By Anna Whittaker, Local Democracy Reporter
A long-awaited report into Nottingham City Council’s finances has revealed “very serious concerns” and a work culture which is not focused on properly following accounting rules.
The Financial Controls Assessment, originally due to be complete by February, was published on Tuesday (June 26).
It concludes controls on how money is managed at the authority are “not fit for purpose”.
The review was carried out by accounting firm Ernst and Young Global Limited to check historical accounting practices to check for any potential manipulation of accounts.
It follows the uncovering in 2021 of huge misspending in the council’s Housing Revenue Account, involving the wrongful use of the funds from council tenants’ rent, and estimated to cost up to £51 million.
The report reveals concerns over ineffective systems including the inability to find documents and a culture which is “not focused on compliance” – but no fraudulent transactions have been found.
Nottingham City Council has published a summary of the report but the full document has not been made public
Nottingham City Council said it has “responded quickly” and commissioned an initial three-month remediation plan to address the control weaknesses.
Councillors will discuss the report at the Audit Committee on Friday, June 30.
It was commissioned following the uncovering of millions of pounds in wrongful spending from the Labour-run authority’s Housing Revenue Account in 2021.
EY examined six ring-fenced areas: the dedicated Schools Grant, the Better Care Fund, licensing income, parking, traffic regulation and bus lane enforcement income, the Transforming Cities Grant and Selective Licensing.
EY has rated the overall risk as ‘high’ in the six areas examined but they stated that there is “no suggestion of any fraudulent transactions”.
They concluded that for the period 2019 to 2022, there are a number of “very serious concerns identified”.
“EY observed a weak control environment, ineffective systems, associated management information and a culture which is not focused upon compliance”, the report stated.
It added: “The findings of the financial controls assessment underpin a conclusion that NCC is operating with a considerably weakened control environment which is not fit for purpose in allowing a Local Authority to enact effective financial stewardship.”
EY said ineffective systems within the council “contribute to a
culture where compliance is not valued nor seen as a priority”.
But they acknowledged that the scale of change required with the city council’s finances “will take a number of years to fully implement”.
Concerns were also raised over the council’s “inability to find documents” as well as document retention and approvals.
EY said the council had an “ineffective audit trail to support transactions, with extensive records either incomplete, onerous to draw from systems or in many cases, missing”.
They added that the council had a culture whereby “policy adherence and knowledge is weak”.
The review includes checking for if any “management override of controls” has taken place.
The term relates to when management, and those in charge of governance, manipulate accounting records and prepare fraudulent financial statements by overriding controls put in place by an organisation.
The report stated that there was a “high risk of controls being circumnavigated through management override”.
It said: “It is recognised that there may be range of reasons for why controls are overridden by management that may include both active decisions by management to override driven by a broad range of reasons including expediency, efficiency or self-interest, along with unintentional override which then is not flagged by a system.
“However, such risks are at the core of an ineffective control environment and hinders the ability of NCC to effective proper financial stewardship.”
A 12-week remediation project has been commissioned which will include weekly review meetings to ensure improvements are made quickly.
Wider improvements to the council’s finances are ongoing as part of the Financial Improvement Plan.
This follows serious accounting problems uncovered in the council’s ring-fenced Housing Revenue Account – the fund created by housing tenants’ rent money.
The cost of the wrongful spending of this fund now totals up to £51m, after money was improperly transferred to the council’s general fund, which finances other services, over a series of years beginning 2014.
EY was appointed to carry out the review towards the end of last year.
It was anticipated the review would take approximately ten weeks and conclude mid-February 2023, however during an Audit Committee meeting in March, councillors were told it was taking longer to complete.
The report added: “EY concerns are of a very serious nature and may result in the external auditor requesting further assurances.”
Ross Brown, Corporate Director Finance & Resources, said: “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.
“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.”
Cllr Audra Wynter, the Council’s Deputy Leader and Portfolio Holder for Finance & 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.”
