City council struggling with “significant” governance weaknesses: external auditors

External auditors have called on Birmingham City Council to tackle a series of cultural challenges at the local authority, including the alleged suppression of bad news and silo working in parts of the organisation.

In a report issued this month, Grant Thornton also recommended the council commit to a long-term programme of organisational development and change aimed at resetting cultural norms, reinforcing ethical values, and strengthening accountability.

The city council is still struggling with its financial position since issuing a section 114 notice in 2023.

As a result of its position, Birmingham has received exceptional financial support from the Government of £1.255 billion to enable it to set a balanced budget, cover its equal pay liabilities and meet redundancy costs.

Much of the EFS loan will go towards the council's equal pay liabilities, which are estimated to be worth between £650m and £760m.

Commenting on the council's budget for 2024/25, which has now been set, the report said: "It has set the budget taking account of its September 2023 estimate of the EP {Equal Pay] liability but notes wider and significant financial pressures and a fundamental structural collapse of the 2023/24 General Fund budget."

The report highlighted budget gaps of £164m across 2023/24 and 2024/25, increased future forecast demands on services, particularly in Adults and Children's Social Care and Housing, and the "failure" of the savings programme in 2023/24.

On governance, the report identified "significant weaknesses" in the council's approach to setting the 2022/23 and 2023/24 budget, which included the approach to planning and delivering savings, the assumptions underpinning the budget, the level of reserves and borrowing and the quality of Section 25 reports.

According to the report, auditors "identified concerns about alleged behaviours within the Council and aspects of the Council's culture which in themselves are a significant weakness and have impacted on the Council's financial sustainability".

These included instances of errors in the calculation of savings "being deliberately ignored ", bad news about performance "being softened or suppressed", and governance arrangements which "failed to recognise a potential conflict of interest", the report said.

The report also voiced concerns about "resistance to change and lack of support for corporate priorities in some parts of the organisation which are sometimes manifested in the form of weak compliance and accountability".

In addition, auditors said they were told by more than one source that much of the decision-making around the final budget report was shaped in meetings which only involved the then leader and the then Section 151 Officer.

The then-leader has refuted the allegations, according to the report.

However, Grant Thornton added: "We do, nevertheless, conclude, on balance, that there was not sufficiently effective and collaborative political and managerial engagement and influence in the approach taken to planning the budget and that there was, at the very least, a perception created that the then-leader and then-Section-151-Officer were excluding other senior officers and members from deliberations regarding the budget."

The auditor made the following two key recommendations (6 and 7 in the report) concerning governance:

6. The council should recognise the specific cultural challenges it faces in terms of:

• • The suppression of 'bad news' and the reluctance to deal with difficult challenges
  • Silo behaviours in some parts of the organisation which undermine corporate coherence and strategy
  • The need to reinforce values which strike an appropriate balance between openness, trust, mutual respect, accountability and constructive challenge.

7. The council should commit to a long-term programme of organisational development and change which resets cultural norms and expectations, reinforces ethical values and behaviours, strengthens accountability, encourages people to raise concerns and values them for doing so, recognises and respects key statutory and professional roles in the organisation which enable the council to function effectively and lawfully. This programme should apply to and engage paid staff and all elected members.

Elsewhere, the auditor recognised improvements at the council, noting that the process for adopting the budget was "significantly improved and more transparent that in the previous 2 years".

It added: "We note the progress the council is making in terms of its re-basing of the General Fund revenue budget and the development of a new approach to savings.

"We also note the changes to the Council's capital programme, the improved reserves and balances policies and forecasting and the improved Section 25 reporting in the 2024/25 budget."

Birmingham City Council has been approached for comment.

Adam Carey