19 December 2008
By Tash Shifrin
Audit Commission investment decisions were not made at a senior level and the watchdog broke its own treasury management rules, a review of its £10m involvement in the Icelandic crisis has found.
But in an interview with Public Finance, commission chair Michael O'Higgins declined to rate the watchdog's performance in comparison with that of local authorities, some of which had decided to withdraw from Iceland before the crisis hit in October.
An internal audit review, published on December 18, said the commission had relied on short-term credit ratings, 'without considering the long-term negative outlook warnings' on Iceland's banks. Deposits were made on a 'rolling, routine basis without due consideration of a wider range of market information'.
The watchdog breached its own treasury management policy by depositing £5m with Heritable bank, which was a subsidiary of Landsbanki where another £5m was already held, the internal audit found.
It added: 'The policy... should have required a more senior level of authorisation that was based on supporting documentation to explain the reasons for the recommended deposit being taken, the sum to be invested and the investment term.'
A review of the internal report carried out by KPMG said the watchdog had a 'reasonable, if not overly sophisticated investment policy, which it implemented rather routinely'.
The process 'did not require extra attention to be given to the rapidly changing economic circumstances of financial institutions being widely reported', KPMG UK chair John Griffith-Jones said in a letter to the commission.
KPMG also assessed a new treasury management policy put in place since the Iceland debacle as 'reasonable', highlighting the low-risk option of making deposits with the government's Debt Management Office. 'This would remove the reputational risks involved with any future loss,' Griffith-Jones said.
O'Higgins said he accepted the findings of both the internal review and KPMG, adding: 'In the light of all the challenges in the financial markets that came to light... clearly a more risk-aware treasury management policy would have been helpful.'
He argued that the Icelandic collapse had been unexpected. 'At the time, no-one anticipated what happened,' he told PF.
The commission's ability to assess local authorities' treasury management performance was 'not in the slightest bit compromised', he said. There was 'only so much foresight' anyone could have.
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