THE Audit Commission says there are "no grounds" to replace the auditor who missed a £35 million hole in NHS Croydon's finances.

An investigation is underway into how the primary care trust spent £35 million more than it budgeted for in 2011/12, despite posting a £5.35 million surplus last year.

Those accounts were given a clean bill of health by Shahida Nasim, a statutorily appointed auditor employed by the Audit Commission, which was paid £275,000 for its work.

Ernst & Young has been tasked with reviewing the accounts Ms Nasim approved but she remains the trust's auditor and will assess the current financial year's accounts.

The commission said it was aware a "potential overspend" had been identified but that it had every confidence in the standard of their officer's work.

A spokesman added: "Ms Nasim has met with NH London's advisors. With the consent of the PCT she has provided copies of documentation provided to her by the PCT and retained on her audit file. She has also provided a general explanation of the scope and nature of the audit work she undertook.

"Ms Nasim completed her audit in accordance with professional standards and reported on the basis of the information available to her at the date of completion."

Labour leader Councillor Tony Newman, vice chairman of the primary care trust,said: "I'm shocked the Audit Commission, paid a significant amount of public money to audit the accounts, failed to spot that accounting practice appeared to not be what it seemed."

But when asked whether it was appropriate that Ms Nasim remains in her position, the Audit Commission said it was "not aware of any grounds for her possible removal".

A spokesman added: "Ms Nasim will consider the outcome of any further work undertaken by the PCT, or NHS London on their behalf, and consider its relevance to her audit for the year ending 31 March 2012."

NHS South West London and a consortium of GPs launched a recovery plan after the overspend came to light in December.

Details of how the money will be recouped, or how frontline services would be affected, have yet to be released but GPs said any plan would focus on "redesigning not cutting".

Discovery of the budget deficit appears to have come as a complete surprise to those in the PCT.

NHS Croydon chief executive Caroline Taylor and finance director Stephen O'Brien, who oversaw the accounts now being scrutinised, left the PCT in February.

It is understood an independent review, being conducted by Ernst & Young, is exploring whether NHS Croydon has deliberately hid excessive spending for a number of years.

One line of enquiry is that expenditure was hidden in the accounts of the London Specialised Commissioning Group (SCG), which has a budget of £832 million and is hosted by NHS Croydon

NHS Croydon used £10.8 million of reserves to reduce its deficit to £25 million.

The PCT now has just £2.7 million left in reserve until the end of the financial year.

Ernst & Young's report is expected in January.