Nottingham: Secret report detailing missing millions and 'acutely' poor financial management published by city council

The independent assessment of how the Labour-run authority managed money has been made public after regulator the Information Commissioner’s Office (ICO) ordered the council to release it.

Accounting firm Ernst and Young (EY) was first asked to review its books after unlawful spending from the council’s Housing Revenue Account was uncovered in 2021.

Millions of pounds strictly intended for council housing and tenants had been wrongly and unlawfully transferred to the authority’s general fund over a series of years.

It is estimated the cost to make amends is around £51m.

The discovery led to EY being asked to investigate whether other ring-fenced pots of cash had been incorrectly used.

However the council refused to publish the full report, saying there was a need to consider what it described as a technical report for officers in a ‘safe space’.

But the Local Democracy Reporting Service appealed the decision to the ICO, which ruled in favour of publishing the report.

The series of documents show EY looked at accounts across financial periods from 2019 to 2022 and identified ‘a number of significant concerns’.

It investigated six areas including parking, traffic regulation and bus lane enforcement, the better care fund, capital expenditure, the transforming cities fund, the dedicated schools grant and licensing income.

“The report states: Four of the six areas where identified as having a medium risk of management override of controls.

“One area, namely parking, traffic regulation and bus lane enforcement was identified as having a high risk of management override of controls.”

In this area EY noted, from interviews with council staff, that historically the council ‘has been commercially-driven and set income targets for the enforcement team, contra to the regulatory guidance’.

It was said the corporate centre has treated this division as a ‘cash cow’.

Furthermore, the report says the council received £5m from the Government for lost car parking income during the pandemic, but the enforcement team ‘did not receive any of this money and it is not clear how it was used’.

Issues with a lack of audit trails in numerous areas were also found, meaning it is difficult to ‘demonstrate that these funds are used for the specified purposes’.

Meanwhile, an overriding ‘commercially-driven culture’ created risks.

EY said: “It was commented that commercially-driven culture within the council has led strategic finance to consolidate its control over the budget-setting process, including the setting of income targets and management of cash inflows.

“The presumed motive for this among interviewees is to meet budget pressures.

“This risks license fees and traffic enforcement becoming divorced from their regulatory purpose.”

Other problems were found in the use of the Bridge Estate charity’s money.

The council is the sole trustee of the charity, which was set up to maintain Trent Bridge by letting out around 100 properties across Nottingham.

When surplus money is made by the charity, it may be transferred to the council’s own account.

But the report reveals the money transferred to the council ‘does not appear to correlate’ with the generated surplus.

For example, in 2021-22 a total of £1m was transferred, but this was £519,584 more than the surplus made in the year.

The report says it appears endowment funds contribute to the transfer.

Endowment is property a charity must keep rather than spend – however, spending, borrowing from, or transferring it can be allowed in some cases.

The right rules must be followed, according to Government guidance, and it must always be done in the best interests of a charity.

The EY report says investigations must be done to check whether any of these transfers ‘would fall outside of the charity objectives, or outside of accepted practice.

It said: “The charity’s objectives state any surplus can be utilised to the ‘benefit of residents of Nottingham’.

“However, a transfer above this surplus would likely be interpreted as outside of the charity’s objectives.”

Within the Dedicated Schools Grant analysis, 80 per cent of issues identified were due to incomplete samples or inappropriate evidence, which EY says ‘points towards an ineffective maintenance of the audit trail’.

Further problems include a lack of transparency, an ‘acutely weak control environment’ and a culture not focused on compliance.

Coun Kevin Clarke (Ind), opposition Independent Group leader, said: “It is very damning, you don’t even have to read between the lines to see all is not right.

“It shows the culture of the whole council.”

In a statement, a city council spokesperson said: “The assessment identified significant weaknesses that needed to be addressed to provide the necessary level of assurance, including a weak control environment, ineffective systems and a culture which was not focused upon compliance.

“A report taken to the council’s audit committee provided a comprehensive summary of the issues raised by the assessment and the urgent action needed to make the necessary improvements.

“It is important to be clear there is nothing specifically identified within the samples tested in the assessment that suggests any allocated funds have been misspent or funding has not been used for its overall intended purpose.

“The council took the view that the full assessment report was of a technical nature designed to support the work of professional officers.

"The Information Commissioner made clear that the council had legitimate concerns around the disclosure of the full report and that it had correctly engaged the exemption not to publish.

“However, they decided that on balance, the public interest outweighed the exemption in this case.

“The council has been open about the nature and seriousness of the assessment’s findings.

"Good progress has been made to address the issues raised, and through the council’s finance improvement plan, reported at every audit committee, to ensure the necessary controls are in place.”