Council admits that misuse of £16m funding was ‘unlawful’

Nottingham City Council has admitted that the misuse of almost £16m that was supposed to be used for housing was against the law.

Last week, the council revealed that it had identified an accounting error that had seen £15.9m deposited in its General Fund – instead its Housing Revenue Account.

In line with local government law, the council’s section 151 officer and monitoring officer have issued legal notices which confirm that the allocation of housing funds to its General Fund was unlawful.

The issue was initially identified as part of ongoing work to confirm that its financial governance and practices were fully compliant, which is part of the ongoing work in line with the council’s Recovery & Improvement Plan.

The council commissioned a report from CIPFA (the Chartered Institute of Public Finance and Accountancy) which confirmed that £15.86m of funds from the Housing Revenue Account – which should only be used for transactions related to council housing landlord functions – had been incorrectly used by the General Fund for all council services since 2014/15. The council says it is taking “immediate steps” to cease this action with effect from April 2020 and to refund to the Housing Revenue Account the full amount from its General Fund reserves.

The authority has admitted that the use of funds in this way is a breach of local government financial law and requires council statutory officers to issue both a Section 114 Notice and a Section 5 Notice – a formal acknowledgement that it has acted unlawfully, in this case specifically in relation to housing services. This is distinct from Section 114 Notices covering all council activities and so does not require further spending controls to be introduced.

City Council Leader, councillor David Mellen, said: “Since I was elected leader in May 2019, I have been carrying out a number of measures to bring about financial stability to the council and have overseen the council’s Recovery and Improvement Plan to date. This has rightly looked at ways we can set about balancing our budget whilst continuing to deliver the vital services we know people across the city need and rely on.

“Clearly, politicians are elected to set the policy and vision for the city, however officers manage the day-to-day running of the council. Despite having the council’s budget and accounts externally audited every year by independent experts, it was the council’s most senior finance officer who rightly alerted me to the accounting irregularity with the Housing Revenue Account and I supported seeking external advice from the Chartered Institute of Public Finance and Accountancy (CIPFA) to review the issue.

“Having reported their recommendations to me last week, I am committed to acting without delay to ensure that the money is accounted for correctly. This will not directly affect the Council’s revenue budget for day to day services but will put further pressure on our General Fund reserves and steps are now being taken to immediately refund the Housing Revenue Account from the council’s General Fund by the full amount.

“I am absolutely committed to making sure that the council continues to deliver vital services whilst ensuring that issues such as this are discovered and dealt with immediately. As Leader of the Council, I am determined that an investigation is carried out without delay to understand how this happened and will absolutely ensure that measures are put in place so that something like this cannot happen again.

“The fact that this continued unchecked for a number of years is clearly disappointing and whilst we understand how this could have happened, it is only right that issues such as this are unearthed and dealt with transparently.”

Mel Barrett, the council’s chief executive, said: “This is clearly a setback for the council in the context of the significant improvement journey underway, however it is positive that the matter has been identified and is being addressed quickly under the current arrangements we now have in place.

“Following legal advice that the use of funds was unlawful, the council is required to issue what’s known as a Section 114 Notice under the Local Government Finance Act 1988 in relation to this activity only. The matter will be brought to a special meeting of the Full Council in the New Year.”