Croydon could be forced to declare bankruptcy again if it has to pay £73 million next year due to an “accounting issue” and its finances could go into “total free-fall”.

The latest financial issue comes as Croydon Council prepares to approve its budget for the 2021/22 financial year.

It has been able to balance the books with the help of £25 million from the government, the latest instalment in a four-year loan arrangement agreed in the wake of the council’s bankruptcy in 2020.

Budget papers outline that the council is in a dispute with its auditors over how £73 million was recorded in the council’s accounts between 2019-2021. If it turns out to be wrong, the council could be at risk of issuing another section 114 notice, declaring effective bankruptcy, the report said.

The council has been battling with its finances since it declared bankruptcy in November 2020.

Its budget report stresses “it is not about monies going missing” but relates to accounting issues in the 2019/20 and 2020/21 financial years.

The report explains that a complex arrangement between the council and Croydon Affordable Homes may have led to £73 million being classified incorrectly. 

Croydon Affordable Homes was set up by the council in 2017 as a way to access money made from council houses sold through ‘right to buy’. This money was used to buy homes which are offered to families in temporary accommodation.

The council’s auditors Grant Thornton have questioned the way Croydon categorised £73 million it spent on council services after maing a deal through an investment company. If the £73 million wasn’t categorised properly, it will come onto the council’s books to be paid in the next financial year.

Opposition councillor, Jason Cummings, said: “The problem is that the auditors have said this isn’t capital receipts. There is now a debate between the council and the auditors Grant Thornton.

“If it happens they can’t agree, at that point the council finances go into total free-fall. There is no money missing but it is highly questionable how it was spent.

“This is another example of the mismanagement of public finances and the desperate measures Croydon Council was going to to balance their budget rather than dealing with inherent overspends in departments.”

As discussions on this issue are set to continue into the new financial year it does not affect the council’s ability to deliver a balanced budget for 2022/23, which is a legal requirement.

A council spokesperson said: “We are working with our external auditor to address all outstanding legacy issues which may impact on the 2019-20 accounts, one of which relates to historic accounting arrangements for Croydon Affordable Homes.

"We aim to resolve these issues and close the accounts as soon as possible.”

Croydon has been able to balance its budget with the help of £25 million from the government after the council declared bankruptcy in November 2020.

A £150 million loan was agreed in four elements of up to £70m in 2020/21, up to £50m in 2021/22, up to £25m for 2022/23 and up to £5m for 2023/24.

Cllr Cummings added: “The budget is balanced but that includes the capitalisation direction. The council is still spending £25 million more than they are getting in.

“There are some very disappointing  things in it for Croydon residents; the cut to council tax support and the increase in council rents by 4.1 per cent. 

"We still very much see Croydon people paying the price for Labour’s bankruptcy.”

The budget sets out that Croydon residents will see a 2.99 per cent increase in council tax.

Councillor Hamida Ali, Leader of the council, said: “Despite our challenging financial position and over a decade of government austerity, this budget keeps all of our libraries and children’s centres open, protects fortnightly bin collections, our youth and domestic violence services and other resident priorities.

“By focusing on quality core services and ensuring we offer our residents the best possible value for money we have been able to protect frontline services and focus on supporting our borough’s recovery from the pandemic.”

Croydon Council is expected to approve the 2022/23 budget at a meeting on Monday.