Select Committee on Public Accounts Minutes of Evidence

Examination of witnesses (Questions 140-159)



  140. I can take it, therefore, that before you came before this Committee you refreshed your memory of this document? (Twentieth Report indicated)
  (Dr Perry) Yes.

  141. You did, good. In that case I expect you will have the answers readily to hand to most of the questions that I want to ask of you. I now refer to the report. In 3.12 "What the Corporation has done to prevent a repetition of the Focus case", it talks of introducing a new series of development and maintenance visits and it says "The Corporation also changed the way it selected schemes for audit from a random approach to one based on risk." That was the agreed report. Having refreshed your memory of the Twentieth Report of this Committee you will notice that there it says: "We recommend that the Corporation look again at the frequency of their coverage, paying particular attention to the risk of fraud and irregularity and the need to ensure the proper conduct of public business." Why is it that it took from 1994-98 to implement the proposal that was there, the recommendation that was there, from the Public Accounts Committee last time?
  (Dr Perry) If I can give a more general answer and then with your permission—

  142. I would really prefer a specific one.
  (Dr Perry) If I could invite Mr Hennessy to give the detailed answer. I was going to say by way of introduction that there has been a sequence of actions taken by the Corporation which perhaps could have been faster, but at any given stage we consult quite widely with the stakeholders on changes in the regulation. We have moved to a very risk focused system. Mr Hennessy will be able to take you through the detail of that.

  143. So you would agree with me—I am happy to take Mr Hennessy's evidence—that four years on the face of it seems a hell of a long time to implement a very clear proposal from the last time?
  (Dr Perry) It did not take four years to implement the proposal, it took four years, if you like, to get to the end of the sequence of events. Actions commenced immediately after your previous report but it culminated in the lead regulation system in 1998. That was the culmination of the system.

  144. Perhaps Mr Hennessy will clarify for us.
  (Mr Hennessy) I will try. The first thing we did do was in 1994 when we carried out an internal audit of our scheme audit function following the report. One of the main recommendations that came out of that—

  145. This was your internal auditor?
  (Mr Hennessy) Our internal auditor of our own system. One of the conclusions was that we should move away from the random selection mode of schemes which are audited into one which was based on risk and primarily, therefore, in terms of amount, really higher cost schemes.

  146. You did that immediately?
  (Mr Hennessy) That was brought in in the beginning of 1995. We then had the issues of Focus which emerged towards the end of 1995 and once we were aware of those we set up two internal reviews, again in the beginning of 1996. One, again, carried out by our internal auditor to look at what had gone wrong particularly with the operation of the internal audit functions, if anything and, secondly, what had gone wrong on the performance audit side. That concluded, amongst other things, at—

  147. Mr Hennessy, you are using the words "internal audit" again and I am not sure whether it is your's or Focus's or another housing association's audit?
  (Mr Hennessy) This initially was a report conducted by our own Director of Internal Audit looking at our own scheme audit systems.

  148. Looking at your own problems?
  (Mr Hennessy) Yes. Again, that concluded in the light of what particularly we had learned from Focus that the scheme audit systems, which were still being applied, notwithstanding the changes that had been made, were still too narrowly focused and still needed to be reviewed. So on the back of that a separate review was carried out to look at how we could best integrate the different kinds of regulatory audits, investigations, that we did bringing together the scheme audit side of things, the technical review, and the performance investigation side looking at the controls and the management of the organisation.

  149. If I can just ask about the performance audit because recommendation seven of the Twentieth Report, you will recall, states "The Corporation need to make faster progress in developing and publishing performance indicators to enable association performance to be compared. . . . . we look to the Corporation to press ahead with publication and use of performance data without further delay." How much delay was there in fact? What you have told me is that there was an initial action in response to recommendation five, looking at risk, but then when you did an internal audit within the Housing Corporation you did a subsequent review because you still thought things were not tight enough and at that subsequent review you then came to the conclusion that the PAC had already reached in January 1994, that the Corporation should press ahead with the publication and use of performance data without further delay. How much delay was there?
  (Mr Hennessy) That delay, just to clarify, did not specifically cover performance indicators, it covered the methodology we use to check systems in housing associations.

  150. I take it you do now publish performance data?
  (Mr Hennessy) We do.

  151. How long did it take to publish the performance data from that recommendation and was it a third review that got you doing that?
  (Mr Hennessy) No, the performance indicator work was done in parallel for separate reasons in terms of a wider application of how we assess and publicly inform people of how an association is performing. That was an exercise running in parallel with what I am talking about, which was a specific review.

  152. So when did you start publishing the performance indicators?
  (Mr Hennessy) I am not sure I can give you the exact date on that now but I know we have been publishing them for at least two years.

  153. At least two years you have been publishing them. In other words, it may be that it took you as long as four years from the publication of the previous PAC Report with that very clear recommendation to implement that recommendation? Could you please provide the Committee with a note on exactly when it was because I do not want to hold you to 1998 if you are doubtful about it. I think it is important that the Committee is clear about just how long it took[8].

  (Mr Hennessy) Certainly[9].

  154. Thank you very much. Before I move on from there, I think the Corporation has a cycle of visits, inspection visits?
  (Dr Perry) It did then. We are moving to a less regular system, more of a risk based system, so they can get a random visit now.

  155. With respect, Dr Perry, from what your colleague has just told me, Mr Hennessy has told me that you have moved away from regular visits to risk based assessment visits. What I am trying to ask is presumably there is a planned coverage so that you bring forward those that are seen to be at greatest risk and you move around to ensure that coverage is over a period of time. Can you tell the Committee whether your planned coverage is on target, whether your cycle of visits is on target? One of the problems that this Committee found in 1994 was that your inspection visits had fallen severely behind the planned cycle despite the fact that there had been an increase in staff to cope with it. How are they doing now?
  (Mr Hennessy) The nature of the visits has changed now as well, so it is not quite comparable. What we do now, if you take the issue under particular consideration here in terms of the risk on development, is every year we look at setting up an annual risk assessment for the RSLs that we are responsible for, to identify which in that year we think need a particular visit to to check, what we call a Development Management Review check, to check the controls and development, to look at the specifics of the schemes they have done. That is based on a number of issues which are on their past performance record, problems we are aware of—

  156. We are very short of time. I appreciate that you will probably be able to inform the Committee of a lot of things that we do not know about the nature of this but what we are keenest to find out is whether, in fact, you are in line with your own schedule and whether you are current or you are behind your planned schedule?
  (Mr Hennessy) As far as I am aware those plans are achieved every year on that issue. The inspections visits are not on a fixed cycle because they are dependent on having issues to investigate. There is a third area which is validation checks where we go in to associations at least every three years to check that the information they have given us is correct and it works in practice. There are different things in operation.

  157. So, to the best of your knowledge on all three types of visits you are up to target?
  (Mr Hennessy) As far as I am aware.

  158. Could you just confirm that in writing to the Committee[10]?

  (Mr Hennessy) Yes[11].

  159. It says in the report: "Since March 1996 the Corporation has required that each registered social landlord's financial statements include a statement about its systems of internal financial control." That is since March 1996. Again, you will be familiar with recommendation eleven from January 1994 which states: "We are concerned that the Corporation have no national data on the extent to which associations have an effective system of internal audit, and we note that the National Audit Office's examination found that a high proportion of associations did not have such systems." It took two years and a bit to get there. It says here in this report that it has been "required" and what I would like to know from you is has it been complied with?
  (Dr Perry) If I can take that first. It should have taken less time than it did. I think the discovery of the fraud within Focus and the stories that told us about the lack of internal controls made the task much more urgent and the Corporation applied some urgency to it.

8   Note by Witness: The Housing Corporation first published performance indicators in January 1995, based on 1993-94 data, ie at the first available opportunity following the recommendations of the Committee of Public Accounts Twentieth Report, 1993-94 session. Our supplementary memorandum summarises our actions on each of the matters Members enquired about. Back

9   Note: See Appendix 1, page 18, (PAC 1999-2000/296). Back

10   Note by Witness: We anticipate completing our programme of regulatory activities to target in 2000-01. Our supplementary memorandum sets out the types of regulatory visit and our performance against target over the previous five years. Back

11   Note: See Appendix 1, pages 18-19 (PAC 1999-2000/296). Back

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