Exclusive: Biggest credit union confident of escape from financial abyss

Leeds City Credit Union (LCCU), England's largest with 22,000 members, last night confirmed another significant loss in its latest published accounts but officials believe a series of savage cuts and a host of new senior appointments will ensure its long-term survival.

The spectre of mismanagement continues to hang over the credit union, which was formerly headed by Sue Davenport, and only survived a complete financial collapse last year with a 4m bail-out from public funds.

LCCU accounts for the year ending September 2009, presented to the annual meeting last night, showed a 1.37m loss, following on from a 2.47m loss the previous financial year.

New auditors Grant Thornton issued a formal health warning as to the accuracy of the accounts because the firm could not be confident the starting point it inherited represented a true picture of LCCU's finances.

The credit union's board also warned of a continuing financial risk presented by bad debts, adding: "In the current economic climate, this risk is expected to increase over the coming year."

But the board reported the credit union had performed in line with its recovery plan in the five months to February this year. The accounts said: "After due consideration, the board have concluded that the credit union will have adequate measures to continue its operations for the foreseeable future and to meet the requirements imposed upon it by its key partners and funders."

Last night board president Michael McGowan acknowledged the organisation had suffered "a serious body blow" and faced "immense challenges" to recover.

Mr McGowan said: "A great deal of work has been devoted to repairing broken processes and procedures and introducing new ones where needed and we still have a long way to go in order to achieve the results we want.

"It obviously cannot happen overnight and will take some time but the past year has been important in preparing the ground and beginning to move forward and we are on course in relation to our recovery programme."

The credit union's chief executive, Chris Smyth, said a 40 per cent cut in operating costs – which has meant more than 30 redundancies – had helped rescue the financial situation and he hoped the organisation would begin reporting monthly surpluses from June.

He added: "There is no doubt that we still have a long hard slog ahead to fully recover and there will be things that will work against us, but I am now more confident than before that Leeds City Credit Union will move forward and finally shake off legacy issues."

The credit union's finances unravelled following the departure of Mrs Davenport, who resigned as chief executive in 2008 following a Yorkshire Post investigation into mismanagement and the intervention of the Financial Services Authority. She was arrested last month by Fraud Squad detectives, whose investigation is continuing.

Prompted by the Yorkshire Post expos in 2007, forensic accountants were commissioned by the credit union to carry out an internal inquiry and their findings were passed to West Yorkshire Police last summer. The police inquiry has focused on provision of loans, accounting practices and use of the company credit card.

Last year's accounts revealed the sudden emergence of a financial black hole with around 2m of so-called toxic debt that had previously gone unreported. Without emergency funding from Leeds Council and the Department for Work and Pensions, the credit union would not have survived. To add to the credit union's woes, Mrs Davenport was declared bankrupt last summer with debts of more than 90,000, including nearly 40,000 owed to her former employer in unpaid loans.

Last month, the Yorkshire Post also revealed a second police inquiry into another former employee. Area manager Beverley Farmer, who was sacked last year, allegedly made irregular money transfers and obtained loans without proper authorisation.