External auditors looking into the running of a community-based ICT project said they could not account for around pound;378,000 of New Opportunities Fund cash distributed between 2002 and 2004. Other possible irregularities have since emerged.
Liberal Democrats are now pressing the Labour-run authority to instruct the council's chief executive at a full council meeting next Thursday to order an investigation by the city's internal auditor.
The move follows the vindication last month of John Travers, a community education worker, at an employment tribunal. Mr Travers was awarded Pounds 5,000 costs after he took the council to a tribunal to clear his name and end disciplinary action against him.
He was found to be justified in using the Public Interest Disclosure Act to highlight concerns about the management of the City Connect project, an offshoot of the Edinburgh Lifelong Learning Partnership (ELLP).
In late 2002, Mr Travers circulated a series of anonymous emails around the council and to Donald Anderson, the council leader, alleging possible mismanagement in City Connect, a project to bring computers and new technology to the "digitally excluded" in the city's peripheral housing schemes. Council officials, however, traced the emails and he was subsequently disciplined.
The council and its ELLP partners in the universities and colleges have since closed the entire operation and moved staff at the centre of the allegations.
The ELLP board was chaired by Lesley Hinds, the city's Lord Provost, and contained leading figures such as Ewan Aitken, the city's education spokesman. The company secretary was Mike Rosendale, then head of the community education department.
This week Gordon Mackenzie, a Liberal Democrat councillor, tabled a lengthy series of questions following the written judgment of the employment tribunal.
Mr Mackenzie said: "I am increasingly concerned that we are not getting answers to the serious questions raised in this case. An investigation by the auditor has to be the next step.
"The tribunal highlighted major concerns about how this project was run, the council's investigations thus far and the treatment of Mr Travers. A proper independent inquiry is needed and I hope the auditor will provide that."
Mr Mackenzie wants to know when the council became aware of auditors'
concerns and what action it took. He also wants answers on whether children of council employees were employed on the project and if recruitment and appointment procedures were followed; and "whether it is appropriate for employees of the council or an organisation such as ELLP to establish, or become directors of, private companies on their own initiative and for the council or an organisation such as ELLP to contract with that company for the provision of goods or services".
He also asks whether council employees or ELLP employees "formed a private company known as Wabster (or Wabster IP) which was contracted by ELLP to provide information technology services and whether that relationship was in accordance with (Lord Nolan's) principles of public service and demonstrated best value".
The three key staff involved with City Connect, a project that attracted Pounds 900,000 of NOF cash over three years, were Peter McDougall, Alistair Frater and David Hillson, who was seconded two days a week from the community education department.
The tribunal established that one of City Connect's prime initiatives was to develop a web portal called "myEdinburgh" through a private company called Mercury Tide, run by Tamlin Roberts, who was also an associate director of Wabster IP, the separate company run by Mr McDougall, Mr Frater and Mr Hillson. Mr Hillson told the tribunal he was a Wabster board member for two years before he resigned.
In its judgment, the tribunal states that having heard evidence from Mr McDougall, Mr Frater and Mr Hillson, "we are satisfied that there were sufficient straws in the wind to lead the claimant (Mr Travers) to believe that all was not as it should be. For example, these witnesses confirmed that: family members had been employed; money had been paid in respect of a car and that there was an issue as to who owns the rights to exploit the IP (internet portal) in myEdinburgh.
"We emphasise that we are making no judgment as to whether there was anything untoward in relation to these matters or any of the claimant's other suspicions - the only issue is whether the claim had a reasonable belief to that effect at the time."
The official audit for the year ending 2003, submitted to the ELLP board, states: "Evidence available to us was limited because there was no system of control over the expenditure of pound;265,126 on the City Connect project on which we could rely which could provide us with assurance that the expenditure was properly incurred either for that project or for the general objects of the charity itself."
A year later the same auditors raised questions over an apparent deficit of pound;138,000.
The council has now ordered the chief executive to investigate and Jim Inch, the council's monitoring officer, has been told to report in the near future. "It would not be appropriate to comment further until the report is published," a spokesman said.
But Mr Mackenzie is insisting on an outside inquiry. "It's not just about the whistle-blowing procedures, it's about the original allegations. There has to be transparency throughout."