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External auditor slams legal, governance and finance failings over multi-million pound arts centre refurbishment project run by London borough

The lack of formal consideration of external legal advice, the lack of completed legal land transfer documentation and the lack of properly executed written legal arrangements covering the provision of funding to its wholly owned housing development company was “a very serious matter” and demonstrated “fundamental failings” by Croydon Council, the local authority’s external auditor has found in a public interest report on the troubled refurbishment of an arts, entertainment and conference centre the council owns.

These shortcomings were among a litany of legal, governance and financial control failings identified by Grant Thornton in relation to the Fairfield Halls project, which was delivered over a year late in September 2019 and with a final cost of £67.5m that was more than double the initial budget.

The housing development company, Brick by Brick, had been engaged by the council to deliver elements of the College Green scheme encompassing a house building scheme, public realm improvements and the regeneration of the arts centre. But the inclusion of the latter within the project added significant complexity.

In the public interest report, which can be found here, Grant Thornton concluded: “The Fairfield Halls refurbishment project was a complex project which was delivered late and with significant additional spend beyond the amount approved by Members; the entirety of the project spend has now been accounted for as capital expenditure.

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“The Council’s historical arrangements failed to ensure the legality of the arrangements for the project and allowed governance gaps which prevented monitoring of the project, oversight, and wider scrutiny and challenge that may have allowed corrective action to have been taken.”

Grant Thornton suggested that throughout the project there were individuals with both the knowledge of the many issues with the project and who had duties and responsibilities which the auditor would expect to require action to address the known issues.

It said: “The lack of appropriate action, in our view, represents a failure to discharge the duties expected from a small group of senior officers (the then three Senior Statutory Officers and the then Executive Director of Place). This group reported to the then Portfolio Holders (the then Portfolio Holders for Homes and Gateway Services, for Finance and Resources and the Leader) who were either not briefed by officers and should have requested briefings on the project given what they appeared to know or did not take effective action in response to concerns raised by the officers.”

The statutory officers and chief officers throughout the time of the refurbishment, including the then chief executive, the two Section 151 officers and the then monitoring officer, have since left the council.

Amongst other things, Grant Thornton said that in obtaining external legal advice on a land transfer option and not acting on that advice, it was the auditor’s view that the council failed to ensure it was acting lawfully. “We can find no evidence of senior statutory officers updating Cabinet formally on the legal risks emerging, consideration of how the emerging risks could be effectively mitigated or of the anticipated shortfall in funding and the foreseeable implications.”

The report also suggested that the underlying reality of the arrangements put in place between the council and Brick by Brick meant Croydon was likely to have been found to have been a breach of public procurement law, had it been challenged in court.

Grant Thornton also said that while draft conditional agreement of sale and draft loan agreements were available, neither the council nor Brick by Brick could provide properly executed written versions of these documents.

“There therefore appears to be no clear contractual basis at all for the project (and we note that while it is technically possible for unsigned written contracts to give rise to enforceable legal obligations, where the parties are acting in accordance with their terms, this will not always be the case, so even in a best case scenario, with absent properly executed written contracts the Council was subject to a material risk that in the event of an action to enforce the loans, a court could find that there was no enforceable contract).”

The auditor said it therefore did not consider that the council properly exercised its powers to make payments to Brick by Brick.

Grant Thornton has made a series of statutory and other recommendations (see below), with a number covering issues around legal advice and documentation. 

Croydon Council has said it fully accepts the conclusions, which will be considered at an extraordinary council meeting next week (3 February). An action plan will be put together to address the recommendations.

The local authority insisted that over the past 12 months it had overhauled and strengthened its financial, legal, decision-making and other governance processes, and through its Croydon Renewal Plan was “creating a new culture of good decision-making, transparency, accountability and value for money”.

Cllr Hamida Ali, leader of Croydon Council, said: “Since I became leader we have been rebuilding the council and tackling the problems of our recent past. Last year we raised serious concerns with the auditor about the historic management of the Fairfield Halls refurbishment which then led to this report.

“The people of Croydon deserve value for money from every penny the council spends. This report shows that the original arrangements for the refurbishment of Fairfield Halls fell well short of that standard.

“I know that people across Croydon will be rightly angry to hear their money wasn’t safeguarded as it should have been and I want to apologise for that on behalf of the council.”

Cllr Ali added: “Over the past year we have transformed the way the council operates, appointing a whole new leadership team and strengthening our processes to ensure this could never happen again.

“Fairfield Halls is one of Croydon’s most iconic venues and the council remains committed to supporting the future of this incredible institution.”

In February 2021 the then Local Government Secretary Robert Jenrick appointed an Improvement and Assurance Panel to address what he described as “serious failures” at Croydon.

The measures came in response to the findings of a rapid non-statutory review commissioned in October 2020 to examine the council’s overall governance, culture and risk management following the announcement that it would seek exceptional financial support from the Ministry for Housing, Communities and Local Government (as was).

An earlier public interest report from Grant Thornton, issued in November 2020, had accused the council of suffering “collective corporate blindness” when it lost control of its finances and involving itself with business ventures it did not properly understand.

The council has said it intends to wind down Brick by Brick once it has completed its outstanding building work. It added that it has also replaced the Brick by Brick board with two experienced financial directors, while the Fairfield Halls refurbishment contracts were novated and taken back under direct council control.

 

Grant Thornton’s recommendations (statutory recommendations highlighted in bold)

R1 The Chief Executive supported by the Monitoring Officer and the Section 151 Officer should ensure that Cabinet papers for major projects set out clearly

R1.1 the legal powers to enter into a particular arrangement and attendant risk

R1.2 how the Council can protect its interests and secure economy, efficiency and effectiveness.

R2 The Monitoring Officer should ensure that

R2.1 contracts are properly executed before entering into arrangements with third parties

R2.2 the properly executed documents are stored robustly to allow future scrutiny.

R2.3 key requirements underpinning the legal advice are in place before progressing with the arrangement

R3 The Monitoring Officer should ensure that where legal advice changes after a Cabinet decision that the consideration of the implications of the changes is documented and where the Monitoring Officer considers additional legal risks are identified that the Cabinet is updated on the impact on the original decision made.

R4 The Section 151 Officer should ensure that prior to making payments to third parties that appropriate legal documentation is in place such as a properly executed contract or a properly executed loan agreement

R5 The Monitoring Officer and Section 151 Officer should ensure that arrangements are in place to properly consider public procurement rules and UK obligations on subsidy control rules before entering into arrangements.

R6 The Chief Executive, Monitoring Officer and Section 151 Officer need to consider how to respond appropriately to challenge on decisions and be prepared to take corrective action where necessary.

R7 The Chief Executive should improve record keeping arrangements so that

R7.1 the records supporting key decisions including financial analysis are maintained

R7.2 a standard approach to record keeping with monitoring of which decisions have been implemented

R7.2 tolerances are established for reporting back changes to Cabinet

R8 The Chief Executive, as Head of Paid Service, should ensure appropriate governance arrangements are implemented in a timely manner particularly for strategic developments such as Brick by Brick including where appropriate that there is clear guidance for nominated representatives on the expectations of the role including reporting back to the Council

R9 The Chief Executive should work with the Leader to continue to embed

R9.1 a clearly understood distinction between the different roles and responsibilities of Members, officers and representatives of entities akin to Brick by Brick.

R9.2 clear responsibilities for officers and Portfolio Holders in challenging reports presented to Cabinet and other committees for balance, accuracy and consistency in terms of knowledge

R10 The Chief Executive should review the terms of reference for officer and member/officer boards that oversee significant projects and capital/revenue expenditure and clarify the escalation routes for significant additional expenditure in excess of the budget

R11 The Section 151 Officer should ensure financial reporting on significant capital projects is enhanced so that

R11.1 a clear agreed budget for the project is identified and the underlying financial analysis is maintained

R11.2 a clear agreed project expenditure amount can be reported through appropriate governance processes

R11.3 where there are changes in the original financial assumptions that there is an assessment on the project’s financial viability with appropriate reporting

R11.4 the revenue impact of any changes in the capital project are addressed in future budget setting

R12 The Chief Executive should put in place arrangements to consider inherent conflicts of interest for executive officers.

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