Appendix T:
Internal Audit

Background

Thanet’s IA department has 5.5 full-time staff and reports to the Director of Finance. There is no formal relationship with the benefits section, that is, there are no regular meetings or joint forums, but the day-to-day working relationship is said to be good. The current staff have a mixed background of local government finance and commercial accountancy, but one member of staff has several years’ experience of HB. Other than this former HB officer, they have not received any consistent training on HB. They have limited fraud experience drawn from occasional fraud investigation as part of the broader remit of IA work.

IA has a limited training budget which is usually spent on training in audit skills, technical briefings (for example on IT) or new legislation. However, the IA section library contains guidance on HB.

Role of Internal Audit

The corporate role of IA is to provide assurance across all council activity. With particular regard to benefits, the role is primarily seen as ensuring probity. IA has developed a prevention of fraud and corruption policy statement and is notified about cases of internal fraud.

Findings

Thanet’s total annual expenditure amounts to about £71 million. Of this, £45 million is spent on the administration and payment of benefits. Expenditure on benefits accounts for about 65% of total council expenditure.

Risk assessment

Although IA has been involved in an assessment of risk following particular instances of internal fraud, at the time of the on-site inspection we were not told that a risk assessment had been conducted on the overall threats associated with the administration of benefits. In subsequent discussions we have been told about this risk assessment.

Allocation of ‘audit days’

Demands on IA create conflicting priorities for them to manage. IA produces an annual business plan which is approved by the Director of Finance. This plan describes the allocation of available audit days to various aspects of council business.

With regard to HB administration, IA intends to audit all the components of the end-to-end process within a 3-year period. The following table shows the audit days allocated to different parts of the council’s business in 1997/98. (The areas listed are not exhaustive.)

Source: BFI inspection

In 1997/98 IA planned to spend 1.8% of available audit days on providing assurance that the administration of HB was efficient and secure. This level of planned activity was inadequate to provide the required level of assurance. In fact Thanet halved this planned allocation and in practice devoted less than 0.8% of available days to auditing HB administration.

A significant proportion of IA time is spent on activity which, arguably, should be managed elsewhere. For example:

• 12% of allocated time was spent on project management work connected with the implementation of the new IT system
• a significant proportion of time was devoted to areas which are primarily an accountancy function:

- 5% of time was spent on ‘non-audit’ work. This was primarily due to increased demands as a result of changes in VAT regulations
- 9% of time was spent on ‘routine’ work, which includes dealing with the reconciliation of income collection and deposits.

Conclusions

Thanet does not make effective use of IA. Although there can be no direct correlation, it is not sufficient to devote 0.8% of IA time to an area responsible for 65% of total expenditure.

The role of IA is to act as a further internal control, providing continuing assurance of the probity, efficiency, quality and robustness of business delivery mechanisms. To achieve this, audits must be comprehensive and sufficiently detailed to thoroughly test that mechanisms operate to required standards. It is good practice for IA to be an integral part of the internal control system of any LA responsible for administering large sums of money.

Thanet runs a number of risks in giving such low priority to this area of work, for example:

• the threat of internal or collusive fraud may be increased
• there is no assurance of the quality and integrity of the subsidy claim.

In addition, a comprehensive audit could benefit Thanet’s business by:

• increasing levels of accuracy
• reducing levels of appeals, and associated costs
• reducing the risk of incorrect payment
• improving assurance of the security of the IT systems
• increasing confidence of the discharge of duties under section 151 of the Local Government Act 1972, which includes an obligation to safeguard an LA’s financial affairs.

Thanet should ensure that it:

• gives IA staff sufficient training to conduct a detailed audit of the HB administration
• develops and implements an action plan for a comprehensive audit of the end-to-end benefits payment and administration. This must include as a minimum:

• setting a timescale for the audit
• identification of, and commitment to, the number of audit days for the audit
• a process to ensure the implementation of any recommendations arising from the audit
• a proposal for ensuring that members have an appropriate level of continuing assurance

• considers setting up an audit committee to oversee and give formal approval to the IA section business plan
• considers moving some of IA’s current responsibilities elsewhere within the council, if they are based on history rather than business sense.