The report of the Engagement Lead is attached.

Contact: Avtar S Sohal (0121) 232 6420

The Committee received the report of the Engagement Lead which highlighted Shropshire Council’s financial challenges and the one statutory and three key recommendations focussing on financial resilience. 

The Executive Director (Section 151 Officer) introduced the Draft Auditors Annual Report and noted that it was a regular annual item for the Audit and Governance Committee. He explained that this year’s report included a statutory recommendation, three key recommendations, and two improvement recommendations. He emphasized that while the statutory recommendation was not unexpected given the Council’s financial situation, it was serious and must be addressed.  He went on to highlight that many plans to address the issues were already in place, such as the independently chaired Improvement Board and the Improvement Plan going to Cabinet and Council.  He reported that a revised medium-term financial strategy and a capital strategy were being developed, with a pre-budget report to reset the financial position ahead of February Council.

The Chairman explained that the statutory recommendation had legal implications, requiring a meeting within 30 days to decide on actions and whether to accept the recommendations.  He stated that it was not within the Audit and Governance Committee’s remit to determine the response but that the Committee could comment and advise Council.

The Chairman stressed the seriousness of the situation, noting that statutory recommendations were rare and reflected the gravity of the issues facing the authority and he informed the Committee that he would move that the matter be referred to Council for consideration and action.

The Associate Director, Public Services Advisory (External Audit) informed the Committee that they had exercised their powers under the Local Audit and Accountability Act to issue a statutory recommendation due to the Council’s deteriorating financial position and governance weaknesses. He took Members through the detail of the statutory recommendation (set out on page 12 of the report) which included to urgently review all services (statutory and non-statutory) to identify the cost of minimum viable service provision, review all budget estimates and modelling, develop a realistic medium-term plan to reduce reliance on exceptional financial support, and immediately action internal audit recommendations on budget monitoring. 

The report also raised three key recommendations (set out on pages 13 to 15 of the report) around improving savings delivery and reducing optimism bias in savings targets, to address the increasing Dedicated Schools Grant (DSG) deficit and to address the persistent limited assurance rating from internal audit, now in its sixth year, indicating ongoing control environment failures. Two improvement recommendations were also made around improvements in the capital reporting to increase the granularity on slippage in the capital programmes and to ensure that action plans were in place around the LGA peer review recommendations.

The Engagement Lead acknowledged the positive steps taken by the Council and detailed in the management responses, such as establishing an Improvement Board, implementing spend control panels, and developing an Improvement Plan, but stressed the scale and urgency of the financial challenge. 

The Chairman described the report as a "very sobering moment" for the Council, particularly because it clearly stated that poor governance performance had directly impacted the Council’s financial situation, which was a distinct concern for both the Council and its residents.

The Audit and Governance Committee discussed the seriousness of the findings, the need for cultural change, and the importance of robust monitoring and assurance processes.

In response to a query about why significant weaknesses in financial monitoring and reporting were not identified earlier, the Executive Director (Section 151 Officer) explained the unprecedented level of savings required, the development of new monitoring dashboards, and that discrepancies were only identified at year-end reconciliation. The internal audit review was commissioned after the issue was discovered, and management actions picked up by the Interim Chief Executive when she came into post, and that report was included in that day’s agenda.

In response to concerns that assumptions rather than actuals were used in the budget monitoring process, the Executive Director (Section 151 Officer) explained that actuals were not previously reported, however he acknowledged the error and explained that it had been caused by actual savings not being allocated against the correct cost centre. He assured the Committee that lessons learned had been applied, and the deterioration in period 6 and 7 reflected this improved detection. 

The Executive Director (Section 151 Officer) explained that the various teams had worked much closer together and had been much clearer about the savings that had been identified and there was only a small number of savings shown as amber with the majority either not delivered, delivered or in delivery.  As part of the 2026/27 budget setting process, the Interim Chief Executive had said that she did not want a position next year where there were savings that were not 100% delivered, so whatever was put on the table they had a plan to deliver it 100%, and because they were taking a longer term view they would be looking to deliver 100% of those savings in year but would also be trying to get ahead of the curve in terms of those later savings and getting plans in place so it may be possible to move some of that forward.  He therefore felt that the culture was changing around the expectations as an organisation of what should be put forward and what should be being delivered.

In response to a further query, the Executive Director (Section 151 Officer) stated that in previous years, savings proposals had been identified and pushed out for public consultation quickly, but detailed delivery plans often lagged behind, leading to some plans not being delivered as intended. However, the approach this year was changing: instead of immediately setting out specific savings proposals, the focus was on developing more detailed delivery plans before the budget was set, with public consultation centred on broader ideas and themes and would be overseen by the Improvement Board. 

He emphasized that for the 2026/27 budget, the goal was to have a much more modest and realistic savings target, ensuring that every savings proposal included had a clear, deliverable plan. He also mentioned the intention to look further ahead, aiming to deliver future years’ savings early where possible.

A query was raised about why the report combined last years and the current years data, as making recommendations seemed retrospective, when action had already been taken by the Council.  The Engagement Lead explained the need to report on post-year-end events due to the seriousness of the financial situation and the time required for formal reporting and consultation. 

The Vice Chair of the Transformation and Infrastructure Overview and Scrutiny Committee, raised concerns about the realism and deliverability of the savings identified by Price Waterhouse Coopers (PwC), noting that many savings were undelivered or potentially undeliverable.  She emphasized the need for transparency and requested sight of the PwC transformational recommendations to assess their realism, value for money, and to learn from them. She suggested that the Audit and Governance Committee should look into these recommendations and challenge them as part of their oversight. It was however confirmed that the Improvement Board and the LGA would be reviewing the PwC work and that transparency on this matter was ongoing.

Concern was raised about the growing Dedicated Schools Grant (DSG) deficit. In response, the Engagement Lead explained that the DSG was distributed to all schools including Academies, and that pressure stemmed mainly from the increase in Special Educational Needs. The deficit was a national issue, and a recovery plan was being developed. The statutory override was in place until 2028, but the historic deficit may then fall on local authorities.

The Associate Director, Public Services Advisory (External Audit) clarified that the “minimum viable service provision” referred to meant identifying the minimum statutory services the Council must provide, to understand the structural deficit and inform decisions on discretionary and preventative services.

It was suggested that the Council should start actively looking for waste, not just focus on making savings and a task and finish group or an internal audit was proposed to identify areas of waste, for example the costs associated with net zero/climate emergency initiatives and equality/diversity efforts across departments. It could be argued that these areas might offer considerable opportunities for cost reduction, which were currently being ignored.  The Chairman felt that this was a matter for Council not for the Audit and Governance Committee and he explained that internal audit looked at value for money in the various service areas being audited, the outcomes of which were reported to the Committee.

In conclusion, it was proposed that the Audit and Governance Committee should monitor the control environment and finances more closely in response to the statutory recommendation and to that end a motion was suggested that Internal Audit should consider reviewing the following: the new budgeting process for 2026/27; the Improvement Board Action Plan, especially elements related to limited assurance; the effectiveness of spending boards; the process for calculating exceptional financial support, be involved in the pre-budget report; the process for reporting potential savings, to avoid previous issues; potential value for money areas of saving, including areas that may be blind spots for managers. It was also recommended that the Council conduct a review of the cost of minimum viable service provision. 

Concern was raised at the lack of notice for this motion, along with the extra responsibility put on internal audit, who may well undertake some of this work already.  It was agreed that these suggestions be recorded in the minutes, and considered further, possibly in a future meeting.

The Head of Policy and Governance confirmed that those areas were already part of their planning and stated that the 2025/26 internal audit plan could be reviewed to see what was currently included and where the Audit and Governance Committee were receiving assurances, with adjustments possible as needed.  He mentioned that the planning process for the 2026/27 audit plan was about to start, and it was important to consider the improvement plan work and external auditor recommendations during this process. He confirmed that these considerations could be taken away and incorporated into the planning.

The Internal Audit Manager explained that the internal audit plan was constantly reviewed and revised after every Committee meeting to ensure the right audits were being done at the right time. She stated that the process for planning next year's audit was starting, and the Committee received a revised internal audit plan regularly.   She added that as part of the planning process, she reviewed the external auditor's report to identify any areas needing assurance before the next annual review. She also mentioned that meetings with the senior leadership team and Committee Members were part of the planning process, and that strategic risks and organizational priorities, including everything in the improvement plan, were considered. 

RESOLVED:

to refer the external auditor’s report to Council so that the Council can discharge the obligations on the authority under schedule seven and to recommend that the report be accepted and that a detailed Action Plan be prepared covering all recommendations and for the Audit and Governance Committee to monitor the resulting action plan at every meeting.