The Accounts Commission says councils need to improve financial planning

Their response came after the Accounts Commission voiced "growing concern" over problems with financial planning.

The report, compiled by Audit Scotland, cited a lack of transparency and control in how money is handed out to external bodies.

But the Convention of Scottish Local Authorities (Cosla) accused the body of seeking "cheap headlines".

More than �1bn was kept in reserve by Scotland's 32 councils at the end of the 2003-4 financial year, the report found.

Audit Scotland assists the Accounts Commission by investigating, on its behalf, how public bodies work.

Commission chairman Alastair MacNish said: "It is for each local authority to decide what levels are needed locally.

Public performance reporting requires significant improvement Alastair MacNish Accounts Commission

"But we want councils to ensure that clear strategies and policies are part of robust financial planning and that efforts are made to communicate this information to the public.

"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."

However, Cosla hit back at the commission's report and defended councils.

Its president, Pat Watters, said: "It is wrong for Audit Scotland to go with an all-Scotland figure - reserves and balances are something that should be treated on a case by case basis.

'Billion pounds headline'

"They have obviously gone for the all-Scotland figure to give the media its billion pounds headline.

"Councils are accountable to their local electorate and will be held to account by their electorate."

He added: "Councils hold balances in accordance with local needs and a strategy for long-term investment in the future."

The report found that spending had risen "significantly" in recent years to about �13.8bn.

The biggest increase was in social work, caused in part by Scotland's ageing population.

The people of Scotland are crying out for value for money Brian Monteith Scottish Tories

Scottish National Party finance spokesman Alasdair Morgan MSP said the report gave cause for concern.

He said it highlighted the fact councils had not heeded Audit Scotland's warning last year to control money held in reserve.

"We need clear guidelines to ensure that hard-earned taxpayers' cash is used effectively to provide high quality services," he said.

"The fact that this is not happening gives us serious cause for concern."

Mr Morgan added that council tax payers needed assurances that they are not paying over the odds for money to lie dormant in their local authority's bank account.

Scottish Conservative local government spokesman Brian Monteith said the public were being short-changed.

"The people of Scotland are crying out for value for money and are entitled to ask why there are increases in council reserves when spending on housing is down, our roads remain in disrepair and council tax just keeps on rising," he said.