The commission – which was also embroiled in the affair, losing £10M of its own money – has issued the report in advance of the CLG select committee report on the banking collapse, which is expected to strongly criticise the commission.

Speaking in a personal capacity, chair of the select committee, Dr Phyllis Starkey, told LocalGov's sister title,The MJ, it was ‘perfectly reasonable' for the commission to consider what happened in the councils but, she added: ‘It will be interesting to know whether the errors the councils made were also the errors made by the Audit Commission itself.'

She added: ‘It does not change the lack of any effective action by the Audit Commission before the crisis arose.' Chief executive of the Audit Commission, Steve Bundred, acknowledged the losses the commission itself made. He said the circumstances of the collapsed banks were ‘exceptional'.

‘Our report shows there are lessons which must be learned by everyone – local government, central government CIPFA and the commission itself,' he said. The seven councils listed as ‘negligent' (see box) are all accused by the commission of missing ‘warning signs' and investing in Icelandic banks – a total of £32.8M – after 30 September.

While some were due to ‘contractual commitments', the other explanations included – not opening an e-mail warning, using a different approved lending list, and an officer placing a deposit which exceeded the authority's deposit limit for a single bank. Kent CC's cabinet member for finance, Nick Chard, said the report was ‘a case of the pot calling the kettle black'.

He added: ‘I find this a convenient smokescreen for the Audit Commission which has twice the level of exposure in Icelandic banks that Kent has – 18% of its total deposits compared with 9% at Kent.'

The council has admitted £3.3m was deposited due to ‘human error'. A spokesperson for Havering LBC said the council was ‘shocked and outraged' to be branded as ‘negligent'.

‘This accusation is not backed up by any evidence and we have demanded a full retraction.'

Havering has sent the commission a Letter Before Action and is considering a possible legal challenge. However, despite the £954m losses overall, the commission acknowledged that most authorities heeded the warning signs and acted properly in managing their investments when dealing with risk. LGA chairman, Margaret Eaton, said councils expected to get ‘the lion's share' of the cash back.

But, she added: ‘Money from council investments has generated hundreds of millions of pounds which has gone in to keeping council tax down and providing frontline services to local residents. It is in everyone's interests that councils continue to invest and ensure that they are doing so prudently.'

On its own losses, the Audit Commission said in an internal review: 'The commission acted appropriately…. However, the process of investment had become too routine and was not scrutinised at a senior level.'

Commission recomendations: