Governance failures at Croydon Council

The struggle to make ends meet was neatly summarised by Dickens’ optimistically hapless Mr Micawber: ‘Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery… in short you are for ever floored. As I am!’

But while individuals like Micawber are generally responsible only to themselves for balancing the budget, local authorities have an obligation to use public resources prudently. This fiduciary (trustee) duty was classically summarised by Lord Diplock in Bromley LBC v Greater London Council and another [1982] 1 All ER 129: ‘It is well established by the authorities… that a local authority owes a fiduciary duty to the ratepayers from whom it obtains moneys needed to carry out its statutory functions, and that this includes a duty not to expend those moneys thriftlessly but to deploy the full financial resources available to it to the best advantage’.

If an authority fails in this duty its external auditor is likely to pick this up. For under section 20(1) of the Local Audit and Accountability Act 2014 a local auditor must, by examination of the accounts and otherwise, be satisfied that:

a)    the accounts comply with the requirements of applicable enactments,

b)    proper practices have been observed in the preparation of the statement of accounts, and that the statement presents a true and fair view, and

c)    the authority has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources.

Section 24 of and schedule 7 to the 2014 act require a local auditor to consider whether s/he should report in the public interest on any material matter coming to notice during the audit so it can be highlighted for the authority, the public and other relevant persons. Such reports are usually issued where there have been serious financial and/or governance failings.

This happened with Croydon London Borough Council. On 23 October its auditor Grant Thornton issued a 21-page public interest report. As the council accepted, this detailed ‘serious concerns about the council’s financial situation and its financial decision-making and governance across a wide range of service areas, over a number of years’. The report paints an unfortunate picture. For instance:

• ‘The London Borough of Croydon (the council) has experienced deteriorating financial resilience for a number of years with spending pressures within both children’s and adult social care and low levels of reserves which created a significant financial challenge in 2020/21.’
• ‘… spending pressures identified in 2017/18 continued into 2020/21 and we wrote to the former chief executive in April 2020 setting out action we considered vital. At the end of August 2020, the council had failed to produce a formal action plan or to respond to our audit recommendations effectively’.
• ‘The council has had an unsustainably low level of reserves for some time.’
• ‘The council’s approach to borrowing and investments has exposed the council and future generations of taxpayers to significant financial risk. There has not been appropriate governance over the significant capital spending and the strategy to finance that spending.’
• ‘The council’s governance and oversight of [associated] companies shows insufficient rigour and control. Despite heavy investment from the council, the council has not yet received any significant return.’
• ‘There has been collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken.’
• ‘Had the council implemented strong financial governance, responded promptly to previous recommendations and built up reserves and addressed the overspends in children’s and adult social care, it would have been in a stronger position to withstand the financial pressures of the pandemic.’

The report concludes: ‘Action must be taken to restore the council to a sound financial position supported by effective governance.’ Croydon Council fully accepted all the report’s findings and recommendations and indicated deep regret for the serious failings highlighted. Councillor Hamida Ali, recently appointed council leader, apologised to residents, staff and partners and said her first priority was to put things right. She was ‘absolutely determined’ that Croydon will from now on live within its means and ‘be open and honest… about what that means’.

So on 19 November 2020 it agreed an action plan designed to ‘put strong financial management and governance right at the heart of the organisation’. This includes ‘mandatory training for senior officers and councillors across the council in financial management and effective risk management’. On 11 November, the council’s finance director activated section 114 of the Local Government Finance Act 1988 where (among other things) expenditure exceeds resources. As the council noted, this means ‘all new non-essential spending will be stopped while an emergency budget is drawn up to find further savings in this and the coming years’. On 29 October, the government had also announced that a ‘rapid non-statutory review’ will be conducted into the council, focusing on overall governance, culture and risk management. Given the continuing financial shortfall, section 114 was again activated on 2 December. Following this, the Housing, Communities and Local Government Select Committee launched an inquiry into the scale and depth of local authority financial sustainability (evidence submissions by 22 January 2021).

Strong and effective governance requires sound structures, procedures and accountability, together with a constant vigilant eye on the corporate dashboard and a robust cultural commitment by all to ensure maximum value from every pound of public money. All authorities will learn and benefit from the financial and governance issues highlighted in the Croydon report and, as keeper of the corporate conscience, the monitoring officer plays a key role.

Nicholas Dobson writes on local authority law and governance