Agenda item

Report of the Corporate Director for Finance and Resources

Councillor Audra Wynter, Deputy Leader and Portfolio Holder for Finance, Ross Brown, Corporate Director for Finance and Resources, Annabel Scholes, Interim Director of Finance and Shabana Kausar, Director of Finance, presented the report which outlined the initial findings of a report commissioned by the Council and conducted by EY Ltd into the effectiveness of internal controls within the Council’s financial processes and to provide risk management assurances to the Audit Committee and the External Auditor. Additional comments were provided by Michael Clifford, a representative of EY. The following information was highlighted:

 

(a)  the Control Environment is the set of standards, processes, and structures that provide the basis for carrying out internal controls across an organisation. These internal controls can consist of policies, procedures, and technical safeguards that protect local authority assets by preventing and detecting errors and inappropriate actions. They are essential for the accomplishment of goals and objectives, providing reliable financial reporting and ensuring compliance with applicable laws and regulations;

 

(b)  all Councils are required by legislation to appoint a s151 Officer, who is a professionally qualified and experienced person who makes arrangements for the proper administration of that Council’s financial affairs;

 

(c)  the Council developed a recovery and improvement plan as part of its response to the 2020 Non-Statutory Review. As part of the Medium-Term Financial Strategy workstream, work was undertaken to gain assurance on financial management. From the work, it became apparent that the Council had breached the ring-fenced requirement for the Housing Revenue Account (HRA), which is unlawful. As a result, the Corporate Director for Finance and Resources commissioned this review;

 

(d)  EY, who have undertaken this review, have examined six ring-fenced areas that analyse policies, procedures, financial records, data and samples of historic financial transactions for evidence of effective control measures. The six ring-fenced areas examined are as follows:

 

·  Dedicated Schools Grant (all four blocks);

·  Better Care Fund – including Disability Facilities Grants;

·  Licensing income;

·  Parking, Traffic Regulation and bus lane enforcement income;

·  Transforming Cities Grant;

·  Selective Licensing;

 

(e)  EY’s evaluation took place over a three-month period, during which they requested procurement contracts, receipts and bank statements. They also interviewed council colleagues;

 

(f)  there are a number of very serious concerns identified from the results of the transactional testing for the period 2019 to 2022. EY observed a weak control environment, ineffective systems, associated management information and a culture not focused on compliance;

 

(g)  further areas of concern include ineffective audit trails, issues across samples such as transaction classification and approvals, limited preventative and detective controls, weaknesses in policy adherence and knowledge, and controls being circumnavigated through management override;

 

(h)  the challenges within those practices have continued into the 2022/2023 financial year;

 

(i)  the following conclusions are drawn from the assessment:

 

·  an urgent intervention is required in establishing interim controls to avoid future inappropriate financial activity;

·  ineffective systems and processes led to a culture of non-compliance with financial procedures which needs to be addressed;

·  effective IT systems need to be implemented to strengthen the control environment;

·  improving skills and capabilities amongst officers to support effective financial management will improve the culture of compliance;

·  the process of improvement will be a long-term activity for the Council;

 

(j)  more needs to be done in terms of the governance and transparency of financial controls and transactions;

 

(k)  examples of systematic weaknesses include the failure of the system to archive previous records of transactions, hence leaving officers unsupported when they needed to take action;

 

(l)  there is evidence of insufficient record keeping in the finance journals;

 

(m)since the EY work was commissioned, the Council has been issued with two instructions from the Improvement and Assurance Board (IAB) which link to this work. The first instruction is the resolution of all outstanding matters relating to the 2019/20, 2020/21 and 2021/22 audit of accounts. The second instruction is to deliver a Financial Improvement Plan (FIP), covering the key elements identified by the IAB to provide assurance in respect of finance and accounting;

 

(n)  in response to the findings, the control weaknesses have been mapped onto the existing FIP and an assessment of capacity to deliver at pace has been completed. A remediation project has been scoped and commissioned to deliver a 12-week focused controls remediation response that will work alongside the Council’s FIP resources;

 

(o)  Phase 1 of the remediation work will ensure the Council has the essential basics. Further investment in systems will be required to provide the most effective control environment, where the system will deliver record actions and the supporting evidence required for each financial transaction;

 

(p)  the aim of these remediation measures will be to move the Council from an assurance position to a high assurance position with regard to its financial processes;

 

(q)  the Corporate Director for Finance and Resources will have weekly meetings and reports upon the progress of the FIP and the remediation project; 

 

During the discussion and in response to questions from the Committee, the following points were raised:

 

(r)  all the transactions which were examined by EY showed that the funds were spent correctly. The work undertaken on the FIP will not impact on the 2024/25 budget planning, but it will have an impact on the outturns for the 2023/24 financial year;

 

(s)  the Portfolio Holder for Finance has fortnightly briefings on the FIP and is confident that the officers will deliver the remediation measures on time;

 

(t)  the Council’s HR and Procurement Teams are looking at skilling up members of staff and acquiring additional resources to put the Council on a strong footing to address the financial control issues. Additional training sessions will take place to change the culture by emphasising the importance of financial controls;

 

(u)  risk registers identify the weaknesses in system implementations;

 

(v)  the Audit Committee can use its remit to request a standing item for future meetings on the progress of the remediation measures within the five areas identified within the report;

 

(w)a Cardiff Checks audit is effectively a “cradle to grave” audit of all aspects of procurement and finance by selecting a small number of invoices as a random sample which is then reviewed by members of the Audit Committee. These were stopped around fifteen years ago as they are a resource intensive exercise which yields limited results;

 

(x)  smaller task and finish groups or panels can be established to regular monitor the FIP and remediation works;

 

(y)  the Audit Committee can request for a Chartered Institute for Public Finance and Accountancy (CIPFA) assessment on itself to judge its effectiveness in financial audit matters.

 

Resolved to:

 

1.  note the outcomes of the controls review, specifically the findings of the Controls Assessment underpin a conclusion that NCC is operation with a considerably weakened control environment which is not fit for purpose in allowing a Local Authority to enact effective financial stewardship;

 

2.  note the immediate next steps that the Council has taken to address the findings;

 

3.  receive future updates on the remediation work through the FIP reporting;

 

4.  the remediation work becomes a standing item for future meetings;

 

5.  establish a sub-group that can assist the remediation work;

 

6.  establish new panels, the remit of which will be established at a future meeting;

 

7.  undertake a CIPFA Self-Assessment on the Audit Committee.