Stephen Fitzgerald on armchair auditors, the future of LGPS and getting the basics right

Stephen Fitzgerald is a leading finance and management expert who, after 8 years service, left the London Borough of Hounslow at the beginning of May, as their Director of Finance, to join the National Audit Office as Director, Value for Money Studies. On his first week in the job he spent some time in Room151 reflecting on life in local government and the challenge ahead. 

Room151: Why the move away from local government now and will you be doing in your new role at the National Audit Office (NAO)?

Stephen Fitzgerald: I don’t really see it as a move away from local government. Of course the NAO has got a new role it’s developing around value for money in the local government space and I’ll be contributing to that. I think I have a particular set of skills, having been the director of finance of a major London local authority. So I see this as a key local government role going forward and am very much looking forward to it.

Room151: Local authority CFOs are facing some huge challenges. What financial strategies do you think will help councils survive and prosper?

SF:  I think there’s a key thing that’s overlooked here. Yes, there are unprecedented challenges because of grant reduction in local authorities and clearly you need a clear strategic vision and transformation management but what we also need is not to forget the basics. One of things I’ve seen is that often when things aren’t going well it isn’t for lack of strategic vision but because basic things that need to be done within the financial operation of the council aren’t done properly. So I’m talking about ensuring there’s proper budget monitoring, good treasury management, making sure the accounts are closed off properly so that the basic information you’re feeding into your budget strategy is correct – that sort of thing. But also the basics of management: making sure appraisals are done and written up, that basic performance management is done, that proper performance data is collected on individual services and that is fed into the performance management of the organisation.

Adding to that, there needs to be a clear vision of how any given organisation is going to deal with these financial challenges and it’s also very important that the strategy can be communicated to the wider organisation and community so that key stakeholders are engaged in the process.

I think one of the things we did very well at Hounslow in the financial space was we were very clear about where we were and where we were heading. Council tax hasn’t gone up for six years in Hounslow and that was achieved by being very clear at the outset where the expenditure was, where the pressures were and where we were going to take the cuts out going forward. When you’re going through one of these savings programmes, the authorities that are addressing the challenge most effectively are the ones who are properly accounting and budgeting for where the savings are coming from. And that goes back to doing the basics properly.

Room151: How do you see the local authority audit landscape changing and what issues might emerge?

SF: The first thing to say is that both internal and external audit are incredibly important to organisations generally, the public sector and local authorities in particular. With local authority finance coming under greater and greater public scrutiny and greater transparency, also the work of internal and external audit teams is increasingly in the spotlight. So I think there’s an increased pressure on auditors to actually demonstrate the relevance of what they’re doing in terms of their audit work. The armchair auditor is something of a cliché but these individuals do exist – I’ve come across a few of them in recent years – and that means the professional auditors really need to be demonstrating value. One of the really important areas for audit going forward is the materiality of what they’re doing – they absolutely need to be focussing on the core and the high-level corporate financial issues for the organisation and perhaps extracting themselves from some of the process detail.

Room151: If the NAO’s role is to scrutinise public spending, what areas of local authority spending warrant most scrutiny?

SF: It’s important to be clear about the NAO’s role in this – and we’re in a transitional period with the eventual abolition of the Audit Commission – but the NAO’s role is not to manage audit in local authority but we’ll be looking at value for money in the local government sector. But looking at local authority spending as a whole, the key issue we must be considering is the social care offer, the cost of social care and how that links with the resources available to local authorities. So that’s one area of consideration in the NAO that we hope to be looking at over the coming period.

Room151: To what extent do you think local authority treasury should help make a difference to the bottom line or is it just about capital preservation?

SF: I think it’s about both. When I was working for Hounslow, they were looking for absolute security in terms of their treasury management and so my personal criteria was ‘is the public purse going to be safe?’. So my approach to treasury management isn’t as imaginative as some but then again I didn’t have to explain to members why any of our money was deposited in Icelandic banks when they collapsed. I think finance directors do have to think creatively in all they’re doing in corporate finance, including treasury, but the clear steer I had from my members was they wanted a very low-risk strategy when it comes to treasury management.

Room151: You’re parachuted into a failing council that has to make 25% cuts. Where do you start?

SF: A consistent feature of failing authorities is they don’t have the appropriate management and financial information to best assess where they are and where they need to be going. So you might have to undertake an exercise to do that. One of the things I have done in previous authorities is to do a proper mapping of where its expenditure is which was helpful in driving strategic budgeting processes when trying to take out significant amounts of money. Then if you’re taking out 25% over time you want to have a vision of what that base line looks like when you come to the end of that process so you can determine the best way to get there. If you’ve got all those things in place, plus proper accounting of the savings, plus engagement of the workforce and senior leadership or the organisation in terms of delivery then you can hopefully get to where you need to be going.

Room151: You recently undertook a strategic review of your pension fund at Hounslow. Can you tell us about that and the impact it’s had on investments?

SF: One of the successes in terms of finance at Hounslow, in recent years, has been the pension scheme. We’ve been fund of the year in the past, number one in the WM index and we haven’t had to put up employee contributions for some time as a result but we also believe that nothing fails quite like success so decided to undertake a strategic review.The fund is currently based around two major mandates with Aberdeen Asset Management and Blackrock and then we have some directly invested property and some direct private equity investments. Following the strategic review we’re still keeping to the approach of having two major fund houses managing the equity mandates but in order to spread the risk we’re going to introduce a diversified growth fund. The members weren’t convinced of the long terms viability of the private equity investments going forward so to some extent the diversified growth allocation will take that space. Then in terms of the property portfolio, Hounslow currently manages those assets in-house so we were managing various bits of retail space across the country and they have performed quite well. They are a legacy and we took the view that consolidation in the asset class was required so Hounslow will be looking for a manager to take management responsibility for those properties and probably migrate them in to more of a fund-of-fund approach which will maintain exposure to property but releases the authority from direct management.

Room151: Do you think the LGPS can survive in its current form?

SF: From the point of view of the national tax payer one of the attractive things about the LGPS is that it’s a funded scheme and the burden if the funds don’t work falls on the local tax payer. There are obviously strong arguments for aggregation – there’s been a lot of talk in the press about it – and you could make significant savings on fees but I would just urge caution. If your authority has a very good performing fund and then let’s say it gets pooled with a pan-London fund, in which the investment strategy isn’t performing so well, the actual loss to your tax payers will be greater than any gain you could have through  aggregated fees. So I think there needs to be some caution and consideration given to the nature of local government and the appropriate size for local authorities and how if you pool funds you take away the choice and ability to employ a strategy which is going to outperform the benchmark and the market and deliver value for the tax payer. I think actually the LGPS will certainly change but I hope the more attractive benefits prevail and I hope that if we do move to a level of aggregation we do that on the basis of sound data rather than assumptions of what we might end up with.

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The Local Authority Treasurers’ Investment Forum: September 25th, 2012, London Stock Exchange
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