The purpose of this Letter
This Annual Audit Letter summarises for Members the more
important matters arising from our audit for 2001/2002, and comments on other
current issues. We are producing separate reports on completion of specific
aspects of our work for discussion in detail with officers. These reports are
listed at the end of this Letter for Members’ information.
In December 2001 the Government published a White Paper
which announced the introduction of comprehensive performance assessment (CPA)
across local authorities. The Audit Commission was given responsibility for
developing the methodology. The first stage of CPA has resulted in all
metropolitan councils, counties and unitaries being ranked (depending on
measures of performance and ability to improve) into one of five categories
(excellent, good, fair, weak and poor). The results were published nationally
on 12 December 2002.
This annual audit letter summarises the results of the
2001/2 audit. It takes into account the outcome of the CPA process, but retains
as its main focus our statutory responsibilities as external auditor to the
Council.
The Audit Commission has circulated to all audited bodies
a statement that summarises the key responsibilities of auditors. Our audit has
been conducted in accordance with the principles set out in that statement.
What we say about the results of our audit should be viewed in the context of that
more formal background.
Audit objectives
Our Code of Audit Practice requires us to design a
programme of work to address the significant operational and financial risks
you face that impact upon our responsibilities. Our work focuses on whether you
have adequate arrangements for the following:
Performance Management
·
Securing
economy, efficiency and effectiveness in the use of your resources
·
Producing
and publishing a Best Value Performance Plan
·
Producing
performance information
Financial aspects of corporate governance
·
Securing
the legality of financial transactions
·
Ensuring
your financial standing is soundly based
·
Satisfying
yourselves that systems of internal financial control are both adequate and
effective
·
Ensuring proper standards of financial conduct, and the
prevention and detection of fraud and corruption
Accounts
·
Presenting fairly the Council’s financial position
This programme of work is summarised in Exhibit 1.
The three main elements of
audit objectives
Our audit has addressed the requirements of the Code of
Audit Practice and we have worked with the Council to maximise the benefits of
the integrated audit approach. We have reviewed your arrangements for dealing
with risks and we have undertaken additional detailed work in selected areas of
higher audit risk.
We have also liaised with Audit Commission and other
Government Inspectors to minimise duplication where our roles and
responsibilities overlap.
The Annual Audit Letter is an important means by which
the public might learn about the Council’s stewardship of public funds. The
Council is required to:
·
publish the Annual Audit Letter as soon as reasonably practicable following
its receipt
·
keep copies of the Letter available for purchase by any
person on payment of a reasonable sum.
Background to the audit
There have been some significant challenges for the
Council over the past year. In particular, these have involved:
·
further developing performance management arrangements
·
re-organising the management structure to ensure there
are the capacity and skills to deliver the modernising agenda
·
managing the Council’s response to continuing financial
pressures, especially in Social Services
·
tackling underperformance in the Highways and Planning
services.
In addition, the Government has introduced its
Comprehensive Performance Assessment (CPA) and the Council has had to respond
by carrying-out a self-assessment and hosting the Corporate Assessment
inspection team.
In accordance with our responsibilities under the Code of
Audit Practice, we have had regard to all of these issues in the course of our
audit.
Overall conclusion
The CPA process has resulted in the Council being
categorised as a Fair authority. This is a creditable achievement, particularly
when considered against the background outlined above and the Council’s
position 18 months ago.
The judgement was arrived at by assessing
·
how the Council is run
·
how its services perform.
Whilst core service performance compares favourably
with neighbouring unitary councils and services are improving, the Council has
more weaknesses than strengths in its corporate governance arrangements.
The Council recognises that continued action is
needed to ensure that its current record of service achievement can be
sustained and enhanced over the longer term, especially through the present
period of significant change at senior management level.
The political will and staff commitment to succeed is
acknowledged. The Council’s improvement priorities are understandably focused
on improving its governance arrangements. Provided these are delivered and
improvements continue the Council has good prospects of moving quickly to a
‘Good’ overall performance.
The key messages for Members are set out below.
Financial position
The Council continues to face financial pressures,
particularly associated with social services and waste management, and
exacerbated by a relatively unfavourable result in the recently announced Local
Government Settlement for 2003/2004.
A medium-term financial strategy is being developed, to
help in balancing annual budgets while bringing resources and priorities into
closer alignment. This needs to be completed as a priority.
Performance management
There has been continued progress with the design and
build stage of the Council’s performance management framework. For this
investment to be realised, Directors’ Group must ensure that the framework is
applied consistently across the organisation. It will then be necessary to
ensure that monitoring processes are working effectively and that Members are
fully engaged in the process. Once the framework is embedded in the culture of
the organisation it should be a key factor in driving service improvement.
Performance information
We have encountered significant problems with the reliability
of the data supporting Best Value Performance Indicators (BVPIs). We found
that, of the 111 required indicators, 5 were omitted and 23 were either
inaccurate and likely to mislead or of uncertain accuracy.
As a result, our audit opinion on the BVPP is qualified
and we have also made a statutory recommendation to which the Council is
required to respond within 30 working days of its issue date.
Urgent action is needed to ensure that performance data
is reliable, and that calculations are accurate and in accordance with
published definitions.
E-government
The corporate arrangements for delivering and resourcing
the Council’s strategy for e-government are not yet in place. However, the
Council has recognised that prompt and decisive action is needed if the
Government’s national targets are to be met and has now set-out a clear picture
of what it is seeking to achieve. This is to be followed by detailed project
management arrangements over the next six months.
Procurement
Procurement is a key part of the Government’s
modernisation agenda and, recognising this, the Council has developed a
Procurement Strategy. Priority now needs to be given to ensuring appropriate
arrangements are in place to drive the process corporately and that the
relevant skills are available across the organisation to deliver the strategy
effectively.
Risk management
The Council is progressing its approach to risk
management (RM) and now needs to give priority to completing the framework and
building RM into its planning and review processes.
Internal audit
Our review identified a need for action to ensure that
Internal Audit is working to a risk-based annual audit plan agreed by Directors
and Members, and that their staffing and skill levels are appropriate for
delivering that plan. We recognise that action is now being taken to address
these issues.
Performance management
Comprehensive performance assessment (CPA) and Best Value
The Council has been categorised as a Fair authority
through the CPA process. The Best Value Performance Plan (BVPP) for 2002/2003
is a much improved document compared with previous years but a significant
number of the published performance indicators were inaccurate or unsupported
and we have therefore qualified our opinion on the BVPP.
The CPA process results in a score for performance across
service areas together with a score for ability to improve. The combination of
the two assessments results in authorities being placed in one of five
categories (excellent, good, fair, weak and poor).
The judgements in service areas are a combination of
assessments from external agencies, including Ofsted, SSI, BFI and government
offices, results from best value inspections, auditor assessments and
performance indicators. The judgement on ability to improve has been assessed
by an independent review team against criteria in nine specific areas.
The results were published nationally on 12 December
2002 and the Council was ranked as Fair. Exhibit 2 shows its performance in
individual service areas, together with its overall scores for how services
perform and how the Council is run. Scores are on a 1 -4 basis with 1 being low
and 4 being high.
|
Service
|
Score (1 low, 4 high)
|
|
Education
|
3
|
|
Social care – children
|
3
|
|
Social care – adults
|
2
|
|
Environment
|
3
|
|
Housing
|
2
|
|
Libraries and leisure
|
3
|
|
Benefits
|
2
|
|
Use of resources
|
3
|
|
How services perform
|
3
|
|
How the Council is run
|
2
|
Following from the CPA process, the Council is already
well advanced with its improvement planning and a meeting has been held between
regulators and the Council to consider priorities.
The Council’s ranking will influence both the amount of
regulation work that is undertaken in future years and the range of freedoms
and flexibilities that will be granted from central government. In addition it
is envisaged that priorities identified as part of the improvement planning
will feed into the Council’s Best Value Performance Plan for 2003/2004 and will
influence the audit and inspection programme for future years.
The Council’s latest BVPP is a considerable improvement on
the previous years’ documents, complies in most respects with statutory
requirements and was published within the statutory deadline. The document
should be useful both to internal managers and staff and to external
stakeholders in facilitating a wider understanding of the Council and the
issues it faces.
The exception to full compliance concerns the reliability
of the 2001/2002 Best Value Performance Indicators (BVPIs).
Our audit has involved the validation of 15 indicators
prescribed by the Audit Commission because of their significance in the CPA
process, and of others judged locally to be high-risk, along with the review of
information supporting those indicators judged to be lower risk.
We found that 5 of the required 111 indicators had been
omitted. We have expressed reservations on 15 of the 99 non-Fire Service
indicators because definitions have not been complied with or evidence to
support the indicators is inadequate. For 10 of these, the Council has been
unable to comply fully because their information systems do not provide the
necessary data. A further 17 indicators have in our view been significantly
misstated in the BVPP, either because they were published as estimates that
were inaccurate or as actuals that have subsequently been amended.
The impact of these inaccuracies varies as between
understating and overstating performance or costs, and in the degree to which
they misrepresent the Council’s performance. We have concluded that there was
no deliberate intention to mislead, but that for 15 indicators the accuracy of
the reported position is uncertain and for 8 the published figures are
incorrect and likely to mislead a reader of the BVPP.
The indicators and our reservations and amendments have
been submitted to the Audit Commission. We have provided officers with a short
report which makes recommendations for minor improvements to the BVPP and sets
out our judgements on those indicators we found to be inaccurate.
Because of the number of inaccuracies, we have had to
qualify our opinion on the BVPP. We have also considered this to be
sufficiently important to merit a statutory recommendation in our BVPP opinion
and certificate, issued on 20 December 2002. The Council must consider this and
formally respond to the recommendation within 30 working days of the issue
date.
A significant improvement in the accuracy and evidencing of
performance data is required if the Council is to be successful in accessing
rewards and securing freedoms through the CPA and local PSA processes, both of
which rely heavily upon these measures.
The Council has maintained its programme of Best Value
reviews, which is now being revised following the removal of the requirement to
review all functions over a five year period. The new programme will be based
on corporate priorities identified through strategic planning, performance
monitoring, consultation and CPA. This is a sound approach, but the Council
needs to be satisfied that there is sufficient flexibility to enable all of its
functions to be covered.
|
Recommendation
|
|
Ensure that priority is given to improving the
accuracy and reliability of performance information.
|
Use of resources
The Council has continued to
develop its overall performance management arrangements, but the framework is
not yet fully in place. Our reviews of specific services have identified scope
for improvement in some areas.
Performance management arrangements
The Council has continued to develop its performance
management arrangements. The main achievements this year include:
·
The Community Strategy ‘Island Futures’ has been
adopted
·
A Corporate Plan has been prepared and consulted upon
·
Service planning processes are now established across
the organisation
·
The Directors’ Group is now regularly monitoring
performance and identifying areas for attention
·
A Member led ‘performance monitoring task group’ has
helped Members to develop their monitoring role.
There remains much to be done to complete the
arrangements. This was confirmed by the corporate assessment element of CPA,
which pointed in particular to the need for:
·
Maintaining the momentum of development through the
forthcoming period of senior management changes
·
Ensuring service plans are linked explicitly to the
corporate plan
·
Better integrating corporate, service and financial
planning
·
Completing the implementation of corporate performance
management
·
Enhancing risk management, project management and
procurement
·
Reviewing and developing the Council’s approach to
diversity.
These developments are
fundamental to the successful management of the Council’s business and to the
delivery of service improvements, and they have informed the identification of
improvement priorities that forms the final stage of the CPA process.
In addition to contributing to
the CPA process, our work this year has focussed on supporting the development
of the Corporate Plan and providing workshops to help Members further develop
their performance management roles.
|
Recommendation
|
|
Complete the implementation of a comprehensive
performance management framework
|
Service inspections
The service inspections completed by outside agencies
this year are shown in Exhibit 3.
Results
of inspections 2001/2002
|
Service
|
Performance
|
Prospects
|
|
Education Client Services (February 2002)
|
Good
|
Excellent
|
|
Social Services for Older People (June 2002)
|
Good
|
Promising
|
|
Wight Leisure (October 2002)
|
Good
|
Promising
|
|
Homelessness & Housing Advice (August 2002)
|
Fair
|
Promising
|
|
Highways and Transportation re-inspection (October 2002)
|
Fair
|
Promising
|
This is a creditable set of results, and there are many
positive messages from the reports, particularly about the progress that has
been made in developing corporate arrangements.
Most encouraging is the ‘prospects for improvement’
assessment, which is a good indication that best value reviews are now capable
of driving improvement if their conclusions are implemented.
Nevertheless, there are some recurring themes, which need
to be addressed in order to further strengthen the Council’s arrangements,
including:
·
Completing the performance management framework
·
Ensuring that the multiplicity of plans is developed
into a prioritised list of actions, for the short and medium terms
·
Maintaining clarity of aims and objectives, while
translating them into front line service improvements.
We have considered the Council’s progress in addressing
issues raised in the 11 inspections carried out over the last 2 years. This
shows that 94% of the recommendations arising from these inspections have been
implemented or are in progress.
Risk management
We have followed-up our 2000/2001 report on risk
management. This shows there has been some significant progress, with a
strategic risk profile completed and a response to this being developed.
Work is now starting on putting in place a framework for
the systematic identification, assessment and control of significant risks. The
risk management approach will then need to be embedded into the Council’s
processes, including service planning and best value reviews.
|
Recommendation
|
|
Expedite the development of risk management and its
integration into service planning.
|
‘Use of resources’ reviews
We have carried out a number of specific reviews during
the year and the key findings from these are summarised in Exhibit 4.
Financial aspects of corporate governance
Arrangements
We have assessed the Council’s corporate governance
arrangements as being adequate for their purpose. The main areas of weakness
are around Internal Audit and Risk Management.
We have extended our work on each of the Code of Audit
Practice Corporate Governance areas this year in order to arrive at auditor
judgements, as required by the Audit Commission to support CPA. This work has
been completed and we have agreed our assessments, which feed into the CPA
process, with your officers.
The Code of Audit Practice requirement is that we judge
whether the Council’s arrangements are adequate. We have concluded that
arrangements are adequate, with few weaknesses. We have summarised our
conclusions in a report, which sets out recommendations based upon the action
required in each area to move the Council up to the ‘better than adequate’
category. Specific issues for Members to be aware of are covered in the
following sections.
Financial standing
The Council continues to face financial pressures,
particularly in Social Services and Waste Management.
We have reviewed the budget setting processes, including
those for bridging budget gaps and are satisfied they are adequate. The Council
has adopted good practices in making three-year projections of financial needs
and resources, and in providing detailed reports to the Executive that identify
efficiency savings, service reductions and developments, and pressure points.
Budgets are consistently met to within a small percentage
variance. This was achieved in 2001/2002 with the help of pro-active debt
management alongside continuing low interest rates and slippage in capital
schemes. A year-end general balance of £1.8m was budgeted, below the 2% of net
expenditure that has previously been regarded as prudent. In the event, the
balance at 31 March 2002 was £2.5m, which is at the 2% level.
In order to address new developments and continuing
budget pressure in 2002/2003, a 13.25% increase in council tax was agreed.
Financial pressures are likely to increase in 2003/2004
in light of the Government’s recently announced revenue support grant
settlement. The changes in the grant distribution formula will have a relatively
unfavourable impact, which the Council calculates to be equivalent to a loss in
the first year of around £5m compared with the national average.
The Council is preparing a Medium-Term Financial
Strategy, which should bring about closer alignment of corporate priorities and
resources. It will also provide the opportunity to undertake a risk assessment
of the variability of income and expenditure, and to ensure reserves are set at
an appropriate level and adequate contingency reserves maintained. We will
review the strategy and provide feedback to the Director of Finance and
Information and County Treasurer in due course.
The Council’s capital programme is based on needs as
determined through an internal bidding process. It is tailored to what is affordable
and the financing is agreed in advance. The priorities set out in the Asset
Management Plan (AMP) are one consideration when capital bids are being
prioritised. However, if the AMP and Capital Strategy are to be effective
management documents, the links need to be clearer and more consistent.
Practice on reporting financial
information to members has been mixed. Arrangements have now been made for
revenue and capital monitoring reports to be provided to select committees at
least every two months alongside performance reports.
|
Recommendations
|
|
Complete the development of a medium-term financial
strategy.
|
|
Ensure there are clear links between the capital
programme and the priorities set-out in the Asset Management Plan.
|
Systems of internal financial control
Our work did not identify any material issues relating
to specific systems. However, we are concerned about the effectiveness of
Internal Audit.
For purposes of obtaining assurance on the Council’s
internal controls we place reliance as far as possible upon the work of
Internal Audit.
We have reviewed how they plan, control, evidence and
report their work and concluded that they comply with CIPFA standards.
In 2001/2002 the section was under-resourced in terms of
both numbers and skills. This resulted in significant slippage in the work
programme, with less than 66% delivered and a 35% overrun on planned times. In
addition, productivity was down at 43% compared with a planned level of 51%.
Action is now being taken to re-structure the audit
section in order to resolve these problems. This will be too late to ensure
full delivery of the 2002/2003 audit plan.
CIPFA’s Code of Practice for Internal Audit says that the
internal audit function should report, and be accountable, to an audit
committee or equivalent. The Council has had no formal process for reporting to
Members on the audit plan or the results of audit work. This is now being
addressed through a panel of the Resources Select Committee.
In addition, although there is a formal system for
ensuring that recommendations are implemented, this has not been rigorously
adhered to and there is no process for senior management to review the results
of this work.
|
Recommendations
|
|
Ensure that appropriate resources and skills are
available to deliver the internal audit plan
|
|
Introduce procedures for approval of the Audit Plan
and monitoring of progress and results at Directors’ Group and Member level.
|
Standards of conduct, fraud and corruption
Arrangements for maintaining standards of conduct and
for preventing and detecting fraud and corruption appear adequate.
We have reviewed the Council’s overall arrangements for
prevention and detection of fraud and corruption. Whilst arrangements are
adequate, procedures could be enhanced by introducing a formal register of
irregularities and by ensuring that there is a pro-active programme of
anti-fraud and corruption audit work undertaken annually.
The Council needs to ensure that Members and Staff are
familiar with the key corporate governance documents, and that these and
details of the ethical framework are made available to the public and partners.
There also need to be formal arrangements for Members to monitor and test
compliance with codes of conduct and the wider ethical framework.
|
Recommendations
|
|
Establish arrangements for monitoring and testing the
operation of the new ethical framework.
|
Legality of financial transactions
We are satisfied that the Council has adequate
arrangements for ensuring the legality of transactions with financial
consequences.
During the year we have held discussions with officers
and reviewed reports as issues with a legal implication have arisen, and we
have reviewed the Council’s overall arrangements. We have concluded that
arrangements are adequate.
There is scope to further enhance arrangements by
adopting more formal procedures for implementing new legislation and monitoring
compliance, and by raising the profile of the Section 151 officer through
making the associated duties explicit within the Constitution.
The Council is proposing to externalise Wight Leisure to
a ‘not for profit distributing organisation’. We are tracking the processes
being followed in pursuing this option, in order to obtain assurance that
decisions taken are in the Council’s best interests and that due regard is
given to the associated legal considerations.
In December 2000 an elector argued that the Council had
not obtained ‘best consideration’ when leasing its residential homes to
Islecare97. We reached the view, not shared by Council officers, that the actions
taken by the Council were unlawful but, because the same position could have
been reached by lawful means, we decided to take no formal action. This matter
was finalised in June this year when we issued a separate Audit Letter and
closed the audits of the accounts for 1999/2000 and 2000/2001.
There have been no formal challenges to items in the
Council’s 2001/2002 accounts but we have had a number of informal contacts from
electors covering:
·
The Isle of Wight Music Festival
·
Proposed lease of Inver House
·
St Mary’s roundabout planning agreements
·
Beach Cleaning contract
·
Expenditure on un-adopted roads
·
Sites for travellers
·
Impact of a pitch and putt course on a public right of
way
The first three of these remain
live issues for us at this stage.
In relation to the Music
Festival, the Council has suffered a loss of £0.38m through underwriting the
event earlier this year. The Council had agreed a subsidy of £20,000 and
estimated the maximum additional liability as £109,000, to be met from Wight
Leisure reserves. However, this was clearly too optimistic and emphasises the
need for realistic risk assessment as referred to earlier in the letter. An
internal enquiry is now being carried-out to establish whether there were
deficiencies in the Council’s processes or controls.
Accounts
We issued an unqualified audit opinion on
13 December.
Our work on final accounts
this year covered:
·
testing of the key controls within the general ledger
systems
·
a review of procedures for preparing and controlling
the budget
·
a review of close down procedures
·
review and testing of the financial statements.
Members approved the Council’s Financial Statements on 11
September and we issued an unqualified audit opinion on 13 December.
We will report our detailed findings to officers shortly.
There are no issues we wish to draw to the attention of members.
We are also considering the Council’s accounts closedown
process in order to identify scope for shortening the timescale in future
years. This is necessary to meet the Government’s proposal to incorporate local
authority accounts into the ‘Whole of Government Accounts’, beginning with a
dry run in 2004/2005.
Future audit work
We are currently considering the significant operational
and financial risks facing the Council that will need to be addressed in next
year’s audit.
To facilitate the combining of audit and inspection, the
Audit Commission is aligning our financial and operational year with that of
the Inspectorate. This means that:
·
our 2002/2003 audit plan will cover the 5 months from
1 November 2002 to 31 March 2003
·
for 2003/2004 there will be an integrated audit and
inspection plan covering the 12 months from 1 April 2003, driven by CPA
and the Council’s Improvement Plan
·
the above will be the first year of a three-year plan,
with the two subsequent years in outline.
Closing remarks
Finally, I would like to take this opportunity to express
my thanks for the assistance received from officers during the course of our
work.
This has been another demanding year for the Council and
we very much appreciate your co-operation and support, which has contributed to
the efficient delivery of our audit.
Neil Childs
District Auditor
xx December 2002
Reports already issued or in progress
NHS flexibilities (July
2002)
Management of Partnerships (July 2002)
E-Government (August
2002)
Management of Procurement (October 2002)
Financial Aspects of Corporate Governance (October 2002)
Best Value Report (October
2002)
Best Value Opinion and Certificate (20 December 2002)
Financial Statements audit (due November 2002)
