Lessons on governance and finance from recent public interest reports

May 14, 2021

Dr Paul Feild looks at what can be learned from the recent Local Audit and Accountability Act 2014 Schedule 7 Public Interest Reports relating to Croydon LBC and City of York.

There have been two recent Reports in the Public Interest (RPI) under section 24 and Schedule 7 of the Local Audit and Accountability Act 2014 (2014 Act) which have been published which are of interest to local government practitioners from a governance and finance perspective.

The first thing to mention is that all the power of the RPI is in Schedule 7. Section 24 just refers to it. Schedule 7 Paragraph 1 places a duty on a local auditor to consider whether in the public interest, they should make a public interest report on any matter coming to their attention during the audit and relating to the authority or connected entity to the authority so that the recommendation can be considered by the relevant authority or brought to the attention of the public.

It is a very wide scope for the local auditor; a sympathetic view is that effectively if a matter crops up in the audit, then the auditor can write about it. Schedule 7 Para 2 enables a local auditor to issue written recommendations to the authority relating to the authority or entity connected with it, so that the recommendation may be considered. Publicity must be given and as well as sending a copy to the authority a copy must be sent to the Secretary of State (Para 2.(3)(a)). Furthermore, the auditor’s reasonable costs in preparing the report must be paid for by the authority (Para 1(5)).

The second point to mention is that Unlawful Expenditure Notices are issued by a local authority’s chief finance officer (S.151 Officer Local Government 1972) under section 114 Local Government Finance Act 1988. These notices are specifically referred to in the 2014 Act. Essentially the effect of a Section 114 Notice is a drastic finance measure where all spending except for that required by law is frozen. Think of it as the Council body going into shock with all but vital organs being cut off from the blood supply. It requires a report to the council:

Section 114(3): “…The chief finance officer of a relevant authority shall make a report under this section if it appears to him that the expenditure of the authority incurred (including expenditure it proposes to incur) in a financial year is likely to exceed the resources (including sums borrowed) available to it to meet that expenditure.”

So now let us look at the two most recent 2014 Act Sch 7 Reports in the Public Interest.

London Borough of Croydon

Grant Thornton (GT) [i] recently published on 23 October 2020 Report in the Public Interest regarding the London Borough of Croydon https://www.croydon.gov.uk/council-and-elections/budgets-and-spending/reports-and-reviews/report-public-interest.

GT as Croydon’s external auditor had earlier identified concerns relating to the financial sustainability criteria of the value for money conclusion in 2017/18 accounts and made recommendations for improvements.

GT said that Croydon’s financial position deteriorated further during 2018/19. GT made recommendations which were not implemented. GT continued to say that Croydon’s financial position deteriorated during 2019/20. GT wrote to Croydon’s former Chief Executive in April 2020 setting out action they considered to be vital. In GT’s opinion at the end of August 2020, the Council had failed to produce a formal action plan or to respond to the audit recommendations effectively.

GT say there was insufficient challenge from members on the financial risks in the budget, or on the credibility of the planned level of income from third parties and the deliverability of the savings plan. In summer 2020 a budget gap for 2020/21 of £65 million was identified together with £21 million of in-year savings required to narrow the gap if the savings were achieved.

The precarious finance position was reported to the Croydon Cabinet in July 2020 and subject to a Scrutiny and Overview Committee call-in in August 2020. Neither meeting referred the significant fact that the authority’s budget gap exceeded its available reserves, to the full Council. In GT’s view this was a failure of governance and showed a lack of understanding of the urgency of the financial position. In September 2020, following the departure of the former Chief Executive they said there was little progress on making savings, GT noted that the Section 151 Officer had drafted, but not formally issued, a section 114 Notice report. Eventually amendments were made to the 2020/21 General Fund Budget via its Cabinet and full Council later that month.

GT said Croydon had increased the level of borrowing (£545 million in three years) and used the monies to invest in its own companies and to purchase investment properties. The Auditor noted that the investment strategy for investing in properties while it was approved at full Council [ii] had been subject to a form of guillotine procedures meaning there was insufficient time to discuss and challenge the strategy. GT considered that Croydon Council’s approach to borrowing and investments exposed the Council and its taxpayers to significant financial risk. Their opinion was there had not been appropriate governance over the significant capital spending and the strategy to finance that spending.

GT observed Croydon’s governance and oversight of the wholly owned and part owned companies shows insufficient rigor and control and that its investment has not yet received any significant return.

In GT’s opinion there was collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken. Croydon Council commissioned a review of its governance arrangements in March 2020 which concluded that improvements were needed to the culture around decision making. GT agreed with this recommendation but noted that they have not seen an improvement in the culture of decision making so far as it related to financial sustainability. A section 114 Notice was issued on 11 November 2020 followed by a second section 114 Notice on 2 December 2020 and maintained until March 2021.

Croydon Lessons – Local Government Finance Issues

Section 114 Notices and Reports are rare. Inevitably, people are reluctant to use the extreme powers of a section 114 Notice, indeed it had been many years since a Notice had been issued, then the Northamptonshire County Council S.151 officer issued one in the middle of a Best Value inspection.

Croydon’s S.151 officer issued two Section 114 Notices shortly after the GT Report in the Public Interest. The key lesson is that if the finance picture is not looking good from their auditor’s annual report (and they will see it in draft weeks before!) and particularly if the previous year’s audit recommendations have not been implemented, the authority must respond swiftly with an action plan before the report is finalised, or the local auditor may well issue a Report in the Public Interest which will require full council consideration and must be sent to the Secretary of State.

In May 2020 MHCLG published an important guide on how they would manage statutory intervention. It is called Statutory Intervention and Inspection- A guide for local authorities (the ‘Guidance’). The Guidance advises there are powers for the Secretary of State to intervene in a local authority located in the LGA 1999. They are founded on the principle that the authority is failing to deliver best value and continuing improvement. The Guidance makes clear it is a last resort power and the preferred starting point is that problems relating to the effective administration of best value are to be swiftly resolved at local level.

The Guidance makes the point that it would be preferable if the authority seeks help to sort its problems out rather than wait until there is intervention such as sector led support through the LGA’s sector led improvement programme and focussed support from MHCLG. If such an option is considered there will need to be evidence backed decision making which provides assurance to the MHCLG that the authority has a sound grip on the situation and a viable plan for recovery.

City of York Council

City of York Council (York) 2014 Act Sch 7 Public Interest Report by Mazars their local auditor related to the circumstances of the previous Chief Executives (CE) departure. It was considered at the City of York Extraordinary Full Council meeting on 4 May 2021 [iii] it can be accessed at https://www.youtube.com/watch?v=lCZ4wE0b45g.

It is a fascinating case study highlighting several re-occurring governance themes.

Firstly, the vexed problem of a failing relationship between a leader of a council and a chief executive, and whether the Localism Act 2011 Code of Conduct works with officer and member relations at a local level. Secondly, how do you deal with complaints against the leader, the most powerful figure in any council.

So, let us look at Mazars report. It is entitled: Public Interest Report 19 April 2021 Early Termination of the Chief Executive’s Employment Contracthttps://www.york.gov.uk/council/public-interest-report-19-april-2021-remuneration-payment-mary-weastell

It is well presented and written with pace. It has a colour cover with a figure carrying a heavy bag reflected on a closed red stripped electro-sliding door [iv].

Mazars say that they published the report because of their concerns about the:

…regularity and propriety of severance payments made in connection with the termination of the Chief Executive’s employment contract and the disclosures made in the unaudited statement of accounts for 2019/20 which was published by the Council on 30 June 2020. Mazars 2021

Mazars found that after the local election in May 2019 York appointed a new Leader of the Council (Leader), shortly afterwards the CE at the time went absent and did not return to work. In due course the CE requested early retirement. This request was considered on 17 February 2020 in a report presented at a York Staff Matters and Urgency Committee. The new Leader chaired the meeting, and the request was duly agreed. In making the decision the Committee considered the business case and secondly a settlement agreement to an Employment Tribunal (ET) Claim made by the CE on 10 December 2020 against York and the Leader in person.

The gist of the ET was about the CE claiming she suffered a detriment following her investigating a complaint against the councillor in March 2017 before he became Leader about a connection with a recruitment candidate, which was heard in January 2019 by the Standards Sub-Committee. The account of the Sub-Committee finding was the main complaint was not upheld but they agreed that information about candidates was improperly shared. No sanctions were imposed.

I looked up York’s Constitution structure and established the Leader was and is the standing Chair of the Staff Matters and Urgency Committee.

The issues of indemnity arose. Mazars say:

We are aware that the Leader had been told that there was no pecuniary interest because he would be indemnified for financial loss in connection with the claim.

And

We are aware that the Leader had been informed that he was indemnified in respect of that matter and we have not challenged that advice. In our view, however, the claim, the management role, and the earlier investigation into the Leader’s conduct in the recruitment matter presented a clear personal interest that would prejudice the judgement of the public interest and the Leader should have left the room when the matter was considered. It should have been apparent that the matter considered, and the compensation involved, presented a clear ethical threat. The Leader has informed us that he was aware this was a contentious matter but that he would be criticised by other political groups if he avoided the issue. This suggests to us that the Leader prioritised political interests over the need for objectivity in decision-making, and propriety in the use the public funds. Mazars 2021

However, the indemnity is not unlimited. The key legislation is the Local Authorities (Indemnities for Members and Officers) Order 2004 as amended and sets out when an indemnity will be possible and when it will not [v].

Mazars tell us the Leader did not declare any interests in the Staff Matters and Urgency Committee agenda items despite being a named Respondent in the ET proceeding. The settlement agreement included a non-disclosure agreement and was signed by the CE on 16 March 2020, and the Leader and the Director of Governance and Monitoring Officer on 18 March 2020. The reason recorded in the agreement is said to be business efficiency retirement.

Mazars say that was not the end of it. Two complaints (26 June and on 14 July 2020) were apparently made to the York’s Standards Committee. The complainants’ views were that Leader should have declared he had a personal interest in the matters considered at the Staff Matters and Urgency Committee meeting in February 2020. Both complaints were dismissed and not investigated though the precise details are not published by Mazars.

That the Leader had some form of interest was obvious. The ET settlement was part of the Committee’s business and as co-respondents neither York nor the Leader could sensibly settle without telling the other. Indeed, nobody could be under any illusion as to what the business was about.

It is true to say that he did not have a Disclosable Pecuniary Interest as defined by the Localism Act 2011 and the Relevant Authorities (Disclosable Pecuniary Interests) 2012 Regulations, but he certainly had some sort of interest as no one wants to be a defendant in a legal proceeding if they can help it. Incidentally, even if there was cover for legal claims against members taken out by the council, such cover will have limitations. So, should the Leader have chaired or even attended the meeting? In my opinion no, because he had an interest in the settlement.

At this point the question could be raised in that could a dispensation be granted for that Committee? There is no record of it being mentioned in the minutes. Referring to the Localism Act 2011 section 33 gives a power to grant dispensations from the provision of section 31(4) Localism Act 2011 which provides:

31 Pecuniary interests in matters considered at meetings or by a single member

This section has no associated Explanatory Notes

(1) Subsections (2) to (4) apply if a member or co-opted member of a relevant authority—

(a) is present at a meeting of the authority or of any committee, sub-committee, joint committee or joint sub-committee of the authority,

(b) has a disclosable pecuniary interest in any matter to be considered, or being considered, at the meeting, and

(2) If the interest is not entered in the authority’s register, the member or co-opted member must disclose the interest to the meeting, but this is subject to section 32(3).

(3) If the interest is not entered in the authority’s register and is not the subject of a pending notification, the member or co-opted member must notify the authority’s monitoring officer of the interest before the end of 28 days beginning with the date of the disclosure.

(4) The member or co-opted member may not—

(a) participate, or participate further, in any discussion of the matter at the meeting, or

(b) participate in any vote, or further vote, taken on the matter at the meeting,

but this is subject to section 33.

Look at section 31(1)(b) Localism Act 2011 that makes it clear that Dispensations refer to Disclosable Pecuniary Interests (DPI) not other personal interests. So that means only Disclosable Pecuniary Interests are capable of being granted Dispensations under section 33 Localism Act 2011. We have seen that the Leader’s interest was not a DPI, indeed if it were it then it would have been unlawful for him to take part.

Mazars then went onto discuss the legality of making a settlement and commented:

A local authority’s power to make payments on severance is limited to those conferred by legislation. As a consequence, and in certain circumstances, payments made in excess of those permitted by the relevant legislation will be ultra vires (as in Allsop-v-North Tyneside Metropolitan Council (1992)). An employee’s entitlements on termination of employment depend on various factors, including the reason for the termination and whether any claims are being settled. In the case of Hinckley and Bosworth Borough Council-v-Shaw (1998), the High Court confirmed payments to employees could be unlawful if they are paid without good reason. Some of our audit findings relate to complex areas of employment law and we have relied on legal advice from employment specialists in preparing this report. Mazars 2021 p 6

Mazars focused on the business case presented to the Staff Matters and Urgency Committee in February 2020 and observed:

In our view the business case presented did not include sufficient facts in each of these areas to provide Members with the information needed to make an informed decision. In particular, the business case presented:

included a misleading statement about contractual requirements and elements subject to discretion (see tables 1 and 2 below);
included reference to an annual saving of £50,000 without explaining in detail how the savings and costs were calculated;
did not set out the assumptions underpinning the estimate of £250,000 for potential legal costs and damages; and
did not provide context to support the reason for the costs associated with the settlement agreement. Mazars 2021 p7

In terms of the settlement Mazars made a statement which is worth repeating:

A local authority should not enter a settlement agreement simply to avoid embarrassment to the authority or individual elected members, or the cost of defending proceedings. It is only where there is a risk that a claim has a reasonable chance of success that it may be compromised. Mazars 2021 p11

Ok. Up to a point Lord Copper. The fact is a council will from time to time elect a new leader, this may be due to a change of political control or a change in group leadership or a coalition governing arrangement. The CE is either seen by the new leader as the continuity or an agent of an ancien regime. They may have helped the previous leadership hold back the challengers who now have the reins. If so, then the new leadership will want them out and want a CE more attuned to the new political sense of direction. So, there is friction.

Furthermore, there is specific secondary legislation regulations touching CE employment being the Local Authorities (Standing Orders) (England) Regulations and Local Authorities (Standing Orders) (England) (Amendment) Regulations 2015 plus the 2016 Joint Negotiating Committee for Local Authority Chief Executives National Salary Framework & Conditions of Service Handbook. These JNC terms combined with the Regulations make the whole process of staffing matters involving CEs expensive, time and resource consuming. Add into that the need for confidentiality and inevitable senior member and chief officer involvement and finally the dispute or point of difference being with the best paid employee with a strong professional support network (who will put pressure on too) and very quickly such matters will preoccupy the senior political leadership and management.

There is the bigger picture too. All local authorities are driven by the need to maintain reputational management, public faith in elected officials is the cornerstone of democratic government and it is necessary to maintain investment and growth. Why would any investor want to enter a partnership or business venture and regeneration investment with a council if that council was perceived to be feuding between its salaried and political leadership in the ET? Maybe the case is six of one and half a dozen of the other, but all the good and exceptional work should not be trashed in an ET which can take two years plus to get to a hearing.

If there is a difference between the CE and the Leader that does not relate to the CE’s performance, then the Leader’s options are limited, the CE could make a grievance issued under the 2016 JNC Conditions Schedule 7 or alternatively a complaint against the Leader under the Councillors Code of Conduct. Indeed, if a matter is capable of being a justifiable grievance, then it is bound to be in breach of Nolan. See my January Local Government Lawyer 2020 article on bullying for further discussion.

If it gets that far then it may either end up in legal proceedings or a deal if reached.

What of the cost? CE’s terms and conditions and their departure are covered by two standing orders regulations, JNC terms and conditions, ensuring compliance in the council constitution and whatever their local contract says. So, there is a price. Frankly because of the cost of getting it wrong with all the complexity and the political environment it would be foolhardy not to get in counsel and or a national public law firm to review all the materials and ensure that the procedures are sound. It will not be cheap and will easily swallow up tens of thousands.

All the above are proper business considerations and need to be stacked on the scales and may out weight the view that only if the aggrieved party has a reasonable chance of winning is the pivotal factor in settling.

Mazars then follow with a consideration of the Councillors’ Code of Conduct and its application to the Leader. This is a tricky matter because arguably this is beyond their scope for the Report. While, as observed above the 2014 Act Schedule 7’s span for matters to be subject to a report is wide, if there is cause for complaint about a member it should be dealt with under the Localism Act 2011 process. The proper venue for dealing with complaints is prescribed by the Localism Act 2011 section 28(6) process and that is by the authority. So, if a local auditor has a concern about an elected member of a council, then they should put in a complaint under the council’s obligatory statutory complaints procedure. I do not see why it should be time barred nor be affected by the rejection of two earlier complaints [vi]. Maybe they will and for that reason I will refrain from commenting any more on it for now.

Lessons from York

Colleagues - look how wide the Sch 7 power to make a Public Interest Report is to the local auditor! Whether or not that was exceeded by raising matters that were for York to deal with under the Localism Act 2011 is worthy of discussion.

Furthermore, the Monitoring Officer’s advice to the Leader prior to the Committee meeting was selected to be mentioned in the report, yet there is no mention of the S.151 Officer. What this means is Monitoring Officers can be singled out in a PIR even though one may have quaintly assumed local audit was principally about finance. Clearly it is not. This PIR is of extreme significance to legal colleagues and Monitoring Officers, in that their advice and what they do, even if they are not at the chief officer ‘top table’ can be subject to an open report published for all to see and subject to a full council meeting.

Severance payments to Chief Officers will come under scrutiny at audit so they have to be by the book. I’d recommend actually consulting with your local auditor before making any irreversible commitment.

Conclusion

Firstly Section 114 Notices. I repeat CIPFA’s Chief Executive Rob Whiteman in the Local Government Finance Officers Room 151, explains that that action should be taken before service of the notice and that measures have been agreed between CIPFA and MHCLG to the effect of:

At the earliest possible stage, a CFO [Chief Finance Officer] should make informal confidential contact with the Ministry of Housing, Communities and Local Government (MHCLG) to advise of financial concerns and a possible forthcoming S.114 requirement.
The CFO should communicate the potential unbalanced budget position due to COVID-19 to MHCLG at the same time as providing a potential S.114 scenario report to the council executive (cabinet) and the external auditor.

This is truly invaluable advice. Because the current picture is that when the history is written in the BV Inspections and the Public Interest Reports, it can be about what the MO advised and what the S.151 Officer did.

Secondly governance. While there are three Governance Officers, the Head of the Paid Service / Chief Executive is notionally a key figure. Whereas the reality is the governance problems that are picked up in the Best Value reports under the Local Government Act 1999 are essentially about lawfulness and financial competence. Now we see really for the first time use of Sch 7 Reports in the Public Interest are looking at Monitoring Officers advice on governance. This draws in the Monitoring Officer and the S.151 Officer.

The York RPI presents the difficulty of dealing with complaints against elected leaders. I have touched on this before. It is simply unfair to expect junior staff (and many Monitoring Officers who are not chief officers) to deal with complaints against strong leaders and mayors. The other two governance officers must back them up. As I consistently comment it is a mistake not to allow have the Chief Executive as Monitoring Officer anymore. It is worrying when in York’ RPI that when it comes to officers, the local auditors have focused on the MO the junior of the triumvirate, what about the other two - why were they not mentioned?

Finally, let us feel sorry for all the parties in these recent matters. The Leader and a Chief Executive is a close working partnership and with all the professionalism in the world, it they are working in the trade of local politics and they may just not hit it off. In such circumstances, of course the Leader wants to make changes. This is particularly true when there is a change in political party control. In the past there was some experimenting with fixed term contracts, maybe that’s worth revisiting. The legal team and Monitoring Officer do seem to find themselves ‘'piggy in the middle’ again and singled out by external reports. There is a lot to be said for getting external legal support for the objectivity that can be brought and to dispel any inference that in some way the advice has been tailored to suit.

So do find time to read the report and watch the highlights of the full council and reflect but for the grace of God…

Dr Paul Feild is Senior Standards Solicitor working in the Barking & Dagenham Legal Practice Governance Team. He has been a deputy Monitoring Officer on and off for various public authorities for twenty years. His 2015 Doctor of Business Administration thesis was ‘How does Localism for Standards Work in Practice? The Practitioner’s View of Local Standards Post Localism Act 2011’. He researches and writes on governance issues and can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..

References

Local Government Act 1999

Localism Act 2011

Local Audit and Accountability Act 2014

The Relevant Authorities (Disclosable Pecuniary Interests) Regulations 2012

Joint Negotiating Committee For Local Authority Chief Executives

National Salary Framework & Conditions of Service Handbook 2016

Statutory Intervention and Inspection- A guide for local authorities 2020 - Ministry of Housing, Local Government and Communities

London Borough of Croydon - Report in the Public Interest concerning the Council’s financial position and related governance arrangements - Grant Thornton 2020

Public Interest Report 19 April 2021 Early Termination of the Chief Executive’s Employment Contract – Mazars 2021

[i] Who were the Auditors for Nottingham City Council (Robin Hood Energy)

[ii] A full council function see Statutory Guidance on Local Government Investments (3rd Edition) Issued under section 15(1)(a) of the Local Government Act 2003 and effective for financial years commencing on or after 1 April 2018

[iii] It is worth a watch with the Lord Mayor commencing the proceedings by reciting John Keats, though perhaps Hilaire Belloc’s ‘Charles Fortescue’ is the ideal standards poem…

[iv] Not sure what it is supposed to symbolise. Might be better not to have pictures.

[v] See Regulation 5 which defines what an indemnity will be granted for and Regulation which states its restrictions. Thus, this member protection is not unlimited,

[vi] While we do not have the two complaints to read, it is odd they were dismissed yet the auditors considered the same matter merited a Sch 7 Public Interest Report?