Auditors will run the rule over Hertfordshire County Council’s decision to invest millions in risky Icelandic banks after councillors admitted the council broke its own investment rules.

Accountants PriceWaterhouseCoopers will be examining the authority's investment strategy, including the decision to deposit £28 million in Icelandic banks now either actually bust, or teetering on the verge of bankruptcy.

Council leader Robert Gordon, said: “It is too early to say whether we will lose any of the money currently frozen in Iceland and I will continue to work with the intent of seeing every penny returned.

"It is also too early to know whether any loss will be due solely to the wholly exceptional global financial crisis or will have been contributed to by national guidance, the advice of consultants and advisors or decisions taken by the county council.

“In due course all of those aspects will have to be examined and I have asked for this external report so that elected members and the people of Hertfordshire have a thorough and independent assessment of the treasury management lending policy set by members and the operational decisions taken by officers."

Hertfordshire County Council has £28 million deposited with four Icelandic banks: a total of £17 million in Landsbanki and The Heritable (the parent companies of Icesave), £7 million in Glitnr and £4 million in Kaupthing.

These fixed-term deposits were made from January 2007 onwards, long before - the council argues - there was any doubt about the strength of these banks.

Councillor Gordon continued: "In common with many other large councils, Hertfordshire County Council’s money has to be spread amongst a large number of institutions, in accordance with Treasury guidelines, designed to minimise risk.

"Hertfordshire County Council’s total deposits vary from day to day but average at around £300 million, held in around 50 UK and foreign banks.

"This sum results largely from the inevitable flow of cash found in any organisation as large as a county council and does not represent reserves or money available for additional spending.

Cabinet member for Performance & Resources, David Lloyd, said: “Of the £28 million deposited in Icelandic banks, £10 million was with Landsbanki where one of available ratings did not meet the criteria in our treasury management lending policy at the date of the deposits, and we will want the review to establish how this happened and whether it will impact on any loss suffered by the council.”

In addition to the independent enquiry, the cabinet has amended its investment rules to reflect the much smaller number of banks where deposits can now be made safely.

It has also taken preliminary measures to protect services and staff should any financial loss ultimately arise.