INTERNAL AUDIT OUTCOMES REPORT

PAPER B

Committee: AUDIT AND PERFORMANCE COMMITTEE

Date: 12 DECEMBER 2006

Title: INTERNAL AUDIT OUTCOMES REPORT

REPORT OF THE CHIEF INTERNAL AUDITOR

PURPOSE

1. This report is to provide the Committee with a summary of Internal Audit activity completed since the last outcomes report to the Committee in November 2006.

2. The Committee is invited to note the contents of the report and to seek clarification of any issues arising from audits undertaken.

OUTCOMES

3. Whilst this report is to provide the committee with information and does not require a decision, the outcome of the report is to demonstrate to all stakeholders that assurances regarding the Council’s system of internal control are considered and challenged at the highest levels within the Council.

BACKGROUND

4. In keeping with good corporate governance practice, a Committee of elected members should have oversight of the activities of the Internal Audit Service for the following purposes:

5. The Committee should monitor Internal Audit’s performance, both in terms of the quality and quantity of its work;

6. The Committee should satisfy itself that Internal Audit has devoted its attention to the appropriate issues;

7. The Committee should consider the results of Internal Audit reviews to ensure that any significant findings are addressed, including control weaknesses and to ascertain whether, in the opinion of the Chief Internal Auditor, adequate and satisfactory responses have been given by the Authority’s management;

8. The Committee should recommend, if necessary, that further attention should be given to some of the issues raised;

9. To facilitate this process, attached as Appendix 1, are reports of significant audit work completed since the November 2006 report to the Audit Committee.

STRATEGIC CONTEXT

10. The work of internal audit services is concerned with providing assurances that the Council’s system of internal control is adequate and effective in supporting the delivery of the Council’s strategic objectives. As such, it makes an important contribution to the Council’s governance arrangements.

CONSULTATION

11. The internal audit reports attached as appendix one have been subject to detailed consultation with senior and operational managers within the services audited. Gaining the commitment of management is an important feature of Internal Audit’s work. The Committee’s attention will be drawn to those occasions when agreement cannot be reached on an exception basis.

FINANCIAL/BUDGET IMPLICATIONS

12. There are no direct financial implications arising from this report but some of the attached audit reports may have identified financial and budgetary issues needing to be addressed by management.

LEGAL IMPLICATIONS

13. Some of the attached audit reports may have identified legal issues needing to be addressed by management.

14. The Council has a statutory duty under the Accounts and Audit Regulations (amended) 2006 to have an adequate and effective Internal Audit service in place.

RISK MANAGEMENT

15. This entire report is concerned with assessing the adequacy and effectiveness of the Council’s arrangements for controlling risk.

16. The main risk associated with this reporting process is that unless it is performed well, it will weaken the effectiveness of the Committee’s work.

BACKGROUND PAPERS

17. Audit project files held by the Chief Internal Auditor – ext 3683

APPENDICES ATTACHED

18. Appendix 1 is comprised of Internal Audit Reports on the following areas:

· Contract audit progress report

· The Coastal Visitors Centre

· Cowes High School

Contact Point: Ged Richardson, ( 823683, Email: [email protected]

APPENDIX 1

A. CONTRACTS AUDIT PROGRESS REPORT

The Audit Plan for 2006-7 makes allowance for 115 days of work directly relating to contracts. This is further defined as 60 days of ongoing contract monitoring and 55 days of specific projects.

The specific projects included in this years plan are in respect of

Highways Contracts
Service Contract Monitoring
Social Services Care Homes
Partnerships
Follow up of an audit completed in 2005-06 in respect of Accountable bodies.

Ongoing work includes:

Final Accounts
Pre tender reviews
Contracts advice
Current contracts
Financial evaluations.

To date Internal audit have carried out the following ongoing work.

Financial Evaluations:

Prior to inviting a contractor to tender with the IW Council it is prudent to ensure, as far as is practical, that the financial position of the contractor is sufficiently robust to enable them to be in a position to fulfil the terms of the contract.

As at November 2006 evaluations have been carried out in respect of prospective contractors for the following:

The Integrated Waste Management contract
Education Grounds Maintenance contract
Leisure Management
Seasonal Leisure Facilities

In addition a small number evaluations have been carried out in respect of individual companies who wish to be added to the approved contractor list.

Final Accounts

Financial Regulation 3.8 in respect of contract states the following:

“Before final payment is made to a contractor, the Director of Finance shall be afforded the opportunity to examine and audit the final account together with all relevant files and documentation. “

Final accounts have been examined and agreed in respect of the following construction projects to November 2006:

· Sandown High School Multi Use Games Pitch

· Sandy Lane Bridge

· Ryde Park and Ride scheme

· Alverstone Road, Winford new footway

· Jocky Stocks bridge, Rookley

· Solent Middle School Extension

· Kitbridge Middle School – Phase 2b

· Shide Bridge

Each account was agreed and only minor comments made in respect of the length of time taken to prepare the accounts and that Architects or Engineers Instructions should be priced at the time of the alteration to specification.

Education Construction Partnering Scheme

A Principal Auditor has been involved in the above scheme since its inception.

Briefly, the scheme involves taking a different approach to the procurement of construction work within schools.

Following concern regarding the increasing cost of construction on the Island and the impact this had on the ability of the Authority to satisfactorily maintain and improve schools premises, investigations were carried out to identify possible alternatives to the traditional approach to procuring construction.

The option selected was to enter into a partnering or collaborative working arrangement. The basic premise being that engaging with contractors and architects at the very beginning of a scheme, and working together to achieve the desired outcome, would result in a better product, at a lower cost. A significant cost within construction is the amount included to cover unforeseen events. By removing the need for construction contractors to budget for this by agreeing to share additional costs and additional savings (known as pain / gain) this should reduce the overall cost to the authority.

Following an extensive tendering exercise two construction companies and two firms of engineers/ architect were employed to deliver part of the education capital programme.

To enable construction and design partners to share in savings made from projects a series of Key Performance Indicators’s (KPI’s) have been developed that measure a range of items including cost, time and satisfaction. There are a total of 26 KPI’s which each measure a different element of the project. 5 of these KPI’s are considered to be the most relevant / important and the criteria for these must be met before savings made are shared with our partners.

A total of 7 projects have reached the final account stage in the current financial year. As these are radically different to previous construction final account audits carried out a new approach has been adopted. One element of the partnering ethos is open – book accounting. This means in practice that the authority has access to accounting and financial records held by a partner. Discussions are still under way into the most appropriate method for auditing these accounts but it is likely that a representative sample will be examined in full, including information held by our partners, and that others will receive a “lighter touch” which will include the reconciliation of values claimed and the verification of KPI data .

The table below shows the audited projects to date:

Project	Target Cost	Area Metre square	Actual Cost	Over / Under spend on target cost	KPI criteria met	Estimated cost traditional approach.
Grange Primary school	£82,354.66	36	£91,122.04	£8,767.38	No	£93,000
Foreland’s Middle School	£244,832.67	186	£236,956.59	- £7,876.08	Yes	£300,000
Sandown Primary School	£230,844.24	166	£208,327.01	- £22,517.23	Yes	£279,00
Broadlea Primary School	£63,290.84	36	£45,763.30	-£17,527.54	Yes	£73,800
Carisbrooke High School	£557,383.42	563	£531,941.03	-£25,442.39	Yes	£725,000
Carisbrooke Primary School	£42,944.61	51	£47,560.12	£4,615.51	Yes	£57,000
Osborne Middle	£183,305.77	142	£169,912.63	-£13,393.14	Yes	£225,000

The target cost is the estimated cost of the project. This is agreed between the Council, the Contractor and the Architect prior to construction. Further savings (or additional costs) incurred during the actual design and construction result in the actual costs of the scheme.

As can be seen from the table, the majority of the projects has been completed at below the target cost and the criteria of the KPI’s are being met.

Whilst it is possibly a little premature to form a definitive opinion on the success of the partnering scheme, initial findings reveal that savings of, on average, £300 per metre square are being realised. The average size of each scheme is currently 100 square metres and therefore savings of around £30,000 per scheme can be anticipated when compared to the traditional construction procurement approach. The estimated cost of the scheme, had a traditional tendering method been used, has been identified in the final column of the table above, to illustrate the savings being claimed.

Pre tender / Current contracts

Much of the work carried out within Internal Audit in respect of contracts is in the form of advice and guidance as to the rules, procedures and regulations that must be adhered to when procuring goods and services.

In addition pro active detection work is carried out to identify non-compliance. Tender returns, the tender register and the creditor payments system are regularly inspected and each individual audit carried out also considers procurement issues.

B. THE COASTAL VISITORS CENTRE

EXECUTIVE SUMMARY

Scope:

The scope of this audit covers hire of the conference facilities, sale of goods including publications, banking arrangements, petty cash, budget management, insurance arrangements and fees and charges.

Introduction:

The Isle of Wight Coastal Visitors Centre opened in August 1998 in order to provide an accessible point of contact for anyone with an interest in the Island's coastline. The visitors centre has not been audited since opening but received advice from internal audit in respect of financial systems.

The Coastal Centre receives the largest amounts of its income from group visits. During 2005-06 £8355 was received in respect of group admission charges. Income is also received from sale of gift shop items. The cost of stock purchases for financial year 2005-06 was £2659 and income received was £5530.

The value of income and expenditure that is directly controlled by the Coastal Centre is minimal. The total estimated budget for 2005-06 was £109,696, inclusive of BVACOP charges.

Summary of Findings:

There were no significant areas of concern as a result of this audit.

The recommendations relate to the findings summarised below:

· The fees for conference room hire and entrance fees were last reviewed two years ago.

· Some elements of the budget for the Coastal Visitor Centre have been under spent. The budget achieved savings which are then used to support other areas within the service. To ensure that the need for virements are kept to a minimum, the budget should be reallocated to match actual requirements in each area of the service.

· Historically, there has been a level of uncertainty as to whether the provision of the Coastal Visitors Centre would continue; therefore, the Visitors Centre is not being widely advertised. By considering the appropriate use of the advertising budget, the centre could generate more income from entrance fees, gift shop sales and conference room hire. This is currently being considered by the Coastal Centre Manager.

· Currently stock takes occur for re-ordering and for year end purposes only. Although stocks held are small, and are not valuable, the sale of stocks is the second highest profitable activity for the centre and should be controlled sufficiently to mitigate the risk of loss of stock. In addition to this, it was found that some publications are sold at cost price.

· Administration of debtor invoices is being passed to a separate office, resulting in additional administration time being required.

Seven recommendations have been made and these are detailed in the attached action plan.

Acknowledgements:

I would like to take this opportunity to thank the staff at the Coastal Visitors Centre for their time and help throughout this audit.

Internal Audit Action Plan

Title of Report: Coastal Management Centre Date Report issued: 21/11/2006

Finding Reference	Main Findings	Possible Consequences	Recommendation Reference	Action Required	Priority	Responsibility	Target Date
1.1 1.2	Fees for Conference Hire and Entry fees were last reviewed two years ago.	Risk that inadequate fees are being charged.	1.5	Fees and charges should be reviewed annually and this should be evidenced.	3	Coastal Centre Manager	31/3/07
2.7	Income and expenditure is not checked to Fido	Funds expended from or allocated to the incorrect budget codes.	2.9	Gain access to WebFido to check future transactions.	4	Coastal Centre Assistant	31/12/06
2.2	Invoices for group visits and conference hire are created by a separate administration team.	Additional administration time required. Requested invoices might be mislaid.	2.9	1) Obtain a supply of internal invoices from the controlled stationery office. 2) Obtain a Customer Account Request Pad OR request training and access to the Debtors system to create invoices locally.	4	Coastal Centre Assistant	31/3/07
3.3 3.4 3.5 3.6 3.7	Underspends in some areas are being used to support other areas within the Centre.	The detailed allocation of the budget does not accurately reflect the priorities of the service.	3.8	The budget should be reallocated by the Accounting Technician following advice from the budget manager.	2	Budget Manager/ Accounting Technician	31/12/06
3.7	The advertising budget is not being used.	Failure to promote the facilities available in order to generate income.	3.8	Consideration should be given to advertising the service.	4	Coastal Centre Manager	31/12/06
4.3	Stock is checked for re-ordering purposes but is not reconciled to goods sold.	Loss of stock. Theft of stock.	4.7	Consideration should be given to implementing a system whereby reconciliation between actual stocks and stocks sold can be achieved.	3	Coastal Centre Assistant	31/12/06
4.5	Some publications are resold at cost price.	Failure to cover costs.	4.6	Consideration should be given to making an additional charge to publications in order to cover the costs of administration.	4	Coastal Centre Assistant	31/12/06

Priority Rating :- 1 – Serious control weakness requiring immediate action.

2 - Control weakness requiring action within follow up period.

3 – Low priority control weakness requiring action within timescale agreed.

4 – Other -Systems related matters, value for money, administrative.

N.B Failure to implement recommendations by the target date will be reported to the Audit and Performance Committee. Evidence of compliance by the target date will be required; however, notification by email will be adequate.

C. COWES HIGH SCHOOL

A planned audit visit to Cowes High School has been carried out and the report is attached.

APPRAISAL AND RECOMMENDATIONS

Overall the central administration and general management of the school were found to be satisfactory. Records examined were well maintained, easily accessible and comprehensive. Some issues did arise during the audit; the majority of these concerned the work of the Governing Body.

As a result of the audit the following recommendations are made:

1 The “Scheme of Delegation and Committee Terms of Reference” should be reviewed annually and the date of the review shown on the document. ( Sections 1.2, 1.6 )

2 The Governors acceptance of the “Scheme of Delegation and Committee Terms of Reference” should be clearly minuted. (Section 1.6)

3 The Role of the Curriculum, Staffing and Finance Committee should be examined to ensure that the committee is working in line with its Terms of Reference.( Section 1.3 )

4 There should be an opportunity at each meeting for governors interests to be declared (Section 1.7)

5 Governors and staff involved in Financial Management should complete competency matrices to identify and enable any lack of necessary skills to be addressed. ( Section 1.9)

6 Governors should be considering the preparation of a Controls Assurance Statement ( Section 1.10)

7 When policies are reviewed, the date of the review should be shown on the policy, even when no changes have been made. (Section 3.3)

With the introduction of the Financial Management Standard in Schools, which all secondary schools have to meet by March 2007, points 1,3,4,5 and 6 are issues which need to be addressed by the Governing Body to ensure that the school makes progress towards meeting the standard.

During this audit some aspects of the Financial Management Standard in Schools have been highlighted. However there are areas (such as the school development plan and the links to the school budget, which fall outside the scope of this audit) which have not been examined. Comprehensive information and guidance about the Standard has been issued to all secondary schools, and is also available on the DfES website.

Internal Audit Report - Implementation Sheet

This sheet is enclosed to assist you in implementation of the agreed audit recommendations. Please circulate to all relevant staff for action. You will be contacted at a later date by the Audit section to confirm that progress has been made in the agreed areas. If you need any further advice please do not hesitate to contact us.

Title of Report: Cowes High School Date Final Report Issued: October 2006

Main Findings	Possible Consequences	Action required	Priority	Responsibility	Target date
It was not possible to establish when the document “Scheme of Management Delegation and Committee Terms of Reference” was approved by the Governing Body.	No record of agreement and possibility of non-compliance.	Official acceptance of / review of Scheme of Delegation should be recorded in the minutes.	2	Governors / Clerk to the Governors	March 2007
There is no evidence that the “Scheme of Management Delegation and Committee Terms of Reference” has been reviewed since the draft was produced in March 2004.	Responsibilities may have changed and not be fully understood. Government guidelines may have changed and not been implemented	Review Scheme of Delegation annually and:- a) Record the review in the minutes b) Show the date of the review on the document even when no changes have been made.	2	Governors / Clerk to the Governors	March 2007
The Curriculum, Staffing and Finance Committee did not meet as planned in 2005/06. Some steps have been taken to ensure that the work of the committee is carried out.	Role of the Committee not fully carried out. Present arrangements do not match the terms of reference for the committee.	The role of the committee to be examined and measures put in place to ensure a) the committee meets as per their terms of reference b) The work of the committee is completed.	2	Governors	December 2006

Priority rating: - 1- serious control weakness requiring immediate action. 2 - Control weakness requiring action within follow up period.

3 - Low priority control weakness requiring action within time scale determined by the establishment.

Internal Audit Report - Implementation Sheet

Title of Report: Cowes High School Date Final Report Issued: October 2006

Main Findings	Possible Consequences	Action required	Priority	Responsibility	Target date
Declaration of Governors Interests is not a standing item on the agendas of meetings.	School not meeting standards required for the Financial Management Standards in Schools.	Introduce Declaration of Interests as a standing item on meeting agendas.	2	Clerk of the Governors	Immediately
To meet the Financial Management Standard in Schools, Senior Staff and Governors dealing with Financial matters should have completed a financial competency matrix, enabling training needs to be identified.	Training needs / lack of financial skills on Governing Body not identified. Failure to meet the Financial Management Standard in Schools.	Ensure that Governors and Staff involved in Financial Management complete the relevant competency matrix to identify any skills gaps.	1	Governors / Headteacher	To be completed by March 2007
The FMSIS requires the annual preparation of a Controls Assurance Statement (CAS) which needs to be signed by the Headteacher and the Governing Body.	If CAS not produced and signed, failure to meet the standard.	Governing body to produce, consider and sign a Controls assurance Statement.	1	Governors / Headteacher	To be completed by March 2007
Although the Lettings Policy has been reviewed regularly, the document on file is dated 2002.	Not easily possible to establish when policy last reviewed. Uncertainty if the policy is up to date.	When a policy is reviewed, the date of the review should be shown on the policy, even where no changes have been made.	3	Clerk to the Governors	When policy next reviewed.

Priority rating: - 1- serious control weakness requiring immediate action. 2 - Control weakness requiring action within follow up period.

3 - Low priority control weakness requiring action within time scale determined by the establishment.