Former monitoring officer at borough council failed to challenge chief executive on massive borrowing that preceded section 114 report, auditors say

Woking Borough Council's former monitoring officer failed to challenge the former chief executive officer and former s151 officer over decisions to borrow large sums of money with no credible plan for repayment, a public interest report on the council's governance arrangements has concluded.

External auditors Grant Thornton also highlighted a series of "potentially unlawful" decisions and found that the local authority's legal services team were under-resourced, given the scale of the council's investment activities.

In its report published this week, the auditor said Woking failed to secure value for money in the years leading up to its section 114 notice, which was issued in 2023.

The section 114 notice was in response to a budget deficit of more than £1bn, a debt of £1.8bn, and just £16m in core funding available in the 2023/24 financial year.

Two large investments in the council's portfolio – Victoria Place shopping mall and a housing regeneration project in Sheerwater – account for the majority of its debt.

Grant Thornton's report described the council's former CEO, Ray Morgan, as the "principal architect" of the investment decisions which led to the council's debt.

However, it also concluded that the "complacency" of some members and "failures" of the former Monitoring Officer, Peter Bryant, and former s151 Officer to fulfil their roles "enabled the former CEO to push through poor investment decisions largely unchallenged".

Commenting on the former monitoring officer's role, the report said: "There is consistent evidence from member and officer stakeholders and from the former Monitoring Officer himself that he did not, in either his Monitoring Officer or Head of Legal Services roles, challenge the wisdom of the decisions of the former CEO and former s151 Officer to borrow such large sums of money with no credible plan for repayment.

"The scale and basis of the council's lending to its companies and third parties was clearly imprudent, perhaps so imprudent as to be unlawful, making this a matter of law, and not just financial prudence.

"The former Monitoring Officer also confirmed that he knew that the former CEO was using the council's money to purchase land, without independent valuations, which may, in certain cases have been in breach of his fiduciary duty to the council, but there is no evidence that he raised any concerns or issued any warnings to the former CEO, former s151 Officer or members."

The report said the former monitoring officer should have commissioned or undertaken due diligence before the council offered a revolving loan of £250m to a developer whose company had capital of just £100 to redevelop Woking Football Club and build up to 1,100 homes.

According to the report, "close-knit relationships" between officers on the council's senior leadership team were partly to blame for the decision-making around investments.

Peter Bryant and the former CEO had both joined the council in the late 80s.

Grant Thornton reported that some member and officer stakeholders said the approach of the former s151 Officer and the former monitoring officer was to seek to "enable the former CEO's plans and ambitions, without the necessary and appropriate degree of independent thinking and professional challenge".

Alongside this, decisions on investments, the establishment of council-owned companies, loans to those companies and to third parties were also made incrementally and opportunistically over a period of 25 years, with no overarching investment strategy, according to the report.

"This left the direction of the investment portfolio open to a piecemeal and opportunist approach based to a significant extent on the personal judgement of the former CEO and the other senior officers," it said.

Auditors noted that in most cases they looked at, the council did not commission external financial appraisals to test the viability of schemes.

They also concluded that the risks of financing and the development risks relating to the investments were not clearly highlighted to members or assessed, and the impact of the level of borrowing and development and financial risk sitting solely with the council were not adequately considered.

The report highlighted the CEO's control over an "opportunities fund" of £3m per annum, which was used to make ad hoc purchases of houses, commercial buildings and parcels of land with possible development opportunities.

"Most of these acquisitions were made by the former CEO, without any business cases or independent valuations on a 'willing buyer, willing seller' basis," the report said.

Grant Thornton said it would "expect that, unless there were exceptional circumstances which justified a different course, any delegation of authority to the CEO to purchase land on behalf of the council would, in the normal course of affairs, include a requirement to obtain independent valuations.

"Whilst the absence of independent valuations may, in some circumstances, be capable of being lawful, it is unlikely to provide assurance as to Best Value."

The CEO "frequently" paid more than the market value price, resulting in the council now owning several properties which are unable to be developed and are not worth what was paid for them, the report added.

Another purchase in which independent valuations were not sought was the decision to buy parcels of land at Brookwood Lye, which later resulted in a loss of approximately £14m.

The land was bought on behalf of a group of council-owned companies named the Thameswey Group.

The Articles of Association of the Thameswey Group set out an obligation on the part of the companies' directors to act in the best interests of the council.

The former Monitoring Officer signed the contract for the purchase as both the monitoring officer of the council and a director of the Thameswey Group. The CEO also signed the contract.

On this point, the report said the officers "were obliged to protect the best interests of the council, as well as the company.

"In our view, they should have ensured, both in their roles as directors of the company and statutory officers of the council, in the normal course of events, that independent valuations were obtained."

"This approach to the acquisition of assets, without appropriate governance arrangements or member oversight, meant the council were failing in their statutory duty to ensure Best Value," the report said.

Decision-making around investment decisions also suffered because the council's then central finance, commercial, property and legal services "were under-resourced given the scale of the council's investment activities" and "insufficiently knowledgeable and experienced for the increasing complexity of the council's investment activity".

The impact of this was poor record keeping, weak project, programme and risk management, and inadequate contract management arrangements, the report added.

The report meanwhile criticised the council's governance of its 24 companies, which were mostly wholly owned by Woking.

It found that the senior officer team and the former executive members failed to appreciate the risks that arose from conflicts of interest between their council and director roles.

"They also failed to appreciate the extent to which conflicts of interest impede effective governance and decision making, particularly if the interests of the companies and the council diverged," it said.

Some officers declared conflicts of interest but did not remove themselves from decision-making processes, the report said.

This meant that officers were "providing false assurance that they had understood and mitigated the risks arising from those conflicts of interest when they had not meaningfully done so," it added.

Several stakeholders interviewed also told auditors that during key meetings, it was not clear what role officers who were also directors of the companies were playing.

The report noted a case in which the former monitoring officer, who was also a director of the company, Kingston Community Sports Centre Limited (KCSC), which would have benefited from the decision of the council to offer a £250m revolving loan to a developer to build houses on land owned by KCSC.

"The developer's company had only £100 of capital which, in and of itself, called into question the degree of due diligence undertaken," the report said.

"The developer was proposing to redevelop the football stadium, owned by KCSC and build up to 1,100 new homes.

"The responsibility of the monitoring officer to safeguard the interests of the council were therefore in conflict with his role as a director of a company which would benefit directly from a loan agreement between the council and the developer."

The former monitoring officer maintains that there was no conflict of interest arising between his role as monitoring officer and that of a director of the company, KCSC.

The report concluded that there was no evidence that the council considered which formal mechanisms, consistent with the Companies Acts and best practice, for example, the creation of a shareholder board or committee, could have been adopted to mitigate conflicts of interest.

The report added: "The former Monitoring Officer has suggested that the 'Teckal' principle in public procurement law necessitated the approach which was taken.

"We do not agree. Even if the companies needed to be and were Teckal companies, which is not clear in all cases, there was no need for senior or statutory officers to be appointed to board positions, or for them to be appointed without appropriate mechanisms to manage conflicts of interest."

Elsewhere, the report found "significant weaknesses" in the way council members received information about the companies.

In some cases, councillors were shown large spreadsheets during meetings, which they had to then try to digest before they were taken away again at the end of the meeting, according to the report. 

The report also concluded that some members of administrations at the time were not sufficiently curious despite warning signs.

Grant Thornton found "potentially unlawful" activity in relation to the council's minimum revenue provision (MRP) policy.

Standard accounting practice in local government requires that a prudent and proportional annual cost, known as MRP, for the repayment of debt is charged every year to the General Fund.

The annual MRP charge serves as a proxy for actual loan repayment cashflows that may not be required to be repaid until the end of the loan term.

"In the council's case, the extremely high levels of borrowing would be expected to result in an extremely high annual MRP charge that under normal circumstances would not be affordable from annual revenues," the report noted.

"This should have acted as a barrier to further borrowing. However, due to the council's failure to apply a prudent MRP policy, this safeguard was not applied."

The council took external advice on its MRP policy from treasury management advisors Link in 2021, which highlighted major risks, but the council did not act on the warning.

"As a result, of this failure to heed the warnings of external professional advisers, a crucial opportunity to begin urgent remedial action to address the affordability of borrowing and the performance of companies was missed in 2019/20 and we note that these accounts have not yet been audited.

"In our view, no reasonable council could have failed to consider the risks that the companies could not repay the loans from the council, or considered that its approach was prudent, when calculating its MRP to exclude those debts. Its approach was, on this basis, potentially unlawful. The council also failed to comply with its duty under Section 21(1) of the Local Government Act 2003, to have regard to the statutory guidance on the calculation of its MRP."

Commenting on the report, Cllr Ann-Marie Barker, Leader of Woking Borough Council, said the report "represents a pivotal moment in understanding the decisions and actions of the past that have significantly contributed to the financial challenges we face today".

"It is important that my administration, commissioners and senior officers are given time to carefully consider the findings, recommendations and implications of the report before formally responding."

In accordance with statutory requirements, councillors will discuss the report at an Extraordinary Council Meeting on 20 November.

Sir Tony Redmond, Lead Commissioner for the government-appointed team overseeing Woking Borough Council, said: "On behalf of the Commissioner Team, I would like to thank Grant Thornton for producing this comprehensive report.

"Their thorough and independent examination has provided Woking Borough Council with crucial insights into the historic decisions that has led to a legacy of exceptionally high and disproportionate levels of debt.

"The Commissioner Team will study in detail the findings of the report and work closely with the council to ensure that the lessons from the past are fully reflected in the way Woking operates in the future."

Adam Carey