24 October 2008
By Paul Dicken
The Audit Commission has defended its decision to deposit £10m in two of the troubled Icelandic banks, as it emerged that several other public sector watchdogs had stayed clear of investing in Icelandic institutions.
Michael O'Higgins, chair of the inspectorate, told Public Finance that the commission's policy of investing its cash balance across institutions was the right thing to do.
This year it invested £55m in total, in 11 £5m tranches across a range of institutions. One of these was placed in Landsbanki in April and another placed in Heritable Bank in July. Both organisations had an F1 credit rating at the time – the highest quality short-term rating from the agency Fitch. The total figure of £10m accounts for around 4% of the commission's annual turnover.
O'Higgins said: 'We were being prudent and spreading our investment across institutions, so if we end up being caught out on a couple of them, then the majority of them end up being safe. Was that right? I think [it was].'
The commission would look at whether credit rating agency information was used properly or whether there were inconsistencies between ratings, O'Higgins said. An internal investigation will be carried out to establish if the commission's policies were followed or if policies need to be amended.
The commission's financial policy says it 'will seek to optimise cash flows and maximise investment income in an environment of controlled risk'. O'Higgins said that the public would 'expect us to make the best use of their money and not just have it sat there'.
Enquiries by PF, however, show that Ofsted, the Healthcare Commission and the Commission for Social Care Inspection had no money invested in Iceland. The National Audit Office, which acts as external auditor for the Audit Commission, also confirmed it had no deposits in Iceland.
A spokesman said the NAO would be 'looking at the circumstances surrounding the commission's exposure to the Icelandic bank collapse'.
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