RELEVANT PLANS, POLICIES, STRATEGIES AND PERFORMANCE INDICATORS

6. None.

CONSULTATION PROCESS

7. None.

BACKGROUND PAPERS USED IN THE PREPARATION OF THIS REPORT

8. Audit project files

APPENDICES

9. Appendix A – Audit Report and Synopsis

Contact Point: Ged Richardson, Chief Internal Auditor ( (82)3683, email to: [email protected]

G B RICHARDSON

Chief Internal Auditor

APPENDIX A

AUDIT REPORT AND SYNOPSIS

1. Review of Non Domestic Rates (NNDR) 2005-06

The overall objective of the audit is to provide assurance to management that effective controls and procedures are in place to ensure that the NNDR System is operating effectively

The Isle of Wight Council collects Non Domestic Rates on behalf of central government. All income collected goes into a central pool for England and is then redistributed. The redistribution is managed by the Office of the Deputy Prime Minister. For 2005-06 £24.5 million is anticipated to be collected by the Council.

The audit was carried out by interviewing relevant officers and carrying out testing on selected areas to determine the level of compliance with Council policy and procedures.

Many of the properties that receive relief (either mandatory or discretionary) should be reviewed on a regular basis and to this end future review dates are entered on the system. In the sample selected some mandatory relief’s had a review date whilst others did not. This would mean that the Billing Officer would not be able to pick them up for review which could result in relief being given after entitlement had ended. It was determined that Mandatory relief is currently not reviewed unless changes are notified by the recipient. It is recommended that a review is carried out every five years if no notifications have been received in the interim period.

Community Sports Clubs registered with the Inland Revenue are entitled to a discount of 80% on their Business Rates. This discount is funded by central government and therefore is not a cost to the Council. Clubs that have not applied or do not qualify are currently given a discretionary relief at a rate of either 50% or 75%. This discount is funded 75% by the IW Council and 25% from central government. It has been recommended that an exercise is carried out by the Billing Officer to encourage clubs currently not registered to apply. This could result in a significant saving to the Council as the total value of discretionary relief granted in 2005-06 was £53,000.

The performance of the bailiff used by the authority for recovery of NNDR and Council Tax had become unacceptable during the year. This was recognised by the recovery section and a second bailiff has been appointed. The performance of both firms is now acceptable.

Previous Internal Audit reports have identified a lack of Business Continuity Planning as a key risk for the revenues service. Recently the Principal Systems Officer has attended a seminar hosted by the Corporate Business Continuity Officer. Actions need to continue to ensure that a plan is in place either by the end of the year or early in 2006-07.

As will be noted in forthcoming reports into Council Tax and Housing Benefits the Revenues Section has suffered the loss of a number of senior staff this year and will continue to do so with the further loss of senior staff due in January 2006. The loss of the considerable knowledge and experience these officers have could have a significant effect on the service in the short to medium term. The Authority has failed to attract a replacement Revenues and Benefits manager and the Financial Services Manager is currently acting as Revenues and Benefits Manager. He has been successful in appointing an interim manager to cover senior management responsibilities; however the ongoing uncertainty over the future of the revenues section will continue to have a detrimental effect on the service it provides as experienced staff leave the Authority.

In summary: The systems used by NNDR staff are well established with sound control procedures. The retirement of a member of staff and resignation of the Revenue Services Manager has highlighted the volume of knowledge held with individuals. It is clear with the ongoing loss of key staff that succession planning will have to feature more highly within the service.

Minor recommendations have also been made which are of an administrative nature only and we are therefore able to give assurance that the NNDR system is operating satisfactorily and the controls in place are effective.

2. Review of The Use of Consultants

The audit was carried out as part of the 2005-06 audit plan. The objective of the audit was to provide assurance that there are adequate controls and procedures in place to ensure that consultants are appointed in accordance with the Councils Contract Standing Orders (CSO’s).

At the request of the Resources Select Committee we focused on those consultants providing services related to design and construction and we therefore concentrated on Coastal Protection, Highways and Property Services.

In each of these three areas we interviewed officers involved in the procurement of consultants to ascertain the controls currently in place to ensure compliance with the Councils CSO’s. In order to confirm the effectiveness of these controls a sample of contracts in which consultants were used was selected at random from each of the three service areas.

Our findings revealed that generally speaking officers adhered to CSO’s, obtaining quotations as specified and inviting tenders when required. There are however circumstances when it is not possible to comply with CSO’s such as when the choice of consultants is restricted due to the specialised nature of the works required.

Examples of this were found in Highways and one such case was where the consultant Mott Macdonald was appointed to prepare a business case for the Private Finance Initiative (PFI). This is a new initiative and so far only Portsmouth have taken it up with Birmingham Council in the process of doing so. Mr Forbes Johnson of Mott Macdonald has been involved in the process for both of these councils and is the acknowledged expert in this field.

It is important that this type of work is carried out to the highest standard and when the council does not have suitably experienced staff to carry the work, the best available consultant must be used as a great deal is at stake both financially and reputationally.

Another example of the type of case where CSO’s are not followed completely is when there is a natural disaster such as a landslip or cliff fall and an emergency response is required. Generally coastal management staff deal with the initial emergency using known contractors to make areas safe. A consultant is appointed based on the nature of the disaster and the area in which it occurred. The consultants’ particular expertise and their local knowledge if they have undertaken a study of the area are all taken into account when making the decision. The selected consultant would then take the works through to completion without having gone through a proper selection process.

Officers are aware of these problems and a form of agreement is being worked on to provide the necessary protection to all involved.

The Council spends a great deal of money on consultants, a figure of £2.55M in the financial year 2003/04 being the sum quoted to the general public following a freedom of information enquiry. This figure could have been further explained as it includes consultants fees which are reclaimed such as those related to Defra approved coastal protection schemes and a number of highways projects funded by SEEDA.

This would reduce the above figure of £2.55M by approximately £1.15M to £1.4M, which represents the amount spent on consultants from the council’s own budget.

The Coastal Manager feels it is important to point out that coastal management carried out more work in house than most coast protection authorities in England taking account of the specialist local knowledge of coastal erosion and landsliding problems.

Generally the officers dealing with the procurement of consultants are aware of their responsibilities and we are able to give assurance that where possible officers adhere to the councils CSO’s.

We have made three recommendations all of which have been accepted by management.

3. AUDIT SERVICES REPORT – LIQUIDATION OF ORBITAL EVENTS

Background to investigation –

Orbital Events Ltd/ Inspire Success Ltd contracted with the IW Council to provide a marquee and events at Northwood House Cowes during Cowes Week 2005 (29 July – 6 August 2005).

9 September 2005 - Audit Services received from Customer Accounts a copy of the liquidation notice in respect of Orbital Events. They had been advised by Legal Services that as the company was in liquidation the outstanding debt of approximately £54,000 should be written off. They were unhappy with this response and asked for further information.

13 September 2005 – Associate Director of Cultural and Leisure Services visited Compliance and Risk Manager and requested an investigation.

13 September 2005 – Meeting between officer A and a Principal Auditor at Quay Street offices as an initial fact finding interview.

The principal areas of concern arising from these initial discussions were as follows:

The initial procurement and selection process.

The transfer of the contract from Inspire Success Ltd to Orbital Events Ltd.

The agreement by the IW Council to purchase Bar Stock with an estimated value of £19,000 and to pay for the hire of the marquee at a cost of £38,500.

The failure to collect sufficient income from Orbital to cover these purchases as per a supplementary agreement.

The failure to obtain parent company guarantees, performance bonds or other security against the risk of non reimbursement of the Council’s outlay.

Background to Events Leading to Appointment of Inspire Success Ltd / Orbital Events Ltd.

Approximately two years ago a £50,000 saving was required within the events team. This was partially found by ceasing to provide the marquee for Cowes Week events. Blurry Events provided a smaller marquee for 2004 Cowes Week and received a subsidy of £5,000 for a one year contract.

It was decided for 2005 to seek to award a contract for the provision of a marquee and events during Cowes week to a private contractor.

Adverts for expressions of interest were placed in the County Press and on the National Outdoor Events Website. The closing date for expressions of interest was 17 December 2004.

7 expressions of interest were received and information/ tender packs were forwarded.

Two submissions were received: - Blurry Events and Inspire Success Ltd.

An assessment of the submissions was carried out by officer A and the Events Manager.

Further questions were asked of the two tenderers and following scoring Inspire Success were awarded a contract following a decision made under the Scheme of Delegation. This decision was agreed and signed off by the then portfolio holder for Leisure and Tourism on the 1^st March 2005.

Significant subsequent events

Significant events occurred on the following dates:

1 March 2005- Decision to award contract to Inspire Success Ltd.

3 May 2005 – Inspire request that purchase orders are raised by the IW Council to obtain beneficial discounts.

10 May 2005 – Response to above from officer A – would place orders for those companies that have an established business relationship and the Council has a preferential rate. At this stage it was understood that this would result in an immediate reimbursement of expenditure.

27 May 2005 – Email from Inspire – confirm that order for Peppers Marquees can be raised by Council.

2 June 2005 – Inspire advise that they wish to create a “sister” company, Orbital Events to manage this and other key events.

Undated – Formal agreement transferring contract to Orbital Events.

30 June 2005 – Orbital Events put pressure on officer A to agree to pay for marquee and bar stock in a series of emails, also offer different terms for profit share with IW Council taking more of the risk with an increased profit share.

1 July 2005 – confirms in email that IW Council will purchase bar stock and pay invoice from Peppers Marquees. New supplementary agreement to be drawn up to cover purchases made on Orbital’s behalf. Includes arrangements for retaining ticket sales income collected by IW Council, collecting bar income and provision of a cheque or bond to secure income.

3 July 2005 – Orbital agree to agreement but not performance bond as this “will tie up working capital”.

22 July 2005 –Draft Supplementary Agreement sent to Orbital.

16 August 2005 – Orbital Events Ltd enter liquidation.

Findings and recommendations:

1. The initial procurement and selection process.

The selection of Inspire Success Ltd was subject to an evaluation of respective tenders submitted by Blurry Ltd and Inspire Success Ltd. The selection process did not include independent and professional verification of any Health and Safety Submission nor an evaluation of the financial viability of each company.

Whilst the initial contract entered into with Inspire Events limited proposed minimal financial risk to the Council and therefore the failure to obtain financial information relating to the company can to some extent be explained the reputational risk to the Council in the event of the failure of the contractor to meet the terms of the contract was still significant.

It is therefore recommended that the Contract Standing Orders be amended to include the requirement to carry out appropriate financial vetting of all prospective contractors.

The initial contract between Inspire Success Ltd and the subsequent agreement with Orbital Events Ltd placed responsibility for the provision and management of Health & Safety Issues with the contractor. They were required to provide minimum public liability insurance for the sum of £5m.

However, given the nature of the contract and the possibility that 1,700 people may have attended each of the events held in the marquee the Council had a responsibility to ensure the Health & Safety record, proposals, policies and procedures were sufficient for an event of this nature.

It is recommended that Contract Standing Orders be amended to explicitly require officers to have Health & Safety issues approved by a suitably qualified and experienced person prior to the award of a contract.

2. The transfer of contract from Inspire Success Ltd to Orbital Events Ltd.

On the 2 June 2005 Inspire Success Ltd contacted officer A and advised of their decision to set up a “sister” company, Orbital Events Ltd, to manage this and other key events. An agreement was subsequently drawn up via the Legal Department to transfer the terms of the contract to Orbital Events. Following the receipt of the notification of liquidation a search was carried out at Companies House that revealed that there was no formal or legal link between the two companies and therefore the Council has no form of redress against Inspire Success Ltd.

The major control failure in this situation was the failure to obtain a “parent company guarantee” from Inspire Success Ltd. This request would have revealed that in fact the two companies were not related and the failure of Inspire Success Ltd to provide a guarantee would have alerted staff to the risks involved in transferring the contract. At the time of the transfer it is clear that Inspire had approached the Council regarding the provision of purchase orders for goods and services. What is not clear is whether the Council was aware at this stage that the reimbursement of these costs would not be achieved until during or after the event. However the financial situation had changed significantly by this time and it should have been reasonable to assume that the initial assessment of their being no financial risk to the Council may no longer apply and more actions should have been taken to protect Council assets.

It is recommended that prior to the assignment of any agreement to a third party the original contractor is required to guarantee the partner company and failure to do so would mean that the Council would not enter into such an agreement.

3. The agreement by the IW Council to purchase Bar Stock with an estimated value of £19,000 and to pay for the hire of the marquee at a cost of £38,500.

Increasing pressure was placed on the Council to assist Orbital Events with the procurement of various goods and services. The reason given during this period was that the Council had preferential rates with suppliers and could therefore provide greater income generation for the contractor and therefore a larger profit share for the Council and the Cowes Week and Cowes based charities. As requests increased, additional pressure was placed by the contractor claiming that the viability of the event was dependant on the Council’s co-operation. The timescales involved were such that decisions had to be made to either provide assistance to the contractors or risk the contractors withdrawing their services as it was too late to appoint another contractor. It must be remembered that the impact of cancelling the Cowes Week Marquee at this stage would have had a significant impact both on Officers and Elected Members in negative publicity and reputational damage.

It was agreed that the Council would order both the Marquee and Bar Stock on behalf of Orbital Events Ltd. At this point Orbital Events offered to enter into an amended agreement in that the profit from the event would be shared if the Council were to fully fund these costs. This offer was declined and a Supplementary Agreement was drawn up between the two parties.

In summary this agreement stated that the Council would place orders for the Marquee and Bar Stock. The Council would keep all income from tickets sold at its venues up to the value of the Marquee (£37,291.00). Any deficit between the value of tickets sold and the cost of the marquee would be covered by either a cheque or a bond as security prior to the commencement of the event. The income from bar sales would be transferred daily to the Council to cover any deficit from the marquee and to cover the cost of stock. (Approx £11-14k). If these actions did not cover the costs incurred then an invoice would be raised to cover the residue and payment was required within 7 days.

4. The failure to collect income from Orbital to cover these purchases as per the supplementary agreement.

The income received by the Council from ticket sales was £1074.00. The income received from ticket sales from Council venues is obviously significantly lower than was anticipated. This could be explained by the omission of these venues from advertisements and fliers initiated by Orbital. These stated that tickets could be purchased from the official web site or by telephone to a number on the advertisement. No mention was made of other establishments where tickets could be purchased.

Officer A requested a cheque from Orbital to cover the unrecovered costs, as per the agreement, on Friday 29^th July 2005 but was advised that the company cheque book was not on site and that a cheque would be left the following day. This cheque did not materialise.

Bar takings were passed to the Caretakers at Northwood House by Orbital Staff as follows:

3/8/05 - £6745.00

4/8/05 - £950.00

4/8/05 - £1400.00

3/8/05 - £1400.00

The total collected was therefore £10,495.00 plus income from ticket sales of £1074.00 making a total income of £11,569.00. In addition to this, subsequent efforts to reduce the value of stock left on site resulted in the recovery of £4,927.48.

This leaves an unrecovered amount of approximately £37,878.40

5. Failure to obtain parent company guarantees, performance bonds or other security against the risk of non reimbursement of the Council’s outlay.

As mentioned above the supplementary agreement signed by the Director of Orbital Events required that a performance bond or cheque would be required to cover any losses. Orbital events did not obtain a performance bond and the decision was made to obtain a company cheque to cover any subsequent losses. Email correspondence from Orbital shows that they were unwilling to obtain a bond as it would reduce their working capital; however the agreement was signed and should have been enforced.

A possible mitigation that could have prevented this, could have been that the agreement stipulated that a personal cheque was required from the Company Director rather than a company cheque. This would have given the Council an additional route for redress as should the cheque have been returned as not cleared then fraud charges could be pressed against an individual as it is an offence to write a cheque knowing that there are insufficient funds available. At present Orbital have limited the liability to the assets of the company (which it is claimed there are none) and the individuals involved have no personal liability.

There was clearly a failure to obtain the Company cheque as guarantee against unrecovered income, however, given the subsequent liquidation of the company it is reasonable to assume that the cheque would not have been honoured. However as the company declined to provide a performance bond the collection of a cheque should have been given a higher priority.

Summary and Conclusion:

It is clear that a series of control failures have led to the Council potentially losing approximately £38,000.

Corporate controls, particularly relating to Contract Standing Orders should be improved, to not only provide protection to the Authority but to provide guidance to officers as well.

It is clear that increasing pressure was placed upon officers to ensure the events in the marquee went ahead. Many of the decisions made that have resulted in a loss of income to the Council were made after it was clearly too late to cancel the contract with Orbital and employ a different contractor. It must also be considered that had the events been cancelled, which may well have been the only alternative to officers at this time, then the Council would have suffered significant reputational damage.

It should also be considered that at this time the Line Manager of officer A had been seconded to prepare the Aim High document and has stated that whilst he was not easily available to provide advice and support he would have provided such had it been requested.

Officers of the Council, particularly in non-statutory services are increasingly being expected to act in an entrepreneurial manner while still being bound by Council policies and procedures. Where officers are expected to operate in this way then clear guidance must be given as to which actions are appropriate and the level of risk that is acceptable.

Having said this, there were clearly actions that could have been taken to mitigate the risks, and lessons need to be learned and actions taken to reduce the risk of other occurrences.

PURPOSE

APPENDIX A

Minor recommendations have also been made which are of an administrative nature only and we are therefore able to give assurance that the NNDR system is operating satisfactorily and the controls in place are effective.

2. Review of The Use of Consultants