One of the auditors for Nottingham City Council has explained why a series of payments totalling up to £40m may have been missed despite extensive historical reviews. Some of the payments have already been deemed 'unlawful' after cash was spent on general services and not council tenants as intended.
Towards the end of 2021 the Labour-run authority announced a series of payments totalling £15.8m had been uncovered in the form of 'management fee rebate' payments dating back to 2014/15. This money had been 'unlawfully' transferred from its ring-fenced Housing Revenue Account (HRA) to its general fund.
While this total was later amended to just under £15m, two council-commissioned reviews uncovered more misspends. The total is now estimated to be in the region of £40m and some of the city's most vulnerable residents were said to have been 'disadvantaged' as a result.
Read more: Nottingham City Homes to be brought in-house costing £750,000
A £17.1m misspend by Nottingham City Homes was part of this, but the housing provider denies this and claims it still has the money. Despite this the council has already taken steps to bring it back in-house, having served it a 12-month contract termination notice.
Additional questions were then raised over charges dating back as far as the 1990s and the city council's finance director and section 151 officer, Clive Heaphy, says he will now investigate these. Mr Heaphy, who was employed to help the council achieve financial stability as it strives to keep the Government-appointed improvement and assurances board appeased, was the only person to discover the series of misspends.
The auditors who proceeded him did not. Questions as to how, and why, have therefore rightfully been raised.
KPMG acted as the auditor from 2014/15 up to 2017/18, before the appointment of Grant Thornton. At the time KPMG said it was "required to satisfy ourselves that your accounts comply with statutory requirements and that proper practices have been observed in compiling them".
And auditors have a duty to "consider whether to issue a report in the public interest" about something it believes the authority should consider, or if the public should know about something. In its latest audit report however, for the 2017/18 year, KPMG said "we have not identified any matters that would require us to issue a public interest report."
KPMG also said, based on its testing, the key financial controls were 'sound'. Later another auditor, Grant Thornton, was appointed to conduct a public interest report upon the collapse of Robin Hood Energy in January 2020.
While it uncovered a number of significant failings at the council, the misspend of HRA cash remained buried.
Soon after the Government-appointed improvement and assurances board, chaired by Sir Tony Redmond, was established. The board has been continuously scrutinising the cash-strapped council's actions to achieve financial stability, and it must report to the Department for Levelling Up, Housing and Communities each quarter to inform the Government of the progress.
Should the council fail to appease, commissioners could be sent in. When contacted by Nottinghamshire Live both auditors refused to explain in detail why these payments had been missed, however during a meeting of the audit committee in May some speculation was given.
Andrew Smith, key audit partner for Grant Thornton, said: "We weren't the auditor at the time so I cannot comment on what the auditor did at the time. I would argue that having read that paragraph I would have been inclined to have asked questions of management about the appropriateness of those payments at that time.
"The second thing in terms of Grant Thornton's perspective, we obviously started in 18/19. When you come in and start doing and looking first time there are some things you need to do, but it doesn't go anywhere near as far and wide as a full-blown audit, to do so would be cost and time restrictive and no organisation would change its auditor because it takes so long to do.
"But there are some things that we do need to do and a large part of that is actually to review the predecessor auditor's work and what they've done."
Speaking of the review of the previous auditor's work Mr Smith added Grant Thornton initially did not "identify any issues" because KPMG had not reported any such issues in its reports. The payments were therefore missed again.
He continued: "The third point is when we are testing transactions materiality does come into it in the sense that it actually dictates what you test, so you will automatically test anything that is material, but obviously that wasn't the case because each year in the actual transactions there was no material, so they wouldn't automatically get selected for testing so that means they are subject to sample testing.
"And that means there is a chance of getting selected, it means there's a chance they don't get selected and probably a high chance they don't get selected. While I cannot comment on what the predecessor auditor did, it looks likely these transactions may never have been selected for testing and therefore subject to less scrutiny."
In an additional statement a spokesman for Grant Thornton UK LLP added: "I’m afraid we cannot comment in detail on the matter, as it is currently being addressed with the council and relevant bodies as part of the 2019/20 audit, which remains open. However, for the avoidance of doubt, the matter largely pre-dates Grant Thornton’s appointment as the council’s auditor, having taken on the role in the 2018/19 financial year.”
KPMG declined to comment.
