Question 80 (Mr Richard Bacon): Minutes
of Home Office Audit Committee Meeting
Supplementary memorandum submitted by the National
Audit Office
Date | 29 November 2005
| Time | 11:30-14:30 |
| Location | GEB Board Room P3.52
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| Chairman | Patrick Carter |
Secretary | Linda Hood |
| Members Present | Chris Littmoden
Bob Chilton
David Ross
Richard Rosser
Gill Lungley
| In attendance | John Gieve
Helen Kilpatrick
Lin Homer (item 5 )
Darren Box (NAO)
Fiona Spencer
Carl Moynehan
Christine Stewart (item 6)
Aileen Murphie (item 4)
Trevor Marchant (item 6)
Steve Blake (item 6)
Tracy Barker
Tim Hurdle
Kate Collins (item 4)
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1. MINUTES OF
PREVIOUS MEETING
1.1 No amendments were received to the minutes of 14
July 2005.
2. MATTERS ARISING
Approval process for sub-£40 million projects
2.1 Significant projects and programmes (those with a
lifetime cost of more than £40 million) require approval
from the Group Investment Board. IND has established an approval
mechanism for major projects that fall below the £40 million
level. NOMS are establishing a similar system to that used by
IND. The rest of the core Home Office are yet to establish an
approvals mechanism.
Action
Helen Kilpatrick to provide the March Audit Committee
with an update on the progress of an approvals mechanism for Core
Home Office
GEB Review of Internal Audit Resources
2.2 The Home Office internal audit currently obtains
funding from a number of different sources although all the "headcount"
sits with the Finance and Commercial Group. With the current focus
on headcount, this mis-match means that it is difficult to ensure
that limited resources are targeted on a risk basis. The GEB therefore
agreed that each GEB area would fund internal audit within their
area by providing both funds and headcount.
2.3 A draft paper that explains the transition process
from the current situation has been discussed with key representatives
of each GEB area. It is expected that this paper will be formally
issued before Christmas, in time for the new arrangements to come
into place by 1 April 2006.
2.4 Departmental Reform
The Audit Committee referred to paragraph 3.3 of the July
2005 Audit Committee and asked if a document had been issued on
the shared vision. John Gieve advised that a new approach document
had been issued and he would provide the Audit Committee members
with a copy.
Action
John Gieve to provide Audit Committee members with "shared
vision" document
3. PROGRAMMES AND
PROJECTS
3.1 The Audit Committee were advised that the Home Office
has around 40 ongoing projects but only the mission critical ones
are reported to the Committee. There are five gateways (1-5) and
these are largely tied into the procurement process with stage
5 being a review of benefits realised. However, for many programmes
progressing past gateway 1 may take significant time and therefore
a gateway 0 was introduced to ensure that major programmes still
benefit from these types of reviews. It was also noted that across
Government few projects had progressed past gateway 4. However,
the Home Office expect to put Adelphi through gateway 5 in the
New Year.
3.2 Gateways had initially been established to provide
a confidential report to the "Senior Reporting Officer"
on the project process. However, in future, when a project receives
two consecutive "red" gateways then this will automatically
lead to the NAO (Comptroller and Auditor General) being informed
by the Office for Government Commerce (OGC)
Action
NAO to report back at the next audit committee on the
actions that it may take following the receipt of two red gateways
4. FINANCIAL ACCOUNTS
AND AUDITS
NAO progress update
4.1 Darren Box presented a paper on the progress of the
2004-05 Home Office Resource Account audit. The NAO had still
not received a full set of accounts from the Home Office as the
draft accounts received in September were of an "unacceptable
quality" and "displayed a very limited understanding
of how different figures within the financial statements relate
to one another". In addition, serious control weaknesses
had been identified during the audit and including: weaknesses
in IT controls; lack of robust year-end or monthly bank reconciliation
and some weaknesses in contract management and budget monitoring.
4.2 Carl Moynehan advised the Committee that there had
been issues in producing the accounts and he had taken the decision
in October to rebuild the accounts. He advised that within two
weeks he expected to be able to deliver a good quality set of
financial statements for the NAO to review. He was therefore confident
that he would meet a revised deadline of 14 December. The bank
reconciliation was also progressing well and now hoped that it
would be reconciled by the end of December.
4.3 Darren Box advised that subject to receiving good
quality accounts and a robust bank reconciliation he would make
every effort to undertake all the audit work necessary to provide
a clear opinion by 31 January 2006. He cautioned that if the bank
was still unreconciled then the accounts would be qualified and
that the accounts must be received by 14 December to give the
NAO any chance of completing the audit by the statutory deadline.
4.4 The worse case scenario was that a disclaimed opinion
would be issued on the basis that the NAO had insufficient confidence
in the underlying accounting records. This would be accompanied
by a Report to Parliament and could lead to the Home Office being
called before either the Home Affairs Select Committee or, possibly,
the Public Accounts Committee, to explain.
4.5 The Audit Committee thanked the NAO for their report.
They also shared some scepticism on whether the Home Office would
be in a position to provide the NAO with all the information they
required in order to meet the deadline of 31 January 2006. However,
the Home Office should continue to make every effort to achieve
a clean audit opinion but if the 14 December deadline for providing
accounts to the NAO was missed then the Home Office should then
recognise the inevitable and focus on the accounts and audit process
for 2005-06.
Action
Darren Box to advise Tim Hurdle of the status of the Home
Office Accounts to be received on 14 December who would advise
the Audit Committee on status.
4.6 The Audit Committee was also concerned about the
underlying problems and weaknesses in the accounting and control
environment and how they might impact on the ability of the Home
Office to prepare timely and accurate accounts for the 2005-06
year.
4.7 Carl Moynehan explained that the Liverpool based
"Accounts Branch" did not have the necessary higher
level accounting skills to ensure that all reconciliations were
routinely performed and differences investigated and adjusted.
Steps were being taken to re-locate this "higher level"
work to London where he would be able to provide closer supervision
and employ more skilled staff.
4.8 The Audit Committee wanted further assurance, in
the form of a review, over the financial accounting processes
and in particular the ability of the Home Office to maintain good
accounting records from which the statutory accounts can be prepared
in a timely manner. This review should be independent and provide
steps on how the current situation could be avoided in future
years. The review should also add value and it was agreed that
the Chief Internal Auditor in consultation with the Home Office
Finance Director should draft a terms of reference for this review.
It was recognised that while this review was urgent it should
distract from completing the 2004-05 accounts and audit process
Action
Tim Hurdle and Helen Kilpatrick to establish an appropriate
review with the Terms of Reference to be agreed with the Chair
of the Audit Committee.
NAO VFM audits
4.9 Aileen Murphie presented her paper setting out the
key areas for value for money examination over the next two years
in the Home Office. The Committee enquired what changes had been
made as a result of recent vfm reports.
Action
Aileen Murphie to look at the last six reports and see
what recommendations the Home Office has implemented and what
has changed.
Adelphi controls
4.10 Adelphi and Oracle based enterprise resource management
(Finance, Procurement, HR) system had replaced the previous accounting
system BASS which had limited functionality and had been implemented
when "cash" accounting was the method for government.
4.11 Kate Collins explained how the Adelphi system worked
including the controls that were in place. She had noted the NAO's
and internal audit's findings and was already working with Sirius
to address the weaknesses identified including concerns raised
about the system administration and the log in process which have
now been changed. Furthermore at a recent meeting, attended by
many government departments and their bodies, the Home Office
appeared to be leading the way in establishing good practice for
the control environment.
Action
Audit Committee to revisit in April 2006 to see if the
controls are working
5. RISK MANAGEMENT
Unsustainable pressure on custodial capacity
5.1 Christine Stewart presented a paper on the pressure
on custodial capacity.
5.2 The current capacity is 78,432, however this will
increase to 79,100 in June 2006. The population hit an all time
high of 77,823 on 1 November but this has since dropped to 77,421.
Historically the figures normally drop before Christmas but pick
back up again in the January. It is estimated that at the current
rate of increase population will exceed capacity by June next
year, but this could happen as early as March, weekly meetings
are held to check on population levels.
5.3 There are two means of managing this risk, either
by increasing capacity or a reducing the numbers in prison. In
respect of capacity, Buckley Hall prison will change from a female
to a male prison and the same could happen with Peterborough prison
but no decision has yet been made. In addition, there is a contingency
plan of using police cells that will increase capacity by a further
400. Another 1,300 spaces could also be brought on stream in Spring
2008, however, this may be constrained by available resources.
5.4 The Home Secretary and Lord Chief Justice are also
currently looking at measures to manage the demand and reduce
the prison numbers. These include looking at sentencing guidelines
and their implementation to increase the use of non-custodial
sentences such as Home Detention Curfew (electronic tagging).
Similar arrangements could also be used for prisoners currently
held on remand.
5.5 The final option of last resort would be "executive
release". In practice this would mean that prisoners nearing
the end of their sentence would be released earlier than under
the existing schemes.
5.6 John Gieve explained that the pressure on capacity
and mitigating actions carried two further risks for the Home
Office. Increasing pressure on prison capacity significantly increased
the risk of disorder and there was also a "credibility"
risk.
Systemic risks
5.7 Steve Blake presented a paper on systemic risks that
arose out of the 2003-04 Annual System Assurance Statement (ASAS)
process. A key finding was that the Home Office often responded
to key events by quickly establishing a review of the relevant
process or area. These reviews generally generate many recommendations
that the Home Office would accept and begin to implement. However,
while effective at managing the short term "political"
risk, little consideration was given to the affordability of these
recommendations and as a consequence many are subsequently dropped,
deferred or watered down.
5.8 John Gieve agreed that the Home Office needs to narrow
the gap between the handling of a response to a particular event
and implementing the identified actions. This will require a more
systematic process for assessing and agreeing the affordability
of proposals and of reporting this to Ministers. This could involve
being more explicit about those recommendations that are critical
as opposed to highly desirable. Furthermore, the monitoring of
progress against these recommendations could be improved.
Action
[Tim Hurdle/Steve Blake] to prepare a paper on how monitoring
of responses to key reviews can be improved
6. PERIODIC UPDATE
IND guidance project
6.1 A draft red report was issued to IND in October 2005.
IND recently transferred responsibility for this to David Stephens
and he will provide a response to the report after consulting
colleagues and discussion at the forthcoming project board.
6.2 A key finding was that this project was set up in
response to the Sutton report. However, after some good initial
progress the project had slowed and the project Board had not
met since December 2004. The Director General IND, Lin Homer,
accepted that the project had not made as much progress as hoped
and noted that IND needed to tighten up on following through internally
generated reports. In order for the guidance project to move forward,
David Stephens had taken responsibility and was establishing a
team that included resources from the compliance audit and performance
management teams.
6.3 It was also considered necessary to revisit the original
recommendations in light of the introduction of the new asylum
model in 2006, the points based system for managed migration in
2007 and e-borders and border management policy. Lin Homer also
noted a tendency to over complicate and issue `too much' guidance
and she asked that the team give some thought to this and to test
all guidance with front line staff first. She also noted that
in future guidance will be developed as the policy is developed.
Action
Lin Homer to e-mail a copy of her presentation on the
Sutton Programme to the Home Office Audit Committee secretary
to forward on to the members.
Lin Homer to provide an update to the Audit Committee
on progress made on the guidance project in six months (July 2006
Audit Committee)
7. REVIEW OF
INTERNAL CONTROL
Annual System Assurance Statement
7.1 It was agreed that this topic would be deferred to
the next audit committee as this would be after the 2004-05 accounts
had been signed off.
Action
Annual System Assurance Statement to be discussed at the
March 2006 Audit Committee
8. A.O.B.
NOMS Audit Resource
8.1 Tim Hurdle has written to Peter Brooke asking for
£100,000 to resource NOMS audit. To date Tim has yet to receive
a response from Peter, but he would put any response received
before the Audit Committee for consideration.
Action
Lord Rosser would check with NOMS for a response
Question 166 (Mr Richard Bacon): Papers submitted by the NAO
to the Home Office Audit Committee
HOME OFFICE
RESOURCE ACCOUNTS
2004-05 AUDIT UPDATE
FROM THE
NATIONAL AUDIT
OFFICE
INTRODUCTION
1. The purpose of this report is to update the Audit
Committee on progress with the audit of the 2004-05 resource accounts
and to draw the Committee's attention to a potential audit qualification.
QUALITY AND
TIMELINESS OF
DRAFT ACCOUNTS
2. The timetable agreed with the Home Office envisaged
the delivery of draft consolidated accounts for audit by 30 June,
with a view to certification by 30 September. The first draft
accounts were not received until 9 September and contained numerous
fundamental errors and internal inconsistencies, in particular
with respect to cash, Supply figures and Consolidated Fund Extra
Receipts. There were also material omissions or misstatements,
for example with respect to the valuation of the private prison
estate. A paper outlining all of the issues and errors in the
draft financial statements was provided to the Home Office on
29 September. To date, we have not received a revised set of financial
statements.
3. The unacceptable quality of the 2004-05 draft accounts
of 9 September reflect the continuance of some fundamental underlying
issues which we highlighted in our management letter on the 2003-04
accounts:
— The accounts display a very limited understanding
of how different figures within financial statements relate to
one another indicating skills and experience deficits within Accounts
Branch.
— The accounts showed little evidence of meaningful
management review at any level.
— With the notable exception of IND, there is no
evidence of the accounts production process being subject to any
proper project management disciplines.
— Issues raised in our previous management letters
have not been actioned and appear not to have been disseminated
to relevant staff around the organisation in some instances.
— The importance of accurate and timely financial
reporting needs to communicated from the top of the organisation
and reinforced by active engagement with the accounts production
and audit process.
CONTROL WEAKNESSES
4. In addition to late and poor quality financial statements,
serious control weaknesses have also been identified during the
audit. The weaknesses include:
— IT Controls: There is a lack of security within
key IT applications through the absence of unique identification
for system administrators, no audit trails, weaknesses in controls
over standing data such as the creation of supplier records, and
inadequate segregation of duties on both the Adelphi Finance System
and Immigration and Nationality Directorate asylum seeker systems.
— Bank Reconciliation: Bank reconciliations are
the most fundamental of all accounting controls as they enable
payment, receipts and cash balances to be validated to an external
source and provide assurance about debtor and creditor balances.
Due to difficulties in implementing the Adelphi accounting system,
the Home Office has been unable to reconcile its cash at bank
position. A consultant was employed for several months to rectify
matters and was able to identify £67 million worth of transactions
but a difference of £3.025 million remains at 31 March 2005.
Even though this difference has now been written off to expenditure,
we understand that the bank account is still not being successfully
reconciled on a monthly basis in 2005-06.
— General accounting controls: Other basic accounting
reconciliations and controls have not been performed, contract
management controls are variable and we have found several instances
where manual authorisation controls have lapsed.
— Budget Monitoring: Although there is a strong
budgetary control framework in place and detailed budgetary delegations,
the underlying quality of budgetary control across the Home Office
is variable and in many cases it is not sufficiently robust to
act as an effective mitigating control against fraud and irregularity
in payment processes.
5. A further cause for concern has arisen from out review
of Adelphi transaction data. It took six months for the Home Office
to supply us with transaction data that we were able to reconcile
successfully to the Adelphi general ledger. However, when the
gross transaction value of debits and credits within this data
was totalled, they each amounted some £26,527,108,436,994,
almost 2,000 times higher than the Home Office's gross expenditure
for 2004-05 and approximately one and a half times higher than
the estimated GDP of the entire planet. This suggests that something
has gone seriously awry with Adelphi processing during 2004-05.
We have yet to receive an explanation for what has happened.
6. Collectively, these control weaknesses expose the
Home Office to a high risk of fraud, irregularity, poor value
for money and waste in its financial operations.
IMPACT ON
THE C&AG'S
AUDIT OPINION
7. Taken together, the lack of IT and manual controls,
the inability to reconcile the cash at bank position and the absence
of a robust set of financial statements, mean that we need to
consider the impact on the audit opinion. At this stage we are
contemplating a disclaimer opinion on the accounts on the grounds
that fundamental control failures mean that we are unable to form
an opinion on whether the accounts are true and fair and whether
expenditure recorded in them is regular.
8. In the age of Faster Closing and pre-recess certification
targets, late qualified accounts are extremely damaging to the
Home Office's reputation, particularly with the Treasury who are
likely to exercise closer scrutiny over the unaudited resource
budget outturn submitted to them each summer.
THE WAY
FORWARD
9. It is still possible that a qualification can be avoided
if the Department is able to satisfactorily reconcile its bank
account and produce a cogent set of accounts. The Home Office
remains committed to retrieving the situation and is working with
consultants from Sirius to resolve the cash difference. Assuming
that matters can be satisfactorily settled, a substantial further
audit effort will be required to confirm that the accounts are
"true and fair".
10. Accounts will not be available in a finalised form
for the Accounting Officer to sign by the statutory deadline of
30 November. Furthermore, the Home Office has warned us that it
may be unable to present signed accounts to the C&AG by 31
January 2006, the statutory deadline for laying certified accounts
before Parliament.
11. We cannot issue a disclaimer opinion prior to 31
January 2006 as we have a professional obligation to consider
all evidence that can be made available within statutory timescales
and to undertake all possible audit procedures that might enable
a qualification to be avoided.
12. If the accounts cannot be certified by 31 January
2006, the Home Office should consider seriously whether it is
worth expending further time and resources on them. In these circumstances,
regardless of the status of accounts and the eventual audit opinion,
we would anticipate issuing a report to bring the underlying accounting
and control issues leading to late accounts to Parliament's attention.
13. Looking forward to 2005-06, plans have been drawn
up to transfer the financial accounting function to London from
March 2006 in order to improve the Home Office's ability to recruit
staff with the correct skills and to allow for improved and more
visible management control. We welcome these proposals.
OTHER ISSUES:
PRISON SERVICE
EQUAL PAY
CLAIM
14. Delays with the accounts mean that developments
in the Prison Service equal pay claim cases could necessitate
significant adjustments for post balance sheet events. The draft
accounts currently reflect a provision for £1.5 million in
the Prison Service accounts for the two lead cases, Bailey
& Others and Beechcroft, Martin & Others. Since
the Prison Service accounts were certified, however, the Service
has lost its appeal against the decision of the original Employment
Tribunal in Bailey & Others.
15. The second lead case (Beechcroft, Martin &
Others) is expected to be heard in the four weeks commencing
16 January 2006 so is likely to be concluded before the accounts
are certified. The Independent Expert appointed by the Employment
Tribunal in this case has already concluded that most of the claimants
perform work of equal value to their comparators thus reducing
the likelihood that the Service will win the case.
16. A further 2,500 claims have been submitted to the
Tribunal but are stayed pending the outcome of the 30 claims in
Beechcroft, Martin & Others. The key issue for the
2004-05 accounts is whether a provision should be recognised for
these stayed claims in view of developments on lead claims. We
believe that there is a stronger case for providing for stayed
cases in the 2004-05 accounts than there was in the 2003-04 accounts,
given the loss of the Bailey appeal. If the hearing in
January 2006 finds against the Service, we consider that there
would be an overwhelming case for recognition of a provision.
Even if the hearing is delayed, we note that the Prison Service
has agreed to enter talks with the PCS union to explore common
ground as a basis for a potential settlement, possibly involving
a one-off payment. Consultants have also been engaged to assist
in developing a job evaluation system. These actions appear to
be a limited acknowledgement that there are probable liabilities
associated with stayed cases.
17. A three month project is currently ongoing to estimate
the potential liability associated with stayed cases. This is
expected to be concluded by the end of the year. It is anticipated
that the result will be in the region of £30-40 million but
could be as high as £100 million. This estimate excludes
interest which is likely to be charged at around 7%. Further liabilities
may arise due to the Service's loss at Tribunal and on appeal
of its defence against the doubling of pension rights for officers
employed before 1987. This ruling if ultimately upheld could have
ramifications across the Civil Service but cannot currently be
quantified.
21 November 2005
Question 167 (Mr Richard Bacon): Letter from the Comptroller
and the Auditor General to the Permanent Secretary, Home Office
Following consideration of the matter at the Audit Committee[23]
on 29 November, I am writing to tell you that I may have to qualify
my audit opinion on the 2004-05 Home Office Resource Accounts.
The draft accounts presented to the NAO for audit on 9 September
contained material errors and inconsistencies which have yet to
be resolved by your staff. Consequently, the Home Office has been
unable to produce accounts for you to sign as Accounting Officer
by the statutory deadline of 30 November. Furthermore our audit
has identified serious internal control weaknesses in the following
areas:
— IT Controls: There is a lack of security within
key IT applications through the absence of unique identification
for system administrators, no audit trails, weaknesses in establishment
of supplier records, and inadequate segregation of duties on both
the Adelphi finance system and Immigration and Nationality Directorate
asylum seeker systems.
— Bank Reconciliation: Due to difficulties in implementing
the new Adelphi accounting system, the Home Office has been unable
to reconcile its cash bank position leading to an unexplained
difference of £3.025 million at 31 March 2005.
— General accounting controls: Other basic accounting
reconciliations and controls have not been performed, contract
management and budgetary controls are variable and manual authorisation
controls are sometimes by-passed.
The combined effect of the non-availability of accounts for
certification and fundamental weaknesses in internal controls
mean that I am currently unable to conclude that the accounts
are true and fair and that expenditure recorded within them is
regular.
To avoid a qualification, the Home Office needs to reconcile
the cash at bank position and produce a robust set of financial
statements. I understand that work is in progress to achieve this
and our staff are working together to secure a satisfactory outcome.
However, if accounts cannot be laid by 31 January I may have to
issue a report at that time to explain the absence of accounts
to Parliament.
I will keep you and your successor Sir David Normington in
the picture on significant developments and would be happy to
discuss these matters with you before you leave for the Bank of
England.
Sir John Bourn KCB
Comptroller and Auditor General
12 December 2005
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