Auditors look at legal sanctions over council’s finances

CROYDON IN CRISIS: A Town Hall committee has been told that the council was ‘in breach of financial regulations’ over its commercial dealings, as they delivered a report with 75 recommendations for improvements.

The resignation of Simon Hall as Croydon’s cabinet member for finance came barely 48 hours after a director of the council’s external auditors told a Town Hall committee that she and colleagues were actively considering issuing a “Report in the Public Interest”, such is their concern over the handling of the borough’s finances.

In particular, the accountants are taking a long look at the purchase and running of council-owned companies, including controversial loss-making house-builders Brick by Brick.

Grant Thornton’s Sarah Ironmonger was addressing Croydon’s General Purposes and Audit Committee after the councillors on the committee had been given an outline of a 122-page report on a review of the Labour-controlled council’s rocky finances.

The report provides no fewer than 75 recommendations for improvement in areas where Croydon Council has been adjudged by outside finance experts to be operating at less than best-practice.

As part of his presentation to the committee, Ian O’Donnell, the finance consultant who authored the report, was asked about the process that saw the council spend more than £80million on the purchase of the Croydon Park Hotel and the Colonnades entertainment complex.

In answering the question, O’Donnell posed a question to himself: “Were we in breach of financial regulations?” he said. His answer came unhesitatingly: “Yes.”

He also said, “There’s been some practice in the council where data has been out of date…” The decision-making process by councillors, he said, had therefore “not been robust”.

The multi-million-pound purchases of the Colonnades, the hotel and other commercial properties had been the pet project of Councillor Hall, now the ex-cabinet member for finance.

O’Donnell is the local authority finances troubleshooter who was parachuted into Fisher’s Folly in May when the borough’s financial shortcomings could no longer be covered up, as coronavirus choked off the council’s income streams.

Ian O’Donnell: Croydon has been in breach of financial regulations

O’Donnell’s report, which you can download in pdf format here, will be the subject of a special GPAC meeting in the coming days, once the committee members have had a proper opportunity to review its far-reaching recommendations and likely consequences.

Off the back of O’Donnell’s briefing, Ironmonger, as the senior Grant Thornton figure working on the council’s accounts, was asked what options the auditors are considering for further action to protect the public interest, and money.

Grant Thornton had already issued what’s called “an adverse qualification for value for money”, a sort of local authority Yellow Card, and, as Ironmonger noted, the council’s financial position “has not improved since that stage”.

Ironmonger told the committee, “It would seem unlikely that we are going to lift that qualification.”

Now, Ironmonger said, “When we are repeating a qualification, we also have to consider whether there’s anything more we are going to be doing in terms of auditors’ powers. There’s a statutory recommendation that we can issue, or there’s a ‘Report in the Public Interest’, where there are issues sufficiently pervasive across the whole council.”

Big audit dynamite: Sarah Ironmonger delivered devastating opinion from the offices of Grant Thornton

Ironmonger warned that there would need to be “a lot of discussion” with council officials and councillors, but that it is an option that remains on the table. “As we go through the audit we will keep the debate live in that sense,” Ironmonger said.

The last time that outside auditors at a local authority in England issued a “Report in the Public Interest” – under the provisions of the 2014 Local Audit and Accountability Act –  was in August this year, when the same firm of accountants, Grant Thornton, was working through the books at Nottingham City Council.

The auditors’ task is to assess whether the local authority is spending tax-payers’ money and delivering their services in the most efficient and effective ways, fulfilling the legal duty of delivering best value which all councils must meet. That duty of “best value” was established under the Local Government Act 1999, which requires all councils in England to “secure continuous improvement in the way its functions are exercised having regard to a combination of economy, efficiency and effectiveness”.

In practice, this means councils must deliver a balanced budget, deliver the statutory services required and secure value for money in spending decisions.

In Nottingham, the auditors were particularly concerned about a council-owned company, called Robin Hood Energy, and a failure of governance which included not managing risk effectively, not paying due regard to the advice of officials, and failing to ensure the council received accurate and timely information from Robin Hood Energy in order to make reasonable decisions on the financial support the company asked for.

The issues with Robin Hood Energy went public last year when energy regulator Ofgem threatened to withdraw an operating licence over unpaid bills. Nottingham City Council finally pulled the plug on its attempt to break into the energy business in September, with an estimated loss of £38.1million of public money, and 230 jobs lost.

Did the council, and Simon Hall, break finance rules in the £30m purchase of the Croydon Park Hotel?

The interim CEO at Nottingham earlier this year at the time the auditors issued the “Report in the Public Interest” was… Katherine Kerswell, who took the reins in a similar job in Croydon last month.

Kerswell was logged in to Wednesday night’s council committee meeting, and while she held a watching brief, much of what she heard must have seemed eerily familiar.

Such as when O’Donnell said early in the meeting that there had been “issues with the financial management” in the council’s organisation.

“Management of finances has not been as good as it needed to be,” O’Donnell said, outlining how it had been agreed council policy that a body called the Growth Board should make all the key decisions on big-ticket investments, such as the Colonnades and Croydon Park Hotel. O’Donnell told the committee how the Growth Board “fell into disuse”, and that some decisions were taken by a different body, the Asset Board.

Asked a direct question on whether the purchase of the Croydon Park Hotel and Colonnades decision had been taken by the Growth Board, as was required, O’Donnell said, “They were taken by the Asset Board.”

This, according to O’Donnell, puts the council in breach of financial regulations.

Simon Hall: resigned his cabinet finance role on Friday night

And if that seems bad, things are getting even murkier at nearby Spelthorne in leafy Surrey, where according to reports from the Bureau of Investigative Journalism, their accountants are considering reporting the council to the law courts for “unlawful accounts”.

Auditors KPMG had received legal advice that suggested that it was likely that the purchase of three office buildings for £239million in 2017-2018 was unlawful because Tory-run Spelthorne ignored rules that forbid councils borrowing purely to make a profit on subsequent investments.

In total, Spelthorne’s spending spree saw it borrow £1billion from the Public Works Loan Fund, largely to fund speculative commercial property investments which, they hoped, would provide returns in rents which would then be used to pay for some of the council’s services. Sound familiar?

KPMG has refused to sign-off Spelthorne’s accounts for two years.

In Croydon, the council’s 2019-2020 accounts remain unsigned by its auditors. The accounts should have been made available to the public in September. Wednesday’s committee meeting was told that there is hope that they will be available by Christmas. Which will be nice.

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6 Responses to Auditors look at legal sanctions over council’s finances

  1. dracardweig says:

    My God…
    We knew things were rotten in the State of Croy-mark,
    but not this bad!

  2. “Big Audit Dynamite!” Very good.

    I liked some of their early stuff.

  3. Kevin says:

    I don’t think we should be getting our hopes up too much. Reading the article about the Nottingham debacle, it seems that the only people to have suffered any consequences are the council tax payers of Nottingham and the unfortunate employees of RHE who have lost their jobs. The council leader has said sorry and we have to learn lessons.

  4. Lewis White says:

    I don’t think that Councils would try to make income from buying real estate unless it seemed viable at the time. Covid has upset private and public sector apple carts that were previously happily trundling down the road making a reasonable return. They are now one wheel in the ditch at best, or upside down and wheel-less in the ditch at worst.

    Property investment used to be considered as safe as………houses.

    Look now at the ghost town formerly known as central London.

    It is all a huge tragedy.

    Funnily enough, a bright spot for Croydon is that the massive residential boom whereby offices become flats is helping at least to keep people spending in the town centre. This might stop the town centre from being a similar ghost town

    • Take it, from your final sentence, that you have not visited Croydon town centre for a while to sample its unique, ghost town ambience then, Lewis?

      And if the squandering of public money on property investment by the amateurs at the Town Hall was in some manner a “tragedy”, then it was one which was entirely predictable. Indeed, the council has been dabbling in the property market, unsuccessfully, at a cost of hundreds of milions of pounds, for at least 12 years, since the Tories set-up their CCURV with Laings. Hall and Newman railed against that when in opposition, and once in power, repeated the mistake.

    • markelt says:

      Actually councils have been warned repeatedly about such decisions before the current crisis. There are numerous articles from property experts warning about what might go wrong, and the NAO and Treasury have also expressed serious concerns. Croydon won’t be the last.

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