Public interest report calls for all legal advice to be commissioned by legal team

Derby City Council should ensure that all legal advice is commissioned through its chief legal officer or her staff, and departments should not commission legal advice direct, auditors Grant Thornton have recommended in a public interest report.

Grant Thornton also recommended that the local authority “ensure that appropriate internal or external legal advice is sought in relation to contracts, particularly where a large-scale project or initiative is contemplated".

These recommendations followed the provision by the council of support amounting to £2m in 2011 to a firm called Webhelp (originally HEROtsc) to enable it to occupy premises on Pride Park to safeguard jobs.

Delivery of the Webhelp project was one of a number of areas considered by Grant Thornton in preparing the report, which identified failures of governance at the city council in the management of major projects and in relation to member conduct. The other areas were:

• The implementation of job evaluation;
• The operation of the taxi licensing function;
• The implementation of an HRIS payroll project; and
• Overall governance: member and officer arrangements.

On the support provided to Webhelp, Grant Thornton noted that it had achieved a positive outcome. “Cabinet agreed the support but had been informed that external legal advice would be sought to confirm that the arrangement was lawful and compliant with European state aid rules," the report continued.

“The former Chief Executive who headed up the Regeneration Department, had overall responsibility for the project and for ensuring, with his team, that legal advice was secured, in consultation with the council's legal team. We have been unable to locate any such advice. The council received an email giving general advice but it did not address the council's particular circumstances. It would appear that a major project was embarked upon without the council being satisfied that it was lawful.”

Subsequently Webhelp asked for further help on the same basis. In March 2014 discussions took place between Webhelp and the council's officers, including the former Chief Executive, and an offer was made to the firm, without at any stage, involving the council's legal officers.

The council's Monitoring Officer then intervened and the offer was withdrawn and an arrangement negotiated which was legally compliant, the report revealed.

“Although the arrangement had a positive outcome for the City, the failures in governance outlined above, were indicative of a more general culture within the council at that time, where on occasion, corners were cut, and decisions made outside the council's committee and legal structures,” Grant Thornton said.

The external auditors’ public interest report, which can be viewed here, generally noted how the council had a track record of considerable achievement, but some key projects – such as implementation of job evaluation, which had attracted the most public and press interest and has cost more than £5m to date – met with major problems.

This was because officers did not report risks sufficiently promptly, Grant Thornton said. The auditors also said there had been failings of governance “due to members involving themselves inappropriately in operational matters in some areas.

In relation to the job evaluation project, problems arose when the council appointed a small HR consultancy in 2012 to assist. It transpired, the report, said, that the consultancy did not have the intellectual copyright to carry out the Hay evaluations which were required by the council.

Grant Thornton described the decision to appoint the consultancy as “flawed”, as Hay had tendered a lower price for the work, and a referee for the smaller consultancy had questioned whether the firm could deliver Hay evaluations.

“A junior officer queried the decision in September 2012 but the issue was not escalated to senior management. Some important decisions were made too low in the organisation and former senior officers failed to put in place proper project management arrangements or provide adequate oversight,” the public interest report said.

Later, in April 2013, Derby’s then Strategic Director of Resources (SDoR) was told by a Hay representative that he was aware that the smaller consultancy was using the Hay methodology in breach of Hay's copyright.

“The SDoR should have raised this issue corporately and with the council's Chief Legal Officer. He failed to do this,” Grant Thornton said.

The small HR consultancy denied it was using the Hay methodology, but the council's former senior officers, “continued, wrongly, to assume that the firm was licensed to use the approach”.

In January 2014, Hay Group wrote to Derby’s then Leader and Chief Executive highlighting the copyright issue and the possible legal consequences for the council.

“This again was not surfaced corporately. By June 2014 it was clear, following external legal advice, that continuing with Aquarius was untenable,” Grant Thornton said.

“However it should have been clear as early as September 2013 that asking a firm other than Hay to apply a Hay-based approach would be problematic. The Monitoring Officer produced a paper in June 2014 which outlined options. As a result of the project failings, the SDoR was subject to disciplinary action and subsequently dismissed. The Director of HR was also initially suspended but left the council on mutually agreed terms.”

The small consultancy did no further work and Hay was engaged to complete the project, which involved repeating work. The city council has estimated that the mismanagement of the project has cost it an additional £1.2m “as well as imposing stress on staff through the prolongation of the process”.

According to Grant Thornton, the governance of the project was “overcomplicated” and members were too involved in operational matters in some areas.

The pay option adopted in October 2013 for staff subject to job evaluation was motivated, according to officers, by a political desire to protect refuse workers, whom members feared, might strike prior to the May 2014 elections, if they received an unfavourable pay outcome.

“This resulted in extra costs of £3m in the short-term, to ensure that similar staff were treated comparably to the refuse workers. Some members argue that the aim was to protect groups of staff more broadly. The pay option adopted proved costly at a time when the council knew that it needed to save £77m over three years,” the auditors said.

“The meetings at which these matters were discussed were not minuted, so the basis for the decision was neither transparent nor accountable, nor was the decision approved in writing by any committee of the council.”

In respect of the job evaluation project, Grant Thornton made the following recommendations:

• Derby should reinforce existing guidance about the proper role of members, particularly concerning the need for members to avoid involvement in detailed operational matters.
• The council should consider reviewing its project procurement and monitoring systems to ensure that appropriate decisions are made regarding externally commissioned services and adequate monitoring of risks and delivery is undertaken.

For its report Grant Thornton also examined the overall governance of the council, noting how the political culture at Derby had been “fractious for a number of years, due to the behaviour of a minority of members from across the political spectrum and the standards committee [being] used as a vehicle for political point scoring”. Allegations had become part of the mainstream political discourse.

A breakdown in trust meant opposition parties had not in the past put forward members to sit on the standards committee, the report said, although the Conservative group had recently nominated a member to sit on it, “which should strengthen confidence in its operation.”

Grant Thornton noted as well that the officer culture at the authority had strengthened in the last 12 months. “Officers refer to a previous practice of not reporting bad news. Members learnt about significant issues too late. The council was previously seen as chasing awards. But within nine months of the council being awarded the Management Team of the Year award in 2014, the Team had lost half its key members who had been suspended or left the council.”

The auditors said the new management team was more cohesive, in their view, and the officer culture had strengthened.

The report recommended that strategic officers should be issued with clear guidance requiring them to report key strategic, legal and operational risks to the Corporate Management Team, to the monitoring officer as appropriate, and to Cabinet, in a timely manner.

It also called for clear guidance to be issued regarding the operation of the political Cabinet, “to ensure that both officers and members understand that it is not a constituted committee of the council and has no authority to make decisions”.

In relation to taxi licensing the auditors said they had found failings. Officers had stated that some members of the taxi licensing committee had in the past lobbied on individual drivers’ behalf when decisions on granting licences had been made.

The committee had also made “very poor decisions” during the period 2012-2015, which had involved granting taxi licences to individuals with criminal records who had committed offences including hate crime, harassment, intimidation and making improper comments to young females.

Grant Thornton noted how the council had taken steps to strengthen governance in this area including the re-introduction of officer advice in the decision making process.

But the report said the committee had not had strong member leadership and there was evidence that members continued to involve themselves inappropriately in operational matters. “In one instance a member attended a meeting between one of the council’s licensing officers and a taxi driver to inspect his vehicle, and the member made a series of comments which were perceived as being unhelpful to the officer in the discharge of his duties”.

The council needed to reinforce the need for members not to make inappropriate interventions, Grant Thornton said.

The external auditors recommended that Derby “ensure that it continues to monitor member interventions in operational matters relating to taxi licensing, and takes robust action when members have exceeded their proper role”.

The report also called on the council to review the quality of decision making by the taxi licensing committee “and take appropriate action if it becomes evident that poor decisions are being made by the committee”.

It added that Derby should consider whether different administrative arrangements were required to create confidence in the integrity of the taxi licensing function.

The HRIS Payroll Project meanwhile involved the council replacing its payroll computer system in 2012. According to Grant Thornton, the internal project management was not effective which meant that implementation was delayed from June 2013 to April 2014, which in turn necessitated the engagement of additional consultancy assistance to deliver the project

“The SDoR had overall responsibility for the project and whilst he injected energy to ensure it was completed, he signed off four contract waivers totalling £0.52m in respect of the additional consultancy work, none of which were reported to Cabinet, and two of which were not reported to the Audit and Accounts Committee, as was required by standing orders,” the public interest report said.

“The SDoR has stated that the payments were 'urgent' payments which did not need to be reported to Cabinet. We do not agree with that view and conclude that the SDoR failed to ensure that proper reporting processes were followed,” Grant Thornton said.

In this respect the external auditors recommended that:

• The council should ensure that it reinforces the need for officers to observe the council's Contract Procedure Rules, particularly the requirements to report all waivers to the council's Accounts & Audit Committee.
• The council should ensure that it puts in place robust project management arrangements for all major projects, including appropriate consideration of the internal and external resources required to enable effective implementation.

As Grant Thornton’s public interest report was issued under s. 8 of the Audit Commission Act 1998 it must be considered by Derby's full council within one month at a public meeting.

Grant Thornton were the external auditors for the council for the 2013/14 and 2014/15 financial years. The council’s current external auditors are Ernst & Young, whom the report said would form their own views on any matters that related to the 2015/16 financial year.

In a statement Derby City Council acknowledged the findings and the recommendations of the external auditors' public interest report.

“Many of the matters reported occurred some time ago and the council has already taken a large number of improvement actions through a governance action plan. Numerous changes have already been put in place, and a number are on-going in order to strengthen and enhance our governance framework. This framework is subject to a number of checks and balances to ensure continuous improvement,” it insisted.

Cllr Ranjit Banwait, Leader of the Council, said: “I am confident that many of the issues reported by our external auditors are in the past; those issues that are more recent in nature are being reviewed and addressed - robust measures are already in place following an extensive overhaul of our governance framework.

“Grant Thornton recognises improvements by the current leadership and senior management teams and I would like to re-assure the people of Derby that we will discharge the council’s duties with the utmost integrity.”