An independent inquiry into the issuance of a section 114 notice at Birmingham City Council and a revised approach to intervention are both required, according to a new report.
The University of Sheffield’s Audit Reform Lab, a research and campaigning organisation that aims to ‘progress the cause of audit reform’, detailed possible issues leading up to the s114 notice in the report, which was co-commissioned by unions UNISON, Unite, and GMB.
The Audit Reform Lab highlighted a “central ambiguity” around the council’s “prematurely disclosed and potentially overstated equal pay liability”. The £760m figure stated publicly “appeared to be both unaudited by [external auditor] Grant Thornton yet unquestioned by key actors, often after receiving correspondence from the auditor”. The council’s liability therefore remains “speculative and unaudited”, according to the report authors.
However, Grant Thornton has said the report contains many inaccuracies and that the basis on which it has been prepared is “flawed” [see section below].
The report adds that Birmingham’s financial problems were initially attributed to the equal pay liability, “deflecting public attention” from ongoing service level pressures and the “disastrous implementation” of an Oracle IT system, which “seems the more likely explanation of Birmingham’s problems”.
Grant Thornton said this conclusion was inaccurate as the equal pay liability was a “key element” of Birmingham’s financial situation.
The report states that as a result of the equal pay liability attribution, the government “initiated a process that would lead to deep cuts” and asset sales potentially worth £750m “that raise serious concerns about best value and financial sustainability”.
Birmingham is now “cutting capacity in crucial front-line services to pay for a temporary overspend on a failing IT system”, the report said.
The report authors also found that “there was little public consultation on either the 2024/25 revenue budget or the asset sales”. They say that proposals pushed through under statutory direction are therefore “likely to lead to a breach of the council’s statutory duties, undermine business-critical operations, and contribute to cost spirals and worsening outcomes for the city”.
At the end of the current period of capitalisation support, in April 2026, “the city will still be left with substantial deficits and may struggle to set a lawful budget without further support”, the report authors stated.
The Audit Reform Lab has suggested “refocusing” the intervention away from cost-cutting and asset sales to best value delivery, with the current capitalisation direction redrawn and extended to April 2028, “capitalising against the costs of the Oracle IT system” as the apparent main driver of Birmingham’s financial issues.
The report claims that the revised capitalisation direction “would set the revenue budget on an evidence-based approach through to April 2028, with future proposals impact-assessed up to that date and subject to proper public consultation”.
The authors have also advised against any ‘fire sale’ of assets “that simply underwrite transfers between reserves, recommending that asset sales are only advisable where they have a demonstrably net positive impact on the revenue budget”.
As well as calling for an independent inquiry into the issuance of the s114 notice, which would investigate whether the secretary of state followed the government’s own best value guidelines, the report calls for an independent audit of the equal pay liability and a review of potential threats to auditor independence.
The report authors have also called for “proper public consultation” on the 2025/26 budget from autumn 2024 and for proposals “to be put forward on a demonstrable best value rather than cost reduction basis”.
Any future public inquiry should ask questions of the government, the council and of Grant Thornton, the report said. Among these questions, the Audit Reform Lab authors asked why the auditors “did not make it clear in their statutory recommendations of September 2023 that the equal pay liability was unaudited and that they had not obtained the equal pay model upon which the £760m liability value was based”.
And, “if the auditors had not audited or confirmed the £760m equal pay figure, as they claim, then why did Michael Gove assure parliament that it was ‘the independent auditor’s assessment that the revised estimated equal pay liability is likely to be more than £760m’?”.
The authors also questioned why “central government did not conduct the usual best value assessment to properly understand the financial situation prior to statutory intervention in September 2023?”, and asked why the council is “pressing ahead with asset sales to pay for an equal pay liability that the lead commissioner is on the record as saying is overstated”.
Report has flawed basis: Grant Thornton
Responding to the publication of the report, a spokesperson for Grant Thornton UK said it “maintains assumptions and allegations which are incorrect” despite the company “engaging with the report’s authors at length and in detail to clarify its factual misunderstandings” and even after the Audit Reform Lab made “wide-ranging changes to the earlier drafts of the report”.
The spokesperson said: “As a leading provider of audit services to the public sector, Grant Thornton takes its obligations to high quality very seriously. We do not believe this report, which was commissioned by the three trade unions representing many of the council’s employees in the equal pay litigation, presents an accurate reflection of our work for the council or that there are any concerns about our independence.
“A key part of a high quality audit is to only sign the audit report when we are comfortable we have received sufficient appropriate audit evidence across all areas of our work. Any words in this report relating to numbers having been “confirmed”, “completed”, “assessed” or similar before our audit work is complete are factually inaccurate; an audit remains ongoing until all the work is complete and the audit report has been signed, as any informed reader will understand.”
The spokesperson added that the basis of the report is also flawed “as it refers extensively to the equal pay liability as not being a key element of [Birmingham’s] financial situation”, which is “inaccurate”.
“The report acknowledges that it has been prepared only on the basis of publicly available documents and, therefore, without reference to accounting records and other confidential information which are central to explaining the causes of council’s equal pay liability, including the role of any of the key parties involved. As a result, the report is based on an incomplete set of facts,” the spokesperson said.
—————
FREE bi-weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
