Can councillors be held personally liable for financial loss due to their failure to follow normal financial procedure?

Question

The Parish Council in question appointed a new clerk. After a while in office the (now former) clerk saw his opportunity and started to embezzle the funds, eventually totalling the councils entire funds, £80,000. Whilst the clerk was resourceful in how he achieved this, the lack of checks and controls by the Council and their failure to follow their own Standing Orders and the opportunity this created, are key.
The clerk has now been found guilty of embezzlement and sent to jail and unsurprisingly the recovery hearings reveal that he has spent all the money so it cannot be retrieved.
Meanwhile the bank state, amongst other things, that the bank mandates were changed to a single signature, which enabled the clerk to spend as he wished, and they are not at fault and the insurance company state that they will not pay out because the Council did not follow standard financial procedures. Whilst the newly elected 2019 Council has yet to pursue both or either the bank and insurance company further, we need to be aware what responsibility the councillors of the 2015 council, many of whom remain in office having been re-elected, might have.
We seek this advice as much to protect the former councillor members, who face tough questions from the public, as to take action. We just need the money back as we are broke!

Answer 1

They could be held collectively accountable but I don't  think an individual Cllr could be personally liable.  In theory the Council  could implement a steep increase in the precept to  nmke good the losses.- residents  could do nothing more than express their anger through a Parish Poll.

Answer 2

Sounds like you are in a pickle, I'm afraid. Before saying anything else, I think in these circumstances you should be seeking professional advice from a solicitor with substantial experience in dealing with local councils. There are a few. You will probably be able to find one who will hold an initial discussion without charge, and clarify the extent to which legal fees can be charged to the council and the extent to which councillors who may be at risk will have to pay for legal advice. Given the sum involved, it would seem sensible for councillors to be prepared to pay for some advice if necessary. (There could be a problem if the council does not have money to pay legal fees).

The council's insurance most likely covers legal expenses. You may be able to get some help through that route, but it could well fail given the council's weak position, which will affect the likelihood of success in any legal action. Along with the lack of substance of the former clerk.

About the only potential in relation to recovery appears to be the bank. It is not clear from your description whether the change of bank mandate should have been accepted by the bank. That seems worth exploring.

Otherwise, the council does seem at fault. Each year the council is required to pass a resolution stating that it has followed appropriate financial procedures, and the annual return is signed to confirm this. Councillors have a responsibility to review the annual return. Exactly how far all this is deemed to be culpable negligence (and therefore raising a liability on councillors) is really a matter for professional advice.

Comments

Counterpoint's response is a realistic and pragmatic assessment of the position. There seems little to be gained from pursuing the insurance company. If the bank made a mistake, they may be partially liable. If there is a case for personal liability of the councillors, based on their negligence, I presume that this case could only be instigated by the Parish Council as the victim of the fraud, so those members who remain on the council would be suing themselves.

My question is where was the internal auditor whilst this was going on?

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Good point about who might instigate action, DavetheClerk. Although I would caution that public pressure could lead to replacement of the existing council with one that sought to pursue a claim, so I wouldn't rely on being safe on that score. Also good question on the internal auditor. There are no specific qualifications required of an internal auditor, although there are many conscientious and capable auditors, both with and without formal qualifications. But it is right that questions should be asked about the whole chain of checks from councillors via internal audit to the external auditors, who ought in theory to have some responsibility.

Answer 3

I recall that a similar case was covered in one of the ALC training sessions I attended a few years ago. The insurance company refused to pay out as no proper procedures were in place.

Your question prompted me to see how common the problem was. A brief search came up with the sobering list below.

North Norfolk parish clerk jailed after embezzling more than £70,000   July 2011

Dishonest clerk pocketed £36,000 of parish councils' funds over 5 years Jan 2019

Former Alconbury Parish Council clerk is jailed for 12 months after stealing more than £50,000  Mar 2014

‘Lack of checks’ enabled £6,000 to be embezzled from parish council in Huntingdonshire  Mar 2012

Call to strengthen parish council training after Blakeney woman jailed for stealing from five Norfolk councils and Royal British Legion Jul 2011

Council clerk stole £160,000 from taxpayers to fund her 'shopping addiction' by forging cheques with an erasable PEN Oct 2013

Rolvenden Parish Council Clerk guilty of £80,000 fraud is jailed for three years Sep 2019

(Dates are the newspaper date)

Comments

I did the same search a couple of days ago. It's mind-boggling isn't it? Having said that, my councils never check up on me, so it's only at internal audit time that I have to show that I haven't supplemented my meagre salary.

There will be another one on this list in a year's time too. It hasn't hit the press yet, but the Police are crawling all over one of my neighbouring parishes and the former Clerk is "assisting with their enquiries."

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I had always assumed that fraud was a rare occurrence, but as you say, mind boggling. A bit more searching would have found more, I'm sure.
A simple audit team made up of 2 councillors who just spend an hour with the clerk/rfo every couple of months and do a spot check on a random half a dozen payments to ensure the paper trail is complete would have probably prevented such calamities.