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Follow-up to external audit annual letter for 2000/01

Report: 4
Date: 19 March 2001
By: Treasurer

Summary

The report provides follow-up to the external audit annual letter on accounts compliance and control weaknesses.

A. Recommendations

  1. Members are asked to consider the report.

B. Supporting information

1. This Panel received the draft letter from the District Auditor at its meeting on 13 December 2001. A copy of the letter was considered by the Finance, Planning and Best Value Committee on 17 January 2002 and the proposed follow-up actions contained in the action plan prepared by the Treasurer and attached at Appendix 1 were noted. 

2. There are two items which require a follow-up with this Panel – accounts compliance and control weaknesses. 

3. The auditor’s comments and the follow-up actions are outlined below:

External auditor’s comments in the annual audit letter

1. Accounts compliance

The accounts did not comply with the CIPFA Best Value Accounting Code of Practice or with the new accounting standard on charging for the depreciation of fixed assets. These matters, together with the need to account more transparently for pensions, will have to be resolved for 2001/02. 

Follow-up actions

BVACOP

Measures have been set in place to deliver the appropriate analysis required for the Consolidated Revenue Account in the 2001-02 final accounts. The required analysis will be produced by an MS Excel driven spreadsheet model, which will take data from the Authority’s management accounts and reformat in BVACOP presentation style. The model has been developed and will continue to be refined in the coming months.

FRS 15 (the charging of depreciation)

In conjunction with the MPS Estates Group in Property Services Department the MPS Finance Directorate will undertake work with the aim of allowing compliance with FRS 15. It is envisaged that this will result in the execution of a table-top exercise which will calculate depreciation charges based on the existing fixed asset values. The depreciation charges flowing from this model will be applied to the Consolidated Revenue Account as required by the SORP. It is not intended to reflect these depreciation charges directly in the Authority’s detailed management accounts for 2001-02, but charges will be available for any BVACOP performance measures which require depreciation costing.

Pensions

Corresponding figures on the balance sheet at 31 March 2002 will have a more robust justification. We intend to use actuaries to provide better support for figures used for uniformed staff lump sum commutation reserves and provisions. We will also discuss early on in the accounts closure process the presentation of the pension figures with external audit.

External auditor’s comments in the annual audit letter

2. Control weaknesses

Significant weaknesses persist in respect of controls over billed income and the management of suspense accounts. 

Follow-up actions

The monitoring of control and suspense accounts is the responsibility of the Corporate Accountancy team within the new Finance Directorate structure. Every ‘live’ balance sheet account has an identified and responsible MPS staff member. Reconciliation and analysis details are held by the Corporate Accountancy team. Capita who are responsible for the payroll related control accounts, are met with monthly to review reconciliation etc. Detailed procedure manuals are currently being developed. All control/suspense accounts are reviewed monthly as part of the reporting process. A quality control process exists that covers the standard of working papers of reconciliation. 

C. Financial implications

None directly arising from this report.

D. Background papers

None.

E. Contact details

Report author: Peter Martin, Treasurer, MPA.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1: Annual Audit Letter 2000/2001

Follow-up actions

The audit letter does not contain formal recommendations but it makes a number of points which we need to ensure are addressed. The following table seeks to identify all the relevant points, provides an initial comment where appropriate and indicates the process for addressing them. The headings relate to the sections of the annual letter.

External auditor’s comment Initial response Process
Accounts
1. We are minded to qualify our opinion on the financial statements because of reservations about the adequacy of the provisions set aside to meet third party and police pension liabilities. (Subsequently confirmed in the opinion to the accounts.) The two issues require separate consideration. The issue of accrued third party (or insurable) liabilities is addressed in the notes to the accounts. The position can be rectified over a period of years as relevant information is captured. There is probably a resource issue. The pension liabilities item is primarily an issue of finding resource to increase the reserve. Treasurer to report to FPBV Committee to secure agreement to a strategic response.
2. The accounts did not comply with the CIPFA Best Value Accounting Code of Practice or with the new accounting standard on charging for the depreciation of fixed assets. These matters, together with the need to account more transparently for pensions, will have to be resolved for 2001/02.  These matters are being actively addressed. Treasurer to report to Audit Panel on the steps being taken to ensure compliance in 2001/02.
Financial aspects of corporate governance
Financial standing
3. The Authority’s financial position is precarious and is of great concern. The current weaknesses in budgetary control arrangements reinforce the need to build up sufficient balances to meet unforeseen needs. Cultural change initiatives that support local accountability and financial control will be essential pre-requisites to driving forward the improvement agenda….The Authority must take action to ensure that future plans and budgets allow for a prudent level of reserves. 		 These comments relate to the Authority’s reserves policy generally and to the initiatives to improve financial management in the MPS. They need to be considered in the context of an overall strategic approach. A medium term financial management strategy is being developed.  Treasurer to report to FPBV Committee as part of consideration of the overall strategy for improving financial management. 
Systems of internal financial control 
4. Internal audit need to improve on the speed with which they deliver their work and focus more on the resources they consume in delivering audit products…. The MPA should establish a mechanism by which progress on internal audit recommendations can be followed up. 		 Internal audit has responded to the external audito’s report on their performance. The Audit Panel has agreed arrangements for following up internal audit recommendations. Audit Panel to receive the external audit report on internal audit. The Panel to confirm their follow up arrangements.
5. Significant weaknesses persist in respect of controls over billed income and the management of suspense accounts. These control weaknesses have been previously identified by KPMG in their audit work on behalf of the NAO prior to the establishment of the MPA. Director of Resources to report to the Audit Panel on actions to remedy the weaknesses.
6. Our principal concern is the lack of high level controls, such as detailed budget reports and system reconciliations.  This should be addressed as part of the overall programme for improvement of financial management. It should therefore be included in the strategy referred to in item 3 above. Treasurer to include with report in item 3.
Legality of financial transactions
7. There is a need for the arrangements concerning liaison between the monitoring officer and the MPS legal team to be clarified. 		 Clerk to report to FPBV Committee
8. Advice on legal or human resource implications should be included in all reports. This can be dealt with readily in relation to human resource implications and just requires an executive decision. However there is an issue about the internal capacity of the MPA/MPS to address legal issues on a range of subjects as a matter of routine. There is a need to give further consideration as to how assurance can be provided that relevant legal advice has been taken. Clerk (Secretariat) to action in relation to HR implications. Clerk to consider with Commissioner’s representatives in relation to legal implications.
9. There is a need to consider the obligations the MPA/MPS needs to place on its contractors to ensure their compliance with the Human Rights Act. Clerk to consider with Commissioner’s representatives and report as appropriate.
Standards of financial conduct and the prevention and detection of fraud and corruption
10. There remains the need for a global MPA anti-fraud and corruption policy to be introduced. It is recognised that there are already substantial initiatives within the MPS to address fraud and corruption. The requirement here is to have a single policy document approved by the MPA which provides an overall context.  Treasurer and Director of Resources to report proposals to the Audit Panel
11. MPA/MPS need to improve the level of control exercised over the receipt of gifts and hospitality and declarations of pecuniary interest. Clerk/Treasurer to review arrangements and bring forward proposals to the Audit Panel.
Performance management
Best value performance plan 
12. This section refers to the Audit carried out earlier in the year which has already been reported to FPBV Committee 
Performance information
13. No action required
Use of resources
14. This section refers to reviews on specific topics Individual audit reports to be considered by appropriate MPA committees.

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