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ITEM EX5

BEST VALUE & AUDIT COMMITTEE –
31 AUGUST 2004

EXECUTIVE – 7 SEPTEMBER 2004

REVIEW OF FINANCIAL MANAGEMENT

Report by Chief Executive and Director for Resources

Introduction

  1. At the beginning of April, the Leader of the Council wrote to the Chief Executive proposing that we commission a short external review of financial management within the authority. His letter recognized that we had progressively tightened financial management within the authority. However, as we apply much more robust management disciplines, we are identifying further areas that need to be tightened. The financial problems in Social & Health Care were an example of this. (The Leader’s letter was circulated to all Council members at the Council meeting on 6th April 2004).

  2. Proposals were sought from all the accountancy firms who have current experience of auditing local authorities. RSM Robson Rhodes were appointed to undertake the review. They were chosen principally because they intended to use the Chartered Institute of Public Finance and Accountancy (CIPFA) financial management model that was just about to be launched. It is expected that this model will be applied to assess the use of resources within the Audit Commission’s Comprehensive Performance Assessment (CPA) from next year. It made sense to ensure that our financial standards were assessed against the highest standards.

  3. RSM Robson Rhodes have now published their final report (download as .pdf file) which is circulated with this report. The terms of reference for their work are set out in Appendix A of their report. Prior to them completing their work, they gave presentations on their findings to the Executive, a number of other senior members and to finance staff and other senior managers.

  4. This cover report sets out what we believe to be the key messages for the County Council, briefs members on the action that is already being taken to address some of the issues and sets out proposals for ensuring that all the recommendations made by RSM Robson Rhodes are addressed. In the light of the comments by RSM Robson Rhodes about the role of audit committees, we have set out some specific proposals for the Best Value & Audit Committee to consider.

    5. Key Messages for the County Council

  5. The Council is committed to achieving the highest possible standards of financial management. Our willingness to open ourselves to external review is evidence of that. The fact that we are assessing ourselves using the CIPFA model before we are obliged to do so will be looked at favourably by external bodies. Consequently, it is essential that we respond positively to the lessons from the RSM Robson Rhodes report. Paragraphs 15 – 16 of this report set out our proposals to ensure that this happens.

  6. RSM Robson Rhodes have judged us by very high standards – as we requested that we should be. These are new standards nationally. They will be a challenge to all local authorities. As we have already recognised, we fall short of those very high standards.

  7. In their presentations, RSM Robson Rhodes recognised that we are committed to achieving those very high standards. Their report provides a comprehensive analysis of the issues that we must address and sets out their recommendations on the way forward. We have been impressed with the professionalism of their approach and the way that they have carried out their work.

  8. Throughout the review they have reported to us on the high level of commitment within the finance function and elsewhere to improving the state of financial management within the authority. Whilst morale in some parts of the finance function is low, those same sections are showing great interest in making the changes that need to take place. RSM Robson Rhodes also make clear that the Council is not complacent about the challenges we face.

  9. We must meet the very high standards that we are setting ourselves. Paragraphs 10 – 14 below describe some of the work that is already happening whilst paragraphs 15 - 16 set out our proposals for ensuring that all the recommendations are addressed in the form of an implementation plan.

    10. Improvements that are already underway

  10. Financial Control: as RSM Robson Rhodes highlight, this is our greatest challenge. They highlight the fact that this is the foundation for everything else. Work has already started on this issue through the work that has been done on the Statement of Internal Control and the efforts to improve corporate governance. Work on both issues has been reported to the Executive. There is a further report on Risk Management and the Statement of Internal Control on the agenda for the Best Value & Audit Committee. That report sets out the arrangements that must be in place for the Leader and the Chief Executive to gain the assurance that is needed to sign the full Statement of Internal Control for 2004/5. We have recently received positive feedback from our outgoing External Auditors (the Audit Commission) on the work that has already been done. In addition, a considerable amount of work has been done recently on draft financial procedures. We need to review all the action plans that underpin this work in the light of conclusions in the RSM Robson Rhodes report. We also need to ensure that the work of the proposed project team to revitalize SAP (a separate item for consideration by the Executive) ensures that our financial systems assist in the implementation of financial control.

  11. Internal Audit: the Best Value & Audit Committee has recognised already the importance of strengthening the work of Internal Audit. Some steps have already been taken. For example, the Chief Internal Auditor has prepared a new style annual report on the work on Internal Audit during 2003/4. Copies have been sent to the Chair, Deputy Chairman and third Group Spokesperson on the Best Value & Audit Committee. However, there are a number of other issues that must be addressed as part of the implementation plan.

  12. Audit Committee Arrangements: the Best Value & Audit Committee has already discussed the need for changes in the way that it works and has already proposed some amendments which have been agreed by Council, subject to review "when the Consultants’ report on the Council’s Financial Management Arrangements had been published". This issue is considered in more detail in paragraphs 17 - 20 below.

  13. Financial Planning and Budget Management Arrangements: RSM Robson Rhodes recognize that standards are generally higher in this area and thus much closer to the high standards that we are setting ourselves. A detailed action plan already exists to address issues arising from comparing our position with the best standards set out by the Audit Commission in their current Use of Resources model. We need to review that action plan against the recommendations made by RSM Robson Rhodes. A number of issues have already been addressed. Monthly reporting of capital spending was introduced earlier this year. Capital and revenue issues are considered together in the budget report elsewhere on the agenda of the Executive. That budget report is designed to develop a new approach towards financial management. A related issue is simplifying the way that financial reporting is carried out. This will be a high priority for the proposed project team who will work on the SAP project. The report on SAP envisages that these improvements can be made in time for the financial year starting April 2005 providing extra resources are agreed. This will require much greater central prescription including a much simpler code list and accounting hierarchies. If we achieve this, there are significant efficiency improvements to be made.

  14. The Finance Function: as members will be aware, Sue Scane, currently Director of Corporate Resources at the Vale of White Horse District Council, has been appointed as the new Head of Finance. She will be starting with us on 1 October but is also able to spend some time with us before then. One of her key priorities is to provide effective leadership to the finance function supported by other senior finance staff. The implementation plan will contain her proposals on what changes are necessary to ensure that this happens. However, it is important to stress that some changes have already been made. We advertised for three accountancy trainees in August. Sue Scane will be considering further changes over the next few weeks. Any proposals that have been already been developed will be shared with you at your meetings.

    15. An implementation plan to ensure that all the recommendations are addressed

  15. It is essential that all the recommendations in the RSM Robson Rhodes report are addressed and changes that are necessary are implemented effectively. To do this will require a detailed plan that is subject to the principles of good project management. We anticipate that this will require a similar implementation plan to that which is being used to monitor progress against Raising our Performance 2. Supporting that implementation plan will be detailed action plans for the different components of the plan. This plan will require the identification of both a project manager and project sponsor. As RSM Robson Rhodes recommend, the implementation plan will need to build upon the work already done or in hand on the Statement of Internal Control. It is important that there is a single set of improvement plans that can be monitored as a whole.

  16. We suggest that Best Value & Audit Committee oversees progress against the implementation plan. (CCMT will also want to monitor progress against the implementation plan). It will be a major exercise to prepare this plan. We have asked Hugh McGarel-Groves who has completed his time as interim Business Manager within Social & Health Care to oversee the preparation of this implementation plan so that a draft can be considered by the Best Value & Audit Committee at its meeting on 22 September. It will be important that staff working within the finance function have the opportunity to contribute to and comment on the draft plan.

    17. Role of the Best Value & Audit Committee

  17. Robson Rhodes make the following recommendations about an audit committee:

    • "The Council establish a dedicated audit forum and in accordance with best practice its terms of reference should be wider than the current BVAC terms of reference to include:

    • assurance on the risk, control and governance arrangements and the Statement of Internal Control and not just internal financial controls;

    • ensuring coordination between internal and external annual audit plans to maximise the use of resources available as part of a total controls assurance framework; and

    • reporting annually on its own performance.

    • The audit committee’s terms of reference be amended to correctly reflect both its and the Council’s duties and responsibilities with regard to the prevention and detection of fraud and corruption, and to clearly document officer responsibilities and duties in the Council’s Financial Regulations.

    • The audit committee monitors the performance of the internal audit function via periodic reporting and undertaking an annual review using key performance indicators e.g. client satisfaction, percentage of plan completed, percentage of non-chargeable time.

    • The audit committee agree an advance programme of work to discharge its audit responsibilities in accordance with its terms of reference.

    • The audit committee to hold informal meetings or a private session as part of the public meeting to facilitate open discussion of particular issues which are inappropriate for a public forum.

    • The internal and external auditors to have free access to the chair of the audit committee and to meet with the full audit committee without officers present at least once each year to raise any unresolved issues of concern." (paragraph 6.22)

  1. In their report, they also set out best practice arrangements across a number of organizations in both the public and private sectors.

  2. Decisions about democratic arrangements are a matter for elected members and ultimately the full Council, subject to the legal provisions which reserve most Council functions to the Executive. However, we believe that there is an appropriate way forward that responds positively to the recommendations of Robson Rhodes but also retains an overarching Best Value & Audit Committee so that audit and best value matters can be considered at the same forum. We are recommending the following:

    • That an informal Audit Working Group be set up which will act as the dedicated audit forum. The Working Group will meet in private to allow full and frank consideration of all risk, control and governance issues;

    • The Best Value & Audit Committee will continue to be responsible for overseeing audit issues. Key documents such as reports by the council’s external auditors will be treated as public documents and will be considered by the Best Value & Audit Committee as well as by the Audit Working Group;

    • The Audit Working Group should comprise 6 elected members reflecting the current political composition of the Council, together with either one or two independent persons. Under the present political balance this would mean two members from each political group. It would make sense for those members to also be members of the Best Value & Audit Committee;

    • One of the independent persons should chair the Working Group;

    • The terms of reference of the Working Group should be written in a way that incorporates the recommendations set out by Robson Rhodes and incorporates best practice elsewhere;

    • The Working Group should be supported by the Head of Finance, the Head of Legal Services and the Chief Internal Auditor. The Council’s External Auditors would attend whenever necessary. Directors and Heads of Service would be expected to attend whenever they are required.

  1. If Best Value & Audit Committee agrees to the approach set out above then officers will bring back detailed terms of reference for the Audit Working Group (and any appropriate changes to the terms of reference for the Best Value & Audit Committee) to the meeting of the Best Value & Audit Committee on 22 September 2004.

    2. RECOMMENDATIONS

  2. The Best Value & Audit Committee is RECOMMENDED to:

          1. welcome the report by RSM Robson Rhodes;

          2. endorse the response set out in the report by the Chief Executive and Director for Resources, and in particular the proposals for:

              1. drawing up an implementation plan;

              2. monitoring progress against the implementation plan; and

              3. the role of the Best Value & Audit Committee;

          3. RECOMMEND the Council to agree the retention of best value and audit functions under a single committee as at present, subject to the proposals set out in the report by the Chief Executive and Director for Resources for the role of the Committee and the proposed Audit Working Group;

          4. ask officers to report further to the Committee with specific proposals for the terms of reference for the Audit Working Group and any appropriate changes to the terms of reference for the Best Value & Audit Committee for recommendation to Council.

  1. The Executive is RECOMMENDED as set out in paragraph 21 (a) and (b) above, subject to the decisions thereon of the Best Value & Audit Committee (to be reported at the meeting).

 

RICHARD SHAW
Chief Executive

JOHN JACKSON
Director for Resources

Background papers: Nil

Contact Officer: John Jackson, Director for Resources Tel: 01865 810163

August 2004

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