The Long Read: The Peoples’ Audit of KCC’s Accounts 16/17

The Shepwayvox team with two independent qualified CIPFA accountants, a retired PWC Auditor and a few lawyers have undertaken a Peoples’ Audit of Kent County Council’s (KCC) accounts for the financial year 2016/17.

We have discovered evidence of financial mismanagement a systemic lack of financial governance and issues surrounding value for money, costing millions of pounds of public money. We have used our citizens’ powers to discover all this, by using the Local Audit & Accountability Act 2014 which empowers all citizens’ of Kent.

KCC’s 14 PFI Contracts & their Lifetime Costs.

In 2016/17, KCC had to find savings of £80 million pounds.

As you may or may not know KCC have 14 PFI contracts – 11 schools and 3 Plant & Machinery contracts, and over half the schools PFI contracts are owned offshore in places such as Jersey & Luxembourg 

The lifetime costs of these PFI Contracts has been steadily falling from £916 million in 2010/11 to £698 million in 2015/16. However, in 16/17, the year KCC had to make £80 million pound savings, the lifetime costs of KCC’s PFI contracts rose by £54 million to £752 million, an increase of 7.75%.

the initial decision to enter into the PFI contracts was based on “for profit” advice from audit consultants and was not in the public interest we personally believe.

The “value for money” calaculations and “public sector comparator” were rigged in favour of PFI at procurement statge, and access to public funding was restricted to ensure that the PFI option was the “only game in town”, thus costing the Kent Taxpayer dearly as can be evidenced above

So the question we wish to put to Cllr Paul Carter, Leader of KCC. is were the £80 million savings in part, to pay of the £54 million increase in the life time costs of the 14 PFI contracts?

We have asked the Auditor, Paul Hughes (pictured) of Grant Thornton, who decided that a £1.3 million scandal  was too expensive to investigate at Barnet Council. Even though the former Communities Secretary Eric Pickles weighed into the situation praising the Barnet bloggers who discovered the scandal.

But no, Mr Hughes was adamant, there would be no investigation. We have to wonder why, was it costs alone? And/Or wilful blindness?

Anyway, under s27 of the Local Audit & Accountability Act 2014, we have asked the Auditor to prepare a public interest report, with regards to the very sudden lifetime costs increase of the 14 PFI contracts.

What do you think Mr Hughes response will be?

KCC LOBO Loans

We have written about KCC’s Lender Option, Borrower Option” LOBO loans before. LOBO loans contain derivatives, which in some cases have similar properties to interest rate swaps declared ultra-vires or illegal for use by UK  local government following the landmark 1989 Hammersmith & Fulham case. The legality of LOBO loans remains untested in a UK court of law.

KCC was influenced in its decision to borrow LOBO loans with information from its Treasury Management Advisors – Butlers – a trading division of ICAP run by Conservative donor and former party treasurer Michael Spencer.

Unbeknown to KCC, Butlers was receiving undeclared kickback payments from brokers including ICAP and Tullet Prebon when KCC borrowed from banks, in breach of its contractual obligation to provide “independent” advice to KCC skewing the decision to borrow in the worst direction financially for KCC and the Kent taxpayer.

The existence of kickback payments from brokers to Treasury Management Advisors on LOBO loans is a matter of public record – from the  2015 Communities & Local Government Bank Loans Inquiry and the 2011 Competition Commission review into the Butlers – Sector merger.

With the current contracts, should KCC choose to repay the loan (for example to access a cheaper rate loan elsewhere) without waiting for the lender to exercise their “option”, KCC would need to pay a “break penalty” to exit the loan, which given the pricing of derivatives in the contracts can cost muliples of the original loan principal.

The impact of falling rates is to increase the total repayment or “breakage cost” of the LOBO loan portfolio, effectively locking KCC into paying higher interest rates until maturity, forgoing the opportunity to refinance at lower interest rates.

The full “breakage cost” to exit the loans is impossible to monitor by KCC, and would only be determined through a negotiation process with the bank.

Independent financial analysis of KCC’s LOBO loans portfolio, and financial position by financial analysts Nicholas Dunbar & Gary Kendall established that Barclays, RBS and Dexia recorded an upfront trading profit on day one of £23 million from the embedded derivatives in KCC LOBO loans.

We have called upon the Auditor – Paul Hughes – of Grant Thornton, under s28 of the Local Udit & Accountability Act 2014 , to apply to the courts for a declaration that KCC’s LOBO loan borrowing as referenced in the 16/17 accounts is a gamble, irrational and unlawful, and that he too prepare a public interest report on this matter.

KCC Duplicate Payments

We know that from KCC’s own data in 16/17 that their internal reference numbers for supplier invoices indicates that the possibility of £7.5 million pounds worth of duplicate payments have been made. It was brought KCC’s attention and since then nothing has been heard from KCC regarding this matter; which is deeply disturbing.

If only some of the examples identified are real overpayments, then the matter is extremely serious because it would point to either grave control issues in the accounting software that have gone unnoticed for years, or systemic manipulation by one or more people within the organisation, presumably acting in collusion with the beneficiary suppliers

Duplicate supplier payments usually occur when a invoice is “accidentally” presented twice, entered twice onto the accounts payable system and paid twice without internal controls or human controls spotting the “accident”/error, therefore raising serious concerns about issues of governance during the financial year 16/17

In KCC’s published Invoices Over £250 payment data for 16/17, seven examples of apparent duplicate payments were identified in which KCC’s internal reference number was duplicated in a second payment with a later date. Normally this would be impossible because once an invoice has been paid in full, the accounting software sets the open amount to zero and there is nothing left to pay against that invoice so it physically cannot be paid a second time.

It is clear that the checks and balances which are necessary to prevent payment of invoices twice, fails on issues of sanity checking and governance issues. We are deeply concerned as it creates and raises the real possibility of fraud happening throughout the whole of the financial year 16/17 within KCC.

We have asked the Auditor – Paul Hughes of Grant Thornton – under s27 of the Local Audit & Accountability Act 2014 to prepare a public interest report on duplicate payments.

KCC Annual Audit Letters & Certificates

KCC have failed to publish Annual Audit Letters on their website since 2013/14 onwards. The Act and the Code of Practice places a requirement on the Auditor to produce an annual audit letter for all local government bodies

“ The annual audit letter summarises key findings from across the range of the auditor’s work and responsibilities under statute and the Code of Practice. It covers the work carried out by auditors since the previous letter was issued. It should provide a clear, readily understandable commentary on the results of the auditor’s work and highlight any issues that the auditor wishes to draw to the attention of the public. The annual audit letter is a public facing document and should be written for a wider audience because it will be published by the audited body.”

The Annual Audit Letter is very important as it informs us of the fees the Auditor – Grant Thornton – have charged KCC. Also the Annual Audit Letter delivers the bad news and any areas where KCC would have to pull its socks up.

Screen shot taken at 08:00am 14/07/17

Also KCC have failed to publish their Audit Certificates for 14/15 and 15/16.

The information contained in an Auditor’s certificate will provide a short statement on whether the auditor approves or disapproves of KCC’s financial information. Four types of certificates are common: unqualified, qualified, disclaimer or adverse opinion.

If the Auditor’s certificate contains an unqualified opinion this would indicate the Auditor has no lingering questions or doubts about KCC’s financial statements. Informally, this is known as a “clean bill of health”, mimiicking the statement a doctor would give a healthy individual. An unqualified opion assures stakeholders (Kent Taxpayers) that the financial statements comply with all accounting standards, internal controls are adequate and no limitations existed throughout the audit.

A qualified opinion means the Auditor has an issue with the application of accounting standards or some other issue exists as a result of the audit. This may include a failure to disclose material information relating to KCC’s, an unfair representation of KCC’s accounts, or failure to properly apply accounting standards. The Auditor’s Certificate typically requires KCC to undergo a remedial audit to retest financial information upon corrections being made.

We understand the Auditor has issued the Annual Audit Letter since 13/14 and but not the Audit Certificates for 14/15 and 15/16 as previous objections to KCC accounts have not yet been resolved by the Auditor. Meaning we cannot tell if KCC accounts for 14/15 & 15/16 have a “clean bill of health”. This is very distributing as two years worth of KCC’s accounts have failed to receive an Audit Certificate, and remain not signed off.

Travel & Costs

For those of you who do not know, KCC have an office in Brussels. In the financial year 16/17 the rental/lease costs for the office was £14,065.

Also KCC officers and elected Members travelled to the following countries in 16/17 all paid for by the public purse.

New Zealand, Iceland, Finland, Czech Republic, Germany, Belgium, Moldova, Greece, Italy, Spain, Holland, Denmark and France.

The costs for all this extensive travel has not been disclosed as yet, even though it was requested while the accounts were open. What was the purpose of all this travel?

Conclusion

Our public face has lodged an objection to the Accounts for 16/17, asking the Auditor declare the LOBO loans unlawful, and that he issue a public interest report on the LOBO Loans, the duplicate payments and the lifetime costs of the 14 PFI Contracts, as they raise issues of Governance and Value for Money.

KCC elected members are responsible for the money and we are quite sure that none of them probably realised that the lifetime costs of the 14 PFI contracts had risen by £54 million, nor that the LOBO Loans are a one sided contract, nor that up to £7.5 million pounds worth of fraud may have been committed, given the facts sets out above.

We do not believe the vast majority of our elected at County Hall have the skills sets to analyse or investigate these matters in the course of their duties and believe that each of them should at least receive training in how to use Excel, or SQL Server, allowing them to interrogate the financial data independently. However, that said we are sure there are some who would not welcome that level of scrutiny.

Finally, it is clear to us and those who assisted us through the period the accounts were open, that there are real problems with KCC’s accounts for the financial year 16/17, that is why our public face has lodged an objection. We await the outcome of the Auditor’s findings, but do not hold out much hope anything will be done, especially when one considers his stance on the Barnet Fiasco.

The Shepwayvox Team