Clan gathering loan criticised by Audit Scotland
The Scottish government lent a private company an interest-free loan of £180,000 without making "robust checks" just months before it went bust.
An Audit Scotland report said the loan was approved for last year's clan gathering event in Edinburgh after the organisers reported cash flow problems.
Organising company The Gathering 2009 Ltd went bust after receiving £670,500 in public grants and loans.
The report said details about the loan were kept secret by the government.
The Gathering event was the showpiece of the Scottish Year of Homecoming.
It is thought to have boosted the economy by £10m but it lost more than £500,000.
According to the auditors report, the Scottish government did not complete robust checks of the company's ability to repay a loan of £180,000, or seek information from the Gathering's steering group members about the company and the event's status.
The auditor general also said officials did not seek professional advice on the legality of the loan.
The report said steering group members were not informed of the loan "as media interest was intense at the time and the Scottish government was concerned that a leak of information would jeopardise the delivery of the event's economic impact".
As a result, the other public sector funders were therefore making decisions without the full knowledge of other public sector cash-flow assistance.
The Scottish government said it would consider the report's recommendations but pointed out that the company delivering the event was a private company that was neither established nor contracted by government.
A spokeswoman said: "Given its important economic value, the Scottish government worked hard to protect the concept of the Gathering and secure the future economic benefits of the event."
However, Scottish Labour claimed the report had "exposed the financial fiasco behind the scenes of the Gathering".
Sarah Boyack, Labour MSP for Edinburgh Central, said: "We need to know why the SNP government took a risk with public funds when the event was already in trouble. If it was for political reasons then that is simply unacceptable."
The Audit Scotland report said lessons needed to be learned by all public bodies about using the private sector to achieve objectives.
Auditor General for Scotland, Robert Black, said: "There needs to be a clear understanding of the relationship between all parties. This includes clarity about the roles and remits of each partner and the expectations about reporting and financial monitoring.
"All of this needs to be underpinned by clear and regular communication."
A total of £490,500 was initially invested by the Scottish government, VisitScotland, Edinburgh City Council, Scottish Enterprise and the Heritage Lottery fund.
In May 2009, directors from The Gathering 2009 Ltd informed Scottish ministers the company was experiencing cash flow difficulties.
In response, the Scottish government provided the company with a short-term loan of £180,000, to be repaid by 31 August 2009 at the latest.
In September last year, the company told the Scottish government the event had made a significant loss of £516,000 and it was unable to repay the loan. The loan was later written off.
The auditor general's report showed that expenditure for the event was largely on budget, but there was a considerable shortfall in income.
Less income than forecast was received from ticket sales, sponsorship and merchandise sales.
Following the problems, several other agencies, including the police and ambulance service, decided against recovering the cash they were owed, partly to help secure the future of The Gathering.
In January, it emerged 50 Edinburgh companies were owed about £300,000 in connection with the event, although money due to private firms falls outside the watchdog's remit.