By Sandra Berwick

THE AUDIT Commission has called for powers to prevent councils entering into illegal "creative accounting" deals.

At present, auditors can only act after deals, which may involve millions of pounds, have been made, and David Cooksey, the commission's chairman, said: "The law should be changed so that auditors can s1987 an authority completing a substantial financial transaction which they think is contrary to the law."

Many local authorities have taken out lease-back arrangements, by which debts are deferred to the future when another administration and another generation of ratepayers will have to cope with the repayments.

Not all such schemes are illegal. One of the problems which worries the Audit Commission, an independent body aimed at helping local authorities to become more efficient, is that it is difficult to knew what is legal and reasonable and what is an unreasonable financial strategy.

There is a public interest report outstanding at Haringey, north London, where the Labour council has done an interest rates swap giving it a cash sum in the first year. Auditors are required to issue public interest reports in cases where they believe there are matters serious enough to require reporting to a wider audience than members and officers. A total of 84 were issued during the year to 31 March 1987.

Howard Davies, controller of the Audit Commission, said: "The auditor has said he is very doubtful about the propriety of taking revenue in year one.

"In this case we might have said we don't think it is reasonable and the district auditor would, if he had been able, have put a s1987 notice on it. Then Haringey would appear against our s1987 notice, if it liked, in the courts.

"If we had these powers, we believe more councils would consult the auditor before setting up schemes."

The commission is drawing up guidelines on reasonable behaviour by councils in creative accounting. It believes it is essential to establish voluntary codes or central government will act to impose rigid controls.

Mr Davies believes courts would refer to such a voluntary code when making decisions and that it would give objectors to a local authority's accounts firmer grounds for appeal. '

The Audit Commission says it does not wish to be the body responsible for bringing actions against councils imposing the surcharge. It believes this is better left with the district auditor, whose current responsibility it is.

• Ratepayers in Waltham Forest, east London, yesterday lost their High Court battle against a 62 per cent rate increase.

Two judges rejected the complaint of the 20,000-strong Waltham Forest Ratepayers' Action Group that the Labour-dominated borough council had imposed a rise which was "irrational unreasonable and illegal". The ratepayers are considering an appeal.

The judgment will come as a blow to other ratepayers' groups in London who also plan to challenge the legality of high rate rises imposed by their local authorities. The West London Ratepayers' Action Group plans to seek court orders quashing a 49.6 per cent increase by Labour-controlled Hammersmith and Fulham Borough Council, and in Baling a challenge has been launched against a 65 per cent increase. So far leave has been refused by the High Court, but an appeal is pending.

*Manchester City Council is to lead a local authority campaign against Government policies on the inner cities, local government reform and the proposed introduction of poll tax. It hopes to enlist the support of churches and voluntary organisations.

The council, which has been rate-capped, was expected to approve spending cuts of £42m. In an attempt to alleviate a projected deficit of £lOm next year.