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.

INDEX: Council Leader Covers Up £218m of Accounting "Errors"

July 2023

This is a series of posts in numerical order, click on any link to be taken directly to that post.

Summary of contents:

1 - Executive summary. 2

2 - What is City Deal? 3

3 - How local authorities should account for capital grants 3

4 - 2015/16 – City deal is accounted for correctly. 4

5 - 2016/17 – Correct accounting in the first draft accounts 5

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

7 – The additional £17.8m accounting blunder 8

8 – The A&A Committee approves the accounts without knowing their contents 10

9 - November 2017 – the CFO distances himself from his own accounts. 12

10 - 2018/19 – EY fails to challenge accounting treatment 14

11 – The £160m U-turn and £218m cover-up. 16

12 - The evidence for fraudulent false accounting. 19

13 - Cambridgeshire CC’s going concern position. 20

14 - EY’s retrospective objection investigations 23

15 - Conclusion. 24

Cambridgeshire County Council’s leader, Cllr Lucy Nethsingha has declined to explain why the authority failed to correct acknowledged accounting errors totalling £218 million that materially overstated the level of usable reserves in five consecutive years’ audited financial statements, even after the council was forced to make a £160m correction for the identical error in the following year’s accounts (2020/21). 

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 2/15 in a series - What is City Deal?

2 - What is City Deal?

City Deals 1 and 2 are two, five-year government grant arrangements sponsored by the DLUHC and the Treasury.  The grants were awarded to the Greater Cambridge Partnership (GCP).  CCC is the accountable body for the GCP, which means it holds funds and oversees payments to its delivery partners under the scheme (Cambridge City Council and South Cambs District Council) and suppliers where relevant.

The first City Deal (City Deal 1) ran from 2015/16 to 2019/20.  It comprised five annual grants, with conditions, worth £20 million each, i.e. £100m over all five years. 

City Deal 2 began in 2020/21.  It too comprises five annual grants, with the same conditions, worth £40m each, i.e. £200m over the five years to 2024/25.

The conditions are contained in grant determination documents signed by authority of the Minister of State for Housing, Communities and Local Government (now DLUHC).  The grant determination documents have been sent to CCC each year since 2015/16 to accompany the corresponding annual grant payments.  The conditions in all City Deal grant determination documents to date have been the same.  They state:

“Grant paid to a local authority under this determination may be used only for the purposes that a capital receipt may be used for in accordance with regulations made under section 11 of the Local Government Act 2003.”

That means if any grant monies are used for purposes, outside those specified, the grant monies may need to be returned, or the government may cease to pay the grants.

Accounting Errors at CCC - Post 3/15 in a series - How Local Authorities should account for Capital Grants

3 - How local authorities should account for 

capital grants

Each year, CCC’s published statement of accounts contain the following statement under the section on the Chief Finance Officer’s responsibilities:

The Chief Finance Officer is responsible for the preparation of the Council's Statement of Accounts in accordance with proper practices as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the Code).

The Code has been prepared under International Financial Reporting Standards (IFRS), which since 2010 have been adopted as the basis for public sector accounting in the UK.  Therefore, the Code is consistent with IFRS.

The fundamental accounting principle in the Code and IFRS is accruals base accounting.  That means that income and expenditure are recognised in the Comprehensive Income & Expenditure Statement (CIES) in the financial period to which they relate.  This is made explicit in the section headed “Accounting policies, general principles” in CCC’s published financial statements:

ACCRUALS OF INCOME AND EXPENDITURE Revenue accounts are maintained on an accruals basis. Expenditure is charged to the revenue accounts in the year in which goods and services are received and, similarly, income is credited in the year to which it relates, regardless of the timing of cash payments or receipts. For example, accrued income is recognised where an amount is earned in the current accounting year, but is expected to be received in a subsequent year. Deferred income reflects any income which has been received in advance of it being earned, and is recognised when it can be matched with the year in which it is earned.

Accruals base accounting for recognising capital grants is also made explicit in paragraph 2.3.2.8 of the CIPFA Code:

The word “immediately” above relates only to the year of account.  It means that if the authority has satisfied the grant conditions for that year, but the grant payment has still not been received, then the grant receivable in that financial year may be recognised in that year’s Comprehensive Income and Expenditure Account.  

It does not mean that the authority can recognise the revenue from future years’ grants before those grants become receivable.  To do so would breach the fundamental principle of accruals base accounting and materially distort the financial statements.

Accounting Errors at CCC - Post 4/15 in a series - City Deal Accounted for Correctly

4 - 2015/16 – City deal accounted for correctly

2015/16 was the first financial year of City Deal 1.  The first City Deal grant of £20m was receivable and duly received in that financial year. Consequently £20m was correctly recorded in the Comprehensive Income & Expenditure Account (CIES) as City Deal revenue. 

In the same year CCC received an additional £17.8m of City Deal grant.  This component was disclosed as grant received in advance because it related to the following year’s grant.  The £17.8m was therefore not recognised in the 2015/16 CIES but was held in the balance sheet as a creditor (Dr Cash, Cr Creditor - £17.8m).  This accounting treatment was correct, and corresponds to the deferred income scenario described in the box above.  This is how it was disclosed on page 89 of CCC’s final 2015/16 financial statements:

This correct accounting treatment shows that CCC’s CFO and the BDO auditor understood how City Deal grants should be accounted for.  In the following year (2016/17), only £2.221m of grant would be receivable in cash from the government under the arrangement, and the credit balance above would be reversed out to make the revenue up to the £20m grant total for the 2016/17 financial year (Dr Creditors, Cr Revenue £17.8m).

Accounting Errors at CCC - Post 5/15 in a series - 2016/17 Correct Accounting in First Draft Accounts

 

5 - 2016/17 – Correct accounting in the first draft accounts

The draft accounts for 2016/17 were published in July 2017 and made available to the public to inspect - click here to view - Agenda Item 11. These accounts correctly reversed out the City Deal grant received in advance the year before, as stated on page 11:

Legislation (The Local Authority and Accountability Act 2014) requires councils to publish draft accounts for the external auditors to audit and for interested parties to inspect, request documents, and ask questions of the auditors.  Local electors may also submit objections to the draft accounts, addressing their objection to the auditor.  The statutory period for the public and local electors to do this for the 2016/17 draft accounts expired on 15^th August 2017.