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The auditors’ report about the governance and oversight of Middlesbrough Development Company made shocking reading for councillors.
Largely funded through local authority loans, Middlesbrough Development Company (MDC) – separate from the Middlesbrough Development Corporation – was formed approved and formed as MHomes in 2018 to 2019 under the then Labour-controlled council to build houses in areas commercial developers would not touch, with Middlesbrough Council as the sole shareholder. But alarm was raised about governance and “risk of financial/reputational issues” and the council’s executive voted earlier this year to stop the company trading.
Charlotte Benjamin, the council’s director of legal and governance services, said an investigation by the authority’s internal audit service Veritau came from her request for fact-finding following a complaint.
READ MORE: Damning report about development company is ‘a lesson on how not to do it’
Veritau’s report says no one in the council was given formal independent responsibility for holding MDC to account – “a significant departure from recommended practice” – and no committee or board oversaw its operations. It found full consideration was not given to conflicts of interest, with the then mayor and members of the executive appointed as company directors.
It says former mayor Andy Preston was a shareholder representative and was also appointed as a company director in December 2019, “effectively removing their independence”. Cllr Julia Rostron said in a council corporate affairs and audit committee meeting on Tuesday (August 15): “To me, my simple view, that means he was the borrower and the lender. Isn’t that a conflict of interest?”
Ms Benjamin responded: “The way in which that was set up, that arrangement with the potential for conflicts, was not particularly helpful. It wasn’t unlawful but it wasn’t best practice.”
The report found senior council officers went to meetings as observers and could give informal advice. But some felt unable to challenge decisions, most felt they did not have well-defined roles, and it was “not clear about who was attending board meetings as a director and who was an observer”.
No evidence on risk or value for money arrangements
The auditors said reports to the council executive gave updates on business plans but had “little information about overall company financial performance or risk”. They said: “There is little focus on overall company performance or financial activity (other than funding for projects). For example, overall profit and loss and future projections. A balance sheet is only prepared annually.”
They found no evidence the company was following requirements on what must be included in business plans and budgets.
The report adds: “We have also seen no evidence during the audit to show the council has defined arrangements for measuring and reviewing value for money provided by the company as a whole. There are no clearly defined arrangements for considering company-related risks and how they will be managed.
“Overall, we saw little evidence that the MDC business plan was actively used to manage the business or monitor performance. The primary focus for both the board and the council is the management of individual projects.”
Project’s approval could not be verified
It says the aim of the company changed significantly in 2020 to stimulating the property and development market in Middlesbrough. But there was no evidence the council considered whether a trading company was the best way to achieve this or whether it would be sustainable.
It says the company undertook projects on behalf of the council, with most ideas and decisions from the local authority: “We saw little to indicate that the company was acting as an independent trading company in practice.
“In one case we were unable to verify whether a project in progress had been approved by the MDC board at all. It is not clear whether MDC has effective control over the work it undertakes on behalf of the council and ultimately on the overall management of the business.
“Our overall impression was that MDC operates largely as an in-house service, although sitting outside normal council governance arrangements.”
Auditors found there was a “general lack of transparency around, and formal review of, the accounts”, with very limited information given to Companies House, accounts filed late, no code of conduct for board members and employees, no formal arrangements to review the managing director’s performance, inconsistent minutes and decisions not always recorded at board meetings, and only one person working for the company – the managing director – who had sole responsibility for payments and income under £50,000.
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