16 October 2008
By Paul Dicken
The Audit Commission has defended its decision to invest £10m early this year in two of the now troubled Icelandic banks.
Michael O'Higgins, chair of the public spending watchdog, told Public Finance that the commission's policy was to invest its cash resources across institutions. This year it invested £55m in total, in 11 £5m tranches. Two of these were placed with Icelandic banks, in April and July, accounting for around 4% of the commission's annual turnover.
The commission announced on October 16 that £5m was invested in Landsbanki in April and £5m in Heritable Bank in July. At the time of the investments both banks had an F1 credit rating – the highest quality short-term rating from the agency Fitch.
O'Higgins said: 'If our cash-needs change we would invest less or more. 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 the answer is yes.'
At a meeting of the Audit Commission's audit committee in June it was agreed that more than one credit rating agency should be used when investing cash surpluses, but O'Higgins said the commission would look at the role this advice had played in their investment decisions.
'We will be looking both at any other information the credit rating agencies had, whether we were using that information properly and whether or not there were any apparent questions or inconsistencies in what the credit ratings were doing.'
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'.
'The public would expect us to make the best use of their money and not just have it sat there not earning any money,' O'Higgins said.
It is not expected that the exposure to the collapse of the finance sector in Iceland will have a knock-on effect on the operations or plans of the commission, as the investments were fixed term and not due to mature until 2009.
O'Higgins also suggested that the outlook for getting funds back from Heritable was positive, but repayment of deposits from Landsbanki was more uncertain and could be more drawn out.
'Fortunately, because of the way we handle ourselves, a delay in that doesn't put any particular squeeze on that,' he added.
The findings of the internal investigation will be passed to the commission's external auditor, the National Audit Office.
A NAO spokesman told PF that the NAO would be 'looking at the circumstances surrounding the commission's exposure to the Icelandic bank collapse'.
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