Examination of Witnesses (Questions 140
- 159)
MONDAY 13 NOVEMBER 2000
SIR JOHN
BOURN, DR
NORMAN PERRY,
MR BILL
HENNESSY AND
MR RICHARD
CLARK
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 17 (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 (PAC 1999-2000/296). Back
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