Accounting Errors at CCC - Post 13/15 in a series - CCC's Going Concern Position

13 - Cambridgeshire CC’s going concern position

Along with denials of fraudulent conduct, last September members of the A&A Committee also denied there is any question over the authority’s going concern status as a possible motive for deliberately overstating debtors and usable reserves.  Here too, that assertion does not stand up to honest enquiry.

In recent years CCC’s general fund and earmarked reserves have been at the lower end among County Councils, as this graph produced by Grant Thornton shows.

Only Somerset CC and the former Northamptonshire CC (CCC’s former partner in the ill-fated Local Government Shared Services arrangement) are lower.  The non-existent reserves from the City Deal false accounting are not included under Earmarked Reserves or General Fund.  In CCC’s annual Movements in Reserves Statements, the Capital Grants and Contributions Unapplied Reserve appears in a separate column, where its year-end balance was overstated by up to 600% (2016/17) during the City Deal 1 years.

During the 2020/21 financial year, CCC still maintained that no conditions were attached to City Deal grants.  On 16^th October 2020, CCC’s Commercial & Investment Committee met to discuss how to budget for the coming months and years given the unknown effects of the Covid-19 pandemic.  At the time the country had experienced the first wave of the virus.  Finance had prepared a report with three possible financial scenarios: A (the most benign), to C (possible worst case scenario).(Agenda Item 4 Appendix). The estimated additional savings requirement for 2021-22 ranged between £32.8m and £82.2m.

At the time, the authority had fended off the challenges over City Deal accounting for four years, and was no doubt counting on maintaining that position throughout the City Deal 2 years.  Thus the CFO would have assumed he could overstate usable reserves in 2020/21 by £160 million, and in 2021/22 by £120m.  £120m exceeds by some margin the worst case scenario envisaged at the time for the savings needed in 2021/22.

The transcript below reveals the CFO’s concerns about the council’s precarious financial position in the absence of additional support from central government.  Whether or not his reference to exhausting the reserves and “stripping out everything we’ve got in the balance sheet” included the virtual capital grants unapplied reserve, it cannot be denied that the CFO was concerned enough about the council’s financial position to talk openly about the possibility of having to issue a Section 114 Notice. 

“You may or may not yet be aware but we are engaging proactively with MHCLG [now DLUHC] who obviously are the government department that overview local government finances.  We have started a process to ensure that they are aware of our financial position.

If the Scenario is more likely to be a B+ or even, as Cllr Shellens highlighted, the C Scenario, we simply can’t fund that.  And I can’t fund it from the reserves that we’ve got available – even stripping out everything we’ve got in the balance sheet if it’s up towards the upper end of that scenario modelling.  Therefore, the implications of that are I would have to issue a Section 114 Statement, which effectively says the Council can’t meet its liabilities.

 

Now I want to be clear that we’re not anywhere near that position, and we want to obviously avoid it – hence the reason why we’re engaging early with MHCLG to talk through what the mitigations and flexibilities [are] that might be afforded – and what additional support might be afforded by the government.  But we are – I’m not trying to cover up anything, I’m trying to be transparent in terms of the challenges we are facing.” (Timestamp 26:28)

Since then, other financial challenges have emerged, including, in particular, the state of the council’s loss-making housing development company, This Land Ltd.  At last September’s meeting of the A&A Committee, Mr Hodgson took members through the risks in his audit plan report for the 2021/22 audit.  

A new and significant risk for 2021/22, (though it should have been signalled several years earlier) was the “Recoverability of Long-Term Debtor with This Land Group”. (Agenda Item 6 Appendix, p6)  Mr Hodgson explained it as follows:

“There has been some significant press coverage of both This Land and other housing-related subsidiaries in the country, and their ability to repay the borrowing to which they have been afforded.  And in light of that we need to review the business model that This Land has via the component auditor, their going concern assumptions, and therefore their ability to repay the £113 million that is currently outstanding at 31^st March [2022] – and discuss with management the need for any impairment over that balance because of any recoverability issues.”

The salient facts about This Land are that at 31 March 2022 (the balance sheet date of the latest available accounts), the This Land group had cumulative comprehensive losses of £27 million and outstanding borrowing from CCC of £113.8 million.   

Only £44.5m of that is secured against land CCC sold to This Land.  The remaining £69m is unsecured after This Land sold off much of its land to third parties without repaying the mortgages to CCC in order to meet the interest payments it owed to its 100% shareholder.   

Historically, when This Land could not pay the loan interest (because it was not selling any houses), it simply borrowed more from CCC, which sourced the funds from the Public Works Loan Board.  That avenue is no longer available to the authority.  Each of the 18 homes This Land sold In2021/22 represented a loss of £399,000 towards the company’s £7.2m comprehensive loss for that financial year.

If CCC were to take a realistic view about the recoverability of the nine-figure sum lent to This Land and write off a significant portion of it, that would only add to concerns about the council’s own going concern assumptions.  So it is certainly not unreasonable for members of the public to raise those concerns with members of the committee charged with governance, and with the wider taxpaying public.

On the same subject, CCC’s audited accounts for 2021/22 have still not been published, nearly seven months after the statutory deadline, whilst publication of the draft accounts for 2022/23 has been delayed until at least July 20^th.  These too are disconcerting details, especially in light of the uncorrected material misstatements in the authority’s recent statements of accounts.