Sleepwalking to disaster. How This Land Ltd is failing

 By Andrew Rowson – January 2024 

‘In Local Government there is no substitute for doing boring really well. Only when you have a solid foundation can you innovate.’

Max Caller, CBE

 

 ‘If you look at Northamptonshire through to Woking, with others in between, what was happening there was a situation crystallising around a financial risk based largely upon commercial ventures.  That’s reflected a position whereby those organisations were not identifying and not addressing those risks.’

Michael Hudson, Cambridgeshire County Council S151 Officer

 

Certainly, if one looks back, it is absolutely the case that each of the local authorities that have had to issue section 114 notices has had failures of leadership, management and governance, and some have taken risks that were unmerited….So far….there has been a direct linkage between poor leadership and the subsequent issuance of a section 114 notice.

Rt Hon Michael Gove MP, Secretary of State, DLUHC

 

1 - Introduction

This report mostly comprises extracts from official minutes or transcripts from council committee meetings, or from reports by Cambridgeshire County Council (CCC) or its outgoing external auditor – EY.  It demonstrates firstly the recklessness of council officers and elected Members of CCC’s former Commercial and Investment Committee for launching a high-cost, high-risk commercial venture in 2016 with no detailed business plan, no public consultation, and on the basis of a fundamentally flawed prospectus.  The Council and its Members appeared to be oblivious to the reality that under the original flimsy “outline business case” even under the “extremely buoyant economic conditions for housing development” that existed seven years ago, the housing company was not expected to turn a profit “for years, if not decades”.  That being the case, the only two ways This Land Ltd could service its substantial interest-only loans to CCC were:

a)       By CCC borrowing yet more from the Public Works Loan Board (PWLB) and lending it on to This Land at commercial rates, thus creating a spiralling liability that could never be repaid, or, once central government put an end to that option...  

b)      By selling land purchased from CCC (with borrowed money) on to developers, and using that income to service the debt to CCC.  In so doing, This Land has cannibalised itself, whilst at the same time steadily eroding its potential for making future profits from selling its own houses – the very opposite of what the company was set up to do.

The longer This Land remains a loss-making enterprise, the heavier the debt burden becomes, the more land the company has to sell, and the less likely any prospect of ever making a profit or of repaying the debt.  In the accounting period to March 2023, 78% of This Land’s total revenue has come from Land sales rather than residential property sales.  It would appear, given the scale of the outstanding debt (£113.8m), the sale of £53.4m worth of land to date, and the surprisingly low sale prices of the units sold in 2022/23 (£247,000/unit on average), that This Land may already be past the point of no return.

The second revelation in this report is EY’s dishonesty in its statements about the prospects of CCC recovering the long-term debt owed by its wholly owned subsidiary.  In September 2022 EY acknowledged for the first time the “new and significant risk” of CCC not recovering some or all of its long term debt (113.8m) from This Land Ltd.  That risk was not new.  It was brought to EY’s attention in September 2021 by a local elector in an objection to the previous year’s accounts (2020/21), when CCC’s long-term debt from This Land had risen by £26 million to £113.8m.  EY ignored that objection (as it had ignored the two prior to that and the one after it), until presented with a Letter Before Action in October 2022.  Within days of that letter, EY accepted all four objections relating to four successive years’ accounts. 

In the September 2022 Audit & Accounts meeting, EY’s audit partner, Mr Mark Hodgson, told Committee Members that EY was discussing with management the possible need for “impairments” to the debt owed by This Land because of recoverability issues.  Yet six months later, (3^rd March 2023) in his decision notice to all four objections, the same audit partner declined to issue a public interest report about the significant risk of default because he had “not to date identified a level of indebtedness by This Land that would affect our value for money conclusion”.  Nine months after that, on 1^st December 2023, and after several missed self-imposed deadlines for completing its audit work on this matter, the auditor told CCC Members that the audit team has still not completed its audit work to establish how likely CCC is to recover all that substantial debt.  Those Members, like the public, may now have to wait until February to find out how safe local taxpayers’ money is.  That would be twenty-nine months after the matter was first brought to the external auditor’s attention, seventeen months after the auditor first flagged it up as a significant risk in his September 2022 audit plan, and seven months after EY and CCC had access to This Land’s 2023 Business Plan.  Last November's resignation of This Land’s Chief Executive (£235,038 annual remuneration including pension contributions) does not augur well for a positive outcome.

2 - Outline Business Case for CCC to establish a company as a Housing Development Vehicle (HDV) – 27^th May 2016

 

‘In view of CCC’s land holdings, and the currently extremely buoyant economic conditions for housing development, there is an opportunity for CCC to develop its own land rather than sell it. Simply selling sites for others to develop, and profit from, is no longer an option for CCC. The scale of the financial challenges facing CCC requires that it has to review every opportunity available to it in order to create an on-going revenue stream that can mitigate the reduction in the services that it otherwise would have to make.

 The vision is to transform CCC from being a seller of sites to being a developer of sites. CCC is therefore developing, and delivering, a series of principally residential development projects from its property portfolio across Cambridgeshire, planned over an initial 10-year timescale.’

The nature of housing developments is that there is a significant time lag from the point at which sites are identified until the point that a revenue stream is created. One way of ensuring that revenue is received by CCC much earlier in this cycle is for CCC to establish a market loan to the HDV [Housing Development Vehicle]. The HDV needs to borrow at market rates in order to avoid state aid regulations but CCC can borrow at far more competitive rates from the Public Works Loan Board and take the margin on the loan in to CCC’s revenue account. CCC will therefore gain approximately 3.0 to 3.5% on everything it lends to the HDV from the point at which the loan is made, not when sales or rents start to be received by the HDV. This will mean that the HDV will be making substantial losses for many years. This is not of concern as this will be within the financial model and long-term business plan of the HDV.  See Agenda Item

3 - Minutes – Commercial & Investment Committee – 27^th May 2016

 ‘A Member spoke in favour of the direction proposed, given his experience as a member of another property board for a LA with considerable assets.  However, he felt that the risk already highlighted of government changing legislation, and ultimately the returns to the LA reducing, was a very real one which needed to be evaluated. He also pointed out that the simple business model presented gave the impression of “making money out of nothing”, which may appear to be the case for the Council’s revenue account, but it did have significant cashflow implications. He asked if enough was known about the Council’s future cashflow predictions, and sought reassurance that the Council would not go illiquid. Officers commented that this was a valid point, and the level of indebtedness would significantly increase, albeit to an acceptable level, as construction costs would require upfront funding, and this would be reflected on the Balance Sheet.

 A Member asked, on the basis of forecasts already undertaken on borrowing, repayments and income streams, how long it would be until there was net income. Officers advised that they did not expect the HDV [Housing Development Vehicle] to make a profit for some time, maybe even for decades, although the income for the Council would be realised straight away. Much depended on the shape and length of the development pipeline.

 A Member asked if the HDV would be open to legal challenges by other developers i.e. as a result of the Council selling land to its own company.  Officers advised that experience around the country to date showed that land had successfully been transferred in this way, and there had been no legal challenges to date. Members noted the potential issues where there could be challenge, around selling at less than best consideration. However, the model proposed would protect the Council from such challenges, as it was proposing to transfer land at market value to the HDV.

 A Member commented that future discussions and reports need to be clear whether they were referring to the County Council or the HDV. He also queried if making a return on money borrowed from the government in the way proposed was completely legal. Officers advised that it was, although it was noted that the government may introduce a cap on prudential borrowing in the future, at which stage the Council would need to look at other potential mechanisms.”  See Committee Meeting Minutes here.

Notwithstanding the above misgivings, Members voted unanimously for officers to incorporate the housing company, with no detailed business case, and without going to public consultation. Cambridge Housing and Investment Company Ltd (CHIC) was incorporated three weeks later.

4 - Minutes – Commercial & Investment Committee – 23rd February 2018

 A Member commented that the Committee was being asked to agree to the transfer of very substantial assets to a company when Members do not fully understand the reporting and governance arrangements: a workshop on these issues has been promised but had not happened. The Committee was unaware of the name change/ rebranding until the invitation to the relaunch event. The Member suggested that the decision be deferred pending the workshop being carried out. Another Member agreed, saying that this proposal was effectively being presented as a fait accompli, and she reiterated her concerns on the Risk Register and mitigation of the risks presented.

The Monitoring Officer and Deputy Chief Executive reassured Members that they took their roles very seriously, especially in ensuring the governance of the organisation was carried out in an appropriate way. Operational issues were the responsibility of the This Land Board: the Committee was not running the company. The Committee had appointed the Managing Director and shareholder representatives. Whilst the workshop on governance and reporting processes had not yet taken place, the Committee had had a workshop on the processes involved in the portfolio transfer, and there was no lack of transparency or openness on how that process was taking place.

In response to a Member question, it was confirmed that the Committee did not normally have the right to the commercially confidential minutes of the Board of Directors, but the Directors and Managing Director would be happy to talk to Members as shareholders.

A Member noted that whilst one of the recommendations was to declare the properties listed in the confidential Appendix 1 to the report as surplus, but there was no information provided on why those properties were surplus. In terms of process and audit trail, this information was required. Officers pointed out that the schedules and reports on these properties had been presented to the Committee over the course of the last 18 months. A Member highlighted that the Committee was in unchartered territory, and whilst This Land clearly had a clear business plan, there was nothing to compel them to realise their objectives, and the company had no mission statement, vision or values.

The Deputy Chief Executive commented that those issues had been set out in their Business Plan, specifically about how the company sought to differentiate itself. He stressed that the Council’s role as shareholder meant that they could not compel the company to deliver a certain percentage of affordable housing – if the Council did that, the dynamic would change, and the relationship would become contractual, which would have implications for the company’s ability to operate in a commercial environment.  See Committee Meeting Minutes here.

5 – Blog - Rt Hon Lucy Frazer KC, MP - 4^th April 2018

 

Lucy Frazer MP and senior representatives from Cambridgeshire County Council; Leader of the Council Cllr Steve Count, Chief Executive Gillian Beasley, and Deputy Chief Executive and CFO Chris Malyon, met with, Housing, Communities and Local Government Minister, Rishi Sunak MP to discuss the financial challenges that Cambridgeshire County Council face given their current funding…

Lucy said, “I am very grateful to Rishi for offering this meeting to Steve, Gillian, Chris and myself. Our meeting was extremely positive.  Rishi listened attentively to the concerns expressed and acknowledged the entrepreneurial spirit of Cambridgeshire County Council, praising their highly efficient operations….

The Minister acknowledged the Council’s highly efficient operations, praising the shared service agreements between Cambridgeshire and Peterborough, and identifying Cambridgeshire County Council as an example of good practice.  See Lucy Frazer's website here.

6 - Commercial & Investment Committee, 16^th October 2020

 Cllr Boden

‘..the Committee will have had the benefit of an email from Mr Rowson that was sent yesterday concerning various other councils and their attempts to raise money through commercial and investment processes.  And I think that that is an extremely helpful thing for all members to read – if you haven’t yet read it.  Because it shows just how things can go wrong if they are set up in the wrong way, and not properly monitored and any problems addressed, or if attempts are made to overreach.  And I think it's really important because this is something which officers and members in this Council have learned from.  We’ve learned from the mistakes in some other local councils – and there have been some… I’m not going to name any specific names, but there are some dreadful ones in addition to those that have already been highlighted by Mr Rowson in his email.  And we’ve learned from those lessons and we will make sure that we in Cambridgeshire don’t make some of the same mistakes that have been made elsewhere.

So far as this agenda item is concerned, I think that from our point of view in this committee, it’s important to bear more in mind than just the published figures of This Land Ltd.  We’ve set This Land Ltd up in order to be able to act in a commercial way – to be able to achieve certain objectives at arm’s length from the Council. We obviously have an interest in the financial performance of This Land Ltd.  But the interrelationship between the Council and This Land Ltd is of really vital importance.  And that isn’t really reflected in the figures of This Land Ltd, but relates to the fact that, first of all, we are receiving significant amounts of interest from This Land Ltd which assists us significantly in revenue terms.  And secondly we are effectively, in some respects, converting capital into revenue through what we do in This Land - which is also of benefit to the Council.  So when we’re looking at the effectiveness from this Council’s point of view of This Land Ltd, we don’t just look, as though we are an investor, at the figures that This Land produces.  We also have to think of how else we benefit as a Council.  And I don’t think that point always gets across very well, and it’s fairly clear from Mr Rowson’s question that it doesn’t get across to the public as well as it should do.

So I think that is something we all need to bear in mind.  And in connection with that, and looking at the recommendations that we’ve got in front of us today, I would ask – I’m not asking for the recommendations to be amended – but I would ask that what’s been delegated to the officers and the Chairman in terms of the detailed terms of the loan – that we ensure that the terms which are granted to This Land Ltd are no better that they would be able to get from the commercial market.  Because we’re not here to do benefit to This Land Ltd.  We’re here for the benefit of the Council.  And in order to achieve the best balance between what goes on within This Land Ltd and what we need in this Council, it’s important that we do follow the requirements of central government financing, to avoid state financing, but also to benefit this Council by ensuring that those terms are not at uncommercial and unrealistic rates.’  See YouTube video here. (Timestamp 1.03.56)

7 - Mark Hodgson, EY partner – CCC Audit & Accounts Committee meeting, 29^th September 2022

 For your attention primarily there are two new audit risks around the debtor associated with This Land, which links to working capital loans made to your wholly-owned subsidiary.

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 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 [£113.8m] 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. See YouTube video here. (Timestamp: 54.26)

 

8 - Mark Hodgson, EY Partner – Decision Notice on a local elector’s 2021 objection to the accounts – 3^rd March 2023

 Auditor’s decision and reasons: Local authorities have a general power to trade in function-related activities through a company (section 95 of the Local Government Act 2003 (LGA 2003)).  They also have a power to invest under section 12 of the LGA 2003.  The statutory guidance issued under 15(1) of the LGA 2003 gives further details around what investments are – financial investments include loans (paragraph 40).  Paragraph 33 states that local authorities can make loans to (inter alia) wholly owned companies.  Section 111 of the Local Government Act 1972 also provides a subsidiary power to local authorities to “do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions”.  It is clear CCC has the power to pass money to This Land Ltd.  We are also not aware of any ground on which to base a conclusion of public law unlawfulness in respect of the exercise of such powers.  Therefore, there is no unlawful item of account.  We have not to date identified a level of indebtedness by This Land Ltd that would affect our value for money conclusion.  We have carefully reviewed these conclusions again, and we do not see an unlawful item of account or grounds to make a public interest report under the 2014 Act.  We are of the opinion that – from the governance and oversight arrangements in respect of This Land Ltd set out by CCC in its response (as well as the publicly available documents: particularly the Avison Young report and subsequent action and consideration of that report well into 2022) – there is appropriate governance, transparency and oversight of This Land Ltd.

 

9 - CCC - Audit & Accounts Committee meeting – 28^th September 2023

 Cllr Gay

Yes.  Just on This Land.  Can you give any sense on what sort of areas the projections (EY testing This Land’s cash flow projections in its 2022 Business Plan) cover, because I think the first capital repayment is in 2026, and obviously a default on those payments by This Land would be very serious indeed for the authority, and we need look no further than Thurrock to know that ill-conceived and failed capital projects have contributed to the failures in Slough and in Thurrock and a number of others.  So have we got any preliminary indications, and is there any sense in which we can plan to mitigate any impacts that failure to repay on time would have?

Tom Kelly, Service Director: Finance & Procurement

Yes.  So in terms of the audit of 21/22, I think EY have highlighted that as the recoverability of the long term debtor, or credit loss – so exactly the point Cllr Gay makes.  I think perhaps in simplified terms, the approach that’s been taken is to look at the assurance the Council has effectively received through the submitted This Land Business Plan, which for the relevant year shows a surplus of £16 million over the planning period in their central scenario.  And then looks at the assurances we’ve received and kind of test some of the underlying assumptions related to that.  So EY are for instance looking at checking [that] some of the actual values received back up the Business Plan.  They’re looking in detail at one of the construction sites that’s been completed, and again checking the income and expenditure figures match through there.  It relies on checking through how in particular inflation indices have been applied to the programme, and the future assumptions that have been made around strategic land sites that This Land still needs to acquire. 

So that gives you a sense of the detail and the type of responses that the Council’s needing to provide as part of that testing.  Of course, rolling forward to where we are now, there’s been a subsequent business plan received from This Land Ltd, and there’s been those national developments that Cllr Gay refers to.  And we have a number of assurance mechanisms continuing with the company and also in our kind of consideration of reserves provision and MRP.  There are kind of mitigations in place for some of the downside risk on those scenarios.  So it’s actively under consideration.

Cllr Wilson (Chair)

I’m not sure if you’ve got the bottom line.  Are we comfortable that we’re going to get the money back?  I heard a lot of “things are being studied in detail”.  But the bottom line is – are we confident we’re going to get the money back?

Service Director: Finance & Procurement

Yes.  So I think that the shareholder committee for This Land is the Strategy and Resources and er, was Strategy and Resources – now moves across to Assets and Procurement.  Relatively recently they got the most recent Business Plan report that does show the central scenario continuing to project full repayment of the loans on time.  The Council has officially received that, and we are comfortable with that position.  But it does show that there is risk with this venture, and there are sensitivities where that declines.  So that’s hence why we need to keep that kind of ever watchful vigilance in respect to it.

Chair

Thank you.  Any other comments?  Chris?

Cllr Boden

Not on This Land.

YouTube video here  - Timestamp: 50.26

 

10 - EY – Audit Results Report (ISA 260) - 21^st November 2023

Type of risk	Description	Findings and conclusion
Significant Risk	Recoverability of Long-Term Debtor with This Land Group	We have not yet fully completed our work in this area and will provide a verbal update on 1 December 2023. See Minutes here - Agenda Item 7.

 In the promised verbal update at the 1^st December 2023 meeting of CCC’s Audit & Accounts Committee, EY reported that its audit team was still working on this item, which remains the only outstanding material risk issue before the auditor can issue his 2021/22 audit opinion (Timestamp 1.20.50). The statutory deadline for 2021/22 audit completions was 30^th November 2022.

According to EY, the audit team is now looking at This Land’s future cashflow projections from its 2023 business plan.  EY and CCC have had access to the business plan since July.

That cashflow projection, (based on the assumption of zero inflation – see below) shows cash balances fluctuating between £10m and £20m for the next three years, before shooting up in the second half of 2026 and 2027, just in time to repay the loan principal in three tranches:

·         January 2028 - £64.7m

·         September 2028 – circa £39.2m

·         January 2029 – circa £9.9m.

This Land’s eventual success in repaying the loans therefore depends entirely on an unlikely surge of substantial profits in the last two years before March 2029, in the teeth of economic headwinds of falling house prices, falling land prices, and with an onerous debt burden.  Given This Land’s track record for getting its projections wrong, the above cashflow forecast does not inspire confidence.  CCC, This Land Ltd and their respective external auditors both assess This Land’s going concern status by looking only at the next twelve month horizon.l

11 - This Land’s 2023 Business Plan – Alice in Wonderland

The “outline business case” that CCC Members approved unanimously in May 2016 made no mention of the number of houses the HDV planned to build.  A year later, CCC’s 2017/18 financial statements contained the following:

Five years later, This Land’s 2023 business plan (see below) sets out the more modest ambition of building and selling only 490 houses itself by January or March 2029, with a further 453 to be built by other developers, making up 863 in total.  Given the 53 units This Land has sold in the seven years to March 2023, that presumably means that in order to meet its target of repaying the £113.8m loan principal by 2029, This Land itself anticipates selling a further 437 homes (490-53) in the six years to 2029.  That equates to an average of 73 annual house sales until then.  Most of those will need to be built without This Land being able to borrow further from CCC.  These figures and assumptions are all based on the limited information available to the public.

This Land’s original outline business case and subsequent business plans all proved unrealistic.  Delays in securing planning permission and other setbacks meant that the company did not sell its first house until its fifth year of operation.  Without considering where the cash would come from to pay its growing loan interest obligations, and with central government putting a stop to councils borrowing from the Public Works Loan Board for commercial gain, in the last three accounting periods This Land was obliged to sell some of the land it had purchased from CCC just to keep the company afloat.  As at March 2023, only 22% of This Land’s total revenue had come from selling houses.  The remaining 78% came from land sales.  The £53.2m figure for land sales in the graph below excludes a further £27 million CCC claims This Land will receive from land sales between 2023 and 2026 in a “binding contract” (p 36). Additional plot sales are expected during 2023/24.  That would mean This Land receiving at least £80m of revenue from selling land it had originally bought to build houses on.  It is precisely what council officers assured Members in May 2016 it would not do:

“Simply selling sites for others to develop, and profit from, is no longer an option for CCC.”

The public has no information about any profit share arrangements between This Land and the developers who have purchased the £80m worth of land.

As noted in a previous article, the headlong dash for cash has also meant that the average sale price of homes sold by This Land in the last three accounting periods (as per This Land’s audited accounts) has fallen from £550,000 per unit in 2020/21, to £329,000 in 2021/22, and to £247,000 in 2022/23.

This Land’s 2023 business plan projects future net profits totalling £42.5 million from 2023/24 onwards:

When placed alongside the company’s audited historical losses up to and including 2022/23, the figures look like this:

On 17^th November 2023, 23 days after the company’s latest audited were published on Companies House, This Land Ltd’s Chief Executive resigned.  Those accounts recorded a comprehensive loss of £11.2m for the year to March 2023 - £2m higher than the £9.2m shown in the 2023 business plan published in July (see table above).

If the past history of 53 house sales producing net losses of £38.35m is compared with the future promise of £42.5m net profits and 437 additional houses sold by the beginning of 2029 (see above), the two sets of data produce starkly different net profit/loss per unit statistics:

  

None of the information available to the public can explain the alchemy the company now promises will turn its fortunes around only in three years’ time, or why that secret of success has eluded This Land Ltd for so many years.

The derived net profit figure of £97k per house sale above is after charging around £4m/year of administration expenses, and after the loan interest expense (currently over £8m/year).  When those two are added in, the figures suggest This Land’s gross profit on each house sold in the remaining years to March 2029 will need to be at least £260,000 on average, which is higher than This Land’s average house sale price in 2022/23.  In other words, in the absence of additional critical information not provided to the public, the figures presented in This Land’s latest business plan do not begin to add up, and it should not have taken EY over six months to draw clear conclusions from its audit work – especially when it was first informed of the debt recoverability issue well over two years ago, when the debt first rose to £113.8m. 

For years, CCC has denied the public more granular information about This Land on the grounds of “commercial confidentiality”.  In July 2023, a confidential appendix to This Land’s latest business plan was provided only to Members of the Strategy and Resources Committee behind closed doors.  One concern is that to avoid embarrassment, CCC might be allowing This Land to limp on until it finally crashes, generating further substantial losses along the way that local taxpayers will ultimately have to pay for, rather than putting the public interest first and making a sober assessment of its subsidiary’s future prospects.

As a result of This Land’s substantial losses to date, the succession of failed business plans, the auditor’s recent concerns about the recoverability of loans made to the company, vague talk of using reserves to deal with the “downside risk” of the loans not being repaid, and the suspicious shape of the latest cash flow projection – with cash reserves only beginning to accumulate at least three years hence, the public can have little confidence in the latest plan without seeing more concrete and credible information.  CCC should therefore stop hiding behind the “corporate veil” and the convenient excuse of “commercial confidentiality”, especially since This Land has evidently not been treated on a commercial, arm’s length basis in several respects.  To assure local taxpayers (the ultimate stakeholders) that This Land’s latest business plan is not another illusion or a delay tactic to prolong the company’s end artificially, the County Council should provide additional substantial information to support the latest cash flow forecast.  That information should be in the form of numbers of projected house sales per year up to 2029, with some credible indication of profitability per unit sold.  It should also explain why This Land has used the “base case forecast” for its projections, predicated on a zero percent inflation rate, when inflation rates, especially in construction, are historically extremely high, and predicted to remain high for several years to come.  Credible granular information from the authority is essential since on many occasions in the past EY has shown itself not to be an independent party, as its contradictory statements on This Land also bear witness (see sections 7 and 8 above).  In the absence of any supporting evidence, a simple vote of confidence by EY on the recoverability of the £113.8m debt is unlikely to quell the public’s unease about This Land’s future.

Accounting Errors at CCC - Post 1/15 in a series - Executive Summary

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

-oo0oo-

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.

Accounting Errors at CCC - Post 6/15 in a series - Material Late Changes/Revised Draft Accounts

6 - 2016/17 – Material, late changes in the revised draft accounts

Unusually, five weeks after the deadline for objecting to the accounts, at the 19^th September 2017 meeting of the A&A Committee, CCC finance presented a revised draft set of financial statements to committee members - See Appendix to Item 6 at foot of page.

It was presented late, denying members the statutory five working days to read it before the meeting.  The main difference was a wholesale revision of the accounting treatment for City Deal.  According to BDO’s September 2017 interim report to those charged with governance (ISA 260 report), which was also presented late to the meeting, CCC had revised its accounting treatment of City Deal “in response to recommendations made last year” (see Appendix 1 below).  Presumably those recommendations came from BDO, but there is no evidence of them in any document on the A&A Committee webpages.  The revised draft accounts treated the five annual grants as a single £100m grant, which contradicts the discrete annual grant figures clearly set out in the determination documents.  BDO’s audit findings and conclusion in its ISA 260 report state:

“We concluded that the grant income awarded to the Council in relation to the City Deal in 2015/16 (£100m, to be paid in 5 annual instalments of £20m) did not have any conditions attached regarding its use.  The Code requires that grants should be recognised immediately as income unless any conditions have not been met.  In the absence of such conditions, the grant should have been recognised in full in the year the grant was awarded.” 

This is how BDO’s comments were translated in CCC’s second draft set of accounts:

This set of accounts can be found on the webpage of the 19^th September meeting of the A&A Committee in the Appendix to Agenda Item 6 at the foot of the page.

The council was re-writing the previous year’s accounts, which BDO had signed off as correct in October 2016, and which had correctly shown £20m as the City Deal grant revenue receivable in that financial year, reflecting the contents of that year’s grant determination document MHCLG sent to CCC, the accountable body.

The revised 2015/16 accounts, in this second draft at least, embellished the prior year revenue by £80m (none of which was receivable in that financial year) to reflect BDO’s incorrect new interpretation of the City Deal grant.

To offset that imaginary extra revenue, two debtors were created, one short term, one long term, to reflect the grant cash receivable within 12 months (i.e. £20m in 2016/17), and the remaining £60m receivable in the years to 2019/20.

The amendment also produced £80m of virtual “reserves”, which had to be accounted for somehow.  CCC decided to put them into the “Capital Grants & Contributions Unapplied Reserve”, which forms part of usable reserves and thus made those reserves look £80m healthier than they in fact were.

 CCC’s Capital Grants & Contributions Unapplied Reserve is defined in the notes to the accounts.  It has existed at CCC at least as far back as 2012/13, and the wording of its definition has not changed since then:

“this reserve includes all capital grant income credited to the Comprehensive Income and Expenditure Statement, and subsequently reversed out of the General Fund Balance in the Movement in Reserves Statement.  It is designed to show the position when a capital grant has been received, and conditions of its award met, but is yet to be used to finance capital expenditure.  Amounts in this reserve are transferred to the Capital Adjustment Account once they have been applied to fund capital expenditure.”

 As the highlights show, this reserve is designed for grants that have been received, and for which the conditions have been met.  The £80m worth of future City Deal grants posted to that reserve had not been received, and their conditions had not been met in 2015/16, because the four future, conditional grants of £20m each were not awarded in 2015/16.  They were due to be awarded in the four years that followed 2015/16, subject to CCC continuing to comply with the conditions clearly set out in the grant determination documents.

CCC’s accounting trick that BDO recommended is analogous to the council anticipating the receipt of the next four years’ worth of Council Tax income all in the current year, and thus recognising a massive windfall revenue surge, along with a corresponding rise in usable reserves which cannot be called upon because they simply do not exist.  Using the same trick any council could make any sized hole in their reserves magically disappear, and make their balance sheet look substantially healthier to users of the accounts, including central government, local taxpayers or other councils who might consider lending money to it, based on its apparent liquidity. 

With this revised interpretation of City Deal, CCC was claiming two contradictory things.  It was saying that in year one of the arrangement, the remaining four annual grants had already been received (the £80m added to the capital grants unapplied reserve), but at the same time they had not been received because the £80m was also categorised as debtors.  In any event, the non-existent additional revenue and the non-existent reserves clearly did not give a true and fair view of the council’s financial position.  Instead, the overstatements materially misstated that position.  But things were about to get even worse.