The City Council and its external auditors are in a bizarre conflict over the legality of property investments worth hundreds of millions of pounds.
Spelthorne called the external auditor’s report “dishonest” and “speculative,” amid a fierce reaction from the local government’s senior management set up for a full council meeting next week (December 8). I explained that it is a target.
In 2016, Spellthorn began pursuing a policy of borrowing money from the Public Works Loan Board (PWLB) to invest in commercial real estate. According to KPMG, by the end of the 2017/18 financial year, the local government portfolio was worth more than £1 billion to him.
After auditing its activities, KPMG has filed a public interest allegation that Spelthorne’s decision to borrow £225m from PWLB to purchase three Heathrow properties outside the Borough boundaries in the 2017/18 financial year was illegal. We have issued a report. The legal authority to rent and purchase certain property.”
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Here’s why, according to the Public Interest Report:
- Spelthorne could not rely on the “general powers of authority” in the Localism Act 2011. You purchased a property under your own name, not through a company. ”
- The Council could not rely on its authority to acquire land (Section 120 of the Local Government Act 1972). “benefit, improvement or development of [the authority’s] range”the purchase was made purely for investment purposes (i.e. to make a profit). “The council’s benefits to the community[from increased income]have been and still are too indirect.”
- Borrowing and investment powers under Sections 1 and 12 of the Local Government Act 2003 are for purposes related to the functioning of Parliament (“nothing specified or identifiable and therefore not relevant here”). must be exercised on “For the purpose of prudent management of its financial affairs.” “Borrowing to invest in the hope of making a profit is by its nature a different act from prudent financial management.”
Moreover, even if the Council had the power to borrow and purchase property, KPMG has unlawfully exercised this power in defiance of the Local Government Act 2003 and the “relevant statutory guidance” of the British Institute of Chartered Accountants. I did.” & accountants Prudential Code for Capital Financing in Municipalities.
The 2003 legal guidance recommends the preparation of an annual investment strategy containing policies for managing the Authority’s investments. “While the Council’s 2017/18 Investment Strategy did not address investments in commercial real estate or acknowledged any deviations from its guidance, the Council announced in December 2017 that the same The meeting adopted strategic real estate investment parameters, and at that meeting agreed to acquire one-third of the commercial real estate: three properties in question,” the KPMG report said.
The prudential code states that Congress “must not borrow more than necessary or to profit from the investment of the extra amount borrowed.”
KPMG said its conclusions were supported by the advice of the King’s Counsel. But the audit firm said it decided to issue PIRs rather than ask the court to declare because the council ended its borrowing policy to invest in commercial real estate.
KPMG notes that updated guidance to clarify that municipalities should not borrow more than they need to make a profit and changes to the terms of their loans from PWLB were also factors that led to their decision to oppose the lawsuit. Did.
Spelthorne CEO Daniel Mouawad, Chief Financial Officer Terry Collier and Group Head Corporate Governance Farida Hussain will co-author the report for next week’s Board of Trustees meeting I urged them to agree with KPMG’s recommendations.
However, the trio refuted claims about the legality of the property purchase, noting that the local government relied on legal advice from James Goody KC before making its decision.
The council, on advice from Goody, proceeded with the acquisition of properties outside the borough “to the effect that the acquisition was Intravires,” according to a senior management report.
It continued: “The position of the Council is that in so doing it acted in all cases with full reasonableness and conscientiousness.
“The PIR report first refers only to the advice of the King’s Counsel, the Inspector General, and refrains from referencing the Council’s equally authoritative advice from James Goody KC until much later in the document. That is somewhat dishonest and inappropriate.”
Spelthorne then said he sought further advice from Goudie on legal issues raised within the PIR, claiming that KC believed the investments made in 2017/18 were The argument is not persuasive,” he said. in the PIR’.
The Council also denied KPMG’s claim that it did not seek legal advice as to whether the advice that applied to the previous fiscal year’s purchases would apply equally to the 2017/18 transactions.
In response to allegations that Spelthorne’s investments were illegal, the council’s report stated: If legal advice in support of the Council’s interpretation is provided to the Auditor, the Auditor shall settle and declare, whether immedi- ately or not, that the Council has acted unlawfully. You can not. ”
Additionally, Spelthorne emphasized that KPMG raised no concerns about the legality of similar transactions in its 2016/17 audit.
Alongside concerns about the legality of Spelthorne’s investment, the report also raised concerns about its overall investment approach. PIR said the council had no clear investment strategy, its portfolio was undiversified and its assets were highly concentrated (four investments accounted for over 80% of the value of his 2017/18 portfolio). there is). It also argued, among other issues, inconsistencies between the time horizons of the Council’s financial models.
In light of this, KPMG concluded that there were “serious deficiencies” in the council’s governance structure when making investment purchases.
In its report, Spellthorn disputed these allegations, stating that the Council was able to meet its loan repayment commitments from its rental income, contributing an average of £10m to the Council’s revenue budget, He pointed out that he set aside an average of £7 million a year. Annually into the sinking fund reserve.
According to Spelthorne, the PIR has also “absolutely disapproved” that the council set aside £34m of rental income in reserves as part of its risk mitigation strategy.
Despite these disagreements, the Spelthorne report agreed with all of KMPG’s recommendations. Making “generalities” about its recommendations, Spelthorne’s report states:[This] The report was published more than four years after the year of the audit in question, and as a result we have already been paying attention to these matters for many years, so we can confirm that the recommendations are taken wholeheartedly. increase!”