CROYDON IN CRISIS: A report into the workings of the council’s subsidiary businesses – including Brick by Brick – is expected to be released this week. Here, TIM DEE, an accountant of more than 20 years’ experience, shares his thoughts on how the controversial house-builders helped drag the local authority over the financial brink
In 2017-2018, Brick by Brick had net liabilities of £0.5million. This grew to £1.3million in 2018-2019, with housing stock of approximately £110million, funded by loans from Croydon Council.
In 2018-2019 alone, the council loaned an additional £80million to Brick by Brick, despite the fact there had been just £14,000 of income that year. This was described at the time, by the cabinet member for finance, Simon Hall, as a £63million “slippage”.
The council’s hopes this year of getting a £36million dividend from Brick by Brick was putting all its eggs in one basket.
To generate profits, Brick by Brick needs to sell homes. No dividend can be paid to the council without profits. But anyone can see from the 2018-2019 accounts that it had yet to sell a single property.
In the absence of selling properties, the ongoing viability (“going concern”) of Brick by Brick is entirely dependent on a letter of support from the London Borough of Croydon to June 2022. These letters aren’t generally worth the paper they’re written on and are rarely – if ever – legally binding.
Unusually for a business of this nature and size, Brick by Brick now only has two directors, and there has been a lot of director turnover. This in itself raises alarm bells.
I suspect a fundamental hold up with the overdue 2019-2020 accounts is getting auditor agreement on Brick by Brick’s status as a going concern. The council’s finances now render the letter of support utterly useless… and with net liabilities, there is no room for manoeuvre.
If Brick by Brick does not secure the funding it requires to satisfy the auditors that it is still a going concern, then its 2019-2020 accounts will need to be prepared on a liquidation basis, likely worsening its net liability position.
So what next for Croydon Council? There’s currently more than £110million of housing stock sitting on its subsidiary’s balance sheet, and little-to-no cash.
I reckon they will have looked at three possibilities.
Option A: transfer the housing stock up to the council and liquidate Brick by Brick. Try to sell off the housing stock to individuals over time.
Option B: try to sell Brick by Brick, its the housing stock and schemes with planning permission to a commercial house builder. This option is likely to incur a significant loss.
Option C: start a new housing association to take over the housing stock. This, though, seems unlikely, given the 400-plus job losses at the council and the expertise required to operate the housing association.
Whichever option the council goes with, it is not going to get its £36million dividends or any interest payments on its loans from Brick by Brick for some considerable time. If at all.
All of this could easily have been foreseen by any qualified accountant well over a year ago.
The question remains: why was Croydon counting on Brick by Brick to make dividend payments to balance its 2020-2021 budget when all the indications were that these were never going to be possible in the short-term?
I suspect Brick by Brick is also trying to value its housing stock and get this past the auditors. Typically these would be valued at the lower of (a) cost and (b) “net realisable value” (what it can get for the properties minus any selling costs and related overhead).
This is first and foremost a crisis of leadership from within the council, and then a lack of scrutiny from the council members themselves.
On reading the Report in the Public Interest, the auditors Grant Thornton have (quite rightly) crucified the council and they have found massive failings in the finance, governance, legal and strategy functions.
Having the London Borough of Croydon on a CV will probably be very damaging to professionals’ career prospects, so I’d expect a high level of turnover in those teams, and that will only worsen the situation.
- Read Croydon Council’s S114 notice in full here
- To read the Report in the Public Interest in full, click here
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Were accountancy skills needed? The external auditors’ warnings were ignored.
Even if you went to the Diane Abbott school of accountancy and were incapable of reading a balance sheet, surely you must have at least had an understanding of why you need an external audit.
An accountant could have foreseen this a year ago? Come on!
Any decent accountant (not an oxymoron) could have seen it ages ago, as did so many others, for example, my modest self from the very beginning.
The basic flaw in the model was that Brick by Brick was set up, supposedly, to be independent of the Council and dependent only upon it for the initial setup.
The reality is that Brick by Brick was, in reality, just another department of the council in fancy dress. The other reality is that it could never have worked financially: the sums involved in the set up were too vast for there ever to be any real profit….ever. The potential just wasn’t there are there was absolutely no backup plans in case of a recession or a drop in the housing market generally.
Basically, as I have said, it was a combination of onanistic and narcissistic Ponzi scheme in which the notion of profit was akin to a bubble in the Southern seas.
Just look: you set up, from your front room, a huge new family business with great ambitions. You lend it lots of money and use your connections to smooth its business path, you house in on a spare back room in the house.
When it stutters you lend it a lot more, when it pays any of that back you say that is profit and, from the profit, you lend it a little more, telling yourself that it is going to do great things and make the family rich.
You know that the economy will continue flourishing, that we will remain in Europe and that there will never be a pandemic. It was farcical from the beginning. And now sell it? With its debts? Fantasy.
If it wasn’t for the fact that those councillors involved have such little understanding of business and economics, instead of there being a case of criminal negligence it would be a case of corruption and a referral to the DPP.
Let’s hope the LGA don’t whitewash this and the actions of the council go to a public enquiry. People need to be named and shamed. There should be no hiding place and no stone left unturned.
Legislation needs to be strengthened to stop this abuse of public money by unqualified ignorant risk-takers happening again.