Urgent action is needed at Nottingham City Council to "avoid the risk of inappropriate financial activity" according to a new report which highlights issues including missing records. The authority says more may need to be spent on improving its finance systems in the wake of the report, which says the council's ability to provide "proper financial stewardship" is being held back.
The report was drawn up by the accounting firm Ernst & Young (EY) and was commissioned by the council amid concerns about some of its financial controls. Concerns arose after it was revealed in 2021 that money which should have been spent on the council's housing stock was illegally being spent in other areas.
More than £40 million was misspent, with all that money now being paid back into the Housing Revenue Account (HRA). Due to inflation, it was said earlier this year that the cost of these errors could eventually reach up to £51 million.
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The findings of EY's review, which have just been published, do not show that any other funds have been misspent following the HRA issue. But the firm's report warns of an "ineffective control environment" at Nottingham City Council, with the authority now taking steps to make immediate improvements.
The report comes as an Improvement and Assurance Board (IAB) monitoring improvements at Nottingham City Council, in the wake of issues including the HRA spending and the collapse of Robin Hood Energy, remains in place. The IAB's most recent report described a "lack of urgency" at the council in terms of those improvements.
EY looked into financial controls within six areas of the council including dedicated grants for transport projects, schools and disabled facilities. Income received from licensing, parking and bus lane enforcement was also reviewed.
All six of these areas have been given a 'RAG rating' of Red by EY, meaning the financial controls within them are creating a high risk at the council. The authority says concerns raised are of "a very serious nature" and that its external auditor, Grant Thornton, may now require further assurances about the state of its financial systems.
Ross Brown, the Corporate Director Finance and Resources at Nottingham City Council, aid: "We've been undertaking detailed work since significant issues were found with our Housing Revenue Account, including how we receive and process ring-fenced grants which are allocated to the council for a certain projects or areas of our work.
"Whilst this assessment hasn't specifically identified that allocated funds have been misspent in the samples tested, it has revealed serious weaknesses in this area, and it’s clear that urgent action needs to be taken to improve procedures and practices from the point of acceptance through to delivery of services."
EY's report is not being published in full by Nottingham City Council, with the authority instead summarising it in a report being presented to councillors at an audit committee meeting on Friday (June 30). Representatives from EY will be at that meeting for councillors to question them.
In terms of why EY's full report is not being published, the council says there are exempt documents attached to its report which "contain information relating to the financial and business affairs of third parties." The council also says: "It is not in the public interest to disclose this information because full disclosure at this stage may impact on further activity that still needs to be undertaken."
The key issues found by EY include "extensive records either incomplete... or in many cases, missing." Of issues identified, EY says half of them could be blamed on a lack of, or inappropriate, evidence.
The firm also found a culture where policy adherence and knowledge is "weak" and where there is a high risk of managers overriding financial controls. The council's summary says: "This report highlights the weaknesses that have both historically and currently exist in the financial control environment, infrastructure, and culture of the organisation.
"These weaknesses limit the council’s ability to effectively discharge its legislative responsibilities." The council also says: "As much as the findings quite rightly focus on the system and process failings, the cultural and organisational limitations should not be lost as it is a significant contributing factor in the matters raised.
"Rectification of the issues is much more than simply putting in new procedures." Because of the number of issues raised, the council says "additional resources may be requested" for its financial improvement plan. The council recently confirmed that total spending on the company helping its financial improvement plan would total more than £2 million in one year.
Mr Brown said: "We're committed to reviewing all our financial processes as part of our wider improvement journey. We have already taken action to address the findings of the assessment but further work is needed.
"An initial three-month strategy is already in place which will work alongside our wider financial improvement plan." This three-month plan will include a "rapid intervention" on specific issues identified within the six areas, as well as a "health check" across the council.
Councillor Audra Wynter, the council's Deputy Leader and Portfolio Holder for Finance and HR, said: "It's right that as part of our improvement journey we are unflinching in our efforts to identify any issues in our finance and governance arrangements. We can reassure residents and partner organisations that we are working to address the underlying issues as a top priority."
