Independent report

Nottingham City Council Improvement and Assurance Board: Housing Revenue Account (HRA) Second Assessment

Published 23 June 2022

Applies to England

Misappropriation of HRA monies - Report to the Minister for Local Government and Communities

Introduction

In December 2021 I was asked to submit a report in respect of Nottingham City Council’s irregular and unlawful misappropriation of the Housing Revenue Account (HRA) to finance General Fund expenditure between 2011 and 2021 amounting in total to £14,366 million. In particular, attention was paid in that report to the steps being taken by the City Council to address these failings and to ensure there would be no repeat of such malpractices, at the same time complying with its Best Value duty. This report includes further actions taken since December by the Council in terms of governance, management, financing and accounting changes being effected, but its principal purpose is to record further very serious failings in the proper accounting for HRA monies and the impact on the Council and its tenants.

These problems have been highlighted by Cipfa following two further investigations into the structure and financing of the housing function.

Further misappropriation of HRA monies

After the discovery of the irregular payments from the HRA in November last year, Cipfa was commissioned to undertake further detailed investigation into all aspects of the finance and accounting transactions relating to the Housing Revenue Account, spanning the full six year period during which the previously reported irregularities occurred. In addition, an independent report has been produced by Richard Penn which provides a detailed account of events relating to the misappropriation of HRA funds, following interviews with those parties, past and present, who were associated with the workings of the Housing function, from both the client and contractor perspective. The key findings of the two further Cipfa reports together with the conclusions drawn by Richard Penn are provided here.

Cipfa Report 2A – Key Findings

Set out below are the areas identified by Cipfa which reveal further financial accounting treatments which are considered to contravene the ring fencing regulations of HRA expenditure and income:

	£000’s
a) Manvers Street Car Park – This car park remains an HRA asset but income due has been misappropriated to the general fund 295	295
b) Cessation of rebate to the HRA relating to the RTB/Public Realm charges	5272
c) Introduction of a charge to HRA in respect of pest control	80
d) Charges in relation to street lighting which is a non-core service	2272
e) Contribution from HRA to the general fund regarding solar panels	400
f) Cessation of HRA charge to General Fund regarding the housing partnership team	184
Total	8503

These irregularities span the period from 2014/2015 to 2020/22 although some of the accounting practices were perpetrated for less than the full six year period.

Cipfa Report 2B Key Findings

• The funding in respect of HRA received by Nottingham City Homes (NCH) between 2014/15 and

2020/21 was £417,800,960m of which £386,178,247 was expended, leaving a difference of £31,622,713. To date, £14,366,500 has been returned to HRA from general fund leaving a balance of £17,256,213 still attributable to HRA and its tenants, as yet unspent.

• The capacity of NCH to remedy this gap is considered to be limited.

The Cipfa report also details the following poor or inadequate practices:

• the ledger kept by NCH does not differentiate between HRA and non-HRA activities
• there is no ring fencing of management fees and repairs and maintenance in respect of HRA.
• the schedule of rates in determining repairs and maintenance costs, cannot be validated
• outdated re-charges between account codes are utilised and HRA costs are recovered from NCH subsidiaries based on assumed rather than actual costs
• there is insufficient differentiation between NCH and its subsidiaries in terms of its accounting records

Richard Penn Report

Following a very comprehensive set of interviews involving relevant parties, Richard Penn highlighted the following key points:

• External audit was unaware of misappropriations but noted the amounts involved were below ‘materiality’ levels
• It was, initially, an officer initiative to suggest use of the HRA funds for general fund purposes
• On some occasions officers subsequently challenged transactions but were discouraged from pursuing concerns
• Size of transactions raised issues for some offices/members but were not acted upon
• ‘Big-ticket’ savings were a key driver for the annual budget process and HRA items were part of that
• “Strong Leader” process sometimes deterred officers from challenge
• NCH denied any wrongdoing and stated that it was unaware of technical issues arising from HRA ring fencing
• NCH providing HRA ‘surpluses’ on an annual basis for NCC was an ‘expectation’
• Monitoring officers assert that they were not cited on unlawful transactions

A Strategic and Operational Overview

The specific breach of the ring fence revealed by Cipfa’s first report cannot now be considered as a historic one-off event. The Penn Report into that specific breach and the numerous cases exposed by all three Cipfa reports reflects a culture of casual, barely challenged, systemic, current as well as historic, inappropriate use of HRA monies. Penn points to professional failures and weakness as being particularly key. This inappropriate use of HRA resources has been to the detriment of tenants’ interests.

Taking the three reports together, Cipfa currently estimates, the amount of inappropriate use of HRA monies is some £40m, of which £15m identified in the first Cipfa report is therefore but part. The poor quality of record keeping and lack of an audit trail are such that Cipfa has had to rely on estimation, extrapolation, and an experienced view of what is, and what is not, an appropriate charge to the HRA.

However, other identified accounting adjustments, to the HRA, may also be inappropriate. The absence of any meaningful documentation and audit trail means Cipfa could not be always definitive in its findings. That same absence of information makes further investigation of historical individual charges and adjustments of questionable value. The Council will need to devote its energies to putting the HRA accounting, and all Council (i.e General Fund) charges and adjustments falling on the HRA, onto a sound footing.

The four reports reveal fundamental failure in financial governance in two respects. First, there was a failure to ensure robust gatekeeping of the HRA, in the interest of the tenants, to ensure only fair and appropriate charges/adjustments were, and are, allowed. Second, and until rectified recently, there was the failure by the Council to specify to its 100% owned subsidiary, NCH, the HRA ring- fence requirement, in general or specific terms. Delegating the management and operation of the HRA to the subsidiary, NCH, does not absolve the Council of its statutory responsibility to protect the interest of its tenants.

The report also demonstrates systemic failures and weaknesses in financial management, accounting and financial control in respect of the HRA and possibly across the Council in general. This has been an ongoing general concern already reflected in previous reports from the IAB to the Secretary of State. Regrettably the ‘scrutiny’ functions undertaken by internal and external audit appear not to have raised any specific concerns in these areas in the past.

The professional, cultural and other weaknesses that have allowed this to happen within the HRA over many years raise the question as to the potential for other significant and inappropriate budget or accounting adjustments relating to the remaining Council operations to have occurred. The Council’s external auditor has now put this question, formally, to the Council.

The Council’s Response

In terms of the unlawful transactions in November last year the Council received a section 114 report from the CFO which detailed the amounts relating to each of the financial years from 2014/15 to 2020/21. Subsequently, the decision was taken to transfer £14.366 million from the General Fund to the HRA, to be financed from Reserves. In addition, Richard Penn was commissioned to carry out the independent investigation into the causes of these failings and Cipfa was engaged to establish whether any further irregularities had occurred. This was together with an examination of the structure, governance, financial and accounting arrangements underpinning the way the Housing Revenue Account was managed, having regard to the statutory context in which the local authority service operates. In commissioning a further three reports after the first issue (inappropriate remission of surpluses) the Council demonstrated willingness to engage with difficult matters in a transparent way and a determination to put in place appropriate protection against a recurrence.

Subsequent to those reports the council must now consider the funding of an additional amount of up to £25,759 million of misappropriated HRA monies, made up as follows

	£000s
Incorrect financial/accounting treatment	8,503
Deficit on expenditure allocated to HRA	17,256
Total	25,759

The Council is currently considering the possible use of reserves or a request for further capitalisation, or a combination of both.

The Council is also aware that it must significantly strengthen its housing client function and, to this end, a Housing Accountant and Housing Director have been appointed with extensive experience in the field, including an in-depth knowledge of the operation of Arms-Length Management Organisations (ALMOS). Governance is to be addressed, including a review of NCH’s Articles of Association. Nottingham is also looking critically at the lack of experience and expertise in the finance and accounting function in respect of the detailed technical aspects of the housing revenue account and its statutory basis. This will be addressed as a matter of urgency. It is to be emphasised that continuity and consistency in the discharge of the finance function at the most senior level is also critical if the Council is to address, fully, the shortcomings in the HRA function, within the set time scale. NCC’s capacity as a whole to deliver sound financial management and accounting is now being tackled as a priority with the necessary resources identified to enable this to happen. The local authority is well aware that it must create the capacity to effect these changes very quickly. The immediate challenge is to establish new systems and procedures accompanied by ways of working which will ensure that there will be no further instances of such serious irregularities. Apart from the issues relating to the HRA, the Council is engaged in a thorough examination of the financing of other services where government grant is a dedicated one and cannot be utilised to assist other services financially. These outcomes are awaited.

Armed with all four reports the Council is beginning to put in place a robust and resilient action plan:

• Specify its policy and financial requirements regarding HRA operations, to its provider, NCH
• A project plan to bring all HRA operations in-house as soon as can practically be achieved
• Greatly enhance the current client function within NCC
• Establish proper financial processes, skills and protocols in relation to the HRA, as part of a major Council wide finance improvement programme.
• Ensure all Council charges and adjustments impacting the HRA are fair, defensible and consistent with appropriate legislation and regulation
• Deliver proper accounting across all of its operations
• Risk register encompassing both the Council and NCH activities
• Project Boards at various levels to ensure engagement with tenants, leaseholders, staff, unions, stakeholders and contractors

The Council will also be reviewing its Medium Term Financial Plan – which covers its general fund – so as to eliminate the further inappropriate HRA adjustments, identified by Cipfa, that are still figuring as part of its general fund MTFP going forward. This, inevitably, will introduce budget gaps but the Council’s current reserves flexibility may provide cover, pending the identification of proper compensatory savings.

Conclusion

There is absolutely no doubt that the substantial further breaches of HRA regulations are a serious setback to the Council in the delivery of its recovery and improvement plan. The fifth quarterly report pointed to some noteworthy improvements in governance and transformation alongside relatively good progress in financial resilience and sustainability. Although there is much still to be done in the implementation and delivery of the plans, advances in a number of areas are encouraging.

This setback is a significant one and, whilst it may be argued that a large proportion of the failings are historical, a number of those shortcomings have yet to be completely eradicated. The apparent lack of technical knowledge and experience of the HRA rules and regulations governing the financing, accounting and delivery of the housing service to tenants has yet to be fully resolved. A further £25.76 million has yet to be returned to the HRA, with its funding still to be determined. I am assured by the leadership, members and officers alike, that resolving these problems represent the Council’s highest priority. A full response to the Cipfa and Penn reports is also awaited, with a radical improvement in governance and accounting essential as a matter of urgency.

As indicated in the fifth quarterly report the IAB is not in a position, at this stage, to provide full assurance and it is why the independent board members wish to take a more proactive role in testing, on a continuous basis, the delivery of the recovery plan. The housing issue makes it even more important that the Council’s commitment to rectify this will be monitored very carefully. It is further proposed that monthly updates on progress be provided to DLUHC.

Sir Tony Redmond
Chair of the Improvement & Assurance Board