Audit Commission

The Audit Commission maintains serious criticism of seven authorities that made deposits in Icelandic banks last October, in an amendment to its report Risk and Return. This follows representations made by named authorities, threats of legal action by two of them, and misleading press reports.

In turbulent financial circumstances, the authorities failed to make use of up to date market intelligence to ensure the security of public money.  At the time of investment the banks’ credit ratings were below acceptable levels.

Any council investing public funds should, in the Commission’s view, have carefully monitored the extraordinary and deteriorating situation in the global financial markets during September last year.  In the fortnight following the collapse of Lehman Brothers on 15 September 2008, numerous other banks collapsed on both sides of the Atlantic.  On 29 September, the Icelandic government announced a rescue of Glitnir Bank, and all main Icelandic banks’ credit ratings were downgraded on 30 September by the Fitch credit rating agency. 

The turmoil in the global economy was widely covered by the media at the time.  There were reports in newspapers ranging from the Financial Times to the Sun that drew attention to the fragility of the Icelandic economy as a whole, and the Icelandic banking system in particular.   In these circumstances, local authorities should have exercised particular caution when making investments.  Arrangements for new or renewed deposits should not have been made in Icelandic banks in October. 

Two authorities, the London Borough of Havering and Kent County Council, threatened legal proceedings over the use of the word ‘negligent’ to describe their failure to ensure the security of public funds in Risk and Return, the Commission’s report into local authority investments in Iceland.  Mindful of the costs of litigation, the Commission has sought to avoid the expense of court action, which would have been paid for by tax-payers whatever the outcome.

‘It would be an inexplicable waste of public money to seek judicial review of a dispute about the meaning of a single word,’ said Michael O’Higgins, the Commission’s Chairman. 
 
‘The simple fact is that seven authorities, including Kent and Havering, invested in Icelandic banks when they should not have done.  These were extraordinary circumstances that called for vigilance. Whether it was through negligence, carelessness or following an inappropriate policy, millions of pounds of public money was put at risk when it should not have been.’
 
The authorities should have had an opportunity to make representations before publication of the report. They have now been given an opportunity to do so and, following careful consideration, the Commission is issuing an amendment to its report that provides details of the events and sets out its serious criticism of the authorities.

‘Partial and misleading reports of the discussions between the Commission and Kent and Havering councils have appeared in the press,’ Mr O’Higgins added.  ‘The Commission thought it inappropriate to comment while engaged in discussions in good faith. But now its views have been finalised, the Commission feels obliged to set the public record straight’.

The priority now is for all councils to ensure their treasury management is up to scratch. Risk and Return provides good practice advice on treasury management for all councils.  Auditors appointed by the Audit Commission will follow up the findings of the Commission’s study at all local government bodies in their annual reviews of financial management arrangements.

Notes to editors

1. 'Risk and Return: English Local Authorities and the Icelandic banks' was originally published on 26 March 2009.
2. The Communities and Local Government Select Committee published its report on local authority investments in Iceland (HC164-1) on 11 June 2009.  This refers to the seven authorities in Table 3 above in paragraph 42:  ‘We endorse the Audit Commission’s censure of these rudimentary mistakes in organisations responsible for investing large amounts of public money.’
3. The Audit Commission itself made deposits totalling £10 million in two Icelandic banks on 29 May 2008 and 2 July 2008.  The later investment was made over two months before the turmoil in global financial markets that followed the collapse of Lehman Brothers on 15 September 2008 and nearly three months before the credit ratings were downgraded on 30 September 2008.  An internal audit report and external review of that report considered the Commission’s investment decisions and set out the lessons to be learnt. These were both published and are available on the Commission’s web-site.  Risk and Return notes (page 2) that the Commission had reviewed its own approach, identified weaknesses and taken action.
4. The Audit Commission is an independent watchdog, driving economy, efficiency and effectiveness in local public services to deliver better outcomes for everyone. Our work across local government, health, housing, community safety and fire and rescue services means that we have a unique perspective. We promote value for money for taxpayers, auditing the £200 billion spent by 11,000 local public bodies. As a force for improvement, we work in partnership to assess local public services and make practical recommendations for promoting a better quality of life for local people. Further details about the role of the Audit Commission can be obtained from www.audit-commission.gov.uk

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