Red-faced officials at the Audit Commission have pledged to be ‘transparent' after confirming it had £10m invested equally between twoIcelandic banks.

Chairman, Michael O'Higgins, said an internal investigation would examine the circumstances around the two deposits made in April and July this year in Heritable Bank.

The findings will be shared with the commission's own auditor, the National Audit Office.

The commission expects the NAO will also wish to conduct its own review.

Mr O'Higgins said: ‘The key questions are, were the processes that we had in place appropriate, and were they followed? And the internal investigation will be made public. We are happy to be transparent.'

Commission chiefs held a crisis meeting on 9 October after being warned it too was likely to be involved in the crisis. Confirmation came on 14 October.

The amount was just 4% of its annual turnover, and its £55m investments had been spread across a wide base of 11 institutions to spread risk.

Mr O'Higgins defended the decision to invest abroad. He said: ‘We were prudent in that we diversified our risk.

Given the nature of the financial crisis, it's not entirely surprising.'

There was support for the councils involved, and recognition at the progress made from the era of bankrupt local authorities.

He said: ‘It is an irony that good financial management has created a situation for councils where financial reserves are available.'

Mr O'Higgins also warned the commission's critics in local government that its auditors would not be going easy on councils with financial irregularities: ‘It won't impact on our ability to operate.

If they think they will get away with it, I'm afraid they are going to be mistaken.'