28. Councils are complex organisations which provide a wide range of services, so performance reports which focus on individual services are required.  Performance management systems need to provide information about service performance that can be made readily available for the public and service users. 

Scrutiny and controls
29. Effective scrutiny is central to good governance. It involves elected members holding officers to account for service performance and the adequacy of corporate controls.

30. There has been progress in developing the scrutiny and performance monitoring role of elected members but this has tended to centre on setting up structures such as scrutiny panels or sub-committees. These arrangements would be more effective if they were supported by better training and support for the elected members involved.

Audit committees
31. The Accounts Commission has consistently underlined the key scrutiny role for audit committees in providing independent assurance, both to the council and its wider stakeholders, that resources are used properly and effectively. 

32. To be effective, audit committees must promote good corporate governance – by gaining an overview of the council’s overall control environment, reviewing the effectiveness of risk management, and monitoring the performance of audit and actions taken in response to audit recommendations. If this does not happen then a key component of effective governance is absent, and there are risks to financial and service performance.

33. Councils where the audit committee function is carried out as a part of wider scrutiny responsibilities must ensure that time is available to deal with core audit committee business. 

34. The Chartered Institute of Public Finance and Accountancy (CIPFA) has set out three fundamental principles for audit committees.

35. During 2004 the Accounts Commission published a report on internal audit in Scottish councils. As part of the exercise, auditors assessed each council’s level of compliance against 12 aspects of good practice for audit committees. This confirmed the conclusion in last year’s overview report that two-thirds of councils were not operating fully under audit committee principles. The emerging evidence from the audits of Best Value also indicates that substantial improvement is required in applying these principles.

36. Auditors are continuing to assess the adequacy of audit committee arrangements as part of their annual review of governance. The auditors of Dumfries & Galloway, East Ayrshire and Stirling councils recommended that steps are taken to ensure compliance with audit committee principles. At Shetland Islands the auditors carried out a review of the effectiveness of the audit committee. They reported that there was a need to develop roles and responsibilities to include risk management, and for the council to identify the training needs of elected members who serve on the audit committee. 
 
Internal audit
37. Scrutiny through effective internal audit is also an essential element of good governance and audit committees have a key role in ensuring internal audit resources and plans meet their councils’ needs.

38. The national study on internal audit measured councils’ overall in addressing weaknesses and progress made by individual councils in improving the effectiveness of internal audit.

39. The study found that councils still need to improve in the following areas:

• basing their work on a comprehensive risk assessment

• more structured planning

• following-up recommendations to ensure appropriate action is taken

• developing an effective performance management framework

• clarifying the respective roles of management and internal audit in maintaining internal control.

40. External auditors assess the extent to which they can rely on internal audit to ensure the best use of the overall audit resource. They reported that the improvements in compliance against the CIPFA Code2 did not always translate into significant improvements in the degree to which they could place reliance on internal audit. In two councils (East Dunbartonshire and Eilean Siar), the auditors were unable to place reliance on internal audit, mainly due to the timing of work or inconsistent quality. This shows that, in practice, compliance with the 
Code is only part of the picture. Decisions on internal audit resources and risk management have a direct effect on the quality of internal audit service delivered.  

Internal controls
41. Local authorities include a statement in their annual accounts setting out how financial control is managed and reviewed, including the arrangements for internal audit. Through this, councils highlight areas they know need to improve. This is known as the Statement on the System of Internal Financial Control (SSIFC) – some councils opt for a wider assurance statement on corporate governance as a whole. The most commonly occurring disclosures are set out in Exhibit 7. 
 
42. Following similar disclosures in 2002/03, Inverclyde Council again acknowledged the need to strengthen corporate governance and risk management arrangements, document financial procedures and develop business continuity planning. The auditors also reported weaknesses in implementing a housing management information system and in accounting reconciliations which affected internal controls in 2004/05. 
   
Risk management
43. Local authorities need to develop risk management processes, identify operational and financial risks and put in place appropriate responses to mitigate the risk to the organisation. This needs to be explicit, including the completion and maintenance of risk registers.
  
44. Councils acknowledge that more work is required, with 14 disclosing weaknesses in risk management in their governance statements. For example, auditors highlighted that Argyll & Bute, Orkney Islands and Scottish Borders still had significant work to do to develop their risk management frameworks.

Following the Public Pound
45. Councils see real benefits in funding external organisations to deliver services, for example by attracting funding from alternative sources, encouraging more effective engagement with communities or providing more choices for service users. However, they need to maintain control and accountability over public funds and ensure that good governance principles are observed. 

46. Following its consideration of an initial report on Following the Public Pound,3 the Accounts Commission expressed concern about councils’ funding of external organisations, particularly the lack of reliable information on the position. Auditors’ reports confirm that this continues to be an area requiring action (Exhibit 8). The Commission is undertaking a follow-up study to establish the amounts involved and councils’ governance arrangements. 

Financial stewardship

47. This section of the report looks at issues arising from the audit of local authority accounts and financial management arrangements. 
 
Accounts and audit

Completion
48. All 32 councils and 35 related local authority organisations made their 2003/04 accounts available for audit by the statutory deadline of 
30 June 2004. In about a third of councils significant changes to accounts were required as a result of the audit, mainly in relation to the disclosure of trading operations, capital accounting adjustments and accounting for pensions.  

49. The Accounts Commission requires auditors to complete the financial audit by 30 September 2004. For the first time, all 32 council audits were signed off by this deadline. The position on joint boards also improved.

50. There was also an overall improvement in the period between the completion of the audit and the date on which audited accounts were published. The position at Highland Council, however, is concerning. Although the audit was completed in September 2004 the accounts were not published until February 2005.  This follows a significant delay in completing the 2002/03 audit. Earlier publication of audited financial results increases the value of the information.

51. In addition to the audit of the accounts, auditors were required to provide a report on 2003/04 audits by 30 November 2004. Most met this deadline. However, with the significant improvement in the time taken to complete audits there is scope for earlier audit reporting. 
For 2004/05, Audit Scotland has asked auditors to aim to provide both the audited accounts and their annual audit report by the end of September 2005. Deadlines will continue to be reviewed in light of experience and in consultation with auditors. 

Audit opinions
52. There were two audit qualifications in 2003/04 (2002/03: none). In addition, auditors highlighted 29 issues in their opinions which, although significant, did not affect the accuracy of the accounts.

53. The audit opinion on East Lothian’s accounts was qualified because the auditor was unable to determine whether the council had complied with the statutory requirement for trading accounts.  At Highland & Islands Fire Board a qualified opinion was given because the board had not revalued land and buildings within the timescales required by the accounting code.

54. Glasgow City’s auditor included an explanatory paragraph because trading disclosures were based on the previous Direct Labour/Direct Service Organisations, pending a Best Value review. In the auditor’s view, the council had not taken sufficient steps to identify significant trading operations and had therefore not complied fully with the statutory requirements. The overall position on trading accounts is considered later in this part of the report.

55. The other 28 explanatory paragraphs relate to the Supporting People programme. This grant is provided by central government to councils to provide housing support services for vulnerable people. The scheme required service providers to apply for registration of each service with the Care Commission by 1 October 2003. However, due to the complex nature of the services, no applications were made by that date. As a result, payments by councils to service providers from 1 October 2003 until 31 March 2004 did not comply with statute. The overall value of the grant to councils exceeded £406 million in 2003/04, of which expenditure in the six months to 31 March 2004 was about £225 million.

56. In August 2004, as a temporary measure, the existing legislation was amended to remove the requirement for providers to be registered before they can receive payment. The Scottish Executive has introduced legislation which, when enacted, will rectify the position for both the operation of unregistered providers and the payments made to them by councils.  

57. The Auditor General has already reported to Parliament on the position as it relates to the accounts of the Care Commission and the Scottish Executive. In view of the substantial amounts of public funds involved, Audit Scotland will continue to monitor the situation.

Financial management

Budgetary control
58. Budgetary control is a key aspect of financial management and its effectiveness is an indicator of the quality of stewardship. In the past, auditors have highlighted cases where councils have experienced problems in controlling budgets. The auditors of Scottish Borders Council reported a further improvement in budgetary control in 2003/04, following previous overspends on education.

59. Compared with the previous year, there are fewer audit comments on budgetary control. But councils need to do more to improve the timing and quality of information provided to elected members to enable them to monitor service performance and the overall financial position. There were particular problems at Clackmannanshire and Inverclyde (Exhibit 11). More generally, auditors identified significant underspending in social work which councils attribute to uncertainties about the Supporting People programme and social work vacancies.

Capital expenditure
60. Auditors’ reports provide evidence of slippage in councils’ capital programmes arising from delays in project design, contract letting and negotiations for land acquisition. Further examination is needed to establish the extent, the underlying reasons and the impact on future capital programmes. For example, at North Ayrshire, total capital expenditure in 2003/04 was about £10 million lower than the £31 million budget, with the variance attributed to capital projects running behind schedule. At Stirling Council, the auditors reported that, since local government reorganisation in 1996, the council has underspent against its general services capital programme each year, with 2003/04 seeing the largest underspend yet. 

61. Central government control over capital expenditure by way of consent to spend has now been replaced by a system based on affordability and prudent capital planning. Councils are required to have regard to CIPFA’s Prudential Code4 which sets out the new framework for local authority capital finance and good practice in planning and managing capital expenditure.
  
62. The new arrangements depend on accurate and consistent financial information. However, as noted earlier, capital accounting difficulty was one of the most common reasons for changes in the accounts presented for audit. Councils need to have clear policies which ensure consistency in differentiating between revenue and capital. Auditors’ reports also highlight the need for robust and up-to-date asset registers.

63. More generally, auditors’ reports indicate that councils need to review and improve their asset management arrangements. This is an essential element of Best Value, affecting the financial and property resources available to councils. It will also help identify scope for collaboration in the public sector, in line with the Efficient Government agenda.

Reserves and balances
64. Against a backdrop of overall net expenditure of about £10 billion, the total value of reserves held by councils at 31 March 2004 was over £1 billion (31 March 2003: £839 million). This covers a range of reserves and there is wide variation in the amounts held by individual councils.

65. At 31 March 2004, councils had general fund balances totalling £377 million and housing revenue balances totalling £102 million. Other reserves, which include capital funds, repair and renewal funds and insurance funds total £571 million. These figures exclude the substantial funds held by Orkney Islands and Shetland Islands (£233 million and £357 million respectively) arising mainly from harbour and oil-related activities. 

66. Income and expenditure on services other than housing is reflected in the general fund balance. The overall figure of £377 million at 31 March 2004 compares with £323 million at the end of the previous year. In relation to spend, this represents an increase from 4% in 2002/03 to 4.3% in 2003/04. The position at individual councils is shown in Exhibit 13.

67. General fund balances at 31 March 2004 range from less than 1% of net expenditure at South Lanarkshire to about 12% at Moray. Over half of councils had balances of between 3% and 6% of net expenditure; four councils had balances in excess of 9% of net expenditure – Dumfries & Galloway and Eilean Siar (both 10%), Inverclyde (11%) and Moray (12%).

68. General funds consist of earmarked amounts set aside to support future years’ expenditure and often include a contingency for unexpected events or emergencies. The financial statements of the four councils with the largest general fund balances relative to spend provide further information. 

69. The appropriate level of balances is for councils to determine, taking account of local circumstances. Councils have plans to use balances held at 
31 March 2004 but need to ensure that they have clear and explicit policies on the overall level of balances they intend to hold and how these will be applied.

Trading accounts
70. Councils are required to disclose significant trading operations and to break-even on these activities over a rolling three-year period. 2003/04 was the first year of these requirements. An analysis of councils’ accounts shows that the total number of trading operations in 2003/04 was 163. Of these, 146 (90%) relate to trading operations that were previously Direct Labour/Direct Service Organisations under the former Compulsory Competitive Tendering (CCT) arrangements. The remaining 17 activities include school crossing patrols, letting of commercial property, car parking, golf courses, architectural services and printing services.

71. Councils have taken very different approaches in identifying trading operations. The numbers identified range significantly from none at East Lothian to 11 at Glasgow City Council. As indicated earlier, the position at East Lothian resulted in audit qualification. 
 
72. In total, council trading operations produced net surpluses of £48 million. The requirement is to break-even over a three year period – in 2003/04, ten out of the 163 showed deficits totalling £1.3 million. Exhibit 15 sets out examples of auditors’ comments.

73. In addition to comments about the disclosure of trading operations and break-even, auditors highlighted more general points relating to business management. These include the need for robust business and financial plans, service reviews, service level agreements or contracts and effective performance monitoring and reporting.  

Pensions 
74. Eleven councils administer pension funds under the Local Government Pension Scheme in Scotland. The remaining councils, and many other public bodies, are admitted members of these schemes. Employee contribution rates are set in regulations and employers’ contribution rates are determined by actuarial assessment every three years. Triennial reviews show the need for significant increases in employers’ contribution rates in future.

75. The value of assets in pension funds increased to £9.7 billion from £7.6 billion in the previous year, reflecting the overall improvement in stock market conditions at 31 March 2004. At the same time, liabilities increased to £11.6 billion from £10.8 billion, resulting in net liabilities at 31 March 2004 of £1.9 billion compared with £3.2 billion at 31 March 2003.  

76. The police and firefighters’ pension schemes are unfunded ‘pay as you go’ schemes – actual pension payments are met from revenue as they fall due. There is no underlying fund to meet the costs and therefore the pension liability in the accounts is always likely to exceed the overall net asset position. Across Scotland, pension liabilities disclosed in police and fire authority accounts went up by around 7% to £4.65 billion for the police and £1.22 billion for fire authorities. Councils fund police and fire authorities and are required to meet their share of costs as they fall due. During 2005, Audit Scotland will review the position of each of the Scottish public pension schemes.  

Fraud 
77. Auditors provide details of reported fraud. Excluding benefit-related fraud, 147 cases were reported in 2003/04 totalling £648,000 (2002/03: 109 cases totalling £166,000). Most reported cases were discovered by employees (60%) or through internal controls (22%).  

78. The housing and council tax benefit system involves a large number of transactions and is susceptible to fraud. The level of reported claimant fraud in 2003/04 was £5.2 million (£5.3 million in 2002/03) against total benefit paid out during the year of £1.5 billion. 
The overall number and value of frauds detected and reported by Scottish councils has declined in the last three years. 

79. The National Fraud Initiative (NFI) compares records held in different parts of the public sector to identify errors, inconsistencies and potential fraud. Computerised data-matching may identify, for example, pensions that continue to be paid after people have died or local authority employees who have not declared their income when claiming benefits. The results of the NFI have been passed to councils and police and fire authorities for further investigation, and auditors will report on this in 2005.

80. Employees need safe and proper channels for reporting concerns about malpractice and fraud and corruption. During 2004, in co-operation with Public Concern at Work, Audit Scotland issued two good practice leaflets for the Scottish public sector. These cover how employees should raise concerns about potential fraud and corruption, and emphasise the need for accessible whistleblowing policies. 

Service performance

81. In addition to the audit of Best Value and Community Planning, which considers corporate performance, Audit Scotland undertakes other specific work which focuses on the performance of individual council services, through statutory performance indicators (SPIs) and performance studies. This section summarises the outcome of the 2004 work.

Statutory performance indicators 
82. In 2003/04, councils, fire brigades and police forces were required to report their service standards against 77 SPIs. These indicators covered a wide range of services and highlight the variation in performance among councils and the change in performance over time.

83. Six pamphlets have been published summarising local authority performance and key performance issues in 2003/04. They cover corporate management; cultural and community services; education and children’s services; environmental and regulatory services; housing and social work services; and police and fire services. Key messages highlighted in the published performance SPIs are set out in Exhibit 17. The pamphlets are available on Audit Scotland’s website www.audit-scotland.gov.uk.

84. In a small number, about 3%, the SPI information was either not provided or auditors raised questions about the reliability of information. At Eilean Siar, the auditor reported that firm action was required to improve the arrangements for completing the SPIs to ensure that 
all indicators are calculated properly. During 2005 Audit Scotland will review with the services concerned the indicators where there have been concerns recorded by auditors.

Studies
85. In addition to the SPIs, Audit Scotland also undertakes a programme of studies of the performance of individual services. These are often 'cross-cutting', looking at the wider picture across public sector boundaries. The reports published in 2004 are summarised below – copies are available on Audit Scotland's website www.audit-scotland.gov.uk.

Community care 
86. Councils' community care services assist a wide range of people, including: older people and people with dementia; people with physical disabilities; people with mental health problems; children and young people with special needs; and carers.

87. Providing assistance with washing, dressing and shopping contributes to the quality of older people's lives by supporting them in their own homes while minimising the demand for residential care places and NHS beds. Annual spending on older people's services stands at around £560 million across Scotland and accounts for almost two-thirds of councils' community care expenditure. 

88. Over the next 20 years, Scotland will see a large increase in the numbers of older people, together with a progressive decrease in the numbers of younger people available to provide unpaid care for friends and relatives. Together, this will place increasing pressure on services.

89. A study in this area found that, to cope with future need, councils were planning and developing services for older people. However, some aspects of planning, including having good information about older people's needs, were not as developed as they should have been. The report also highlighted that:

• in all but one council, older people were waiting for care home places

• in more than half of councils (18 of 32), older people were waiting for homecare services

• a quarter of councils needed to improve care for older people in their own home

• few councils monitored waiting times for all community care services, although all councils monitored waiting times for some services 

• councils need to improve their evaluation of new policies such as free personal care.

90. A separate study looked at community equipment and adaptations. These cover a wide range of items, including walking-frames, bath aids, stairlifts, wheelchair ramps and lowered kitchen worktops. Such aids/adaptations can improve the everyday quality of people’s lives. They can also help prevent admissions to hospital, speed up discharge from hospital and reduce the need for other community care services and the support of carers.
 
91. About a third of Scottish households have at least one person with a long-term illness, health problem or disability. One-in-three adults with such difficulties has equipment or adaptations in their home. Council social work services spent approximately £30 million on community equipment and minor adaptations in 2001/02, and demand is likely to rise as Scotland's older population grows.

92. The report found that the way in which services were organised was confusing for staff and clients. Councils and the NHS should both improve the planning, organisation and delivery of equipment and adaptation services to support people living in their own homes, especially older people. The report also concluded that it is an opportune time to revise national guidance on the respective responsibilities of health and council services in this area.

Fire services
93. This report considered the progress made by fire authorities in implementing the modernisation agenda for the fire and rescue service, as set out in a UK-wide national pay agreement.  

94. The report concluded that:

• two authorities had made good progress – Lothian & Borders and Strathclyde 

• two authorities had made reasonable progress – Highlands & Islands and Tayside 

• four had made some progress – Central Scotland, Dumfries & Galloway, Fife and Grampian.  

95. Overall, authorities were taking the necessary early steps, but a significant amount of work was required before real change would be seen on the ground. 

Housing
96. A report published jointly with Communities Scotland assessed how councils and Registered Social Landlords (RSLs) manage empty and low-demand houses – properties that are frequently rejected or accepted only reluctantly even by applicants in urgent housing need. Effective property management minimises the amount of empty housing, improves the availability of homes, and increases rental income. 

97. The report highlighted differences in performance between councils and RSLs. For example, on average, RSLs relet their properties twice as quickly as councils, with RSLs taking 56 days to relet low-demand properties compared to 112 days for councils. 

98. Recommendations focused on the need to: improve management information; better manage sheltered accommodation; accelerate the letting process; conduct benchmarking exercises; and ensure that any strategy developed for properties that can no longer be relet is part of a wider housing and community strategy agreed with other relevant agencies.

Road maintenance 
99. This report considered the condition of roads in Scotland and how councils and the Scottish Executive manage road maintenance. The 3,500 km motorway and trunk road network is managed by the Executive. The remaining 51,000 km of other public roads are maintained by Scottish councils. Demands on the road network are increasing – between 1993 and 2003, traffic increased by 18% and the number of vehicles licensed increased by 27%.

100. Almost 90% of motorways and dual carriageway trunk roads were in an acceptable condition compared to two-thirds of A roads, 55% of B roads, 63% of C roads and only 49% of unclassified roads. But around 7,000 km of roads were in need of repair, about 13% of the total.

101. Some councils' roads were in better condition than others. In four councils, more than 20% of roads had deteriorated to a point where repairs were needed to prolong their life (East Renfrewshire, City of Edinburgh, Inverclyde and Stirling).

102. Councils need to take action to bring their roads up to standard. They can do this by developing long-term investment plans and giving sufficient priority to structural maintenance. This will prevent roads from deteriorating to the point where they are either unsafe or need expensive reconstruction, and will save money in the long run. But to do this they need better information on the condition of the assets they are managing, not just the roads, but footways, bridges, lighting, safety barriers, drainage and all the other assets associated with the road network.

Economic development
103. Local economic forums (LEFs) were established by the Scottish Executive in 2001 to create an economic development strategy for each Local Enterprise Company area, that more effectively coordinated the resources of all relevant public sector agencies, including local authorities.
 
104. In June 2004, Audit Scotland published a follow-up report on LEFs’ progress. LEFs had generally made good progress towards eliminating overlap and duplication in service provision, but the report suggested that the Scottish Executive needed to review whether LEFs are needed in their current form, given the more comprehensive Community Planning agenda.

1	Local Government in Scotland Act 2003: Elected Member Leadership in Best Value Advisory Note, Convention of Scottish Local Authorities (COSLA), 2005.
2	Code of Practice for Internal Audit in Local Government, CIPFA, 2000, updated 2003.
3	Following the Public Pound, Controller of Audit’s report and Accounts Commission’s findings, March 2004.
4	The Prudential Code for Capital Finance in Local Authorities, CIPFA, 2003.

Part 3. Looking ahead

105. This part of the report looks at how auditors will address the key issues identified here in future audit work.   

Future audit work

Governance
106. Sound governance arrangements underpin local authority financial and service performance and will continue to be a principal focus for audit. In parallel with developments in the private sector, the public sector governance agenda is evolving: 
for example, the Good Governance Standard for Public Services has recently been published by an independent commission established by CIPFA and the Office of Public Management (OPM), which identifies six core principles of good governance. 

107. More detailed, specific guidance is now available to councils on audit committee principles and the role of the elected member in Best Value – these and similar publications provide practical advice and are useful benchmarks.

108. Auditors’ views on governance will feed into the programme of audits of Best Value and Community Planning to contribute to a fuller picture of council performance. Reports on Inverclyde, West Lothian, Dundee City, East Renfrewshire, Glasgow City, Argyll & Bute, Highland and Moray are expected later in 2005. These will provide a national picture on progress which will be reflected in the 2005 overview report. Performance management and scrutiny, including the effectiveness of audit committees, will remain a key focus. 

109. Governance-based studies on Community Planning and Following the Public Pound are under way.

Financial stewardship and management
110. Auditors provide annual assurance on financial stewardship and management. Their focus will be on earlier completion of audits, reporting the financial position to elected members and managing reserves and balances. The 2005 overview report will also provide an update on trading activities and progress of the NFI.

111. Capital accounting, the new prudential framework and pensions will also be reviewed by auditors in 2005. Perhaps the most significant challenge in local authority accounting is the modified arrangements for group accounting under which councils will be required to account, in aggregate, for their material interests in companies, joint ventures and statutory bodies. This is not mandatory until 2005/06, but action is required now to: identify material interests, align accounting policies and periods, and ensure that comparative figures are available for 2004/05. The process of collecting information in support of the Following the Public Pound report should assist in identifying the ‘group’ for accounting purposes.

Service performance

SPIs
112. Changes to the SPIs are set out in the Accounts Commission’s annual directions for 2004/05 and 2005/06. These include changes to indicators, reflecting the national review of the fire service and the study on empty and low-demand housing. In 2005, the Commission will be reviewing its approach to performance information in light of the audit of Best Value and Community Planning, and new requirements for public performance reporting by councils. 

113. SPIs also inform the performance audit programme. For example, a study is planned to investigate the wide variation in performance on waste management highlighted by the SPIs. 

Studies programme 
114. Following wide-ranging consultation, the Accounts Commission has agreed a joint programme of studies with the Auditor General for Scotland. This includes both new projects and follow-up work. In addition to the Community Planning and Following the Public Pound reports already highlighted, a range of studies will be undertaken. Work is also planned on chronic disease management, equalities and leadership in the public sector.

Appendix 1. Audit appointments 2003/04

Aberdeen City Council						Ernst & Young
Aberdeenshire Council						Audit Scotland 
Angus Council							Audit Scotland 
Argyll & Bute Council						Audit Scotland 
Clackmannanshire Council					KPMG
Comhairle nan Eilean Siar (Western Isles Council)	Audit Scotland 
Dumfries & Galloway Council					Audit Scotland 
Dundee City Council						Audit Scotland 
East Ayrshire Council						PricewaterhouseCoopers
East Dunbartonshire Council					Audit Scotland 
East Lothian Council						Audit Scotland  
East Renfrewshire Council					KPMG
City of Edinburgh Council					Audit Scotland 
Falkirk Council							PricewaterhouseCoopers
Fife Council								Henderson Loggie
Glasgow City Council						Audit Scotland 
Highland Council							Audit Scotland 
Inverclyde Council						Audit Scotland 
Midlothian Council						Audit Scotland 
Moray Council							Blueprint Scotland
North Ayrshire Council						PricewaterhouseCoopers
North Lanarkshire Council					Audit Scotland 
Orkney Islands Council						Audit Scotland 
Perth & Kinross Council						Audit Scotland 
Renfrewshire Council						Audit Scotland 
Scottish Borders Council					Scott-Moncrieff
Shetland Islands Council					PricewaterhouseCoopers
South Ayrshire Council						KPMG
South Lanarkshire Council					Audit Scotland 
Stirling Council							Scott-Moncrieff
West Dunbartonshire Council					Audit Scotland 
West Lothian Council						Audit Scotland 
Argyll, Bute and Dunbartonshires 
Criminal Justice Social Work Partnership 			 
Joint Committee							Audit Scotland
Authorities Buying Consortium				Audit Scotland 
Ayrshire Valuation Joint Board				KPMG
Central Scotland Fire Board					PricewaterhouseCoopers
Central Scotland Joint Police Board				Scott-Moncrieff
Central Scotland Valuation Joint Board			KPMG
Clyde Muirshiel Park Authority Joint Committee		Audit Scotland 
Dunbartonshire and Argyll & Bute Valuation 
Joint Board								Audit Scotland 
Forth Estuary Transport Authority				Audit Scotland 
Glasgow & Clyde Valley Joint Structure 
Plan Committee							Audit Scotland 
Grampian Fire Board						Audit Scotland 
Grampian Joint Police Board					Ernst & Young
Grampian Valuation Joint Board				Blueprint Scotland
Highland & Islands Fire Board					Audit Scotland 
Highland and Western Isles Valuation Joint Board	Audit Scotland 
Lanarkshire Valuation Joint Board				Audit Scotland 
Loch Lomond and the Trossachs Interim Committee	Audit Scotland 
Lothian & Borders Fire Board					Audit Scotland 
Lothian & Borders Police Joint Board			Audit Scotland 
Lothian Valuation Joint Board					Audit Scotland 
Mugdock Country Park Joint Committee			Audit Scotland 
Northern Joint Police Board					Audit Scotland 
Orkney and Shetland Valuation Joint Board		PricewaterhouseCoopers
Renfrewshire Valuation Joint Board				Audit Scotland 
Scottish Local Government Information Unit		Audit Scotland 
Strathclyde Concessionary Travel Scheme Joint 
Committee								PricewaterhouseCoopers
Strathclyde Fire Board						Audit Scotland 
Strathclyde Joint Police Board					Audit Scotland 
Strathclyde Passenger Transport Authority		PricewaterhouseCoopers
Tay Road Bridge Joint Board					Audit Scotland 
Tayside Contracts Joint Committee				Audit Scotland 
Tayside Fire Board						Audit Scotland 
Tayside Police Joint Board					Audit Scotland 
Tayside Valuation Joint Board					Audit Scotland 
West of Scotland Transport Partnership			Audit Scotland

If you require this publication in an alternative format and/or language, please contact us to discuss your needs. It is also available on our website: www.audit-scotland.gov.uk

Audit Scotland 
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