County Councillor Mark Goldsack Quotes

 

Assets and Procurement Committee – 28 November 2023

Agenda Item 6 – This Land – Publication of Shareholders Agreement

Click here for Source – Timestamp 47.25

Cllr Mark Goldsack

“Thank you Chair.  I really welcome the Shareholder’s Agreement, openness and being able to see this in a public meeting.  And I think it’s a real step in the right direction.  As part of the debate of this section I would encourage everyone involved with This Land to go further, and further disclosure.  There’s a lot of disinformation and misinformation in the public domain about the operation of This Land.  And that affects people’s judgement and people’s perception of the reality of the situation.  I have spoken to the Chair of This Land direct, and asked for better communication out to councils – parish councils, town councils and the like.  But I see this very much as a step in the right direction, and I would encourage all those involved – Tom and Michael etc. to really push for more information out there – factual information that does counter some of the disinformation that circulates out there.  Unfortunately, we live in an era (and I’ve used this phrase many times), but we live in an era of social media.  And on social media, noise wins over fact.  So we have to make sure that fact stands absolutely true out there.  So, thank you for bringing this.  I look forward to more.”

Perhaps Cllr Goldsack could start the ball rolling by providing just two examples of where in the public domain, or social media, anyone at all has circulated disinformation and misinformation about This Land, and in what way that information was incorrect.  Cllr Goldsack has a tenuous relationship with factual information, as evidenced by this item from Private Eye’s Rotten Boroughs column published on 3^rd March 2021, about an earlier meeting of Soham Town Council, which the Councillor attended.

Rotten Boroughs, 3 March 2021

Private Eye’s facts were correct in every particular.  This Land’s inability to make its loan interest payments to CCC on time, and the fact it was forced to sell land purchased with those loans just to stay afloat was acknowledged on page 22 of CCC’s own financial statements for the 2020/21 financial year:

“During 2019-20, This Land undertook a significant review and reset of its business plan necessitated by revised assumptions showing a deteriorating financial position. The company had experienced delays achieving planning permission and was concerned its original plan was unduly optimistic and by the future overage obligations it had to the Council. A revised plan was submitted to the Council’s Commercial and Investment Committee in April 2020, with the Committee agreeing, for the Council’s part, to a number of updates and variations arising from the updated approach. Amongst the revisions was a commercial decision by This Land to dispose of a number of assets: refocusing on those of an optimum size and position for the company. By 31st March 2021, five disposals had been made and further disposals were completed during 2021-22. The sales have progressed in a relatively buoyant housing market, thus allowing the company to maximise returns and select the best timing and circumstances for individual sales. The proceeds from these disposals have put the cash flow of the company into a position where less borrowing has been needed from the Council than previously anticipated during 2020-21.

Other significant revisions within the 2020 business plan included a reduction in the Council’s future entitlement to planning overage uplifts from This Land, an increase in the permitted levels of lending to the company in principle (although detailed approval of draw down requests are required to access this and actual lending is currently below the level authorised in 2017) and adding land promotion as a further area of business activity for the company. Adoption of the revised business plan enabled the Council to advance loan amounts that had previously been on hold and in turn This Land could ensure it was up-to-date with previously delayed interest payments back to the Council.”

How transparent is This Land?

If Councillor Goldsack is keen to show transparency, perhaps he could comment on the following.

This Land’s Shareholder Agreement, which is now published, contains a section on Freedom of Information

In fact, requests for information about This Land do not have to go via the County Council.  Since it is a publicly owned company under Section 6 of the Freedom of Information Act 2000, anyone can address FOI requests directly to This Land Ltd, rendering section 11 of the Shareholder Agreement redundant.

In all seven of This Land’s audited accounts published to date on Companies House, a material proportion of its administrative expenses was omitted from the corresponding note to the accounts.  In total, that lack of transparency comes to £8.98m, 46% of its total administrative expenses over seven years - and the equivalent of 23.4% of This Land’s comprehensive losses so far.  

By any measure, those omissions are material.  The unsystematic way in which a large proportion of This Land’s administrative expenses (but no other item of account) has been omitted from the notes to its own audited and published accounts breaches the disclosure requirements set out in Financial Reporting Standard 102 on financial statements (FRS 102), in particular, sections 2.4-2.7, section 8 and sections 2.10 and 2.11.

The missing categories and their amounts have been repeatedly requested by a local elector under s26 of the Local Audit & Accountability Act during the statutory inspection period of Cambridgeshire County Council’s own draft financial statements.  Each year the request has been denied.  

Since 2017/18, This Land’s accounts have been consolidated with the County Council’s own accounts, to form group accounts.  The group accounts form part of the local auditor’s audit.  Since 2018/19 the authority’s local auditor has been EY.  It follows that the audit extends to This Land Ltd’s own accounting records, and therefore that all This Land’s “books, deeds, contracts, bills, vouchers, receipts and other documents relating to those records”, as well as the accounting records themselves also come within the scope of statutory inspections of the County Council’s draft accounts. 

Perhaps Cllr Goldsack could lead by example in the interests of transparency and the public interest, and insist that Cambridgeshire CC stop denying the public their statutory inspection rights, and instead provide the missing details requested last August, including copies of the supplier invoices or other documents that make up the £1.46m worth of omitted administrative expenses in the notes to This Land’s 2022/23 accounts.  

Unless and until that information is provided, the public has no idea whether the undisclosed expenses were consultancy fees, backhanders, or any other inappropriate payments.  This Land and its auditors’ (RSM UK Audit LLP) refusal to comply with FRC 102, EY’s failure to demonstrate professional scepticism and to investigate or even comment, and the authority’s stubborn refusal to comply with its statutory obligations to the public together create what lawyers call “a plausible suspicion of wrongdoing" in respect of those undisclosed administrative expenses.

An Open Letter to Members of Cambridgeshire County Council

From Andrew Rowson, 5^th November 2023

 

Dear Members,

No need to apologise

This letter is a response to an open letter I received from Cambridgeshire County Council’s (CCC) Chief Executive on 26^th October, a copy of which is attached in Appendix 1 below. This letter is being copied widely to other recipients, and will shortly appear on my news website.

Some of you may be aware that in September, the editor of the CambsNews website invited me to submit an opinion piece about being denied my statutory rights under s26 of the Local Audit & Accountability Act 2014 (LAAA 2014) to inspect accounting records at CCC, and about the unresolved issue of CCC’s historical, uncorrected £218 million worth of aggregate accounting errors relating to the central government City Deal grants it received between 2015/16 and 2019/20.  The article, entitled:

“Where has £47 million of Government’s City Deal grant gone?”

was published on Friday September 8^th on the CambsNews website.

The following Monday, CambsNews’ editor received a phone call and an email from CCC’s Head of Communications.  The email contained an ill-informed, five-page response to the opinion piece which the editor immediately shared with me.  In it, the officer asserted that the article made allegations that were:

“serious and in a number of ways defamatory to the Council and its officers.”

The Head of Communications ended her email as follows:

“Happy to discuss any of the points in the attachment further if that is helpful.

In the meantime, I acknowledge that following our conversation just now, you are taking the opinion piece down while you review our points.” [my emphasis]

By the time the editor spoke to me on the Monday evening he had already taken the article down “pending review”.  I told him he should not be concerned since in my opinion the response was full of nonsense that could easily be countered.  The editor said he wished to review the letter with me, and hoped to put the article back up within 24 hours.  I offered to review it with him straight away, but the editor asked me to wait until the following morning.

I phoned the editor at half hour intervals throughout Tuesday 12^th September between 8.30am and 10.30pm to review the Council’s response.  He picked up the phone just once, just after 3.00pm, but told me to call back later.  I have since learned that by that time the “pending review” image on the website had already been replaced by an unreserved apology that had evidently been drafted or directed by CCC’s Communications team.

It seems the council bullied the editor into issuing the pre-prepared apology before he had reviewed the Head of Communications’ letter with me.  So much for that officer’s professional integrity.

In her letter, the Head of Communications expressed concern that the article had been retweeted by “at least two locally prominent and influential twitter accounts”.  She asserted that it had “likely had a wide reach and has already been unfairly damaging - to both the council and a named officer of the council.” 

Perhaps the section that most influenced the editor’s decision to cave in to the council’s bullying was paragraph 2:

“The article does not attempt to make legitimate public policy criticisms of the Council, but instead implies and asserts that the Council has engaged in criminal, unlawful, unethical or otherwise dishonest and unprofessional activities – most seriously alleging that it has engaged in ‘false accounting’.  Unless the article is removed and the council receives a full apology and retraction, it will be seeking legal redress from both Mr Rowson and the CambsNews publishers.”

The simple fact that a council finds an article uncomfortable or damaging to its reputation does not justify bullying a journalist to remove it.  The editor does not speak for me in his apology.  I stand by all my allegations, including those of criminal behaviour and false accounting. They are supported by comprehensive documentary evidence going back six years.  Along with my former County Councillor Mr Mike Mason, I have shared that evidence many times with council members (in particular the Audit & Accounts Committee), council officers and the council’s so-called independent external auditors.  I make this point because the editor’s apology may lead some readers to think that I regret submitting the article, or that I acknowledge the allegations were unfounded or wrong.  That is not the case, which is why I immediately reposted it on another website.  It is now located here.

On September 18^th I wrote to CCC’s Chief Executive, Dr Stephen Moir, expressing disappointment in his officers’ bullying conduct, and demanded an apology.  In a 19-page letter I rebutted every incorrect point in his Head of Communications’ complaint with yet more fully-referenced documentary evidence.  The CEO’s response below does not challenge any of that evidence, does not address the allegations of nine-figure false accounting, or the repeated denial of my public inspection rights (a denial of democracy), or the bullying by his Head of Communications, or the dirty tricks by another officer working in the Communications team that were exposed in a recent edition of Private Eye magazine.  The CEO’s only concern was to defend the officer I had named in the original article.  Dr Moir commented that he considered his officers’ conduct to be “proportionate and entirely appropriate”.  His letter contained no apology, hence this public response.

According to the Head of Communications, the most serious allegation in the article was about the false accounting of City Deal grants.  I wish to comment on this further because it is a serious allegation, and the council’s faux outrage and hypocrisy need to be publicly exposed.

As noted above, for more than five years, Mr Mason and I have repeatedly presented the evidence supporting the false accounting of City Deal grants to the relevant parties – to senior officers, the Audit & Accounts Committee, the external auditors, and all members.  Between the summer of 2021 and September last year I have had a one-to-one meeting with the Deputy Leader (Cllr Meschini), a meeting with Mr Mason and the Chair of the Audit & Accounts Committee (Cllr Wilson), a one-to one meeting with the Council Leader (Cllr Nethsingha), and a one-to-one meeting with the Chief Executive.  City Deal accounting was discussed in detail in all four meetings, and I left the Leader and the Chief Executive with dossiers containing the detailed evidence of the false accounting.   Nobody from the council has provided a single piece of counter evidence to challenge the allegations.  I have also repeatedly and publicly alleged that both auditors were complicit in the false accounting. 

In July 2022 the council and its auditor, Ernst & Young (EY) finally corrected the £160m false accounting treatment of the 2020/21 City Deal grant, but only after the facts were exposed in the press.  The £218m aggregate overstatements of debtors and usable reserves from the identical breach of the CIPFA Code in the council’s five previous annual financial statements remain uncorrected.  Mr Mason still awaits BDO’s response to his formal objection to the 2017/18 accounts on the matter, whilst EY last year declined to insist on its client publishing prior period corrections to the earlier, incorrect accounting treatment so that those items of account would comply with the corrected 2020/21 accounting policy for capital grants, as required by International Accounting Standard 8 (IAS 8).  The dishonest mumbo jumbo below is what EY wrote about prior period adjustments in its whitewash objection decision notice in March this year.  The materiality threshold for each audit is fixed each year by the independent auditor.  The final materiality threshold EY set for its audit of CCC’s 2020/21 accounts was £18.68m.

“Our calculation of planning materiality was based on gross operating expenditure as we view this as the key area for the users of accounts.

Our assessment of whether a prior year error requires adjustment is based on both quantitative and qualitative factors such as, but not limited to, the quantum and nature of financial statement line items impacted, the significance of the impacted metrics to users of the financial statements, the element of subjectivity in determining the appropriate accounting for an item of account, the motivation of management with respect to a particular accounting treatment, the selection and application of appropriate accounting policies.

Overall, as an Audit Firm, we concluded that no PYA was required on a combination of quantitative and qualitative factors.”

As long as those material prior year errors remain uncorrected, the public and other users of the accounts (including lenders, suppliers, and central government) cannot trust a single financial figure CCC publishes.

Mr Mason and I have repeatedly and publicly directed the allegation of false accounting fraud (a criminal offense) at CCC.  So why did the Head of Communications threaten the editor of CambsNews with legal action unless he removed the article and issued a grovelling apology and retraction, whilst Mr Mason and I have never received similar threats?  The answer, I believe, is that it was an empty threat because the authority knows the allegations are true.

An invitation to put up or shut up

In my letter to the Chief Executive nearly seven weeks ago, I gave Dr Moir the website address where the article is now published.  The only difference from the original is that the officer’s name has now been removed.  I have not issued an apology or retraction, and I will not do so.  There is nothing to apologise for.  So, if the council genuinely believes that publishing the allegations online is unfairly damaging to it, and given that the article has doubtless now been read by many more influential people in the last six weeks than the original was in three days, why have I still not heard from the authority or its solicitors?  Again, I believe it is because the authority knows the allegations are true.

Bullying at councils often goes hand in hand with fraud, corruption, and/or dysfunctionality, as events at Croydon Council, Northumberland and West Sussex County Councils - to name but three - have shown.  In recent years, CCC has also had a corrupt and bullying corporate culture, as the Farmgate scandal involving the former Deputy Leader Roger Hickford and former Chief Finance Officer Chris Malyon bear witness.  It appears that this bullying culture is still alive and well. 

It is neither appropriate nor proportionate for holders of public office to bully a local journalist or try to muzzle the free press.  This episode is yet another attempt by CCC to discredit and silence local electors who have raised legitimate concerns about:

·        deliberate, material breaches of the CIPFA Code of Practice that have been aided and abetted by two so-called independent auditors,

·        the authority’s failure to select appropriate accounting policies and apply them consistently,

·        the authority’s systematic denial of statutory rights of access to information designed to allow local electors and other interested parties to properly scrutinise how and where public money has been spent, and whether their local authority has kept “adequate accounting records” under s3, LAAA 2014.

If CCC is confident in its stated position, then to be consistent it should have written to me demanding my full apology and retraction and/or sought legal redress well before now.  One more week should be ample time for it to begin the process.  I look forward to receiving that communication. 

Yours sincerely,

Andrew Rowson

More Tricks More Stalling

 The following article appeared Private Eye last week:

Where has £47 Million of Government's City Deal Grant Gone?

By Andrew Rowson

September 2023

For nearly six years, Cambridgeshire County Council (CCC) deliberately overstated its debtors and usable reserves in its financial statements by an aggregate amount of £378 million.  Two formal objections to the accounts on the matter in 2018 and 2021 by former County Councillor Mike Mason and me were simply ignored by the auditors (BDO and EY).  It was only after the false accounting was exposed by Private Eye magazine in November 2021 (see Appendix 1) that CCC and EY corrected the 2020/21 “error” of £160m.  But they declined to correct the identical prior year errors totalling £218m on the grounds that they were “not material to the users of the accounts.”

During the statutory accounts inspection period last month, I sought to establish that the £40m City Deal grant for 2022/23 had been properly spent.  I asked CCC’s Head of Finance, Mr......... for a reconciliation of grant income and expenditure during the year, and a list of the cost centres used to ring fence City Deal expenditure from the rest of the council’s business.  City Deal is a Greater Cambridge Partnership programme (GCP).  At the agreed documents inspection meeting on 22^nd August at New Shire Hall,...........denied my request, and asserted, incorrectly, that he did not have to answer any questions about the accounts.  When shown the NAO’s guide to the public’s rights,............ claimed questions could only be put in writing.  Also not true.  My written questions about City Deal were ignored until 29^th August, when I received the set of balances shown in Appendix 2 below, and a list of 65 names of supposed City Deal Cost Centres.

46 of these were not cost centres at all, and it was not until 1.41pm on the final day of the statutory inspection period that Mr ........ sent me a revised “full list” of City Deal cost centres in the last of 32 attachments in one email.

When matched with the council’s published expenditure, those cost centres had only paid out £16.7m in 2022/23 – nearly £11m lower than Mr.......... £27.8m figure for the accounting year.

When the reconciliation is extended back to earlier years (see Appendix 2), it appears that nearly £47m of City Deal government grants earmarked for specific GCP infrastructure projects might have been spent on CCC’s own goods and services not connected with City Deal, possibly breaching the grant conditions that for years CCC and its auditors claimed did not exist.

When I informed Mr ........of my findings, the Head of Finance claimed that he could not answer any more questions because the inspection period was now over.  His action is unlawful because, as established in the case of Moss v RB Kingston in 2021:

“section 26 of the Local Audit & Accountability Act 2014 does not allow a relevant authority to refuse to process an inspection request on grounds of the time it will take to satisfy the request” - see paragraph 83.

Mr........ conduct in previous inspection visits has been equally obstructive and unprofessional.  Getting to the bottom of this matter is important because the public (and presumably the government) need to know whether many millions of pounds of grant money have been correctly spent in a way that complies with the City Deal grant conditions that the authority is well aware of.

About the author

I am a former auditor with Price Waterhouse and have worked in business software applications (ERP) and data mining for nearly thirty years.  In recent years I have specialised in local authority finances. 

 Appendix 1 Private Eye - Rotten Boroughs articles on City Deal

Issue 1560 – 10^th November 2021

Issue 1564 – 5^th January 2022

Issue 1575 – 15^th June 2022

Appendix 2 – City Deal grant reconciliations

This is the set of balances provided by the Head of Finance on 29^th August 2023:

 

The tables below show City Deal grant income and net expenditure matched to the set of revised City Deal cost centres provided by CCC’s Head of Finance.

The two reconciliations below show how nearly £47 million of City Deal grants received by CCC on behalf of the GCP have not been accounted for.  £10.88m is unaccounted for in 2022/23, whilst the opening balance above indicates that around £36m may have been spent in previous years on goods or services unrelated to City Deal projects.

Accounting Errors at CCC - Post 10/15 in a series - Ernst & Young Fails to Challenge Accounting Treatment

10 - 2018/19 - Ernst & Young fails to challenge accounting treatment

EY took over from BDO as CCC’s auditor for the 2018/19 audit onwards.  EY did nothing to challenge the City Deal accounting treatment in 2018/19 or 2019/20.  It carried on where BDO left off, issuing unqualified audit opinions on both years’ financial statements.  On page 44 of the 2018/19 audited accounts, CCC wrote in the section on General Accounting Policies and Judgements:

The Council previously judged that the appropriate accounting treatment for the City Deal funding from Central Government to the Greater Cambridge Partnership (GCP) of £20m per year from 2015-16 to 2019-20 was the recognition of the total funding as a grant in 2015-16, along with a debtor for £80m.  This accounting treatment continues to be applied with a further £20m received in 2018-19, reducing the debtor balance to £20m.

The same message, (only with the debtor balance reducing to zero) was included in the 2019/20 accounts.  The £20m overstated debtor balance, the £20m overstated usable reserves balance, and the understated £20m revenue in both years were all above the final materiality thresholds EY set for those audits of £16.1m and £19.58 respectively.   

Yet Mr Hodgson steadfastly chose to say and do nothing.  He had access to CCC’s and BDO’s stated reasons for the change in accounting in 2016/17.  All the relevant documents are in the public domain on CCC’s website.  In addition, EY’s Cambridge office is adjacent to BDO’s office.   

Following EY’s appointment, both audit partners have met regularly to discuss the progress of the outstanding objections.  It is therefore inconceivable that Mr Hodgson was unaware of Mr Mason’s 2018 objection on City Deal accounting, or was unaware that the City Deal accounting treatment breached the CIPFA Code and CCC’s stated accounting policy for income and expenditure recognition.   

He could not have been ignorant of the fact that the 2018/19 financial statements were not free from material misstatements, or that his statements to the contrary in his audit opinions were false.

Between 2019 and 2022 I submitted four objections about CCC’s draft accounts to EY.  Up to October 2022 Mr Hodgson declined to accept or reject any of them on the stated grounds that he could do nothing until BDO had completed its investigations into Mr Mason’s two historical objections.  That conduct breaches the National Audit Office’s Code of Audit Practice that auditors are obliged to comply with under Section 20(5) of the Local Audit and Accountability Act 2014 (LAAA 2014) – see Appendix 2 below.

Thus, by 2022, six formal objections to CCC’s last six annual accounts remained outstanding.  One of the matters in my 2020/21 objection was the accounting treatment for City Deal 2, whereby, as with City Deal 1, all five years’ worth of City Deal 2 grant income were recognised in year one (2020/21) as a single grant.  City Deal 2 was worth £200m over five years, so the incorrect accounting recognised £200m as grant revenue for 2020/21 alone, instead of the correct value of £40m, as set out in the determination documents.   

The result was that in 2020/21, revenue, debtors and usable reserves were all overstated by £160m, over eight times the materiality threshold EY set for its audit of CCC’s 2020/21 accounts.  Those overstatements meant that the draft usable reserves balance of £375,478,000 was overstated by 74% - hardly an immaterial difference.

During the 2021 statutory inspection period under Section 26 of the LAAA 2014, I asked to inspect and have a copy of that year’s City Deal grant determination document, which contained the conditions CCC alleged did not exist.  I already had copies of previous years’ determination documents from a contact at the National Audit Office (NAO).   

CCC’s Head of Finance repeatedly wrote to me asserting that no such document existed.  I mentioned this lack of cooperation from the senior officer in my objection to EY on the 2020/21 financial statements which was submitted on 13^th September 2021.  I sent a copy of the objection to CCC Finance.   

Just three hours later, CCC’s Head of Finance wrote to me enclosing copies of two determination documents covering the 2020/21 financial year.  The grant value in each document was £20 million.  Both documents contained the expected grant conditions that CCC had previously denied existed, but now acknowledges.

In its audit plan for the 2020/21 audit EY presented to the A&A Committee in September 2021 (Agenda Item 8), the auditor made no mention of any audit work to be done on City Deal accounting, despite the scale of the overstatements in the draft financial statements or his knowledge of Mr Mason’s outstanding 2018 objection.   

At that same meeting, Mr Mason submitted a written question about City Deal accounting.  The question and the answer from the Head of Finance can be found online (Timestamp 13.22) and in the minutes (Appendix 1).  The Head of Finance’s response was factually incorrect and misleading on several counts:

·       CCC had not been consistent in its treatment of GCP funding.  In 2015/16 it accounted correctly for that year’s grant, on an accruals basis (see Sections 4 and 5 above),

·       The revenue frontloading accounting treatment does not comply with the CIPFA Code (accruals basis) or with any recognised accounting policy,

·       The Head of Finance misquoted from the CIPFA Code and fabricated content that is not in the Code.  He conspicuously omitted to mention the overriding obligation to account for capital grants on an accruals basis.

·       Adding short and long-term debtors to balance the overstated revenue does nothing to correct or diminish the false accounting. The net result is still £160m overstated revenue, debtors and usable reserves which simply did not exist in that financial year.  Users of the accounts, such as short term lenders and central government had still all been materially misled.

·       In addition to creating long and short term debtors for the non-existent revenue, the resulting “reserves” were taken to the same Capital Grants and Contributions Unapplied Reserve, which on CCC’s own definition is designed for grants already received.

Following that response, the Committee Chairman stated that he would expect City Deal accounting to be looked at by the external auditor as part of its audit work that year.

After that September meeting, I wrote to Private Eye magazine, providing a copy of the draft accounts and other background evidence.  The magazine sought professional opinions, including from a former investigator at the Serious Fraud Office and a former investigator at the Financial Reporting Council.  The resulting articles published on the magazine’s Rotten Boroughs page in November 2021, January 2022, and June 2022 are shown in Appendix 3 below.

Accounting Errors at CCC - Post 11/15 in a series - The £160m U-Turn & £218m Cover-Up

 11 – The £160m U-turn and £218m cover-up

The exposure from the first two Private Eye articles appears to have achieved what five years of campaigning and two formal objections failed to achieve.   

In May 2022, EY recommended making the £160 million correction to the 2020/21 City Deal grant and returning to the correct, accruals basis accounting after endorsing the incorrect accounting treatment in its previous two audits.  Mr Hodgson would not admit the error by using the term “accruals accounting”.  This is how it was explained in EY’s Audit Completion Report – Addendum in May 2022.  It amounts to the same thing:

“That when broken down, the City Dealagreement was in fact 5 annual grants of £40 million, determined on an annualbasis by Government within the overall 5-year funding agreement settlement, andtherefore should be recognised in that manner.”(Agenda item 8, page 9)

A simple reading of any of the City Deal 1 or 2 grant determination documents would have given him that same information.

Under International Accounting Standard 8 (IAS 8 - Accounting policies, changes in accounting estimates and errors), when a material error is discovered, and the same material error took place in prior years, the comparative amounts for the prior period(s) need to be restated and properly disclosed “as far back as is practicable”. 

The correct disclosure under IAS 8 is set out in paragraph 49

The erroneous frontloading of City Deal 2 revenue in 2020/21, which was corrected, is identical to the frontloading of City Deal 1 revenue in 2015/16 and the corresponding overstatements of debtors and usable reserves between 2015/16 (prior period adjustment) and 2019/20.  The  City Deal 1 accounting errors were material, amounting to £217.8m in the aggregate, as set out above.  Nobody at CCC or EY or BDO has challenged that figure with counter evidence.

As the Financial Reporting Council’s final decision notice in the matter of Grant Thornton’s audits of Patisserie Valerie noted last year, the principal objective of audits is…

“to obtain reasonable assurance about whether the financial statements as a whole were free from material misstatement, whether caused by fraud or error”.

The case for CCC and EY therefore to comply with IAS 8 with respect to the City Deal 1 accounting errors back to 2015/16 appears to be overwhelming.

However, in its final 2020/21 financial statements published in July last year, CCC declined to comply with IAS 8.  On page 51 of the final, audited accounts, under the section on General Accounting Policies and Judgements, the CFO wrote:

“The Council have considered whether a prior year adjustment is required, due to the judgement made about income recognition in respect of the second City Deal funding agreement. The Council has concluded that a Prior Year Adjustment is not required, as it is not material to the users of the accounts under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.”

In its Independent Auditor’s Report, which forms part of the published financial statements, EY made no mention of the £160m correction made during that audit, or of any consideration of prior period adjustments.

The auditor issued his 2020/21 audit opinion in July 2022 without having accepted or rejected my objection, just as he had done in the two previous years.

At the 29^th September 2022 meeting of the A&A Committee (two months after the 2020/21 accounts were signed off), the Chairman asked EY’s audit partner to comment on the absence of prior period adjustments in those accounts.  Mr Hodgson replied:

“…On City Deal, we did, as part of our opinion for 20/21 consider the need for prior year adjustments – both the immediate prior year and the whole life of the previous City Deal “tranche”.  We concluded a prior year adjustment was not merited.  One consideration point is that neither we nor management in place now could have gone back and understood what information upon which management made their decision in 2015/16 was based, as nobody was around to validate that.  And clearly, as we have gone through City Deal, you could take one view, or you could take another view, depending on which element of weight you gave to the accounting and evidence base behind them.  So on balance, a prior year adjustment was not required.” (Timestamp 51:51)

It is important for the public to understand the full import of the above statement.  It falls into two parts.

Mr Hodgson’s first argument is nonsense.  As set out in Sections 6 and 7 above, all that information is in the public domain and was known to Mr Hodgson. But even if he had been unaware of it, that begs the question: why did EY slavishly follow the same incorrect accounting “policy” for two years, without ever questioning it?  By law auditors are required to maintain “professional scepticism” throughout the audit:

“In accordance with ISA (UK) 200 (Revised June 2016), the auditor shall maintain professional scepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor's past experience of the honesty and integrity of the entity's management and those charged with governance.” (Paragraph 13)

But even if EY had not known why CCC accounted incorrectly for City Deal 1, that is no argument for not entering prior year adjustments for the same acknowledged error that the auditor and his client have just agreeed should be corrected for City Deal 2.  Accounting policies, once chosen, have to be applied consistently.  The CFO signs a certification to that effect in each year’s published financial statements (see above).

The second part to Mr Hodgson’s response to the committee Chair – highlighted in yellow above, makes even less sense.  In March 2022 the EY audit partner told the A&A Committee that his decision on the correct accounting treatment for City Deal 2 would be a binary choice between revenue frontloading and accruals basis accounting.   

Here Mr Hodgson is effectively saying that there is no objective right or wrong, and you can choose either one or the other accounting treatment depending on how you feel.  He is contradicting his own conclusion from May 2022 when he correctly stated that accruals accounting was the correct policy for the discrete City Deal 2 grants, paving the way for the £160m correction to the 2020/21 financial statements.

Furthermore, even if one posits that there is no right or wrong and therefore the Council and/or EY can make a subjective choice on the accounting treatment of hundreds of millions of pounds based on nothing in particular, then the consistency imperative for accounting policies would compel CCC to stick with the previous revenue frontloading arrangement for the sake of consistency, and not make the £160m correction to the 2020/21 grant.   

The fact that the £160m correction was finally made means that EY recognises that the previous accounting treatment was incorrect.  That means the same correction should be followed through to City Deal 1 and prior year adjustments should be made to implememt those corrections, as prescribed in IAS 8 (see above).  

Mr Hodgson’s statement at the September A&A meeting therefore makes no logical sense.  His conduct indicates that he is simply trying to divert attention away from his own complicity in the incorrect accounting in 2018/19 and 2019/20 which he, as auditor, conspicuously failed to challenge. 

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