A Whitley Pump opinion
Much was made by the audit & governance committee on 18 November of the problems caused by the transition from the previous auditors, KPMG, to the new ones, Ernst & Young, who were appointed by the Audit Commission to audit Reading Borough Council (RBC) for the next three years.
It is questionable if the change should have had the impact that we are led to believe. The audit results report lists a number of concerns that should worry Reading residents.
Financial reconciliation irregularities
The auditors explained :
It is the Council’s responsibility to develop and implement systems of internal financial control and to have proper arrangements to monitor their actual adequacy and effectiveness. Our responsibility as auditor is to consider whether the Council has arrangements to satisfy itself that this is indeed the case.
We found at year end that reconciliations for a number of control accounts were still being completed when we started the audit and this caused us further delays.
Adjustments were required to these balances during the audit and the auditors said that £35,000 remained unreconciled in RBC’s main bank accounts. This may be small when compared to the council’s net budget of £124.9 million, but uncertainty over cash and bank balances is always a cause of concern.
Membership of the audit and governance committee
Ernst & Young recommended a review of the composition of the audit & governance committee because the Chartered Institute of Public Finance and Accountancy (CIPFA) has issued guidance that council leadership should not be on such committees. Councillor Jo Lovelock, the leader of the Council, and councillor Tony Page, the deputy leader, are currently on this committee.
The current members of the council’s audit & governance committee are:
chair councillor David Stevens (Conservative, Thames ward),
vice-chair councillor Jo Lovelock (Labour, Norcot ward),
councillor Eileen McElligott (Labour, Church ward),
councillor Emmett McKenna (Labour, Whitley ward),
councillor Tony Page (Labour, Abbey ward),
councillor Liz Terry (Labour, Minster ward),
councillor Tom Steele (Conservative, Kentwood Ward).
Value for money
The council’s external auditors were required to come to a conclusion on whether “proper arrangements” were in place to secure economy, efficiency and effectiveness in the council’s use of resources.
This covers the council’s arrangements to :
- take informed decisions,
- deploy resources in a sustainable manner, and
- work with partners and other third parties.
They delivered an adverse conclusion on this and listed a number of failures in RBC financial management:
We found that the financial and performance information used by the Council is not always accurate and reliable and therefore did not help informed decision making. This is demonstrated by the financial position that the Council currently finds itself in and the need for significant savings.
We found that the financial reporting was not reliable as it did not identify the amount of the financial pressures that the Council faces in 2016/17 and in particular the overspends in children’s services. The overspend in children’s services is greater than predicted at the beginning of the year and we understand that Officers are working hard to identify the true extent of it.
And finally, they said:
We found that planned action had not been taken to achieve sustainable savings during 2016 that may have prevented the need for significant savings to be made as a matter of urgency in the 2016/17 budget.
The next policy committee on 5 December 2016 will receive the most up-to-date budget monitoring report which shows a forecast overspend of £7.6 million as well as proposals to make more cuts from 2017. About £6.7 million of this overspend comes from RBC’s children’s, education and early help services which were rated ‘inadequate’ by Ofsted this year. Addressing these failings is costing more than budgeted, so savings expected in this area for 2016/17 are now unachievable.
This means that up here on Katesgrove Hill, within the sixth most deprived ward of Reading, we are not getting the services from the Council that we expect. We are concerned about what is really going on down in the valley between the Kennet and Holy Brook at the Civic Centre. In an era of budget stringency it is disappointing that reporting cannot be relied on.
Our evaluation of the situation suggests some actions that need to be taken to put matters right:
1. Is the council’s internal audit, an important part of the governance and oversight structure, concentrating on the right things?
There is more to an internal audit than the financial audit, but did internal audit reports have anything to say about the council’s failure to implement key internal controls such as basic reconciliations of cash and bank accounts? The (draft) annual internal audit report delivered to the audit and governance committee on 21 July is silent on this.
Although the Council’s internal audit discusses some of things highlighted by Ernst & Young in their ‘value for money’ report, the internal auditors took a different approach:
Internal Audit were requested to undertake some targeted reviews during the year to ensure proper processes are being followed and the Council can demonstrate it is spending appropriately.
They reviewed a number of the usual suspects, such as stationery costs, as well as topical items of expenditure related to temporary, contract, interim and ad-hoc staff. They did not review the reliability and timeliness of management information.
In 2016/17 a review was undertaken on the council’s adult and children social care system (MOSAIC) and the summary of audit findings was presented to the audit & governance committee on 29 September 2016 which stated that, despite raising concerns about financial reporting from the system:
The reason for the limited number of recommendations and positive assurance opinion is due to recognition that Mosaic and Fusion interfaces require development and although inefficient, manual interventions provide the basis for reasonable financial reporting.
2. Improve governance.
The the audit and governance committee terms of reference are inadequate when it comes to oversight of financial management information.
The chairman of the committee, David Stevens, has been in the position for most years since 2008/9 and so a change of chair looks to be a good idea given the circumstances.
The first two actions on the annual governance statement improvement plan for 2016/17 are all but the same as for 2015/16. This year’s additions are in italics:
[AGS 1] Develop, manage and deliver a budget and financial management strategy to operate within available resources over the period to 2019/20. Draft four year financial sustainability plan to be submitted to government.
[AGS 2] Strengthen financial and budget management throughout Council services and provide effective financial management support considering reducing budgets and the changing nature of income.
The committee needs to strengthen its review, and challenge papers put before it for accuracy, consistency, transparency, coherence and integrity. It is not enough just to ask if the numbers are “robust”, as was asked at the 29 September Audit & Governance Committee [00:42:00].
The audit committee should ensure the removal of bad practice described in the audit report from within the finance department.
Will it all come crumbling down?
3. Increase financial expertise and interest.
Councillors and committees need to increase their expertise and interest in financial matters in order manage budgetary issues and to challenge the financial reports that are presented to them.
The 26 September 2016 policy committee represents a case study of the current financial chaos in which the council and councillors find themselves.
The agenda included several items of direct financial interest; an update on the Council’s financial position, a budget savings proposal, the Arthur Hill Pool, the introduction of green waste collection charges, and the budget monitoring report 2016/17. Into this mix was thrown an opportunity to participate in an offer made by the government to obtain a degree of funding security by publishing a four year financial sustainability plan.
The proposal on the Arthur Hill Pool was postponed because the petition to stop the closure had reached 1,500 signatures and had triggered a Council debate, which took place on 18 October 2016. This made it impossible to deal with the recommendations in the update on the council’s financial position as planned.
After the interim managing director had spoken on the report, councillor Jo Lovelock said [00:27:30]:
I don’t think any of us can exaggerate the scale of the issue that we are facing in terms of ongoing government cuts and we can’t take the amount of money that the government is taking away from us out of a budget of a small council like Reading and not expect it to have a direct impact on services; everything from Arthur Hill to libraries to everything else. We are in a very difficult position; we have to make a legal budget each year, unlike the Government who can apparently go on having a deficit… I think it’s right that the managing director reminds us of the scale of the issues before us… We will need to return later on in the Autumn to even more proposed savings which will be painful.
22 minutes were spent debating the introduction of a £50 charge for green waste bin or £15 for green waste bag collection per annum. Although a surplus of £500,000 might be generated from these charges, there were warnings about the number of customers who could drop out of the service and instead cause additional costs at the Island Road waste facility. The administration costs of dealing with concessionary charges, invoices to customers and processing payments were not examined.
The last item on the agenda, the budget monitoring report 2016/17, showed a £6.8 million forecast overspend. Four minutes were spent talking about this report. The overspend for each directorate was shown in a table on the front page of this report; these figures did not add up and the Whitley Pump have asked for a correction and an explanation.
Councillors spend a lot of time moaning about the Government’s budget cuts, trading party political insults directed at the Government, the previous Government, other councillors, talking about how they are spending their own budgets and why it is difficult to control costs.
It is worth listening to the webcasts of these items and reading the reports to form an opinion as to whether officers, councillors and Reading residents have enough information to enable them to understand what is going on.
4. Raise the profile of regular financial reporting to Council committees by bringing it forward in the agenda.
Why is the budget monitoring report is the last item on the policy committee agenda? Is it really a case of last but not least? Other council meeting agendas would suggest that there is a pecking order here and last really does means least.
At the end of sometimes a long council meeting a prolonged discussion on finances would not go down well with councillor colleagues.
5. Reduce reliance on contractors.
It is unrealistic to expect a finance department to implement major systems changes, manage budget cuts as well as keep on top of the day job. This applies as much to finance as to any ‘front line’ department. There is at least one criticism in the audit report on the reliance on a contractor and complex spreadsheets in producing year-end accounts. This is a single point of failure which should strike a chill into the hearts of the audit and governance committee.
6. Plan the recovery.
The deadline for submission of accounts on the year-end timetable was 30 September 2016. This was not met, and six weeks of financial management time has been lost to finalising the audit.
As well as lost time, bad accounting practice reported by the auditors has led to increased audit costs above the budgeted approximate of £130,000, as well as additional effort spent in explanation and documentation which means distraction from managing council finances.
An Interim Strategic Finance Director has recently been appointed, but at what cost?
This, on top of the current financial crisis into which the council is spiralling, is likely to prove impossible to manage. The audit and governance committee should request and rigorously challenge a realistic plan on how financial management and reporting can recoup this lost time.
At the request of the managing director, the next policy committee was deferred from 28 November to 5 December 2016.
- Ernst & Young audit report into Reading Borough Council
- Audit & Governance Committee 17 November 2016 (not webcast)
- Audit & Governance Committee 29 September 2016 papers and webcast
- 26 October 2016 Policy Committee papers and webcast
- Greens and Labour disagree over four year funding settlement
- 5 December 2016 Policy Committee papers
- Audit & governance committee terms of reference