1 - Executive summary
“At a time when several councils are experiencing financial difficulties following high-risk investments, high quality audit is vital to maintain public trust.”
Dame Meg Hillier, Chair of the House of Commons Public Accounts Committee.
Seventh Annual Report of the Chair of the Committee of Public Accounts 2022-23
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This lengthy and detailed narrative is an account of how Cambridgeshire County Council (CCC) deliberately and materially misstated its revenue position and embellished its balance sheet and usable reserves by prematurely recognising five years’ worth of central government City Deal grants in the first year of a five-year arrangement (2015/16 – 2019/20).
In 2020/21 CCC employed the same incorrect accounting treatment in its draft accounts, but it performed a swift U-turn in May 2022 after the accounting treatment was exposed in the national press under the headline “Cooking the books”.
Having acknowledged the error for the 2020/21 grant, the authority declined to enter prior-period adjustments for the same error in the previous five annual grants which overstated the council’s true debtor balances and usable reserves, and hence its liquidity position by a total of £218m in the aggregate. The reason CCC gave for not making those prior-year adjustments (in breach of International Accounting Standard 8), was that the errors were “not material to the users of the accounts.” Ernst & Young (EY), CCC’s current external auditor has failed to challenge its client over its inconsistent accounting treatment.
Two independent auditors - BDO from 2015/16 to 2017/18 and EY from 2019/20 onwards have colluded with CCC in agreeing to the material misstatements and attempting to cover them up. At the time of writing BDO has still not concluded its investigation into a formal objection in 2018 from a local elector over City Deal accounting.
Both external auditors at different times
have held contradictory opinions on the issue and signed off the financial statements
with both the correct and the incorrect accounting treatments, stating them to
be true and fair on each occasion.
CCC finance officers and the two audit firms have repeatedly lied to and intentionally misled elected members of the Audit & Accounts Committee (A&A) on this matter. Finance officers have also lied to the two local electors who first challenged the incorrect accounting treatment in November 2017. The electors have also been provided with false information and denied documents that finance officers repeatedly claimed did not exist, only for them to be produced at a later date.
The same two electors have been insulted and on one occasion threatened in public meetings by elected members serving on the A&A Committee – (the committee charged with governance) for speaking the truth about the incorrect City Deal accounting treatment.
The historical overstatements of debtors and reserves took place over a period in which the council’s short-term borrowing rose seventy-three-fold from £3.4m in 2015/16 to £248.9m in 2020/21, the year in which the former Chief Finance Officer admitted that the authority was engaging proactively with MHCLG (now DLUHC) to discuss its precarious financial position.
CCC’s failure over five years to correct the material historical misstatements, and the two audit firms’ collusion mean that local taxpayers and other users of CCC’s financial statements (including central government) can have no confidence in the veracity of any financial information published by the authority even after it has been audited by BDO or EY.
The sections below explain what City Deal is and set out the correct accounting treatment for capital grants. The sections from 4 onwards chronicle how City Deal grants were accounted for at CCC, and how both external audit firms have conducted themselves since 2015/16.
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