The London Brough of Croydon suffered “collective corporate blindness” when it lost control of its finances and involved itself with business ventures it did not properly understand, an audit report has found.
Auditor Grant Thornton took the rare step of issuing a public interest report on the council, whose borrowings exceed reserves.
Grant Thornton said in its report that while the Covid-19 pandemic had worsened Croydon’s financial plight, it had been in difficulties long before that, which it had failed to scrutinise or address properly.
It made some 20 recommendations and said the council must act urgently on these.
The firm said it identified “concerns relating to the financial sustainability criteria of the value for money conclusion” as long ago as 2017-18 but recommendations made then were not implemented, leading to continued deterioration and an adverse qualification on value for money the next year.
It wrote to then chief executive Jo Negrini in April 2020 “setting out action we considered to be vital” but by August the council had still failed to respond effectively.
Grant Thornton said Croydon had had “an unsustainably low level of reserves for some time…the lowest level of all London boroughs”, which had fallen in each of the previous three years.
Budget monitoring reports during 2019-20 showed significant overspends, which reduced following ‘corporate adjustments’ of £17.7m, an explanation accepted by councillors “without an appropriate level of challenge…the council’s governance over the budget setting and monitoring has not been good enough”.
In response to this problem the council appointed a financial consultant who identified a budget gap for 2020-21 of £65m together with £21m of in-year savings needed.
This gap exceeded the reserves, but neither the cabinet nor scrutiny and overview committee referred this to full council.
“In our view this was a failure of governance and showed a lack of understanding of the urgency of the financial position,” Grant Thornton said.
Croydon has also borrowed £545m to invest in companies it owned and in properties.
“The council’s approach to borrowing and investments has exposed the council and future generations of taxpayers to significant financial risk,” Grant Thornton said.
“There has not been appropriate governance over the significant capital spending and the strategy to finance that spending.
Despite heavy investment Croydon had not yet received any significant return from these companies and there had been “collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken”.
Croydon’s revolving investment fund (RIF) was to lend at commercial rates while borrowing more cheaply with returns contributing to the council’s financial position.
The RIF was projected to reach £223m by 2022-23. “A scheme of the value of the RIF should have a risk assessment which is updated regularly to reflect changes in market conditions. No such risk assessment has been undertaken. In our view this is another example of a lack of financial rigour being exercised by members,” the auditor said.
Some RIF funds went to Brick by Brick Croydon, a limited company wholly owned by the council, which was supposed to build affordable homes.
In January 2020 it emerged when potential purchasers for the share ownership properties were unable to obtain mortgages that Brick by Brick had neglected to register as a shared ownership provider.
“This failure indicates a lack of understanding of the requirements and how the regulatory context developed over time,” Grant Thornton said.
Council stakes in various other ventures were held through Croydon Holdings, wholly owned by the council.
But lack of knowledge of company law saw Croydon Holdings dissolved by compulsory strike off by Companies House for failure to file financial accounts and its assets being transferred to the crown, which Croydon is seeking to retrieve.
Similar lack of commercial knowledge saw the council spend £46m on the Colonnades shopping centre, which has since closed, and £30m on the Croydon Park Hotel, which entered administration in June.
Croydon’s new leader, Labour councillor Hamida Ali, said: “This report highlights serious issues with how the council has managed its finances in recent years. These problems have deep roots, but I am sorry we got things wrong and I want to reassure our residents, staff and partners that my absolute priority as the council’s newly-elected leader is to put this right.
“While a decade of austerity and the Covid-19 crisis have had a major impact on our finances they do not excuse the issues this report has laid bare.
“The council fully accepts the findings and recommendations of this report and the council’s new leadership will take swift and decisive action to stabilise the council’s finances and governance.”