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Audit group Grant Thornton, Birmingham council, and the past Tory government all have “serious questions to answer” over their response to the financial collapse of the UK local authority last year, according to an investigation by forensic accountants at Sheffield University.
The Audit Reform Lab — a collective of academics who investigate apparent auditing failures — called for an independent public inquiry after finding a “catalogue of problems and errors” surrounding the city’s de facto bankruptcy last September.
Its report — commissioned by the GMB, Unison and Unite unions — said on Monday that the council’s problems had been “misdiagnosed” from the start.
Birmingham city council, the largest in Europe, was the most high profile of a string of local authorities to declare its inability to fulfil a legal responsibility to balance its budget under the previous Conservative government.
The council’s section 114 notice, declaring de facto bankruptcy in 2023, came after a near £100mn overspend on a new Oracle software operating system, as well as a huge leap in the estimate for a historic equal pay liability.
Much of the disagreement around the collapse of the council rests on this accounting figure, which relates to potential back pay over alleged differences in the treatment of men and women.
The ARL report found that the city council’s woes were initially attributed to “a prematurely disclosed and potentially overstated equal pay liability” of £760mn, a figure council officers had adjusted from an earlier figure of £121mn.
At the time of the collapse, then levelling-up secretary Michael Gove said the primary cause of the bankruptcy was the £760mn liability, a figure that Grant Thornton had referenced in its statutory recommendations using the council’s estimate but — crucially — had not audited. Gove did not respond to a request for comment.
In its response to the ARL report, Grant Thornton said: “Both officers and commissioners have confirmed that this [£760mn] is the best estimate available of the council’s liability on the available information.” It added that auditing of the figure remains ongoing.
In a lengthy rebuttal also released on Monday, the auditing group said the ARL “report presents significantly inaccurate and misleading information and inferences as to our role as the council’s auditors”.
The ARL report also said that focusing on the number “deflected public attention”, from the role that increased demand for services and cuts to council funding by Westminster had played in the council’s demise.
During the decade to 2021, budget cuts meant the council lost around a third of its spending power, the report said.
The council’s problems were also in part due to the disastrous implementation of the new IT system, which resulted in tens of thousands of cash transactions going untraced, according to the report. Oracle did not immediately respond to a request for comment.
In its response Grant Thornton also said that “service pressures and equal pay claims play a greater part in the council’s financial issues” than the IT issues.
“Very little of the deficits relate to the equal pay liability,” James Brackley, lead author of the report, argued.
The report also deals with the response imposed on the council by the Tory government.
Birmingham is currently in the throes of a drastic restructuring exercise imposed by Westminster. The council has been obliged to start a £750mn sale of assets and impose some of the most swingeing cuts to services in local government history worth at least £300mn.
The ARL argues that the measures are likely to lead to “a breach of the council’s statutory duties” to provide essential services, and “contribute to cost spirals and worsening outcomes” for the more than 1mn people who live within the council area.
Brackley said a “new recovery plan for the city” from the Labour government “would give Birmingham longer to balance the books and stop the absurd situation of the council being forced to make permanent cuts to services and sell revenue-generating assets to deal with the temporary Oracle costs”.
In his response to the report, John Cotton, Labour leader of the council, said he had been clear from the start that the council “must take responsibility for the failings that have contributed to our current difficulties”.
But he said the mistakes made in Birmingham “have not occurred in a vacuum”.
“There’s a national crisis in local government caused by 14 years of neglect from the previous Tory government, combined with major rises in demand and cost-led pressures,” he said.
In a statement, the government commissioners sent in to oversee the council’s finances said that at the time that the government agreed to an exceptional financial support package, Birmingham’s budget deficit was £390mn.
“This is a major deficit that has occurred for a number of reasons including non-achievement of savings, unrealistic budget assumptions and service pressures, especially social care,” they said.
They added that the Oracle overspend was only “a relatively small proportion of the 2024-5 budget gap”.
Birmingham’s financial position had since worsened, they added, partly as a result of the demand for children’s services. Required savings for 2025-26 had therefore grown to £200mn.
