Cunninghame House, Irvine.

19 May 2016

Audit Committee

You are requested to attend a Meeting of the above mentioned Committee of North Ayrshire Council to be held in the Council Chambers, Cunninghame House, Irvine on MONDAY 23 MAY 2016 at 10.00 a.m. to consider the undernoted business.

Yours faithfully

Elma Murray

Chief Executive

1. Declarations of Interest Members are requested to give notice of any declarations of interest in respect of items of business on the Agenda.

2. Minutes (Page 7) The accuracy of the Minutes of the meeting of the Committee held on 15 February 2016 will be confirmed and the Minutes signed in accordance with Paragraph 7 (1) of Schedule 7 of the Local Government (Scotland) Act 1973 (copy enclosed).

3. School Funds (Page 11) Submit report by the Executive Director (Education & Youth Employment) on the actions following the recent School Fund Internal Audit investigation (copy enclosed).

North Ayrshire Council, Cunninghame House, Irvine KA12 8EE Reports for Approval

4. Internal Audit Reports issued (Page 15) Submit report by the Executive Director (Finance and Corporate Support) on the findings of Internal Audit work completed between 1 February and 30 April 2016 (copy enclosed).

5. Internal Audit and Corporate Fraud Action Plans: Quarter 4 update (Page 29) Submit report by the Executive Director (Finance and Corporate Support) on progress made by Council services in implementing the agreed actions from Internal Audit and Corporate Fraud reports as at 31 March 2016 (copy enclosed).

6. Annual Governance Statement 2015/16 (Page 39) Submit report by the Executive Director (Finance and Corporate Support) on the Council's Annual Governance Statement for 2015/16 which will be included within the Annual Accounts (copy enclosed).

7. Accounting Policies 2015/16 (Page 47) Submit report by the Executive Director (Finance and Corporate Support) on the accounting policies which will be adopted in the preparation of the Council's annual accounts for the year to 31 March 2016 (copy enclosed).

Reports for Noting

8. Review of Housing Benefit subsidy certification 2014/15 (Page 61) Submit report by the Executive Director (Finance and Corporate Support) on the findings of the Audit Scotland review of Housing Benefit subsidy certification 2014/15 as set out at Appendix 1 (copy enclosed).

9. Audit Scotland report: Procurement in councils - Impact report (Page 93) Submit report by the Executive Director (Finance and Corporate Support) on the impact of the 2014 report 'Procurement in councils' (copy enclosed).

10. Audit Scotland report: Why the Accounts Matter (Page 121) Submit report by the Executive Director (Finance and Corporate Support) the findings of the recent Audit Scotland report entitled 'Financial Reporting and Scrutiny: Why the Accounts Matter' (copy enclosed).

11. Audit Scotland: Major Capital Investment in Councils - Follow Up (Page 129) Submit report by the Executive Director (Finance and Corporate Support) on the recent Audit Scotland follow up report on capital investment by local authorities (copy enclosed).

North Ayrshire Council, Cunninghame House, Irvine KA12 8EE 2 12. Audit Scotland report: Health and Social Care Integration (Page 181) Submit report by the Director (Health & Social Care Partnership) on the overview of the recent national report by Audit Scotland on the integration of Health and Social Care services and to provide a local context for North Ayrshire (copy enclosed).

13. External Audit Plan 2015/16 (Page 237) Submit report by the Executive Director (Finance and Corporate Support) on the External Audit plan for 2015/16 (copy enclosed).

14. External Audit overview of Internal Audit (Page 261) Submit report by the Executive Director (Finance and Corporate Support) the outcome of the annual assessment of the Internal Audit function by the external auditor (copy enclosed).

15. Local Scrutiny Plan and National Scrutiny Plan 2016/17 (Page 265) Submit report by the Executive Director (Finance and Corporate Support) on the Local Scrutiny Plan (LSP) for 2016/17 prepared by the Local Area Network of external scrutiny bodies and the National Scrutiny Plan, which brings together all LSPs and is prepared by the Strategic Scrutiny Group (copy enclosed).

16. Internal Audit Annual Report 2015/16 (Page 289) Submit report by the Executive Director (Finance and Corporate Support) on the work of Internal Audit during 2015/16 and provide an opinion on the governance, risk management and internal control environment of the Council (copy enclosed).

17. Corporate Fraud Annual Report 2015/16 (Page 307) Submit report by the Executive Director (Finance and Corporate Support) on the annual overview of the work of the Corporate Fraud team during 2015/16 (copy enclosed).

18. External Audit Action Plans: Quarter 4 progress update (Page 311) Submit report by the Executive Director (Finance and Corporate Support) on progress made in implementing the agreed action plans arising from the external audit of the Council's 2014/15 accounts (copy enclosed).

19. Strategic Risk Register 2016/17 (Page 317) Submit report by the Executive Director (Finance and Corporate Support) on the strategic risks faced by the Council in 2016/17 (copy enclosed).

North Ayrshire Council, Cunninghame House, Irvine KA12 8EE 3 20. Internal Controls update (Page 333) Submit report by the Executive Director (Finance and Corporate Support)Audit Scotland’s Annual Review of Systems of Internal Control (copy enclosed).

21. Urgent Items Any other items which the Chair considers to be urgent.

EXEMPT INFORMATION

22. Exclusion of the Public Resolve in terms of Section 50(A)4 of the Local Government (Scotland) Act 1973, to exclude from the Meeting the press and the public for the following items of business on the grounds indicated in terms of Paragraph 9 of Part 1 of Schedule 7A of the Act.

Non Disclosure of Information In terms of Standing Order 17 (Disclosure of Information) the information contained within the following reports is confidential information within the meaning of Section 50A of the 1973 Act and shall not be disclosed to any person by any Member or Officer.

22.1 Corporate Fraud Reports issued (Page 345) Submit report by the Executive Director (Finance and Corporate Support) on the findings of Corporate Fraud investigations completed between 1 February and 30 April 2016 (copy enclosed).

North Ayrshire Council, Cunninghame House, Irvine KA12 8EE 4 Audit Committee

Sederunt: Peter McNamara (Chair) John Ferguson Chair: Tom Marshall Catherine McMillan David O'Neill Robert Steel Joan Sturgeon Attending:

Apologies:

Meeting Ended:

North Ayrshire Council, Cunninghame House, Irvine KA12 8EE 5 6 Agenda Item 2 Audit Committee 15 February 2016

Irvine, 15 February 2016 - At a meeting of the Audit Committee of North Ayrshire Council at 10.00 a.m.

Present Peter McNamara, John Ferguson, Tom Marshall, Catherine McMillan, David O'Neill, Robert Steel and Joan Sturgeon.

In Attendance L. Friel, Executive Director, P. Doak, Senior Manager (Internal Audit, Risk and Performance) and A.M. Fenton, Team Manager (Internal Audit) (Finance and Corporate Support); A. Sutton, Head of Service (Connected Communities) (Economy and Communities); R. McCutcheon, Head of Service (Commercial) and T.Reaney, Senior Manager (Streetscene) (Place); M. Davision, Senior Manager (Democratic Services) and M. Anderson, Committee Services Team Leader (Chief Executive's Service).

Chair Councillor McNamara in the Chair.

1. Declarations of Interest

In terms of Standing Order 10 and Section 5 of the Code of Conduct for Councillors, Councillor Steel, as a member of the community association in question, declared an indirect non-pecuniary interest in Agenda Item 4 (Internal Audit and Corporate Fraud reports issued) as it related to the Corporate Fraud Investigation in respect of Economy and Communities at Appendix 1.

2. Chair's Remarks

The Chair, in terms of Standing Order 9.3, agreed to vary the order of business to allow earlier consideration of the Corporate Fraud Investigation in respect of a community centre, as referred to within Appendix 1 to Agenda Item 4 (Internal Audit and Corporate Fraud reports issued).

Page 1 7 3. Internal Audit and Corporate Fraud reports issued

Submitted report by the Executive Director (Finance and Corporate Support) on the findings of Internal Audit and Corporate Fraud work completed between 1 November 2015 and 31 January 2016. Appendix 1 to the report provided information on reviews which have been completed, including a Corporate Fraud Investigation in respect of a community centre.

Members asked questions on the community centre Corporate Fraud Investigation, and were provided with further information, on the following:-

 the interview process undertaken in connection with the preliminary investigation in particular;  the records retention arrangements with regard to lets;  the extent to which key finding 2 might be read as relating to the whole community association, rather than to an officer bearer on behalf of the association;  whether the community association should have been afforded a right of reply in this instance; and  whether there was any substance to apparent concerns that the centre could be at risk of closure.

The Committee agreed (a) to note the outcome of the Corporate Fraud Investigation carried out in respect of a community centre, as referred to in Appendix 1 to the report; and (b) that the Executive Director (Economy and Communities) submit a report to a future meeting of the Committee following completion of the actions identified as part of the investigation.

4. Minutes

The Minutes of the meeting of the Committee held on 19 November 2015 were confirmed and the Minutes signed in accordance with Paragraph 7 (1) of Schedule 7 of the Local Government (Scotland) Act 1973.

5. Internal Audit and Corporate Fraud Action Plans: Quarter 3 update

Submitted report by the Executive Director (Finance and Corporate Support) on the progress made by Council services in implementing the agreed actions from Internal Audit and Corporate Fraud reports as at 31 December 2015. Appendix 1 to the report provided details of the 12 actions not completed within the agreed timescales.

Members asked questions and were provided with further information in relation to:-

 the anticipated timescale for completion of the action on the Open Space asset registers;  the minimum value of items which require to be included on the Council's Asset Register;

Page 2 8  the revised timescale for completion of the actions in respect of training for Senior Information risk Owners and Information Asset Owners and the implementation of the Council Records Management Policy;  whether there were any Data Protection concerns arising from the outstanding action on the development of a standard procedure for handling requests for personal data;  the location of the car park referred to in connection with the APT Skidata parking system and the use made of the data in question;  whether the Council was in breach of any legislation as a result of the outstanding action on the handling of confidential waste;

The Executive Director (Finance and Corporate Support) undertook to confirm the minimum value of items which require to be included on the Council's Asset Register.

The Committee agreed to note (i) the current position with the implementation of Internal Audit actions and (ii) that the Action Plan Update report to the next meeting of the Committee would included revised due dates for all outstanding actions.

6. Internal Audit and Corporate Fraud reports issued

Submitted report by the Executive Director (Finance and Corporate Support) on the findings of Internal Audit and Corporate Fraud work completed between 1 November 2015 and 31 January 2016. Appendix 1 to the report provided information on reviews completed.

Members asked questions and were provided with further information in relation to:-

 the number of staff with responsibility for banking cash at the Transport Garage and operational issues which could result in potential access by other staff;  the origin of the cash referred to within the Transport Garage investigation;  progress in respect of the Agency Agreement referred to as part of the Corporate Transport Hub investigation;  whether the issues highlighted within the Health and Social Care investigation reflected similar findings previously reached in connection with Council Services;  the finding that Health and Social Care Partnership establishment income was not always being banked 'intact';  the potential for network backup tapes to be stored via 'cloud' technology;  key finding 1 in terms of the ICT Disaster Recovery and Business Continuity investigation;  any plans for the future replacement of Lotus Notes;  whether school funds would include fundraising monies; and  any contractual requirement to provide the information referred to in the Education Network Controls investigation.

Page 3 9 The Committee agreed (a) to note the outcomes from the Internal Audit and Corporate Fraud work carried out; (b) to approve the withdrawal from the previously approved 2015-16 Audit Plan of the two audits referred to at Section 2.5 of the report; and (c) that the Executive Director (Education and Youth Employment) submit a report to the next meeting of the Committee on action to resolve the issues identified as part of the School Funds investigation.

7. Internal Audit Plan 2016-2021

Submitted report by the Executive Director (Finance and Corporate Support) on the proposed Internal Audit plan for 2016-2017 and the indicative programme of work for the period 2017-2021. Appendix 1 to the report contained the full list of auditable areas and an indicative programme of work for Internal Audit for the 5-year period from April 2016 to March 2021. Appendix 2 contained the detailed Audit Plan for 2016-17.

The Committee agreed to (a) approve the Internal Audit Plan for 2016-2017; (b) note the indicative programme for 2017-2021; and (c) approve the indicators and targets set out at Section 2.7 of the report.

8. Brief Update on Confidential Waste

Submitted report by the Chief Executive on the development of the Confidential Waste Strategy.

The report summarised the work undertaken in respect of strategy development. The updated strategy has been issued to the Council-wide Data Protection Advisory Group (DPAG) for input and endorsement. Thereafter, the draft strategy will be taken to the Corporate Management Team for approval and subsequent adoption. A training programme will be developed and key staff within service trained to provide assistance within their teams. In the meantime officers are considering options around identifying appropriate confidential waste contractors.

The Committee agreed (a) to note the content of the report; and (b) that the Chief Executive submit an update report in six months' time.

9. Public Sector Internal Audit Standards: Internal Audit Charter and External Quality Assessment

Submitted report by the Executive Director (Finance and Corporate Support) on the updated Internal Audit Charter and the proposed approach to undertaking an external quality assessment of the Internal Audit service. The revised Charter was attached at Appendix 1 to the report.

The Committee agreed to approve (i) the Internal Audit Charter attached at Appendix 1 to the report and (ii) the proposed approach to undertaking an external quality assessment.

The meeting ended at 11.10 a.m.

Page 4 10 NORTH AYRSHIRE COUNCIL

Agenda Item 3 23 May 2016

Audit Committee

Title: School Funds

Purpose: To update the Audit Committee on actions following the recent School Fund Internal Audit investigation.

Recommendation: That the Committee note the actions that have been taken.

1. Executive Summary

1.1 The Audit was requested by the Senior Manager (Internal Audit, Risk and Performance), following an enquiry into cash that had been found belonging to a school fund. Subsequent checks revealed that the funds in this location had not been properly accounted for. As a result of the Audit, four actions were identified and these have now been fully implemented.

2. Background

2.1 The recent Audit carried out reviewed the administration of school funds. The main objectives were to ensure that:

 annual accounts were submitted promptly;  suitable arrangements were in place for cash handling; and  all school funds were being accounted for in line with procedures.

3. Proposals

3.1 The Audit produced four actions:

1. Financial Management should ensure that up-to-date written constitutions are retained for every establishment. Response: Procedures are now in place to highlight any establishments that do not provide the necessary documents. Follow up action will be taken where necessary.

11 2. Establishments failing to submit audited accounts should be reported to the Head of Service (Schools) and further action should be taken. Response: Staff have been advised to escalate non-compliance by informing the Head of Service who will be required to pursue the relevant head of establishment.

3. All errors in accounts should be queried and missing documentation must be followed up by Financial Management. Response: Checklists are now completed for each establishment and any non-compliance queried with the appropriate head of establishment.

4. Head Teachers and clerical staff should be reminded of the correct procedures relating to the management of school funds. Response: A letter has been issued to heads of establishment emphasising that the correct procedures must be followed at all times.

3.2 A correspondence was sent to all heads of establishments reminding them of the expectations in the management of school funds. It also asked all head teachers ensure the following procedures were followed:

 A written copy of school fund constitution is held on file  Minutes of the school fund committee meeting should be retained  Receipts should be issued for school fund income where practical  Appropriate number of signatories should be identified  All income should be banked intact  All requests for funding should be approved in accordance with the school fund constitution  School funds should not be used to make purchases normally associated with Devolved School Management (DSM)

3.3 In addition to the above actions, the Education Business Officers will carry out spot checks during routine visits to establishments. Where any issues are highlighted, these will be reported through the appropriate channels.

12 4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: None Community Benefits: None.

5. Consultation

5.1 No consultation has been required in preparation of this report.

JOHN BUTCHER Executive Director (Education and Youth Employment)

Reference : SQ/AG For further information please contact Steven Quinn, Head of Service (Schools), on 01294 324413. Background Papers None

13 14 NORTH AYRSHIRE COUNCIL

Agenda Item 4 23 May 2016

Audit Committee

Title: Internal Audit Reports issued

Purpose: To inform the Committee of the findings of Internal Audit work completed between 1 February and 30 April 2016.

Recommendation: That the Committee (a) considers the outcomes from the Internal Audit work carried out; and (b) challenges services where there are significant weaknesses in internal controls.

1. Executive Summary

1.1 The Council's local Code of Corporate Governance requires effective arrangements to be put in place for the objective review of risk management and internal control. Internal Audit is an important element in this framework as it reviews internal controls and offers Elected Members and officers an objective and independent appraisal of how effectively resources are being managed.

1.2 The remit of the Audit Committee includes the monitoring of Internal Audit activity. The submission and consideration of regular reports assists the Committee in fulfilling this remit.

2. Background

2.1 This report provides information on the Internal Audit reports published between 1 February and 30 April 2016. Internal control reviews have been completed in respect of the areas detailed in Appendix 1 to this report. The aim of these reviews is to provide assurance that the internal control framework within the areas examined is appropriate and operating effectively.

15 2.2 The findings from each audit assignment have been notified in writing to the Chief Executive, the Executive Director (Finance and Corporate Support) and the relevant Executive Director and service managers on the completion of each assignment. Where appropriate, this has included an action plan detailing recommendations for improving internal control. Appendix 1 includes a summary of the key findings from each audit together with any high priority actions from each.

2.3 Full copies of all Internal Audit reports are provided to all Elected Members, in confidence, through the Council's intranet site. Reports are held within the dedicated 'Members' information' area at:

http://naconnects.north-ayrshire.gov.uk/elected-members/audit-reports /audit-reports.aspx

2.4 The findings from 7 separate audit assignments are detailed at Appendix 1 to this report. The key findings are as follows:

 all Council Services, in conjunction with the People and Transformation Service, must ensure that authorised signatory details for overtime and subsistence claims are kept up-to-date; a significant proportion of claims sampled were authorised by officers who were not flagged on the HR/Payroll system as being authorised to do so.

3. Proposals

3.1 It is proposed that the Committee (a) considers the outcomes from the Internal Audit work carried out during the period; and (b) challenges services where there are significant weaknesses in internal controls.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The work of Internal Audit helps to support the efficient delivery of the strategic priorities within the Council Plan 2015-2020. Community Benefits: None.

16 5. Consultation

5.1 The relevant services are consulted on Internal Audit findings during each audit assignment.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

17 18 Appendix 1

Final Reports issued – 1st February to 30th April 2016

Title Payroll Transaction testing Date of issue 07/04/2016 Lead Council Service Finance and Corporate Support Background and Key An audit of Payroll transactions (assisted by computer audit software) was conducted as part of the 2015/16 Objectives audit plan. The main objectives of this audit were to ensure that:

• Payments made to employees are valid and properly authorised; • Details held for employees are accurate and complete; • Changes to salaries are legitimate and have been approved; • Mileage claims have been completed in accordance with procedures. Key Findings 1. 9 from 20 overtime payments checked had not been signed by authorised officers; 2. Instances were found where managers had authorised mileage and subsistence claims that were in breach of the Council’s Terms and Conditions. Actions High 5 Medium 1 Low 0 High Priority Actions Management Comment Responsible Officer and Due Date Staff (in Payroll and other Services) should An email will be circulated to Services and Payroll staff Team Supervisor be reminded that amendments, overtime and reinforcing this requirement. Access to signatory details held (Payroll), 30/04/2016 mileage payments should only be processed within the HR Payroll will be given to all users who input when documents have been signed by an overtime and mileage directly to CHRIS, users will be advised authorised officer. via email how to check this information to ensure that claims submitted for payment have been approved by an authorised signatory in accordance with the Codes of Financial Practice. Prior to authorising mileage claims, managers The Head of People and Transformation will raise this as an Head of People and should ensure that the forms have been area for concern and action at the ECMT. Executive Transformation, completed correctly, normal home to work Directors/Head of Service will be requested to reinforce the 30/06/2016 travel has been deducted from journeys, and importance of the compliance with the Codes of Financial all miles have been incurred within the three Practice. month timescale.

04/05/2016 [PUBLIC] 19 Final Reports issued – 1st February to 30th April 2016

High Priority Actions Management Comment Responsible Officer and Due Date A meta-compliance notice should be issued A meta-compliance message has previously been issued by Employment Services to (and acknowledged by) employees HR&OD. Following discussion with the Head of People and Manager, Senior reminding them of the procedures and Transformation it is recommended that a meta compliance Manager (Audit), conditions regarding mileage and subsistence message is issued by the Senior Manager (Audit), in 30/06/2016 claims. It should be emphasised that further conjunction with the Employment Services Manager, which action will be taken against claimants and outlines the implications of failure to comply with the Codes of managers who continue to breach Financial Practice. procedures. The Terms and Conditions should be updated Section 8 of the Terms and Conditions will be updated to HR Operations to reflect that taxi fares can only be reclaimed reflect that taxi fares will only be paid where there is no more Manager, Complete where there are no more economical economical alternative. A statement will also be made at the alternatives (e.g. public transport, pool car, start of section 8.2 (car motor and bicycle allowances) to car-sharing, own vehicle) state that a car pool scheme is in operation and should be considered where practical and/or possible in the first instance. Clear direction should be provided by HR on A mini role profile will be developed which identifies the duties HR Operations the use of non-standard payments, the duties to be carried out and the amounts payable to staff in relation Manager, 30/06/2016 these relate to and the amounts payable to to these duties. staff.

04/05/2016 [PUBLIC] 20 Final Reports issued – 1st February to 30th April 2016

Title Revenue Budget Monitoring – Health and Social Care Date of issue 26/02/2016 Lead Council Service Health and Social Care Partnership Background and Key Having completed the shadow phase from April 2014, the Health and Social Care Partnership went live in Objectives April 2015. Revenue budget monitoring arrangements are in place with the Financial Management team and management within the Partnership. The main objectives of this audit were to ensure: • revenue budget monitoring information provided to Members is accurate and useful. • revenue budget monitoring activities of the Financial Management team are efficient and effective. • revenue budget monitoring and budget management activities of the NAHSCP management are efficient and effective. Key Findings 1. Financial information reported to Members and senior management is user friendly, accurate and highly detailed. This is delivered through extensive consultation and operational input. 2. The accuracy of projections could be improved through a number of actions, particularly in relation to care packages. A review of these packages could potentially reduce variances. 3. Budgetary control could be tighter in some service areas. Actions High 2 Medium 6 Low 3 High Priority Actions Management Comment Responsible Officer and Due Date Heads of Service should ensure that a robust HSCP will review all areas of spend to scope where there Principal Manager culture of challenge is in place across all may be need to establish resource allocation meetings to (Finance), 31/10/2016. service areas and in particular when new which finance colleagues will be invited. Senior Managers will care packages or extensions to care also be reminded of the need to prepare as fully as possible packages are considered. for monthly meetings with finance colleagues to ensure greater accuracy in relation to projections. NAHSCP should consider implementing a The performance management framework (ASPIRE) will be Principal Manager program of review of care packages – developed to ensure that information relating to reviews is (Performance), particularly those of a high value – to ensure fully embedded thus allowing monitoring of performance in 31/10/2016. the level of care is appropriate and to ensure this area and early remediation as required. the Partnership is receiving value for money and meeting need within available resources.

04/05/2016 [PUBLIC] 21 Final Reports issued – 1st February to 30th April 2016

Title HR / Payroll System Date of issue 29/03/2016 Lead Council Service Finance and Corporate Support Background and Key Prior to September 2015 HR and Payroll processes relied heavily on paper forms being received from the Objectives relevant services so that the required action could take place. Since then however a new process has been rolled out whereby HR and Payroll related requests are attached to the LAGAN system, either by scanning and appending the form, or directly from the email system. The intention is that this will reduce the opportunity for error and provide better tracking of HR and Payroll tasks.

To date 29 HR and Payroll transaction types have migrated to LAGAN, including requests related to maternity, recruitment and payroll. It is envisaged that more transaction types will be rolled out in future, supplemented by the introduction of e-forms to further streamline the process.

The scope of the audit was to ensure there are sufficient and appropriate controls in place covering the new processes across both the CHRIS (HR/Payroll) and LAGAN (Customer Services) systems. The scope of the audit included: • A review of LAGAN use for HR/Payroll transactions. • A review of system access controls within the CHRIS system, including separation of duties. Key Findings 1. The key controls are in place for the use of LAGAN and are operating effectively. The reasons for using LAGAN as an HR/Payroll tool were clearly communicated and justified to the auditor. The new process provides improved accountability, as transactions are allocated to named users, reduced error rates and improved management information and audit trail data can be extracted for monitoring purposes. 2. The second part of the review focused on the CHRIS system, where some of the key system access controls were lacking. Password controls are not being adequately enforced by the CHRIS system. The functionality is available within the system and is endorsed by the Council’s Acceptable Use Policy, however, strong passwords are not enforced and the default settings installed when the system was introduced in 1998 remain. These do not impose the use of upper and lower case letters, numbers or special characters. Actions High 1 Medium 3 Low 2

04/05/2016 [PUBLIC] 22 Final Reports issued – 1st February to 30th April 2016

High Priority Actions Management Comment Responsible Officer and Due Date Employment Services should ensure that The password control functionality in CHRIS also controls the Senior Adviser (HR password rules are updated within CHRIS so password format in HR21. The automated password reset Payroll Systems), that a mixture of upper and lower case letters, functionality for HR21 resets the password to DOB which is 30/09/2016. numbers and special characters are used. not in upper/lower/special format. Due to the high volume of password resets for HR21, removing this automated password reset functionality will significantly increase the IMS team workload. CHRIS system password reset requests are manually entered by IMS team and an email generated to advise the CHRIS user of the password change. The email advises the CHRIS user to logon and change their password. The email includes the wording that the new password should adhere to Council guidelines - Passwords need to be a minimum of 8 characters in length and must contain letters (upper and lower case) and special characters ($, *,% etc.). The employee guide for HR21 also advises the password should adhere to Council guidelines.

The team will be testing V8 of the CHRIS System which will allow HR21 users to change their own password. Special characters and upper lower case settings etc. will be applied to the system once this version has been installed

04/05/2016 [PUBLIC] 23 Final Reports issued – 1st February to 30th April 2016

Title Housing Benefits Date of issue 09/03/2016 Lead Council Service Finance and Corporate Support Background and Key The scope of the audit was to ensure there are sufficient controls in place relating to Housing Benefit, Objectives including assessment and calculation of claims, dealing with overpayments, system controls and ensuring an appropriate ledger interface. The objectives of the audit included: • Reviewing the procedural documentation to ensure this was up to date and relevant. • Selecting a sample of transactions to ensure that Housing Benefit has been awarded at the correct rate and at the correct time. • Examining the data retained on the Northgate System to ensure it supported any benefits paid. Key Findings 1. Key controls are in place for the processing of Housing Benefit transactions, and these controls appear to be operating effectively. 2. There are detailed policies and procedures to assist staff with processing and these are available for all relevant staff to access. 3. Adequate arrangements exist for updating these documents as well as the Northgate system standing data, which is carried out at least once a year and is subject to detailed testing before the new parameters are used live. 4. Sample testing identified that in two cases reviewed, the benefit had been paid to the incorrect payee, although this did not result in any loss as the award was paid to the tenant instead of direct to the landlord and vice versa. Actions High 1 Medium 1 Low 0 High Priority Actions Management Comment Responsible Officer and Due Date Decision makers should be reminded of the All Benefits staff will receive training by 31 March on the Revenues and Benefits procedural guidance around payments (for welfare reforms due to be introduced from April 2016. The Policy and Training example where there is no safeguarding findings of the audit will be incorporated into the training Team Manager, request, payments should be direct to the programme and this will include a written procedural guide for 31/03/2016 claimant rather than the landlord) and ensure all staff. that awards are directed to the correct recipient.

04/05/2016 [PUBLIC] 24 Final Reports issued – 1st February to 30th April 2016

Title Workforce Planning Date of issue 06/04/2016 Lead Council Service Finance and Corporate Support Background and Key A wide range of workforce planning activities are undertaken across the Council, with the majority of these Objectives involving the input of HR & Organisational Development. These activities include ‘Re-shaping our workforce’, which takes a strategic and planned approach to workforce planning and management of workforce costs. The Head of Customer, People and Corporate Support advised that, in addition to this, workforce planning is an important component of directorate plans. HR & Organisational Development also carries out a range of workforce planning activities both for and in conjunction with services including detailed demographic analysis and producing ad hoc reports.

The main objective of this audit was to assess the Council’s workforce planning arrangements by reviewing: • current arrangements in relation to guidance for the sector • examples of workforce planning exercises undertaken across the Council. Key Findings 1. The corporate approach to workforce planning could be more clearly defined through the creation of a single corporate workforce planning document. Alternatively the role of the Directorate Plans with regards to workforce planning could be enhanced by developing greater consistency in terms of approach and content. 2. Elected Members should be given oversight of the savings and costs associated with workforce programmes. Actions High 0 Medium 2 Low 0 High Priority Actions Management Comment Responsible Officer and Due Date There were no high priority actions.

04/05/2016 [PUBLIC] 25 Final Reports issued – 1st February to 30th April 2016

Title Commercial Refuse Date of issue 07/04/2016 Lead Council Service Place Background and Key An audit carried out on Commercial Refuse Income in December 2013 concluded that the controls in place Objectives were inadequate, and several areas of concern were highlighted. A new Waste Management system (Powersuite) has since been fully implemented.

The main objective of this audit was to carry out a full follow-up review and ensure that:

• The correct paperwork is being completed for new and existing customers; • The invoicing system and general ledger are promptly updated; • Amendments and cancellations to contracts are administered properly. Key Findings 1. The current interface between the finance system and the waste system is inadequate and fails to relay important payment information; 2. Several customers with numerous outstanding invoices were still receiving a collection service from the Council. Actions High 0 Medium 1 Low 0 High Priority Actions Management Comment Responsible Officer and Due Date There were no high priority actions.

04/05/2016 [PUBLIC] 26 Final Reports issued – 1st February to 30th April 2016

Title Treasury Management Date of issue 29/03/2016 Lead Council Service Finance and Corporate Support Background and Key Audit Scotland issued a national report entitled “Borrowing and Treasury Management in Councils” in March Objectives 2015; it was presented to Audit Committee on 25th May with an Action Plan describing how the Council was fulfilling, or would fulfil, the recommendations. The main objective of this audit was to review North Ayrshire Council’s compliance with the requirements of the Audit Scotland national report. Key Findings 1. Although the 2015/16 Treasury Management Strategy was prepared before the Audit Scotland Report, it already complied with most of the recommendations. 2. There were 3 recommendations of the Audit Scotland report which required additional elements to be included in future Treasury Management Strategies. These were: o Information on how the borrowing strategy is informed by corporate priorities or links to corporate objectives. o A Risk Register o Prudential Indicators to be calculated over a period longer than 3 years These elements were all included in the 2016/17 Treasury Management Strategy 3. The detailed cashflow forecast is prepared annually and the projected period falls below 3 months before the new one is produced. In the risk register of the 2016/17 Treasury Management and Investment Strategy, the cashflow forecast is identified as a mitigating control for liquidity risk i.e. the risk that cash will not be available when it is needed. Actions High 0 Medium 1 Low 0 High Priority Actions Management Comment Responsible Officer and Due Date There were no high priority actions.

04/05/2016 [PUBLIC] 27 28 NORTH AYRSHIRE COUNCIL

Agenda Item 5 23 May 2016

Audit Committee

Title: Internal Audit and Corporate Fraud Action Plans: Quarter 4 update

Purpose: To advise the Audit Committee on progress made by Council services in implementing the agreed actions from Internal Audit and Corporate Fraud reports as at 31 March 2016.

Recommendation: That the Committee (a) notes the current position with the implementation of Internal Audit and Corporate Fraud actions; and (b) challenges those services that have not implemented actions within the previously agreed timescales.

1. Executive Summary

1.1 The CIPFA document 'Audit Committee Principles in Local Authorities in Scotland' highlights that Audit Committees should monitor and review the progress made in implementing audit recommendations.

1.2 Service managers are responsible for ensuring that agreed actions arising from Internal Audit and Corporate Fraud reviews are implemented. This provides assurance that identified control weaknesses have been addressed and are being managed effectively.

1.3 All actions are monitored on the Covalent system and service managers are responsible for updating Covalent as they progress each action. This enables Internal Audit to monitor progress on a 'real-time' basis and address any delays in implementation.

1.4 This report details the position at 31 March 2016.

2. Background

2.1 The last report to the Audit Committee on 15 February 2016 highlighted that there were 33 actions outstanding at the end of December 2015: 12 that had not been started or were only partially implemented and 21 where the due date had not yet passed.

29 2.2 In addition to these 33 'carried forward' actions, there have been 61 new actions agreed during quarter 4, giving a total of 94 action points for review.

2.3 Services have completed 54 actions since the last report. All services are required to retain evidence of work carried out in completing their actions and Internal Audit carries out 'spot-checks' on a sample of completed actions on an ongoing basis.

2.4 Of the remaining 40 actions, 11 were either not started or only partially complete at 31 March and the remaining 29 were not due for completion until after that date.

2.5 Appendix 1 to this report provides the Committee with full details of the 11 actions that were not complete within the agreed timescales.

3. Proposals

3.1 It is proposed that the Committee (a) notes the current position with the implementation of Internal Audit and Corporate Fraud actions; and (b) challenges those services that have not implemented actions within the previously agreed timescales.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The effective implementation of agreed Internal Audit actions helps to support the efficient delivery of the strategic priorities within the Council Plan 2015-2020. Community Benefits: None.

30 5. Consultation

5.1 Council services are consulted during the completion of each Internal Audit and Corporate Fraud review and have also provided updates on progress made in implementing action points.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

31 32 Appendix 1

Actions due by 31st March but not started or only partially complete

Generated on: 4 May 2016

Education should ensure that all teaching staff with access to IT equipment should Code IA2014PA027c Description read and sign the Corporate Acceptable Computer Use Policy and have a process in place for ensuring new staff read and sign up to this policy. 2015/16 - Quarter Four Update: All Head Teachers have been asked to report their current processes in relation to the acceptable use policy. They have also been asked to check and report which members of staff have not had an opportunity to sign the acceptable use form and to ensure that they do so as soon as possible. This applies Priority 1 Latest Note to all staff who have access to our IT systems and should be complete by the end of June 2016. All teaching and non- teaching staff in our establishments also have an ongoing responsibility to complete our online security modules to ensure that they have been adequately trained and are well informed about their responsibilities in relation to secure practices when using IT. Progress Bar Original Due Date 31-Aug-2014 Due Date 29-Feb-2016 Managed By Steven Quinn Parent Code & Title IA2014PA027 Education and Skills Mobile Devices Assigned To Teri McIntosh

Training requires to be put in place for Senior Information Risk Owners (SIROs) and Code IA2014PA031e Description Information Asset Owners (IAOs). 2015/16 - Quarter Four Update: Despite staff changes, some progress has been made. A new Information and Governance Manager was appointed in December Priority 2 Latest Note 2015, and the Information and Records Project Officer role will be filled in April 2016. The remaining SIRO and IAO training requirement will be included in the 2016/17 Operational Plan for the Information Governance Team. Progress Bar Original Due Date 01-Apr-2014 Due Date 31-Mar-2015 Managed By Andrew Fraser Parent Code & Title IA2014PA031 Information Management and Data Protection Assigned To Iona Carcary

1 33

NAC Records Management Policy requires to be implemented to dispose of records Code IA2014PA031i Description and data held in excess of the required period. 2015/16 - Quarter Four Update: Despite staff changes, some progress has been made. A new Information and Governance Manager was appointed in December Priority 2 Latest Note 2015, and the Information and Records Project Officer role will be filled in April 2016. Implementation of the RM Policy will be included in the 2016/17 Operational Plan for the Information Governance Team.

Progress Bar Original Due Date 01-Apr-2014 Due Date 31-Dec-2014 Managed By Andrew Fraser Parent Code & Title IA2014PA031 Information Management and Data Protection Assigned To Iona Carcary

A standard procedure for handling requests for personal data requires to be devised, Code IA2014PA031n Description approved and introduced across NAC. 2015/16 - Quarter Four Update: Draft Subject Access Request (SAR) Guidance was discussed was discussed at the March Data Protection and Advisory Group (DPAG). Priority 1 Latest Note Once DPAG comments have been incorporated, the Guidance will be published and training made available to SAR co-ordinators and DPAG members. It is anticipated that this action will be completed by end Q2 2016/17.

Progress Bar Original Due Date 01-Apr-2014 Due Date 30-Sep-2014 Managed By Andrew Fraser Parent Code & Title IA2014PA031 Information Management and Data Protection Assigned To Iona Carcary

2 34

The Information Governance Manager should review the arrangements for destroying confidential waste at all locations across the Council, with a view to ensuring that Code IA2015PA031d Description there are established arrangements for confidential waste at all locations, whilst also raising awareness of confidential waste disposal policies. 2015/16 - Quarter Four Update: The draft Confidential Waste Policy was discussed at the March DPAG. Once DPAG comments have been incorporated, the Policy will go to CMT for consideration and sign-off. In the meantime, the Information Priority 1 Latest Note Governance Team has continued to proactively visit recently vacated premises due to office moves, to ensure no confidential information has been left behind. It is anticipated that this action will be completed by end Q2 2016/17.

Progress Bar Original Due Date 30-Jun-2015 Due Date 30-Jun-2015 Managed By Andrew Fraser Parent Code & Title IA2015PA031 Information Management and Data Protection Assigned To Iona Carcary

The new paper shredding contract should include flexibility that allows any North Ayrshire Council establishment to make use of the contract but should also specifically Code IA2015PA031e Description include the Records Management Store as a designated pick up point for confidential waste. All establishments should then be made aware that they can make use of this contract. 2015/16 - Quarter Four Update: Work was undertaken to scope a Council-wide contract for confidential waste, but it was found to be unfeasible at this point in time. In the absence of a cross Council contract, services will continue to contract individually to meet their local requirements. To further mitigate the risks: Priority 2 Latest Note • A Confidential Waste Policy will be finalised and agreed with CMT by end Q2 2016/17 (see IA2015PA031d). • Information Governance will investigate with Procurement the options to re-issue the tender or develop an alternative approach by end Q2 2016/17. • Action the alternative approach by end Q4 2016/17.

Progress Bar Original Due Date 30-Sep-2015 Due Date 31-Mar-2016 Managed By Andrew Fraser Parent Code & Title IA2015PA031 Information Management and Data Protection Assigned To Iona Carcary

3 35

The Information Governance section should ensure that there are suitable procedures Code IA2015PA031h Description in place relating to the handling of confidential waste in vacated properties. 2015/16 - Quarter Four Update: Formal ‘walk-throughs’ of vacated offices and the Priority 1 Latest Note provision of specific advice to teams moving offices/buildings has continued during Q4. It is anticipated that this action will be completed by end Q2 2016/17.

Progress Bar Original Due Date 31-May-2015 Due Date 31-May-2015 Managed By Andrew Fraser Parent Code & Title IA2015PA031 Information Management and Data Protection Assigned To Iona Carcary

Human Resources should investigate and address the current reporting weaknesses Code IA2015PA034d Description in relation to multipost, bank and casual staff. 2015/16 - Quarter Four Update: Due to delays in the Software being provided testing Priority 1 Latest Note of the Multi Contracts module has not been carried out. It is now anticipated that the module will not be implemented until December 2016.

Progress Bar Original Due Date 31-Mar-2016 Due Date 31-Mar-2016 Managed By Gavin MacGregor Parent Code & Title IA2015PA034 Performance Indicators 2013/2014 Assigned To Jackie Hamilton

Arrangements should be made with APT Skidata to obtain remote access to the Code IA2015PA037a Description parking system. 2015/16 - Quarter Four Update: A job was raised with the IT Service desk on 11 January 2016 to procure this and install this on the PCs of Streetscene and Business Support Staff. Priority 1 Latest Note

IT Security are still evaluating the security implications of this software. If this is approved by IT is will be procured and installed by 30 June 2016.

Progress Bar Original Due Date 30-Jun-2015 Due Date 30-Jun-2015 Managed By Russell McCutcheon Parent Code & Title IA2015PA037 Income Collection Assigned To Thomas Reaney

4 36

A signed copy of a community contract with North Ayrshire Council should be held on Code IA2016CFT003c Description record for all community associations. Priority 1 Latest Note The contract is due to be signed on 30th April.

Progress Bar Original Due Date 31-Mar-2016 Due Date 31-Mar-2016 Managed By Audrey Sutton Parent Code & Title IA2016CFT003 Allegations against a Hall Caretaker Assigned To Jim McHarg

The Corporate Transport Hub, supported by Legal Services, should continue to liaise Code IA2016PA021a Description with SPT to finalise a mutually acceptable Agency Agreement and have this signed at the earliest opportunity. 2015/16 - Quarter Four Update: The Agreement has not been completed despite the best endeavours of the Legal section and the Transport Hub. Both the Solicitor (Contracts and Licensing) and Team Manager (Journeys and Hires) have tried for several months to receive an adequate response from SPT. As a result of the time limit of 31st March, 2016 SPT has made contact and some progress has been made Priority 1 Latest Note but the significant improvements asked for by the Council and which the Council considers to be essential have not yet been agreed to by SPT. As a result this has not been completed and as negotiations have been proceeding for about two years now it is hard to anticipate when that might happen. The Council will endeavour to reach agreement by the end of September 2016.

Progress Bar Original Due Date 31-Mar-2016 Due Date 31-Mar-2016 Andrew Fraser; Russell Managed By McCutcheon Parent Code & Title IA2016PA021 Transportation Susan Adamson; Gordon Assigned To Mitchell; Nicola Shearer

5 37 38 NORTH AYRSHIRE COUNCIL

Agenda Item 6 23 May 2016

Audit Committee

Title: Annual Governance Statement 2015/16

Purpose: To seek Audit Committee approval of the Council's Annual Governance Statement for 2015/16 which will be included within the Annual Accounts.

Recommendation: That the Committee approves the Annual Governance Statement which is attached at Appendix 1 to this report.

1. Executive Summary

1.1 The Council's Annual Governance Statement outlines the governance framework which is in place and changes which have been made to strengthen the framework during 2015/16.

1.2 Approval of the Statement by the Audit Committee will ensure that the Council complies with the requirements of the Local Authority Accounts (Scotland) Regulations 2014.

2. Background

2.1 North Ayrshire Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for and used economically, efficiently and effectively.

2.2 The Council is also responsible for putting in place proper arrangements for the governance of its affairs and facilitating the effective exercise of its functions, which includes arrangements for the management of risk.

2.3 The Council has approved and adopted a Code of Corporate Governance, which is consistent with the principles of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’.

39 2.4 The Local Authority Accounts (Scotland) Regulations 2014, which came into force on 10th October 2014, require that local authorities prepare an Annual Governance Statement, in accordance with proper practices in relation to internal control, and that this Annual Governance Statement should be approved by the Audit Committee of the authority.

2.5 Following approval of the Annual Governance Statement by the Audit Committee, it requires to be signed by the Chief Executive and the Leader of the Council prior to its inclusion within the Council's draft annual accounts.

2.6 The Annual Governance Statement, which is attached in full at Appendix 1 to this report, explains how the Council complies with the Code of Corporate Governance. It identifies the main components of the Corporate Governance framework which is in place, including the system of internal control, and details those significant changes which have taken place to the framework during 2015-16.

2.7 The Statement also identifies a number of actions which the Council intends to implement during 2016-17 to further strengthen the governance framework and concludes with an assurance statement by the Chief Executive and the Leader of the Council.

3. Proposals

3.1 It is proposed that the Audit Committee approves the Annual Governance Statement for 2015/16 which is attached in full at Appendix 1 to this report.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: Good governance arrangements help to underpin the delivery of the Council's key priorities. Community Benefits: None.

40 5. Consultation

5.1 Consultation has taken place with the Chief Executive and the Leader of the Council during the preparation of the Annual Governance Statement.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

41 42 Appendix 1

Scope of Responsibility Annual North Ayrshire Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, Governance and that public money is safeguarded and properly accounted for Statement and used economically, efficiently and effectively. The Council is also responsible for putting in place proper arrangements for the governance of its affairs and facilitating the effective exercise of its functions, which includes arrangements for the management of risk. The Council has approved and adopted a Local Code of Corporate Governance, which is consistent with the principles of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’. A copy of the local code for 2015/16 is available on the Council’s website, or a copy can be obtained from the Chief Executive’s Service, North Ayrshire Council, Cunninghame House, Irvine KA12 8EE. This statement explains how North Ayrshire Council complies with the Code of Corporate Governance and meets the requirements of the ‘Code of Practice for Local Authority Accounting in the UK: A Statement of Recommended Practice’, in relation to the Statement on the System of Internal Financial Control.

The Purpose of the Governance Framework The governance framework comprises the systems and processes, and culture and values by which the authority is directed and controlled and the activities through which it accounts to, engages with and leads the community. It enables the authority to monitor the achievement of its strategic objectives and to consider whether those objectives have led to the delivery of appropriate, cost- effective services. The system of internal control is a significant part of that framework and is designed to manage risk to a reasonable level. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of North Ayrshire Council’s policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically.

The Governance Framework The main features of the governance framework that was in place during 2015-16 are summarised below: • The Cabinet was the key decision-making Committee, comprising the Leader of the Council, the Depute Leader and five members of the Administration, each with a specific portfolio of duties. An Education Cabinet comprised the same members and also included church and teaching profession representatives. The Scrutiny and Petitions Committee was in place to review decisions taken by the Cabinet, amongst other responsibilities, and the Audit Committee considered all matters in relation to Internal and External Audit and Risk Management; • Strategic decision-making is governed by the Council’s key constitutional documents including standing orders, scheme of administration, scheme of delegation to officers and financial regulations and associated codes of financial practice; • The Council has 2 cross-party ‘advisory panels’ with remits covering ‘Physical Environment’ and ‘Communities and Lifelong Learning’. These have no specific delegated powers; however, they provide input to policy direction prior to submission of policy proposals to Cabinet; • The Council’s mission and vision are outlined in the Council Plan 2015-2020 which links closely to the vision of the North Ayrshire Community Planning Partnership and the Single Outcome Agreement and is underpinned by a range of performance indicators; • The Performance Management Strategy focuses very firmly on embedding a performance management culture throughout the Council and a refreshed Strategy was approved by Cabinet during 2015/16. A Performance Management Forum is in place to help embed a high performance culture throughout the Council. Regular reporting to Elected Members takes

43 place and a wide range of performance information is available on the ‘North Ayrshire Performs’ website; • The Council has adopted a ‘Code of Conduct’ for all of its employees. Elected Members adhere to the national ‘Code of Conduct for Councillors’ and a register of interests is in place; • The approach to risk management is set out in the Risk Management Strategy. The Council’s strategic risk register for 2015-16 was reported to the Cabinet in March 2015; • The Council has in place a development programme for all Elected Members. Development programmes are also in place for the Extended Corporate Management Team and senior managers across the Council. A range of training opportunities and a Performance and Personal Development (PPD) scheme are in place for all employees, the aim of which is to focus all employees on their performance and development that contributes towards achieving Service objectives; • The Council has established 6 Locality Partnerships, reflecting the previously agreed local planning areas. These provide Elected Members, Community Planning Partners and local community representatives with the opportunity to be involved in considering the priorities for each area and outline the role for each Community Planning Partner in meeting these priorities in conjunction with the local communities. • In order to enhance its asset management arrangements, the Council has established the Corporate Asset Management Strategy, covering the period 2013-2023. This is underpinned by 6 themed asset management plans for the period 2014-2017, in line with categories recommended by CIPFA: property, housing, ICT, open spaces, road and fleet. • A Capital Programme and Assets Group (CPAG), consisting of senior officers from across Council services and chaired by the Executive Director (Finance and Corporate Support), is in place. This group monitors the delivery of the Council’s capital programme, helping to ensure that projects are delivered on time and within budget. • The Council has a ten-year financial strategy (2013-2023), the primary objective of which is to ensure longer term financial sustainability that provides for appropriate investment in priority services. • The Council has Internal Audit and Corporate Fraud teams to carry out independent and objective reviews of governance and internal control arrangements and investigate allegations of fraud and error both within and against the authority. • An Information Governance framework is in place, supported by a central team of staff within the Chief Executive’s Service. • A Corporate Communications Strategy has been in place since 2011. • The Council has a two-stage Complaints Procedure, which provides a transparent and standardised process for customers who wish to complain, and enables to Council to manage complaints more effectively and to identify any service improvements which may be required. The governance framework has been in place at North Ayrshire Council throughout the year ended 31st March 2015.

The System of Internal Financial Control The system of internal financial control is based on a framework of regular management information, financial regulations, administrative procedures (including segregation of duties), management supervision, and a system of delegation and accountability. Development and maintenance of the system is undertaken by the Extended Corporate Management Team within the Council. In particular, the system includes: • Financial regulations and codes of financial practice; • Comprehensive budgeting systems; • Regular reviews of periodic and annual financial reports that indicate financial performance against the forecasts; • Setting targets to measure financial and other performance; • Clearly defined capital expenditure guidelines; • Formal project management disciplines. 44 The Council’s financial management arrangements conform with the governance requirements of the CIPFA statement: ‘The Role of the Chief Financial Officer in Local Government (2010)’. With regard to the entities incorporated into the Group Accounts, the Council is not aware of any weaknesses within their internal control systems and has placed reliance on the individual Statements of Internal Financial Control where appropriate.

Review of Effectiveness

North Ayrshire Council has responsibility for conducting, at least annually, a review of the effectiveness of its governance framework including the system of internal control. The review of the effectiveness of the framework is informed by the work of the Corporate Management Team who have responsibility for development and maintenance of the governance environment, the annual report by the Senior Manager (Internal Audit, Risk and Fraud) and reports from Audit Scotland and other review agencies. The Executive Director (Finance and Corporate Support) has overall responsibility for Internal Audit in North Ayrshire Council. The Senior Manager (Internal Audit, Risk and Fraud) is responsible for the management of the section and reports directly to the Executive Director on all audit matters, with the right of access to the Chief Executive and Chair of the Audit Committee on any matter. The Internal Audit section is fully resourced to deliver its 5 year audit plan. In accordance with the principles of the code of corporate governance, regular reports were made to the Council’s Audit Committee throughout 2015-16. As detailed in the ‘Internal Audit Charter’ that has been adopted by the Council, the Internal Audit function has independent responsibility for examining, evaluating and reporting on the adequacy of internal control. During 2015-16, the service operated in accordance with the Public Sector Internal Audit Standards. The Senior Manager (Internal Audit, Risk and Fraud) prepares an annual report to the Audit Committee, including an assurance statement containing a view on the adequacy and effectiveness of the system of internal control.

Significant Governance Issues during 2015-16 The Council, together with NHS Ayrshire and Arran, established an integrated Health and Social Care Partnership in April 2015. Considerable progress has been made by the new partnership during 2015- 16 in establishing a governance framework and an integrated senior management structure which will support delivery of its key objectives. The Council’s drive to develop its performance management arrangements was recognised with the achievement of ‘Recognised for Excellence – 3 star’ status in June 2015 from Quality Scotland. The Council has developed an action plan based around the findings of the external evaluation, implementation of which will assist with further improving performance. The Chief Executive introduced a series of six-monthly Performance Management Review meetings, covering each Directorate, and based on an Appreciative Inquiry approach, designed to focus on improvement, reflection and learning. An updated Capital Programme, through to 2025/26, was approved by Council in February 2016. This will deliver an investment programme of £276million, supporting delivery of the Council’s key priorities and service redesign. The Council continued to make progress towards the creation of six Locality Partnerships, covering Irvine, Kilwinning, the Three Towns, Arran, the North Coast and Garnock. Terms of Reference were agreed by Council during March 2016 and it is envisaged that the Partnerships will hold their first formal meetings before the summer. Each Partnership will be chaired by a local Elected Member and will be responsible for developing, reviewing and implementing the priorities of the Locality Plan for its area. The Council’s information governance framework was further developed during 2015-16 with the approval by Cabinet of a revised Information Management Strategy and a Data Protection Policy. The Local Scrutiny Plan 2015-16, published in April 2015 by the Local Area Network of external inspection agencies, noted that there were no scrutiny risks in the Council which required specific scrutiny work to be carried out. The Council continues to develop its ‘Outcome Based Budgeting’ approach to support the next phase of transformation, assisting the Council to address its anticipated future funding gap whilst maximising delivery of strategic objectives. 45 A ‘People Strategy’ entitled ‘Our People Connect’ was launched in June 2015 to support the delivery of the Council Plan and its strategic priorities by focussing on developing the right culture and helping the Council transform to be a leaner, more efficient and high performing organisation where people can develop and thrive. The Council agreed a new Transformation 2 (T2) programme, which will help develop a corporate and co-ordinated approach to transformational change across the organisation. The Internal Audit Annual Report 2015-16, received by the Audit Committee on 23rd May 2016, highlights a number of findings by the Council’s Internal Audit section which indicate some weaknesses in the internal control environment. None of these are considered material enough to have a significant impact on the overall control environment and it is the opinion of the Senior Manager (Internal Audit, Risk and Fraud) that the Council’s systems of internal control continue to provide reasonable assurance against loss.

Further Actions for 2016-17 The Council has identified the following actions for 2016-17 that will assist with the further strengthening of corporate governance arrangements: • Further development of the Strategic Framework for Financial Planning. • A formal review of the 10 year financial strategy to 2026/27 will be concluded when the Scottish Government publishes the 3 year spending review (2017/18 to 2019/20) in September 2016. • Refresh of the Corporate Communications Strategy. • Working with Community Planning Partners to develop a Local Outcomes Improvement Plan (LOIP). • Continuing to work with the Health and Social Care Partnership to ensure that services can be delivered within the available funding.

Assurance Subject to the above, and on the basis of the assurances provided, we consider the governance and internal control environment operating during 2015-16 to provide reasonable and objective assurance that any significant risks impacting on the achievement of our actions will be identified and actions taken to avoid or mitigate their impact. Systems are in place to continually review and improve the governance and internal control environment and action plans are in place to address identified areas for improvement.

Elma Murray Councillor William Gibson Chief Executive Leader of the Council June 2016 June 2016

46 NORTH AYRSHIRE COUNCIL

Agenda Item 7 23 May 2016

Audit Committee

Title: Accounting Policies 2015/16

Purpose: To seek the Audit Committee's approval of the accounting policies which will be adopted in the preparation of the Council's annual accounts for the year to 31 March 2016.

Recommendation: That the Audit Committee (i) approves the accounting policies as detailed in Appendix 2

1. Executive Summary

1.1 The annual accounts for the 2015/16 financial year summarise the Council’s transactions during the year and its position at the year-end of 31 March 2016. Under the Local Authority Accounts (Scotland) Regulations 2014, the Council is required to prepare an annual Statement of Accounts and Section 12 of the Local Government in Scotland Act 2003 requires that these accounts are prepared in accordance with proper accounting practices

1.2 These practices primarily comprise the Code of Practice on Local Authority Accounting in the United Kingdom 2015/16 ("the Code") and the Service Reporting Code of Practice 2015/16, supported by International Financial Reporting Standards (IFRS). These are issued jointly by the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC) and are designed to give a “true and fair view” of the financial performance of the Council.

1.3 The North Ayrshire Council accounting policies are reviewed on an annual basis by the Senior Manager (Financial Management) in line with the CIPFA Code and submitted to the Audit Committee for review in advance of the financial statements being prepared.

1.4 The Accounting Policies are attached at Appendix Two and have been updated to reflect the adoption of IFRS13 Fair Value Measurement and to provide a more comprehensive statement in relation to Investment Properties, the main changes are noted in Appendix 1.

2. Background

47 2.1 Accounting policies are defined in paragraph 3.3.2.1 of the Code as ‘the specific principles, bases, conventions, rules and practices applied by an authority in preparing and presenting financial statements’ .

2.2 Councils are required to select accounting policies, and account for changes in accounting policies in accordance with International Accounting Standard 8 - Accounting Policies.

2.3 The Council is required to adopt the accounting policies most appropriate to its particular circumstances for the purpose of giving a true and fair view. The accounting policies adopted should be reviewed regularly to ensure that they remain appropriate, and be changed when a new policy becomes more appropriate to the Council’s particular circumstances. Sufficient information should be disclosed in the financial statements to enable users to understand the accounting policies adopted and how they have been implemented.

2.4 The accounting policies have been updated to reflect the adoption of IFRS13 Fair Value Measurement which changes the measurement of Surplus Assets and Investment Assets from an existing use basis to a fair value based on the market value of the property based on highest price and best use i.e. the highest price which can be secured based on what is physically possible and legally and financially viable. Appendix One shows the relevant parts of the policy which have been updated to reflect these changes. An opportunity has also been taken to update the asset category to better align with the notes within the accounts.

2.5 Note O Investment Properties has also been updated to provide a more comprehensive statement in relation to these assets and Note Q Leases to reflect an updated position in relation to Finance Leases. Appendix One shows the relevant changes which have been made.

3. Proposals

3.1 The unaudited financial statements are due to be complete by 30 June 2016. It is proposed to apply the accounting policies detailed in Appendix Two in the preparation of the statements.

48 4. Implications

Financial: None Human Resources: None Legal: The Local Government (Scotland) Act 2003 requires accounts to be prepared in accordance with proper practices. Equality: None Environmental & None Sustainability: Key Priorities: None Community Benefits: None

5. Consultation

5.1 No consultations have been required in the preparation of this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Margaret Hogg, Senior Manager (Financial Management) on 01294 324551 Background Papers None

49 50 Extract of Changes to Accounting Policies Appendix One

Note O Investment Properties

Original

Investment properties held by the Council were reclassified on 1 April 2009 as a result of not meeting the criteria defined by the code. These properties are now categorised as Property, Plant and Equipment. Common Good properties are categorised as Investment Properties.

Revised

Investment properties are those that are used solely to earn rentals and/or for capital appreciation. Investment properties are measured initially at cost and subsequently at fair value, being the price that would be received to sell such an asset in an orderly transaction between market participants at the measurement date. As a non-financial asset, investment properties are measured at highest and best use. Properties are not depreciated but reviewed annually and revalued regularly to ensure their carrying value reflects market conditions at the year-end.

Note Q Leases

Original

The Council as Lessee

North Ayrshire Council currently has no finance leases where the Council is the lessee. Rentals paid under operating leases, for vehicles and plant, are charged to the appropriate service account in the CIES as an expense of the services benefiting from use of the leased property.

Revised

North Ayrshire Council currently has one Finance Lease where the Council is the lessee. The item being leased has been treated as if it had been purchased by the Council. It is added in to the Council’s Asset Register at either fair value or if lower the NPV of the minimum lease payments and is then treated in the same way as all other Council assets. Rentals paid under operating leases, for vehicles and plant, are charged to the appropriate service account in the CIES as an expense of the services benefiting for use of the leased equipment.

51 Note R Property, Plant and Equipment

Original

Assets are carried on the Balance Sheet using the following measurement bases:

• plant, equipment, infrastructure and community assets – depreciated historical cost;

• vehicles – net realisable value;

• assets under construction – historical cost;

• dwellings – fair value, determined using the basis of existing use value for social housing (EUV-SH);

• all other assets – fair value, determined by the amount that would be paid for the asset in its existing use (existing use value – EUV).

Revised

Assets are carried on the Balance Sheet using the following measurement bases:

• Council Dwellings - Fair value, determined using the basis of existing use value for social housing (EUV-SH);

• Other Land and Buildings - Fair value, determined by the amount that would be paid for the asset in its existing use (existing use value - EUV). Where there is no market- based evidence of fair value, because of the specialist nature of an asset, depreciated replacement cost is used as an estimate of fair value.

• Vehicles, Plant and Equipment - depreciated historical cost

• Infrastructure Assets - depreciated historical cost

• Community Assets - depreciated historical cost

• Surplus Assets - fair value based on market value in highest and best use

• Assets Under Construction - historical cost

• Investment Properties (Common Good only) - fair value based on market value in highest and best use

52 Appendix 2

Note 40: Accounting Policies recorded in the Balance Sheet. The de minimis level for recognition of such transactions as been General Principles agreed at £5,000, therefore all known transactions of £5,000 or above have been included. These Accounts summarise the Council’s transactions for the 2015/16 financial year and its position at the  Where there is evidence that debts are unlikely to year-end of 31 March 2016. The Council is required to be settled, the balance of debtors is written down prepare an annual Statement of Accounts by the Local and a charge made to revenue for the income that Authority Accounts (Scotland) Regulations 2014 and might not be collected. Section 12 of the Local Government in Scotland Act 2003 requires that they are prepared in accordance B Allocation of Central Support Costs and with proper accounting practices. These practices Recharges to Capital primarily comprise the Code of Practice on Local Authority Accounting in the United Kingdom 2015/16 The net cost of central support services is fully and the Service Reporting Code of Practice 2015/16, allocated to user services in accordance with the supported by International Financial Reporting seven principles of the CIPFA Service Reporting Code Standards (IFRS). of Practice (SeRCOP), with the exception of:

The accounting convention adopted in the Statement  Corporate and Democratic Core: costs relating to of Accounts is principally historical cost, modified by the Council’s status as a multi-functional, the revaluation of certain categories of non-current democratic organisation; assets and financial instruments. The accounts have been prepared on a Going Concern basis.  Non-Distributed Costs: the cost of discretionary benefits awarded to employees retiring early and A Accruals of Income and Expenditure any depreciation and impairment losses chargeable on non-operational properties. Activity is accounted for in the year that it takes place, not simply when cash payments are made or received. These two cost categories are accounted for as In particular: separate headings in the CIES, as part of Net Cost of Services.  Suppliers’ invoices paid in the two weeks following the year-end have been included together with C Carbon Reduction Commitment Scheme specific accruals in respect of further material items provided the goods and services were received The Council is required to participate in the Carbon prior to 31 March. Reduction Commitment (CRC) Energy Efficiency Scheme. This scheme is currently in the second year  All known specific and material sums payable to the of its second phase which ends on 31 March 2019. Council have been brought into account. Revenue The Council is required to purchase allowances, either from the sale of goods or the provision of services prospectively or retrospectively, and surrender them is recognised when the Council transfers the on the basis of emissions i.e. carbon dioxide produced significant risks and rewards of ownership to the as energy is used. As carbon dioxide is emitted, a purchaser or can reliably measure the percentage liability and an expense are recognised. The liability of completion of the transaction and it is probable will be discharged by surrendering allowances. The that economic benefits or service potential liability is measured at the best estimate of the associated with the transaction will flow to the expenditure required to meet the obligation, normally Council. at the current market price of the number of allowances required to meet the liability at the  Supplies are recorded as expenditure when they reporting date. The cost to the authority is recognised are consumed. Where there is a gap between the and reported in the costs of the Council’s services and date supplies are received and their consumption, is apportioned to services on the basis of energy they are carried as inventories on the Balance consumption. Sheet. D Cash and Cash Equivalents  Interest payable on borrowings and receivable on investments is accounted for on the basis of the Cash is represented by cash in hand and deposits with effective interest rate for the relevant financial financial institutions repayable without penalty on instrument rather than the cash flows fixed or notice of not more than 24 hours. Cash equivalents determined by the contract. Interest receivable and are investments that mature in three months or less dividend income is recognised when it is probable from the date of acquisition and that are readily that the economic benefits or service potential convertible to known amounts of cash with insignificant associated with the transaction will flow to the risk of change in value. Council. In the Cash Flow Statement, cash and cash  Where revenue and expenditure have been equivalents are shown net of bank overdrafts that are recognised but cash has not been received or paid, repayable on demand and form an integral part of the a debtor or creditor for the relevant amount is Council’s cash management. 53 Post-Employment Benefits E Charges to Revenue for Non-Current Assets The Council participates in two separate pension schemes: Services are debited with the following amounts to record the cost of holding non-current assets during  The Scottish Teachers’ Pension Scheme the year: administered by the Scottish Government  depreciation attributable to the assets used by the relevant service;  The Local Government (Scotland) Pension Scheme administered by the Strathclyde Pension Fund.  revaluation and impairment losses on assets used by the service where there are no accumulated Both schemes provide defined benefits to members gains in the Revaluation Reserve against which the (retirement lump sums and pensions), earned while losses can be written off; and employees work for the Council. However, the arrangements for the teachers’ scheme mean that  amortisation of intangible fixed assets attributable liabilities for these benefits cannot be identified to the service. specifically to the Council. The scheme is therefore accounted for as if it were a defined contributions The Council is not required to raise council tax to cover scheme. No liability for future payments of benefits is depreciation and impairments. Depreciation and recognised in the Balance Sheet and the Education impairment losses are replaced by Loans Fund Services line in the CIES is charged with the principal repayments in the General Fund Balance, by employer’s contributions payable to the Teachers’ way of an adjusting transaction within the Capital Pension Scheme in the year. Adjustment Account in the Movement in Reserves Statement for the difference between the two. The Local Government Pension Scheme The Local Government Pension Scheme (LGPS) is F Employee Benefits accounted for as a defined benefits scheme.

Benefits Payable During Employment The liabilities of the Strathclyde Pension Fund Short-term employee benefits such as salaries, wages, attributable to the Council are included in the Balance overtime and paid annual leave for current employees, Sheet on an actuarial basis using the ‘projected credit are recognised as an expense in the year in which unit method’. i.e. an assessment of the future employees render service to the Council. All salaries payments that will be made in relation to retirement and wages earned up to 31 March are included in the benefits earned to date by employees, based on Statement of Accounts irrespective of when the assumptions about mortality rates, employee turnover payment was made. An accrual is made for the cost of rates, etc., and projected earnings for current holiday entitlements earned by employees but not employees. taken before the year-end and which employees can carry forward into the next financial year. Such Liabilities are discounted to their value at current accruals are required, under statute, to be reversed prices, using a discount rate as advised by the out of the General Fund Balance by a credit to the actuaries Hymans Robertson. Accumulating Compensated Absences Adjustment Account in the Movement in Reserves Statement. The assets of the Strathclyde Pension Fund attributable to North Ayrshire Council are included in Termination Benefits the Balance Sheet at their fair value of current bid Termination benefits are amounts payable as a result prices as required under IAS19, as revised in June of a decision by the Council to terminate an officer’s 2011. employment before the normal retirement date or an officer’s decision to accept voluntary redundancy. They The change in the net pension liability is analysed into are charged on an accruals basis to the relevant the following components: services line in the CIES at the point when the offer of termination can no longer be withdrawn by the Council.  current service cost – the increase in liabilities as a result of service earned this year, allocated in the Where termination benefits involve the enhancement CIES to the services for which the employees of pensions, the General Fund balance is charged with worked. the amount payable by the Council to the pension fund or pensioner in the year, not the amount calculated  past service cost (including curtailments) – the according to the relevant accounting standards. In the increase in liabilities arising from current year Movement in Reserves Statement, appropriations are decisions whose effect relates to years of service required to and from the Pensions Reserve to remove earned in earlier years, charged to Non Distributed the notional debits and credits for pension Costs in the CIES. enhancement termination benefits and to replace them with debits for the cash paid to the pension fund and  interest cost – the expected increase in the present pensioners and any such amounts payable but unpaid value of liabilities during the year as they move one at the year-end. year closer to being paid, charged to the Financing and Investment Income and Expenditure line in the CIES. 54 I Financial Assets  expected return on assets – the annual investment return on the fund assets attributable to the The financial assets of the Council are entirely Council, based on an average of the expected long- comprised of loans and receivables i.e. assets that term return, credited to the Financing and have fixed or determinable payments but are not Investment Income and Expenditure line in the quoted in an active market. CIES. Loans and receivables are recognised on the Balance  gains/losses on settlements – the result of actions Sheet when the Council becomes a party to the to relieve the Council of liabilities or events that contractual provisions of a financial instrument, initially reduce the expected future service or accrual of measured at fair value, then at amortised cost. For benefits of employees, charged or credited to Non- most of the Council lending, this means that the Distributed Costs in the CIES. amount presented in the Balance Sheet is the outstanding principal receivable (plus accrued interest)  actuarial gains and losses – changes in the net and interest credited to the CIES is the amount pensions liability that arise because events have receivable for the year in the loan agreement. not coincided with either financial assumptions, demographic assumptions, or assumptions based Where assets are identified as impaired because of a on experience made at the last actuarial valuation, likelihood arising from a past event that payments due or because the actuaries have updated these under the contract will not be made, the asset is assumptions, charged to the Pensions Reserve on written down and a charge made to the Financing and the Balance Sheet. Investment Income and Expenditure line in the CIES. The impairment loss is measured as the difference  employer’s contributions – cash paid as employer’s between the carrying amount and the present value of contributions to the pension fund in settlement of the revised future cash flows discounted at the asset’s liabilities, not accounted for as an expense. original effective interest rate.

In relation to retirement benefits, statutory provisions J Financial Liabilities require the General Fund balance to be charged with the amount payable by the Council to the pension fund Financial liabilities are recognised on the balance or directly to pensioners in the year, not the amount sheet when the Council becomes contractually obliged calculated according to the relevant accounting by the financial instrument and are initially measured standards. In the Movement in Reserves Statement, at fair value and then carried at amortised cost. this means that there are appropriations to and from the Pensions Reserve to remove the notional debits For most of the borrowings that the Council has, this and credits for retirement benefits and replace them means that the amount presented in the balance sheet with charges for the cash paid to the pension fund and is the outstanding principal repayable (plus accrued pensioners and any such amounts payable but unpaid interest) and interest charged to the CIES is the at the year-end. The negative balance that arises on amount payable for the year according to the loan the Pensions Reserve thereby measures the beneficial agreement. impact on the General Fund of being required to account for retirement benefits on the basis of cash Costs associated with debt restructuring (premiums flows rather than as benefits earned by employees. and discounts) are charged to the Financing and Investment Income and Expenditure line in the CIES in G Events after the Reporting Period the year of repayment of the original debt in accordance with accounting regulations. These are events, both favourable and unfavourable, that occur between the end of the reporting period (31 Where premiums and discounts have been charged to March) and the date when the Statement of Accounts the CIES, regulations permit the costs of restructuring is authorised for issue. An adjustment is made to the to be released to revenue over the period of the financial statements where there is evidence that the replacement loan. The reconciliation of amounts event relates to the reporting period; otherwise the charged to the CIES to the net charge required against financial statements are not adjusted, and where the the General Fund balance is managed by a transfer to amount is material, a disclosure is made in the notes. or from the Financial Instruments Adjustment Account in the Movement in Reserves Statement. H Exceptional Items and Prior Period Adjustments K Government Grants and Contributions

When items of income or expenditure are material, Whether paid on account, by instalments or in arrears, their nature and amount is disclosed separately, either government grants and third party contributions and on the face of the CIES or in the notes to the accounts, donations are recognised as due to the Council when depending on how significant the items are to an there is reasonable assurance that: understanding of the Council’s financial performance.  the Council will comply with the conditions attached to the payments, and

55  the grants or contributions will be received. active market. The depreciable amount of an intangible asset is amortised over its useful life Monies advanced as grants and contributions for (generally between 1 and 6 years) to the relevant which conditions have not been satisfied are carried in service line(s) in the CIES. the Balance Sheet as creditors. When conditions are satisfied, the grant or contribution is credited to the N Inventories relevant service line (for revenue grants) or Taxation and Non-Specific Grant Income (for non-ring-fenced Inventories include consumable stock and work-in- revenue grants and all capital grants). Where capital progress and are recognised in the Balance Sheet at grants are credited to the CIES, they are reversed out the lower of cost and net realisable value. The of the General Fund Balance in the Movement in valuation of work-in-progress has been made at cost Reserves Statement. plus an appropriate proportion of overheads, together with attributable profits and allowances for foreseeable When the grant has yet to be used to finance capital losses. expenditure, it is posted to the Capital Grants Unapplied Account. When it has been applied, it is O Investment Properties posted to the Capital Adjustment Account. Amounts in the Capital Grants Unapplied Account are transferred Investment properties are those that are used solely to to the Capital Adjustment Account once they have earn rentals and/or for capital appreciation. Investment been applied. properties are measured initially at cost and subsequently at fair value, being the price that would L Heritage Assets be received to sell such an asset in an orderly transaction between market participants at the A heritage asset is defined as a tangible asset with measurement date. As a non-financial asset, historical, artistic, scientific, technological, geophysical investment properties are measured at highest and or environmental qualities that is held and maintained best use. Properties are not depreciated but reviewed principally for its contribution to knowledge and culture. annually and revalued regularly to ensure their carrying value reflects market conditions at the year- The Council holds heritage assets consisting of civic end. regalia and silverware, historical artefacts, fine art and public artworks. The assets are held at valuation and P Landfill Allowance Trading Scheme no depreciation is charged on the assets. Expenditure to maintain the assets is written off to the Landfill allowances became tradable in Scotland on 1 Comprehensive Income and Expenditure Statement April 2008. Allowances (whether issued free by the (CIES) in the year of expenditure. Donated heritage Scottish Government or purchased from another waste assets are reflected in the balance sheet at valuation disposal authority) are recognised as current assets. with a gain equivalent to the value of the asset As landfill is used, a liability is recognised measured at reported in the CIES in the year of donation. the best estimate of the expenditure required to meet the obligation at the balance sheet date, which is Measurement normally the market price. The scheme is currently The Council’s heritage assets are recognised on the under review and the Scottish Government has Balance Sheet at values determined by specialist suspended penalties and trading, therefore no asset or external valuers and by experienced officers within the liability has been recognised in the Statements as Community and Culture service. Valuations have there is no market for the allowances. been largely undertaken on an insurance basis at retail level. Only items deemed to have a value of £10,000 Q Leases and above have been disclosed in the Balance Sheet. Leases are classified as finance leases where the Disclosure terms of the lease transfer substantially all the risks Not all of the Council’s identified heritage assets will be and rewards incidental to ownership of the property disclosed in the Balance Sheet. It is not deemed from the lessor to the lessee. All other leases are practicable to obtain external valuations for all items classified as operating leases. Where a lease covers defined as heritage assets. These include: Museum both land and buildings, the land and buildings and Gallery items with a value of less than £10,000; elements are considered separately for classification. Castles; Monuments and War Memorials. The Council as Lessee M Intangible Assets North Ayrshire Council currently has one Finance Lease where the Council is the lessee. The item being Expenditure on non-monetary assets that do not have leased has been treated as if it had been purchased by physical substance but are controlled by the Council the Council. It is added in to the Council’s Asset as a result of past events (e.g. software licences) is Register at either fair value or if lower the NPV of the capitalised when it is expected that it will bring benefits minimum lease payments and is then treated in the to the Council for more than twelve months. Intangible same way as all other Council assets. Rentals paid assets are measured initially at cost. Amounts are not under operating leases, for vehicles and plant, are revalued, as the fair value of the assets held by the charged to the appropriate service account in the CIES Council cannot be determined by reference to an 56 as an expense of the services benefiting for use of the replacement cost is used as an estimate of fair leased equipment. value.

The Council as Lessor  Vehicles, Plant and Equipment - depreciated North Ayrshire Council has no finance leases where historical cost the Council is the lessor. It rents out property on cancellable operating leases only. Where the Council  Infrastructure Assets - depreciated historical grants an operating lease over a property or an item of cost plant or equipment, the asset is retained in the Balance Sheet.  Community Assets - depreciated historical cost R Property, Plant and Equipment  Surplus Assets - fair value based on market Assets that have physical substance and are held for value in highest and best use use in the supply of services, for rental to others, or for administrative purposes and that are expected to be  Assets Under Construction - historical cost used during more than one financial year are classified as Property, Plant and Equipment.  Investment Properties (Common Good only) - fair value based on market value in highest Valuations of council dwellings are based on beacon and best use values calculated by the District Valuer with valuations of other land and buildings carried out internally. Both Where there is no market-based evidence of fair value valuations are in accordance with the methodologies because of the specialist nature of an asset, and bases of estimation as set out in the professional depreciated replacement cost is used as an estimate standards of the Royal Institution of Chartered of fair value. Surveyors (RICS). Assets included in the Balance Sheet at fair value are Recognition revalued on a rolling 5-year programme. Increases in Expenditure on the acquisition, creation or valuations are matched by credits to the Revaluation enhancement of Property, Plant and Equipment is Reserve to recognise unrealised gains. capitalised on an accruals basis. Expenditure that merely maintains the condition of an asset (i.e. repairs Where decreases in value are identified, the and maintenance) is charged as an expense when it is revaluation loss is accounted for as follows: incurred.  where there is a balance of revaluation gains for The Council has a de minimis level of £10,000 for the asset in the Revaluation Reserve, the carrying expenditure to be classed as capital. Land and amount of the asset is written down against that Buildings with a valuation below £10,000 are not balance (up to the amount of the accumulated recognised on the Council Balance Sheet. gains);

Measurement  where there is no balance in the Revaluation Assets are initially measured at cost, comprising: Reserve or insufficient balance, the carrying

amount of the asset is written down against the  the purchase price; and relevant service line(s) in the CIES.

 any costs attributable to bringing the asset to the The Revaluation Reserve contains revaluation gains location and condition necessary for it to be recognised since 1 April 2007 only, the date of its capable of operating in the manner intended by formal implementation. Gains arising before that date management. have been consolidated into the Capital Adjustment Account. The Council does not capitalise borrowing costs incurred whilst assets are under construction. Impairment Assets are assessed at each year-end to establish Assets are carried on the Balance Sheet using the whether there is any indication that an asset may be following measurement bases: impaired. Where indications exist and any possible differences are estimated to be material, the  Council Dwellings - Fair value, determined recoverable amount of the asset is estimated and, using the basis of existing use value for social where this is less than the carrying amount of the housing (EUV-SH); asset, an impairment loss is recognised for the shortfall.  Other Land and Buildings - Fair value, determined by the amount that would be paid Where impairment losses are identified, they are for the asset in its existing use (existing use accounted for as follows: value - EUV). Where there is no market- based evidence of fair value, because of the  where there is a balance of revaluation gains for specialist nature of an asset, depreciated the asset in the Revaluation Reserve, the carrying 57 amount of the asset is written down against that balance (up to the amount of the accumulated Deprecation is charged on a straight-line basis over gains); the useful life of the assets (as advised by a suitably qualified officer). Depreciation is charged in the year  where there is no balance in the Revaluation of acquisition but not in the year of sale. Reserve or insufficient balance, the carrying amount of the asset is written down against the Where a Property, Plant and Equipment asset has relevant service line(s) in the CIES. major components whose cost is significant in relation to the total cost of the item, the components are Where an impairment loss is subsequently reversed, depreciated separately. For the purposes of the reversal is credited to the relevant service line(s) in component accounting the Council considers the CIES, up to the amount of the original loss, significant components being those with a cost that is adjusted for depreciation that would have been at least 20% of the overall cost of the asset. Individual charged if the loss had not been recognised. assets shall be disregarded for component accounting where their carrying value is below £2m. Disposals When it becomes probable that the carrying amount of Revaluation gains are also depreciated, with an an asset will be recovered principally through a sale amount equal to the difference between current value transaction rather than through its continuing use, it is depreciation charged on assets and the depreciation reclassified as an Asset Held for Sale. The asset is that would have been chargeable based on their revalued immediately before reclassification and then historical cost being transferred each year from the carried at the lower of this amount and fair value less Revaluation Reserve to the Capital Adjustment costs to sell. Where there is a subsequent decrease to Account. fair value less costs to sell, the loss is posted to the Other Operating Expenditure line in the CIES. Gains S Provisions, Contingent Liabilities and in fair value are recognised only up to the amount of Contingent Assets any previously recognised losses. Depreciation is not charged on Assets Held for Sale. Provisions Provisions are made where an event has taken place Property, land and buildings are classified as ‘held for that gives the Council a legal or constructive obligation sale’ when the following criteria are met: that probably requires settlement by a transfer of economic benefits or service potential, and a reliable  the property is available for sale in its present estimate can be made of the amount of the obligation. condition; For instance, the Council may be involved in a court case that could eventually result in the making of a  the sale must be highly probable; settlement or the payment of compensation.

 the asset must be actively marketed for sale at a Provisions are charged as an expense to the price that is reasonable in relation to its current fair appropriate service line in the CIES in the year that the value; Council becomes aware of the obligation, and measured at the best estimate, at the balance sheet  the sale should be expected to qualify for date, of the expenditure required to settle the recognition as a completed sale within one year. obligation, taking into account relevant risks and uncertainties. When an asset is disposed of or decommissioned, the carrying amount of the asset in the Balance Sheet is When payments are eventually made, they are written off to the Other Operating Expenditure line in charged to the provision carried in the balance sheet. the CIES as part of the gain or loss on disposal. Estimated settlements are reviewed at the end of each Receipts from disposals are credited to the same line financial year; where it becomes less than probable in the CIES as part of the gain or loss on disposal. that a transfer of economic benefits will be required (or Any revaluation gains accumulated for the asset in the a lower settlement than anticipated is made); the Revaluation Reserve are transferred to the Capital provision is reversed and credited back to the relevant Adjustment Account. service.

To comply with statutory guidance, this gain or loss is Where some or all of the payment required to settle a excluded when determining the General Fund balance provision is expected to be recovered from another within the Movement in Reserves Statement. party (e.g. from an insurance claim), this is only recognised as income for the relevant service if it is Depreciation virtually certain that reimbursement will be received if Depreciation is provided for on all Property, Plant and the Council settles the obligation. Equipment assets. An exception is made for assets without a determinable finite useful life (i.e. freehold land and certain Community Assets) and assets that Contingent Liabilities are not yet available for use (i.e. assets under A contingent liability arises where an event has taken construction). Investment Properties and Assets Held place that gives the Council a possible obligation, for Sale are not subject to depreciation. whose existence will only be confirmed by the 58 occurrence or otherwise of uncertain future events not  life-cycle replacement costs – proportion of the wholly within the control of the Council. Contingent amounts payable is posted to the Balance Sheet as liabilities also arise in circumstances where a provision a prepayment and then recognised as additions to would otherwise be made but either it is not definite Property, Plant and Equipment when the relevant that an outflow of resources will be required, or the works are eventually carried out. amount of the obligation cannot be measured reliably. U Reserves Contingent liabilities are not recognised in the balance sheet but disclosed in a note to the accounts. Reserves are created by appropriating amounts out of the General Fund Balance in the Movement in Contingent Assets Reserves Statement. When expenditure to be A contingent asset arises where an event has taken financed from a reserve is incurred, it is charged to the place that gives the Council a possible asset whose appropriate service in that year to score against the existence will only be confirmed by the occurrence or Surplus/Deficit on the Provision of Services in the otherwise of uncertain future events not wholly within CIES. The reserve is then appropriated back into the the control of the Council. General Fund Balance in the Movement in Reserves Statement so that there is no net charge against Contingent assets are not recognised in the balance council tax for the expenditure. sheet but disclosed in a note to the accounts where it is probable that there will be an inflow of economic Certain reserves are kept to manage the accounting benefits or service potential. processes for non-current assets, financial instruments and retirement benefits and do not represent usable T Public Private Partnership (PPP) and Similar resources for the Council; these reserves are Contracts explained in the relevant notes.

PPP and similar contracts are agreements to receive V Revenue Expenditure Funded from Capital services, where the responsibility for making available under Statute the property, plant and equipment needed to provide the services passes to the PPP contractor. As the Expenditure incurred during the year that may be Council is deemed to control the services that are capitalised under statutory provisions but does not provided under its PPP schemes and as ownership of result in the creation of a non-current asset is charged the property, plant and equipment will pass to the as expenditure to the relevant service in the CIES in Council at the end of the contracts for no additional the year. Where the Council has determined to meet charge, the Council carries the assets used under the the cost of this expenditure from existing capital contracts on its Balance Sheet as part of Property, resources or by borrowing, a transfer in the Movement Plant and Equipment. in Reserves Statement from the General Fund Balance to the Capital Adjustment Account then reverses out The original recognition of these assets at fair value the amounts charged so that there is no impact on the (based on the cost to purchase the property, plant and level of council tax. equipment) was balanced by the recognition of a liability for amounts due to the scheme operator to pay W VAT for the capital investment. For North Ayrshire Council Schools PPP contract, the liability was written down by All income and expenditure excludes amounts relating an initial capital contribution of £1.743 million. to VAT, as all VAT collected is payable to HM Revenue and Customs and net VAT paid is fully The amounts payable to the PPP operators each year recoverable by the Council. are analysed into five elements:

 fair value of the services received during the year – debited to the relevant service in the CIES;

 finance cost – the interest charge on the outstanding Balance Sheet liability, debited to the Financing and Investment Income and Expenditure line in the CIES;

 contingent rent – increases in the amount to be paid for the property arising during the contract, debited to the Financing and Investment Income and Expenditure line in the CIES;

 payment towards liability – applied to write down the Balance Sheet liability towards the PPP operator (the profile of write-downs is calculated using the same principles as for a finance lease);

59

60 NORTH AYRSHIRE COUNCIL

Agenda Item 8 23 May 2016

Audit Committee

Title: Review of Housing Benefit subsidy certification 2014/15

Purpose: To inform the Committee of the findings of the Audit Scotland review of Housing Benefit subsidy certification 2014/15 as set out at Appendix 1.

Recommendation: That the Committee notes the findings of the Audit Scotland review of Housing Benefit subsidy certification 2014/15 as set out at Appendix 1.

1. Executive Summary

1.1 Audit Scotland has reviewed the housing benefit (HB) subsidy certification letters of all 32 Scottish local authorities for 2014/15. Scottish councils processed 157,617 new claims and 1,426,059 changes of circumstance and paid out £1.778 billion in HB of which £1.761 billion (99%) was recovered from the DWP through subsidy compared to £1.772 billion paid and £1.768 billion (99.8%) recovered in 2013/14. The Council processed 4,940 new claims and 20,944 changes of circumstances and paid out £55.624m in Housing Benefit in 2014/15.

1.2 In 2014/15 Auditors identified 43 subsidy claim errors in 18 local authorities for the sum of £1.134m (0.06% of expenditure) compared to £0.274m (0.01% of expenditure) for 60 errors in 19 local authorities in 2013/14. The majority of errors were in the classification of expenditure (37%) and calculation of claimant income (28%). No errors were found in the Council's subsidy claim.

2. Background

Housing Benefit Expenditure and Subsidy Income from DWP

2.1 All Scottish Councils submit an annual subsidy claim form to the Department for Work and Pensions (DWP) to reclaim Housing Benefit paid to claimants. Audit Scotland is required to certify the subsidy claim is fairly stated and report any errors to the DWP.

61 2.2 Since 2013/14 the Housing Benefit caseload across Scotland has fallen from 476,219 to 468,380 mainly due to people moving into work but expenditure has increased from £1.772 billion in 2013/14 to £1.778 billion in 2014/15 mostly due to increased rent levels and reduced household income; and the average spend per claimant in Scotland has risen from £3,721 to £3,796 during the same period. The Council's Housing Benefit caseload reduced from 15,674 to 15,330 from 2013/14 to 2014/15; a reduction of 344 or 2.1%; Housing Benefit expenditure increased by £0.128m from £55.496m to £55.624m during the same period; and average spend per claimant increased from £3,540 to £3,628 in North Ayrshire.

2.3 DWP administration grant has reduced from £46.5m to £30.3m from 2012/13 to 2014/15 with further reductions due in 2015/16 and 2016/17; Councils are required to operate an efficient and effective Benefits Service with less DWP funding. At the time of the Audit Scotland report the Council's DWP administration grant reduced from £1.528m to £0.958m from 2012/13 to 2014/15 a reduction of £0.570m or 37.3%. Since the report the Council's DWP administration grant has reduced to £0.883m in 2015/16 and £0.828m in 2016/17; a reduction of 54% since 2012/13.

2014/15 Certification Results

2.4 The level of subsidy payable in respect of Housing Benefit overpayments caused by Local Authority errors or administrative delays is based on DWP lower and upper threshold targets:

 Nil subsidy if error rate exceeds upper threshold;  40% subsidy if error rate is between lower and upper thresholds; or  100% if error rate is below lower threshold.

The lower the Local Authority error rate the higher the amount of subsidy received. The Council achieved 100% subsidy by having an error rate of £183,504 which was below the DWP lower threshold target of £266,269; only one Council in Scotland didn't achieve 100% subsidy.

2.5 The level of overpayments across Scotland increased from £52.241m in 2013/14 to £61.371m in 2014/15; 3% of Housing Benefit expenditure. The increase in overpayments identified is related to improved data matching with HM Revenue and Customs and the introduction of the DWP fraud and error incentive scheme (FERIS). The Council identified £1,172,268 Housing Benefit recoverable overpayments in 2014/15 compared to £1,139,788 in 2013/14, an increase of £32,480; 2.1% of Housing Benefit expenditure.

Looking Forward

62 2.6 Scottish Councils paid out Housing Benefit of £52.646m and £1.634m Rent Allowance to Housing Associations for board and lodging, leased or licensed temporary accommodation to assist local authorities in discharging their statutory homeless function, or to prevent a homeless claimant ; compared to £52.757m and £1,803m in 2013/14; an increase of £0.280m. The Council had no expenditure in this area. This expenditure excludes Council owned temporary accommodation which is not separately identified from the subsidy claim and cannot be quantified.

2.7 The DWP has indicated that it intends to replace the current subsidy arrangements for temporary accommodation with a new grant system from 2017/18; details of the scheme are unknown but the aim is to allow local authorities to determine how best to deliver homeless accommodation provision in their local area.

2.8 The DWP increased the amount of Discretionary Housing Payment (DHP) funding from £125m to £150m up £25m (20%) across the UK from 2016/17 to protect vulnerable people from welfare reforms; the Council received DWP funding of £476,146 compared to £374,063 in 2015/16; an increase of £102,083 and allocated as £73,661 for mitigation of spare room subsidy and £28,422 for other hardship cases.

2.9 Housing Benefit for Working Age claimants will transfer to the DWP under Universal Credit; the DWP position with regards to pensioner Housing Benefit claims is less clear. The DWP is considering transferring the responsibility for funding the administration of Housing Benefit for pensioners to Councils but this has not been confirmed.

2.10 New tenants living in social housing from 1 April 2016 and new tenants in Council owned supported accommodation from 1 April 2017 will have their Housing Benefit and Universal Credit limited to Local Housing Allowance levels from 1 April 2018 instead of being calculated against the rent charged. The majority of Councils rents are currently lower than the Local Housing Allowance but with LHA rates frozen for 4 years the position may change. In North Ayrshire the cap is mostly likely to affect single tenants aged under 35 where a shared room rate applies and tenants living in temporary accommodation where weekly rents are higher than LHA rates. This will widen the gap between the amount of Housing Benefit or Universal Credit received and the rent charged. DHP may be used to address this gap on a temporary basis but it is unclear if there will be sufficient DHP funding to cover the shortfall in the cost of providing temporary accommodation. Housing Services is carrying out a review of its temporary accommodation service.

63 3. Proposals

3.1 That the Committee notes the findings of the Audit Scotland review of Housing Benefit subsidy certification 2014/15 as set out at Appendix 1.

4. Implications

Financial: Limiting Housing Benefit and Universal Credit to LHA levels from 1 April 2018 may impact on rent income and increase rent arrears and affect the provision of the Council's homelessness service. DHP may address the shortfall in rental income but DWP funding levels for 2018 are unknown. Human Resources: None Legal: None Equality: None Environmental & None Sustainability: Key Priorities: Audit Scotland report provides a basis for benchmarking Council performance. This report provides assurance in respect of effective governance and the Council's financial position. Community Benefits: Not applicable

5. Consultation

5.1 There has been no consultation on the Audit Scotland report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : SH For further information please contact Stephen Humphries Senior Manager Revenues and Benefits on 01294 310106 Background Papers Audit Scotland Housing Benefit Subsidy Certification 2014/15

64 Appendix 1 Housing benefit subsidy certification 2014/15

Prepared by Audit Strategy January 2016

65

Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission check that organisations spending public money use it properly, efficiently and effectively.

66

Contents

Purpose of this report...... 4 Introduction ...... 4 Key messages ...... 4 Background to HB expenditure and subsidy income from DWP ...... 5 Audit testing methodology ...... 8 2014/15 certification results ...... 9 Local authority error and administrative delay subsidy ...... 10 Other issues: overpayments arising from fraud and error ...... 11 Looking forward ...... 13 Appendix 1: variations in HB expenditure and claimant numbers ...... 16 Appendix 2: Details of errors and auditor comments ...... 18 Expenditure classification ...... 18 Income ...... 20 Reconciliations ...... 22 Eligible rent ...... 23 Benefit cap ...... 24 Uncashed cheques...... 24 Interim benefit subsidy ...... 24 Modified schemes ...... 25 Appendix 3 ...... 27 Rent rebates...... 27 Rent allowances ...... 27

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67 Purpose of this report

Purpose of this report

Introduction

1. Audit Scotland has reviewed the housing benefit (HB) subsidy certification letters of all 32 Scottish local authorities for 2014/15. This report provides an overview of the findings of that review and the extent to which auditors reported errors during the certification process.

2. As well as identifying areas where the Department for Work and Pensions (DWP) may reclaim subsidy from local authorities, it also highlights common issues that councils should take note of in order to maximise the amount of subsidy that could be claimed in the future.

3. The final section of this report looks at the DWP's planned reforms and the potential impact on HB subsidy in the future.

Key messages

4. In 2014/15 Scottish councils paid out £1.778 billion in HB of which £1.761 billion (99%) was recovered from the DWP through subsidy. In 2013/14, £1.772 billion was paid out and £1.768 billion (99.8%) was recovered from the DWP.

5. Auditors identified 43 errors in subsidy claims and reported them in their 2014/15 certification letters in respect of 18 local authorities which was an improvement over 2013/14 when auditors identified 60 errors in subsidy claims of 19 local authorities.

6. The errors identified during the 2014/15 certification process resulted in subsidy being over claimed by £1.134million (0.06% of expenditure) in the year-end claims submitted by local authorities to the DWP. This represents a significant increase over the £0.274 million (0.01% of expenditure) of over claimed subsidy that was identified in 2013/14. This increase is mainly due to Falkirk Council's year-end claim including an error in the interim benefit subsidy received of £0.823 million.

7. Additionally, one local authority was unable to claim a total of £0.244 million in subsidy as a result of exceeding the DWPs pre-agreed threshold limits for local authority error and administrative delay overpayments. This is, however, a significant improvement from 2013/14 when five Scottish local authorities were unable to claim a total of £0.784 million in subsidy.

8. Auditors reported that most errors were identified in the classification of expenditure and the calculation of claimant income. As these were the same categories where most errors were identified in 2013/14, local authorities should ensure that effective management arrangements are in place to help minimise processing errors, overpayments and administrative delays and, where overpayments have occurred, that they are correctly calculated and classified.

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68 Purpose of this report

9. Local authorities should also review HB and housing service arrangements in order to ensure that they are prepared to meet the significant challenges posed by future planned subsidy reforms such as the reduction in administration subsidy, and the impact of changes to homeless accommodation subsidy.

Background to HB expenditure and subsidy income from DWP

10. Local authorities administer HB, a means tested social security benefit, on behalf of the DWP. HB is intended to help claimants meet housing costs for rented accommodation in both the private and social rented sector.

11. HB is split into two categories; rent rebates, where the local authority is the landlord, and rent allowances, where the landlord is, for example, a social sector organisation such as a housing association, or a private individual.

12. Local authorities submit subsidy claim forms to the DWP at the end of each financial year in order to reclaim most of the HB paid to claimants. The subsidy claim form contains various cells which detail the local authority's HB expenditure in areas such as the total rent rebate and total rent allowance paid, and the value of overpayments identified.

13. Each year the local authority's appointed external auditor is required to conclude whether the subsidy claim is fairly stated and certify it accordingly. Any errors identified are reported to the DWP in a covering letter that accompanies the final claim.

14. The HB subsidy scheme has built in incentives to encourage local authorities to take appropriate action to minimise HB overpayments, and expenditure above DWP set limits in respect of administrative delays.

15. Exhibit 1 below shows that there has been an overall reduction in the number of HB claimants since 2013/14. However, this does not correlate with HB expenditure in exhibit 2 which saw a reduction of 1% from £1.791 billion in 2012/13 to £1.772 billion in 2013/14, before rising slightly by 0.3% in 2014/15 to £1.778 billion.

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69 Purpose of this report

Exhibit 1: No. of HB claimants in Scotland 490,000 484,868 485,000 483,880

480,000

474,972 476,219 475,000

470,000 468,380 465,000 466,445

460,000

455,000 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Exhibit 2: Total HB Spend in Scotland

£1,900,000,000 £1,700,000,000 £1,500,000,000 £1,300,000,000 £1,100,000,000 £900,000,000 £700,000,000 £500,000,000 £300,000,000 £100,000,000 2010-11 2011-12 2012-13 2013-14 2014-15

16. Table 1 below shows that the average amount spent per claimant, using claimant numbers at the end of each financial year as a guide, has been rising.

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Table 1 average spend per claimant

Year Claimant numbers in March Average spend per claimant

2010/11 474,8972 £2,283

2011/12 483,880 £3,576

2012/13 484,868 £3,694

2013/14 476,219 £3,721

2014/15 468,380 £3,796

17. As detailed in Appendix 1, of all 32 Scottish councils, only Orkney Islands Council showed a small rise in the number of claimants in 2014/15.

18. However, there was a greater variation in individual councils' expenditure levels from 2013/14 to 2014/15 from an increase of £1,053,949 (0.9%) in Fife Council, to a decrease of £463,783 (2.3%) in Stirling Council.

19. Factors in the 0.3% increase in overall expenditure in 2014/15 are increasing rent levels and claimants qualifying for increased levels of HB due to reduced levels of household income.

20. The most likely factor in the overall decrease in expenditure in 2013/14 is the reduction in claimant numbers.

21. Likely factors in the decrease in the number of HB claimants in the last two years include:  people working longer before retiring  falling unemployment levels in some areas  claimants moving into work, possibly due to the claimant commitment changes in Jobseeker's Allowance and the reducing numbers of people qualifying for Employment Support Allowance, Incapacity Benefit and Personal Independence Payments  a small number of claimants moving to Universal Credit and therefore becoming ineligible for HB.

22. In 2014/15, Scottish local authorities processed 157,617 new claims and 1,426,059 changes of circumstance and paid out £1.778 billion in HB to local residents. £1.761 billion, 99% of this expenditure was recovered from the DWP in subsidy. In comparison, in 2013/14, 162,887 new claims and 1,280,139 changes of circumstance were processed and £1.772 billion was paid out with £1.768 billion (99.8%) recovered from the DWP.

23. The DWP also paid an administration subsidy of £30.3 million to Scottish local authorities to administer the HB scheme in 2014/15. However, as detailed in exhibit 3 below, the level of administration subsidy has been significantly reduced from £46.5 million in 2012/13 to £30.3 million in 2014/15 (-34.8%) due to DWP efficiency measures and government reforms such as

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71

Audit testing methodology

the end of council tax benefit in 2013. Administration funding will reduce further in 2016/17 to £25.2 million.

24. It is essential therefore that local authorities regularly review their processes and procedures to ensure that they operate in the most efficient and effective way possible. This could involve taking a risk-based approach to certain aspects of the service such as the level of automation within benefit IT systems e.g. changes notified from DWP systems, quality checking and targeted intervention activity.

Exhibit 3: Level of administration subsidy

£46m £41m £36m £31m £26m £21m £16m £11m £6m £1m 2012/13 2013/14 2014/15 2015/16 2016/17

Audit testing methodology

25. The DWP requires that final subsidy claims are reviewed by external auditors using the HB COUNT testing and reporting methodology. Where auditors identify errors and are unable to conclude that the errors are isolated, HB COUNT methodology requires that an additional sample of cases is tested which is focused on the particular error that has been found.

26. HB COUNT methodology requires auditors to extrapolate the results of the initial and additional testing by multiplying the subsidy claim cell (or sub-population) total by the proportion of the sample value that is found to be in error, and agree an amendment to the claim form with the local authority. Where an amendment cannot be agreed, the auditor includes details of the error and testing carried out in their covering letter to the DWP.

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27. Low value errors identified in audit sample testing can result in a relatively large amount of subsidy being reclaimed by the DWP as a result of the extrapolation methodology.

2014/15 certification results

28. Auditors identified 43 errors in 2014/15 subsidy claims and reported them in their covering letters in respect of 18 local authorities. This is an improvement from 2013/14 where auditors identified 60 errors in respect of 19 local authorities.

29. The errors identified in the 2014/15 certification resulted in subsidy being over claimed by £1.134 million (0.06% of expenditure) in year end claims submitted by local authorities to the DWP (£0.274 million or 0.01% of expenditure in 2013/14). The increase from 2013/14 is mainly due to an error of £822,941 in relation to the entry for interim subsidy in Falkirk Council's claim form.

30. Auditors also brought to the DWP's attention exceptions to DWP practices and other areas which auditors were unable to conclude in their 2014/15 covering letters for five local authorities.

31. The categories of errors identified by auditors in 2014/15 are shown in exhibit 4 below and were mainly due to expenditure misclassification and the incorrect calculation of claimant income which could equally apply to rent rebate or rent allowance claims. These are the same categories where most errors were found in 2013/14.

Exhibit 4: Types of errors reported by auditors

2% 2%

2% Expenditure classification 7% Income

9% 37% Reconciliations Eligible Rent

12% Benefit Cap Uncashed Cheques Interim Subsidy 28% Modified Schemes

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73 2014/15 certification results

32. In order to help reduce subsidy loss, local authorities should ensure that effective management arrangements are in place to help minimise processing errors, overpayments and administrative delays and, where overpayments have occurred, these should be accurately calculated and correctly classified. These arrangements would typically include an effective quality review process where claims are reviewed on a risk based approach. Where errors are identified, these should be analysed and used to help identify areas for improvement leading to appropriate improvement action plans being put in place.

33. The issues and types of errors identified during the certification of the 2014/15 subsidy claims are discussed in Appendix 2. Where adjustments could not be made to subsidy claims, the potential impact should the DWP decide to reclaim subsidy in respect of these errors is also shown. Errors reported in covering letters to the DWP that do not affect subsidy for 2014/15 are also discussed as they could result in a loss of subsidy in the future.

Local authority error and administrative delay subsidy

34. The DWP awards local authorities additional subsidy in respect of their local authority (LA) error and administrative delay overpayments where the total value of these overpayments is within a specified percentage of the total value of all correct payments made. Details are shown in table 2 below:

Table 2: level of subsidy paid in respect of LA error and administrative delay overpayments

Total value of LA error/admin delay overpayments as percentage the total Subsidy paid value of expenditure

Lower threshold Less than 0.48% 100%

Between 0.48% and 0.54% 40%

Upper threshold Greater than 0.54% 0%

35. During 2014/15, Aberdeen City Council was the only Scottish local authority to exceed the upper threshold (five local authorities, including Aberdeen City Council, were above the upper threshold in 2013/14). The maximum amount of additional subsidy unable to be claimed was £0.244 million (in 2013/14, the losses ranged from £23,281 to £0.243 million in respect of the five local authorities).

36. No authorities were between the upper and lower thresholds. A review was undertaken by Audit Scotland of the other 31 local authorities where the level of local authority error and administrative delay overpayments was below the DWPs lower threshold in 2014/15. Exhibit 5 below shows that the value of LA error and administrative delay overpayments ranged from 14% to 92% of the DWPs lower threshold.

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120% Exhibit 5: Local authority error and administrative 119% delay overpayments as % of lower threshold

100% 92%

86%

83% 80% 80% 77%

80% 75%

62% 61% 60% 58% 58%

56%

54%

60% 54%

49%

47% 44%

43%

41% 41% 41% 40% 39%

40% 35% 33% 33%

28%

21% 19%

20% 14%

0% Fife East… West… Angus Falkirk Moray Stirling Highland Inverclyde Midlothian East Lothian DundeeCity Glasgow City East Ayrshire West Lothian Renfrewshire Dumfries and… Aberdeen City Comhairle nan… Orkney Islands South Ayrshire North AyrshireNorth Aberdeenshire Argyll and Bute Shetland Islands Scottish Borders,… Perth andKinross Edinburgh, City of South Lanarkshire NorthLanarkshire East Renfrewshire Clackmannanshire

37. Local authorities should have suitable arrangements in place to monitor overpayment levels on an on-going basis in order to avoid subsidy loss where possible. Effective accuracy checking processes should also be in place to help minimise errors.

Other issues: overpayments arising from fraud and error

38. Following a steady rise over the last five years in HB fraud and error, DWP statistics for the UK for 2014/15 show a fall in overpayments of 0.7% of expenditure (to 5.3% from 6% in 2013/14) as detailed in exhibit 6 below.

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75 2014/15 certification results

Exhibit 6: HB Overpayments as a percentage of HB expenditure 7.0% 6.0% 6.0% 5.5% 5.1% 5.1% 5.3% 4.7% 4.7% 4.9% 5.0% 4.6% 4.6%

4.0%

3.0%

2.0%

1.0%

0.0% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Source: DWP Fraud and Error in the Benefit System: 2014/15 biannual National Statistics, Great Britain

39. However a review of the levels of fraud and error overpayments from the annual subsidy claims shows that the level of overpayments identified across all Scottish local authorities since 2012/13 has been rising in value while in percentage terms it has remained fairly static at between 2-3% of HB expenditure as detailed in exhibit 7 below.

Exhibit 7: HB overpayments from subsidy claims

Overpayments HB expenditure Overpayments as a % of expenditure

2012/13 £30,262,024 £1,791,201,607 2%

2013/14 £52,241,533 £1,772,157,170 3%

2014/15 £61,371,065 £1,777,970,288 3%

40. This inconsistency is because national statistics are not being calculated by totalling overpayments identified across all local authorities. Instead they are calculated by taking errors identified as part of the DWPs sample testing of benefit cases and extrapolating the results across the whole UK HB caseload. This methodology results in adding approximately £1 million of error to the national statistics for every £1 of error identified by DWP.

41. The likely reasons for the value of overpayments identified during 2014/15 in Scottish authorities rising include the additional activities undertaken by councils in response to the DWPs Fraud and Error Incentive Scheme (FERIS) which was introduced in December 2014 in order to try to reduce the then increasing levels of fraud and error within HB caseloads.

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Overpayments may also have risen due to the issuing to local authorities of the DWP's Real Time Information. This data matches Her Majesty’s Revenue and Customs’ (HMRC) system for collecting Pay as You Earn (PAYE) information from employers and pension providers with council benefit IT systems. These data matches highlight discrepancies between income details held within HB systems and the HMRC system which could indicate that HB is being overpaid.

42. Although many Scottish local authorities did not meet the required FERIS savings thresholds in order to qualify for additional funds during 2014/15, the DWP has committed to reviewing the FERIS thresholds with a view to reducing the savings required in order to help local authorities receive additional funding. This change would apply from April 2016 and will hopefully result in Scottish local authorities increasing their funding from DWP.

Looking forward

2015/16 certification changes

43. Following DWP led local authority subsidy workshops, the DWP made the following changes to the HB COUNT audit certification process from 2015/16:  differences due to rounding issues between the HB system outturn reports and entries made on the subsidy claim form do not require to be included in the covering letter  amendments to claims agreed with auditors will not be classified by DWP as qualifications.

Temporary homeless accommodation

44. From 2017/18, the DWP subsidy for temporary homeless accommodation will be radically reformed. The temporary accommodation management fee currently paid as part of a customer's HB and Universal Credit will be abolished. Instead the DWP has indicated that there will be a new grant system in order to allow local authorities to determine how best to deliver homeless accommodation provision in their local area.

45. The Chancellor of the Exchequer announced in the 2015/16 Autumn Statement that additional Discretionary Housing Payment funding will be available to local authorities to “protect the most vulnerable", including those in temporary accommodation. At the time of this report full details of what this means for local authorities had not been made available.

46. Expenditure on temporary accommodation owned by the local authorities is not separately disclosed on the subsidy claim form. For this type of accommodation, local authorities claim subsidy on HB entitlement calculated using the rent charge plus significant eligible service charges. These service charges vary across local authorities and the results from a survey of 12 Scottish local authorities carried out by the Institute of Revenues, Ratings and Valuations (IRRV) in 2012 showed that the weekly eligible rent charges for council-owned temporary

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accommodation ranged from £100 to £450 per week. In comparison, the local housing allowance rates range from £72 in the Scottish Borders to £127 in Aberdeen and Aberdeenshire for one bedroom properties and from £129 in Dumfries & Galloway to £277 in Lothian for four bedroom properties.

47. Expenditure on certain aspects of temporary accommodation, (board and lodging and leased or licensed accommodation) which are shown separately in subsidy claims is detailed in Appendix 3. Overall, in Scotland, £52.646 million in rent rebates and £1.634 million in rent allowances was paid out in 2014/15 (£52.757 million and £1.803 million respectively in 2013/14) in respect of board and lodging, leased and licensed accommodation. The majority of this expenditure, £32.83 million (60%) was paid out by the City of Edinburgh Council and Glasgow City Council. It should be noted that this amount excludes the significant spend on council owned temporary accommodation which cannot be identified from subsidy claims.

48. Due to the high weekly rents for homeless accommodation, any change to subsidy rules may have a significant impact on local authority homeless services' finances. Local authorities should review their homeless service provision in order understand their costs and how these are funded. The review should also look at:  the type of temporary accommodation used to ensure value for money and that the best outcomes for claimants are being achieved  the cost of temporary accommodation being used to identify if there are any alternative cheaper options  contracts for the provision of accommodation to ensure value for money is being achieved  ensuring value for money is achieved during tendering exercises  alternative delivery models  trying to ensure that, whenever possible, people presenting themselves as homeless are not accommodated in expensive bed and breakfast accommodation.

Pension aged claimants

49. Details are still unclear although there is a suggestion that HB for those claimants of pensionable age will continue to be administered by local authorities going forward. The DWP is giving consideration to transferring the responsibility for funding the administration of HB for pensioners to local authorities in order allow local authorities to deliver services in a way that is right for their area.

Administration grant

50. The DWP have said that the HB administration grant will reduce over the Spending Review period. As previously mentioned, for 2015/16, the administration grant for Scottish local authorities will reduce to £27.8 million and will be further reduced to £25.2 million in 2016/17.

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Social rented sector rents

51. The Chancellor of the Exchequer announced in his November 2015 autumn statement that eligible rent for subsidy purposes in respect of social sector rents will be capped at the local housing allowance rate. It appears that this also applies to all social sector housing including supported accommodation and will apply to any new tenancies agreed from April 2016 with HB entitlement changing from April 2018.

52. At present local housing allowance is used to calculate eligible rent for tenants renting from private landlords. In Scotland the majority of council house rents are lower than the equivalent local housing allowance rate. However, due to local housing allowance rates being frozen for the next four years, this may not be the case in the future. This could have an impact on council house rental income and rent arrears in the future.

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79 Appendix 1: variations in HB expenditure and claimant numbers

Appendix 1: variations in HB expenditure and claimant numbers

Exhibit 8: Variations in local authority HB expenditure from 2013-14 to 2014-15 £2,000,000

£1,500,000

£1,000,000

£500,000

£0

-£500,000

-£1,000,000 Fife Falkirk Moray Orkney Stirling Highland Inverclyde Midlothian East Lothian Glasgow City East Ayrshire West Lothian Renfrewshire South Ayrshire NorthAyrshire Argyll and Bute Shetland Islands Scottish Borders Perth andKinross Edinburgh, City of South Lanarkshire NorthLanarkshire East Renfrewshire Clackmannanshire Angus East Dunbartonshire Comhairle Eilean Siar West Dunbartonshire Dumfries andGalloway Dundee City Aberdeenshire

Aberdeen City

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80 Appendix 1: variations in HB expenditure and claimant numbers

Exhibit 9: Change in HB claimant numbers from 2013-14 to 2014-15 Aberdeen City Aberdeenshire Angus Argyll and Bute Clackmannanshire Comhairle Eilean Siar Dumfries andGalloway DundeeCity East Ayrshire East Dunbartonshire East Lothian East Renfrewshire Edinburgh, City of Falkirk Fife Glasgow City Highland Inverclyde Midlothian Moray NorthAyrshire NorthLanarkshire Orkney Perth andKinross Renfrewshire Scottish Borders Shetland Islands South Ayrshire South Lanarkshire Stirling West Dunbartonshire West Lothian 200 0 -200 -400 -600 -800 -1000 -1200 -1400

Moray Council's change in claimant numbers was insignificant

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81 Appendix 2: Details of errors and auditor comments

Appendix 2: Details of errors and auditor comments

The table below shows issues identified by auditors during the certification of the 2014/15 subsidy claims and where amendments to claim forms were agreed with auditors.

Local authority Details Amount of Total potential error recovery of subsidy by DWP

Expenditure classification

The subsidy claim requires that HB expenditure is correctly classified across the various cells contained in the form. This is particularly important as different types of expenditure attract different rates of subsidy.

Aberdeen City Misclassification of a rent rebate case as £272 £17,383 cell Council an eligible overpayment instead of local adjustment = authority error overpayment £6,953 in subsidy

Aberdeen City Misclassification of two rent allowance £155 £4,266 cell Council cases as eligible overpayments instead of adjustment = local authority error overpayments. £1,706 in subsidy

Aberdeen City Misclassification of two cases as prior £2,937 £50,868 cell Council year eligible overpayments instead of adjustment = local authority error overpayments. £20,347 in subsidy

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Local authority Details Amount of Total potential error recovery of subsidy by DWP

Dumfries & Expenditure classified as board & lodging £0 No change as Galloway Council & non self-contained licensed the cells accommodation where a registered attract the housing association is the landlord instead same subsidy of a self-contained licensed rates accommodation & accommodation owned or leased by a registered housing association where a registered housing association is the landlord.

Dumfries & Expenditure classified as rent allowance £0 No change as Galloway Council board & lodging & non self-contained the cells licensed accommodation where a attract the registered housing association is the same subsidy landlord instead of rent rebate leased or rates licensed accommodation where the local authority is the landlord in cells.

Dumfries & A local housing allowance claim was £45,000 £45,000 claim Galloway Council incorrectly classified as a rent rebate. A amended further 48 incorrect cases were identified.

East Renfrewshire One claim was misclassified between rent £519 £519 claim Council rebate leased or licensed accommodation amended expenditure up to the lower of the local housing allowance rate (LHA) and expenditure above 90% of the LHA rate.

East Renfrewshire Misclassification between duplicate £738 No change as Council payments in the current year and the cells duplicate payments for the prior year attract the same subsidy rates

Midlothian Council Misclassification of two rent rebate cases £109 £2,873 as eligible overpayments instead of local adjustment = authority error overpayments. £1,149 in subsidy

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83 Appendix 2: Details of errors and auditor comments

Local authority Details Amount of Total potential error recovery of subsidy by DWP Midlothian Council Misclassification of two rent allowance £66 £1,039 cases as eligible overpayments instead of adjustment = local authority error overpayments. £416 in subsidy

Moray Council An error in classification of modified £11 £11 claim scheme expenditure on claim. amended

North Lanarkshire A total of 239 cases were incorrectly £559,796 No impact on Council classified as regulated tenancies. subsidy

North Lanarkshire A total of 98 cases were incorrectly £87,077 £87,077 claim Council included as eligible overpayments of rent amended rebates for prior years due to an error in importing data from the debtors system.

North Lanarkshire 18 claims were incorrectly classified as £11,940 no impact on Council having backdated HB. subsidy

North Lanarkshire System error resulted in three cases being £380 £3,776 error = Council misclassified between rent rebate £2,266 in attracting full subsidy but not otherwise subsidy separately identified, eligible overpayments and prior year eligible overpayments

Shetland Islands Rent allowance expenditure on that part of £2,856 £2,856 claim Council weekly eligible rent at or below the rent amended but officer's determination was understated no impact on and total expenditure up to the maximum subsidy rent was overstated in error.

Income

The accurate calculation of a claimant's income is vital for ensuring HB entitlement is accurate and the correct HB awards are made. This can be a complex area with many claimants for example, receiving variable income from zero hour contracts or from being self-employed.

Aberdeen City Error in calculating earnings disregards in £408 £14,997 Council four claims

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Local authority Details Amount of Total potential error recovery of subsidy by DWP Aberdeen City Error in calculating 15 rent rebate £514 £18,534 Council claimants earned income.

Aberdeen City Error in calculating 14 rent allowance £199 £4,068 Council claimants earned income.

Angus Council Error in calculating 15 claimants earned £866 £10,325 income.

City of Edinburgh Error in calculating a claimants earned £1 £0 Council income. Deemed to be an isolated error.

Dumfries & Error in calculating the claimants' sons £14.15 £14 no impact Galloway Council earning & backdated. on subsidy The error was deemed to be an isolated error.

Dumfries & Claimant's wages incorrectly entered from £100 £100 Galloway Council payslips in 3 cases

East Ayrshire Error in calculating a claimants earned £79 £1,898 Claim Council income. amended

The Highland Error in calculating a rent rebate claimants £0.15 £0 Council earned income.

The Highland Error in calculating a rent allowance £6.88 £6.88 Claim Council claimants earned income. amended

Midlothian Council Error in calculating three claimants earned £45 £3,686 income.

Orkney Islands Error in calculating self-employed £169 £1,114 Council earnings.

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85 Appendix 2: Details of errors and auditor comments

Local authority Details Amount of Total potential error recovery of subsidy by DWP

Reconciliations

Reconciliations are an important control within HB systems. Auditors are required, as part of the certification process, to check that HB per the subsidy claim form agrees with the reconciliation figures from the HB IT system for the amount of benefit granted and paid. In addition, the subsidy claim form contains in-year reconciliation cells which are calculated automatically. Auditors should seek to confirm that the figure in each total expenditure cell is supported by an analysis of that expenditure.

Clackmannanshire A difference was noted between rent £102,442 £0 Council allowance payment summaries from the subsidy local authority's ledger system and the claim was amount of HB claimed per the subsidy the lower form due to the local authority's decision value to disregard income through the local scheme for war widows and disablement pensions in excess of that disregarded by DWP. The difference indicated that the local authority had paid out more in the period than it had claimed.

East Renfrewshire A difference was identified in the rent £43 £0 Council allowance reconciliation. The council claimed the lower value as subsidy.

Fife Council The local authority uses an HB IT system Unknown Unknown only used by a small number of other local authorities. The software provider had not provided instructions on the process for reconciling benefit granted, as recorded on the benefit system, to benefit paid. The authority uses its own methodology to carry out the reconciliation. At the certification date there were a number of un-reconciled differences and work was on-going to reconcile these

Page 22 Housing benefit subsidy certification 2014/15

86 Appendix 2: Details of errors and auditor comments

Local authority Details Amount of Total potential error recovery of subsidy by DWP Fife Council In-year reconciliation cells on the subsidy £3,724 £3,724 claim form did not agree.

North Lanarkshire In-year reconciliation cells on the subsidy £1 £1 Council claim form did not agree.

Eligible rent

The accurate calculation of a claimant's eligible rent is an essential element of every HB calculation. Eligible rent is the reasonable rent for a suitable property in a particular area. Eligible rent may include certain service charges such as lift maintenance, but it must not include charges for items such as meals, heating or furniture. The DWPs size criteria means that an element of rental payment is not eligible for HB for those working age social tenants whose properties have more rooms than deemed necessary. Local housing allowance rates and rent officer determinations are used to ensure that tenants of private landlords have eligible rents of an appropriate rate relative to local housing indicators.

Dumfries & One incorrect eligible rent identified after £75 £75 claim Galloway Council taking account of deductions. amended

East Lothian One claim was underpaid due to the local £0 Council housing allowance rate not being updated. There is no eligibility for additional subsidy in respect of underpaid subsidy.

The Highland One claim was overpaid due to an £237 £237 claim Council ineligible cost for a garage being used in amended the HB award calculation.

Stirling Council HB was underpaid in one case due to the £163 No change as rental figure not having been updated as subsidy under notified by the landlord. claimed

Housing benefit subsidy certification 2014/15 Page 23

87 Appendix 2: Details of errors and auditor comments

Local authority Details Amount of Total potential error recovery of subsidy by DWP

Benefit cap

The benefit cap is a limit on the total amount of certain benefits that most working age claimants receive. Where a claimant' benefit income exceeds the cap, HB will be reduced as the amount of benefit paid above the cap limit will be taken off HB payments.

Dumfries & 3 cases were identified where the benefit £96 £96 Galloway Council cap had been removed in error

Uncashed cheques

Local authorities may pay HB by cheque to claimants and/or landlords. At the year end, an adjustment is required in the subsidy claim form to account for cheques which were issued prior to 1 April 2014 that have not been cashed.

Moray Council Uncashed cheques were omitted from the £6,927 £6,927 claim subsidy claim amended

The Highland Uncashed cheques for July to September £1,531 No change as Council 2014 had been incorrectly included on the subsidy under claim claimed

West The balance for uncashed cheques had £79,756 £79,756 claim Dunbartonshire been added to rather than subtracted from amended Council the total subsidy claimed.

Interim benefit subsidy

Interim benefit subsidy is amounts received by local authorities from DWP throughout the year in respect of HB expenditure and administration subsidy.

Falkirk Council The incorrect interim benefit subsidy £822,941 £822,941 figure was included in the claim Claim amended

Page 24 Housing benefit subsidy certification 2014/15

88 Appendix 2: Details of errors and auditor comments

Local authority Details Amount of Total potential error recovery of subsidy by DWP

Modified schemes

Modified schemes are where a local authority operates a discretionary local scheme to disregard any war pension over and above the statutory disregards. This discretionary expenditure receives subsidy of 0.2% of the total subsidy claimed before any local scheme expenditure and is capped at 75% of the total cost of the discretionary scheme.

North Lanarkshire During 2013/14 the authority upgraded its No change as Council HB IT system. This created two issues: claim 1. the war pension disregard was amended not recorded for those claims, within modified schemes that had not been subject to a benefit recalculation after the new system went live. 2. an issue has been identified with in respect of retrospective changes of circumstances on rent allowance modified schemes. The local authority had been in discussion with the software provider and had been advised that the issue cannot be corrected via the system.

TOTAL £1,133,944

Auditors' comments

Local authority Comments

Dundee City Council The parameters for polygamous marriages were not updated on the benefit IT system.

The Highland Council The council was unable to run its IT software provider's update prior to submitting the original claim in April 2015 due to

Housing benefit subsidy certification 2014/15 Page 25

89

Local authority Comments connectivity restrictions. The software update has subsequently been run and the subsidy claim form was revised as appropriate.

Scottish Borders Council The parameters for polygamous marriages were not updated on the benefit IT system.

Perth & Kinross Council In one HB claim the council had corrected a previous year error which arose due to an incorrect (higher) rent figure being used following a rent officer decision (error value £1,774.80). The correction resulted in the amounts being subtracted from the headline cells 94 and 99 rather than being treated as a local authority error. As HB cannot exceed the 'maximum rent' as per the rent officer determinations applicable to any particular case, the overpaid sum was not deemed to have been HB in the first instance. Due to the unusual nature of the correction for this specific case advice was sought from the DWP and it was agreed that there was no impact on the claim as the overpaid amount was not deemed to have been HB in the first instance. DWP are reviewing the need for additional guidance to be issued nationally to clarify this issue.

Dumfries & Galloway Council One local authority operated property which is registered with the Care Inspectorate as a 'care at home' facility with nine residents who received approximately £50,000 of HB during 2014/15. The registration status, and therefore the HB entitlement, is being questioned by three of the resident's representatives. The council provides HB in accordance with the current classification but the appropriateness of this is still being considered.

Page 26 Housing benefit subsidy certification 2014/15

90 Appendix 3

Appendix 3

Rent rebates

53. This section relates to the £52.646 million (£52.757 million in 2013/14) of expenditure where claimants have been housed by the local authority in temporary board and lodging accommodation, non-self-contained licensed accommodation, leased or self-contained licensed accommodation where the local authority is the landlord.

Exhibit 10:Total value of Rent Rebates

2014/15 2013/14 £25,000,000

£20,000,000 £19,124,417

£15,000,000 £13,332,428

£10,000,000

£5,000,000 £2,733,846 £2,220,640 £2,220,281 £1,887,062

£1,581,358 £1,290,175 £1,254,255 £963,748 £862,568 £729,845 £578,521 £557,846 £431,115 £409,246 £353,998 £314,296 £314,869 £312,221 £301,999 £280,103 £224,855 £152,912 £125,489 £67,540 £16,255 £1,207 £2,484 £347 £0 £0 £0

-£5,000,000 Fife Angus Falkirk Moray Orkney Stirling Highland Inverclyde Midlothian DundeeCity East Lothian Glasgow City East Ayrshire West Lothian Renfrewshire Aberdeenshire Aberdeen City South Ayrshire NorthAyrshire Argyll and Bute Shetland Islands Scottish Borders Perth and Kinross andPerth Edinburgh, City of South Lanarkshire NorthLanarkshire East Renfrewshire Clackmannanshire East Dunbartonshire Comhairle Eilean Siar West Dunbartonshire Dumfries andGalloway Rent allowances

54. The chart below details the £1.634 million (£1.803 million in 2013/14) of expenditure on temporary board and lodging accommodation, non-self-contained licensed accommodation, leased or self-contained licensed accommodation paid to registered housing associations to assist the local authority in discharging its statutory homeless function, or to prevent the claimant being or becoming homeless.

Housing benefit subsidy certification 2014/15 Page 27

91 Appendix 3

Exhibit 11:Total value of Rent Allowances £500,000

£450,000 £437,809 £414,619 £414,619

£400,000 £373,884

£350,000 £318,273

£311,640 £311,640

£300,000

£250,000 £237,072

£203,470 £203,470

£200,000 £181,545 £173,236 £166,435 £157,680 £157,680 2014/15

£150,000 £134,070 £123,451 £123,451 2013/14 £107,196

£100,000 £76,315

£50,000

£19,463 £1,169 £49 £0 £0 £0 Fife Angus Aberdeenshire South Ayrshire Argyll and Bute Edinburgh, City of East Renfrewshire Comhairle Eilean Siar West Dunbartonshire Dumfries andGalloway

Page 28 Housing benefit subsidy certification 2014/15

92 NORTH AYRSHIRE COUNCIL

Agenda Item 9 23 May 2016

Audit Committee

Title: Audit Scotland report: Procurement in councils - Impact report

Purpose: To inform the Audit Committee on the impact of the 2014 report 'Procurement in councils'.

Recommendation: Committee is requested to note the findings of the Audit Scotland report, the current position in North Ayrshire and the future procurement capability assessment regime.

1. Executive Summary

1.1 In April 2014, Audit Scotland published a report entitled 'Procurement in councils'. The aim of the audit was to examine whether councils were efficiently and effectively managing the procurement of goods and services. The report made numerous recommendations for Scottish Government, Scotland Excel and Councils.

1.2 In February 2016, Audit Scotland published a report 'Procurement in councils - Impact report'. The aim of this report was to summarise the impact of the 2014 'Procurement in councils' report.

1.3 The Audit Scotland 'Procurement in councils - Impact report' states that it is difficult to identify how much of the improvement in councils procurement performance can be attributed to the Procurement in councils 2014 report; to Scotland Excel’s ongoing support for councils and to councils own improvement work.

1.4 This report provides an overview of the findings from the Audit Scotland 2016 report and provides some information on North Ayrshire progress against the 2014 recommendations.

2. Background

2.1 The 2016 Audit Scotland Procurement in councils - Impact report (attached at Appendix 1) provides a recap of the key messages and recommendations from the 2014 Procurement in councils report.

Key Messages

93  Councils spent over £5.4 billion on goods and services in 2012/2013 more than half was on Social Care and construction.

 Since 2006 initiatives in Scottish Government and Scotland Excel have led to significant changes in councils procurement practices.  Councils are systematically using procurement to improve service quality and achieve benefits for the community.  Spending through collaborative contracts had increased over the previous 3 years by 80% and should continue to increase as more collaborative contract from Scottish Government and Scotland Excel are introduced.  Councils and Scotland Excel have used the Procurement Capability Assessment (PCA) process to improve procurement practice. All councils have improved their PCA score since 2009.  Councils that invest in qualified staff and improved systems can both improve service quality and achieve financial savings.

Some Key Recommendations for councils

 Review and agree Scotland Excel funding to support procurement reform activities.  Make greater use of the HUB tools and facilities.  Engage earlier with suppliers and service users to develop contract specifications.  Use Public Contracts Scotland tender module for all applicable contracts.  Make use of national collaborative contracts.  Develop systematic approach to collecting non-financial benefits.  Make better use of market research, cost avoidance and contract management to identify potential savings.

The 2014 Procurement in councils report and North Ayrshire status against the key recommendations was previously reported to Audit Committee in May 2014. Further progress made by councils against the key recommendations is evidenced in Appendix 1 of the Procurement in councils - Impact report. The overall procurement progress within North Ayrshire Council is shown at 2.4

94 2.2 The impact report notes that the original 2014 report has been well accessed and used to raise awareness. Since the report Scotland Excel has developed a wider range of standardised contracts for services typically procured by councils.

2.3 Audit Scotland review the local consideration of the report by both Scotland Excel and councils but state that it is 'difficult to identify how much of the improvement in councils’ procurement performance can be attributed to the Procurement in councils 2014 report; to Scotland Excel’s ongoing support for councils and to councils own improvement work.

2.4 Using information provided by Scotland Excel, Audit Scotland have taken stock of changes in the councils procurement performance using PCA data from 2009 to 2014 and report that;

 Overall, council average score improved in all 8 sections of the PCA between 2009 and 2013 and from 2013 to 2014  All councils individual PCA overall % score improved between 2009 and 2013 and from 2013 to 2014

The table below shows North Ayrshire Council progress compared with the council average score for 2014

95

North Ayrshire Council is above the average in all but one section and has 3 section in superior performance and 3 sections marginally below superior performance.

2.5 The impact report highlights North Ayrshire Council as one the councils that showed significant improvement between 2013 to 2014 North Ayrshire Council score increased from 61% to 72% compared with the sector average of 56 % in 2013 and 62% in 2014.

2.6 Audit Scotland also note that the PCA score demonstrate that;

 The strength of the link between council size and PCA score has weakened since 2011 suggesting that smaller councils are tending to catch up on larger ones.  Most council have improved their contract coverage since 2009 but need to do more to ensure staff used contracted suppliers.

96 2.7 Audit Scotland notes that progress has been made across the recommendations in the Procurement in councils report, and is ongoing in some areas. Appendix 1 of the Procurement in councils - Impact report lists all the recommendations in the report and, where possible, profiles the progress that has been made.

Outlook

2.8 The method of assessing public sector bodies is changing. The PCA will be replaced by the Procurement & Commercial Improvement Programme (PCIP).

 The PCA was used to assess bodies annually whereas PCIP will occur every two years.  PCIP is a much more challenging assessment and is therefore not comparable with the previous PCA scores.  PCA focus on procedures whereas the PCIP looks for outcomes to be demonstrated.  There are three types of PCIP (Lite, Medium & Full) depending on an organisation's sector, size, complexity and uniqueness - All councils will undertake a Full assessment

2.9 Audit Scotland also comment on the changes to the regulatory framework for procurement that come into force from April to December 2016. These changes are the subject of a report to Cabinet on 24th May 2016.

2.10 The report notes that Scotland Excel is facing financial challenges in funding the procurement reform activities it provides to councils. Scotland Excel developed a funding proposal for its Joint Committee on 27th November 2015 which approved a 9.4% increase in each councils requisition fee for 2016/17. Financial stability after 2016/2017 will be challenging and needs further work to resolve.

2.11 Scotland Excel believe that there is an ongoing shortage of skilled procurement staff. As the economy improves there is a risk that councils will lose qualified staff to other public sector organisations or private sector, where salaries are higher.

3. Proposals

3.1 It is proposed that the Audit Committee note the findings of the Audit Scotland report, the 2014 position in North Ayrshire Council and the future procurement capability assessment regime.

97 4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: Audit Scotland provide a basis for benchmarking Council performance. This report summarises progress on the Councils procurement activity. Community Benefits: None.

5. Consultation

5.1 No consultation was required for the preparation of this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Anne Lyndon, Corporate Procurement Manager on 01294 324097. Background Papers Appendix 1 - Procurement in Councils Impact Report

98 Appendix 1

Procurement in councils Impact report

Prepared by Audit Scotland February 2016

99

Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts Commission. Together they ensure that the Scottish Government and public sector bodies in Scotland are held to account for the proper, efficient and effective use of public funds.

100 Contents

Summary of overall progress ...... 4 Introduction ...... 5 Raising awareness and communication of key messages ...... 8 Parliamentary consideration ...... 9 Local consideration of the report ...... 9 Contribution to national developments...... 14 Progress on implementing recommendations ...... 14 Outlook ...... 14 Appendix 1. Progress on implementing the recommendations ...... 16

101 Summary of overall progress

Contribution to key aspects of public sector audit

• Scotland Excel has developed • The audit has highlighted 48 contracts and is developing

challenges to the financing contracts in a further seven of Scotland Excel’s …better service areas ongoing support for understanding • Between 2013 and 2014, the of financial …better value councils sustainability? for money? procurement performance of • Scotland Excel has 23 out of 25 councils improved promoted the benefits of • Councils’ procurement has greater collaboration improved in all eight among councils categories How did Procurement in councils contribute to... • Councils are now submitting Scotland Excel has calculated • procurement data annually and indicative savings achievable on time from the new contracts it has • Most Best Practice Indicators developed …improved …more transparent have been dropped by the governance reporting of • Over 3,500 council delegates and financial financial and other Scottish Government, due to have attended Scotland Excel management? performance? their overlap with the new PCIP training courses since January tool for assessing councils’ 2009 procurement performance from 2016 onwards

102 Introduction

1. This report describes the impact made by the Accounts Commission’s performance audit report on ‘Procurement in councils’, published on 24 April 2014. The Accounts Commission sponsors for the audit were Colin Peebles and Sandy Cumming.

Audit aim and objectives

2. The audit aimed to assess whether councils were efficiently and effectively managing how they procured goods and services. The specific objectives were to determine:

• How much did councils spend on goods and services, and what savings and other benefits councils identified through better procurement?

• Did councils manage procurement well and have good governance for it in line with good practice?

• How well was Scotland Excel helping councils to improve procurement and achieve savings in spending on goods and services?

Key messages

3. The key messages from the April 2014 report were as follows:

• Councils spent over £5.4 billion on goods and services in 2012/13; over half of the total public sector procurement spend in Scotland. This spending is extremely diverse, although more than half is on social care and construction. Since 2006, initiatives by the Scottish Government and Scotland Excel have led to significant changes in councils’ procurement practices. Procurement now has a higher profile and councils are buying more goods and services collaboratively. New legislation and EU directives will bring about further change.

• Councils can use procurement to improve service quality and achieve benefits for the community. Councils are systematically using procurement spending to support local economic development. Councils have recently begun to make community benefits such as apprenticeships and environmental improvements an integral part of contracts.

• Councils’ spending through collaborative contracts set up by the Scottish Government and Scotland Excel has increased by over 80 per cent over the past three years to £503 million, but accounts for only 9.3 per cent of their total procurement spend. This percentage is likely to increase further as Scotland Excel and the Scottish Government introduce more collaborative contracts. The Scottish Government, Scotland Excel and councils reported total procurement savings of £71 million in 2012/13, 1.3 per cent of procurement spend; with £43 million (61 per cent) of these savings arising from Scotland Excel or Scottish Government collaborative contracts. Councils are relying on procurement to generate savings to meet budget pressures, but some of their savings calculations may not be reliable or may be incomplete. Further savings are possible if councils make greater use of collaborative contracts and replace paper-based systems with ‘purchase to pay’ compliant ICT systems.

103 • Councils and Scotland Excel have used the Procurement Capability Assessment (PCA) process to improve procurement practice. All councils have improved their procurement capability since 2009. However, the average assessment score has only reached 56 per cent. The rate of improvement varies among councils and some need to improve more quickly. Councils that invest in qualified improvement staff and improved systems can both improve service quality and achieve financial savings.

Key recommendations

4. The report’s key recommendations were:

The Scottish Government should work with councils to:

• review and update the Best Practice Indicators (BPIs), drawing on councils' experiences, to reflect changes in procurement since 2008 and improve their usefulness to councils.

Scotland Excel should:

• maintain and improve its sharing of knowledge and experience with the Scottish Futures Trust, and with the associated joint venture companies

• set realistic timescales and savings targets for contracts, particularly in new areas of contracting.

Councils and Scotland Excel should:

• review and formalise arrangements to fund procurement reform activity beyond 2016.

Council staff involved in procurement should:

• submit accurate and complete information to the Procurement Hub (the Hub) on a regular and timely basis (ideally quarterly, and as a minimum within three months of the end of the financial year)

• examine the costs and benefits of differentiating ALEO and council expenditure in their Hub submissions1

• make greater use of the tools and facilities provided by the Hub, including the use of BPIs in their performance reporting and to benchmark their progress

• engage earlier with suppliers and the people who use public services to help develop contract specifications that more accurately reflect service user requirements and allow for greater innovation within contracts

• use the Public Contracts Scotland tender module for all applicable contracts

• make full use of national collaborative contracts and provide a clear explanation for non- participation in these contracts to the relevant council committee

• develop a systematic approach to collecting information on non-financial benefits including economic, community and environmental benefits and report the benefits to the relevant council committee on a regular basis

1 ALEOs = arm’s-length external organisations.

104 • calculate procurement savings using a consistent and transparent methodology that demonstrates clearly how the savings are calculated and their relationship to improved procurement

• make better use of market research, cost avoidance and improved contract management to identify savings and potential service improvements

• aim to achieve the ‘superior performance’ level in the PCA, particularly in relation to:

− spend covered by agreed commodity/project strategies

− participation in Scotland Excel contracts

− automation of procurement and payment processes

− spend captured in the council’s contract register.

Councils’ corporate management teams should:

• benchmark their procurement staffing against similar-sized councils with higher PCA scores and, where appropriate, produce a business case for employing additional qualified procurement staff where they have lower staffing levels

• examine the benefits of joint working or joint procurement teams as a way of securing economies of scale and creating collaborative contracts

• phase out paper purchasing systems and consider the business case for moving all purchasing systems to an electronic ‘purchase to pay’ basis

• raise staff awareness of accountability and controls by:

− implementing a written code of ethics

− requiring staff involved in procurement to complete a register of interest statement

− require internal audit to conduct a regular assessment of procurement risk, including the risk of fraud.

Councils should:

• require a report on procurement savings and non-financial procurement benefits to be submitted to the appropriate committee on a regular basis

• encourage elected members sitting on the main committee(s) dealing with procurement to complete specific training to help them undertake their governance role more effectively.

5. We anticipated that the report would add value in a number of areas by identifying lessons learned and highlighting good practice. To help with this, we also published a self-assessment checklist for councillors in April 2014. It set out issues that councillors may wish to consider in relation to procurement in their own council. It allowed councillors to assess themselves against each good practice statement; identify what actions need to be taken forward; and to apply the checklist annually to review a council’s progress.

105 Raising awareness and communication of key messages

Media coverage

6. The Scotsman, Dundee Courier, Evening Times, STV Online and Public Finance all picked up on the report. Coverage was accurate, reflected the report’s key messages and was largely based around a piece by the Press Association. A local radio station highlighted the performances of Aberdeen City Council and Aberdeenshire Council.2 Comhairle nan Eilean Siar (Western Isles Council) issued a release based on its procurement practice.3 Also, Renfrewshire Council’s work was highlighted by the Paisley Daily Express.4

Politics

7. COSLA President David O'Neill said: "As today's report recognises, councils have made good progress in terms of procurement. We have established Scotland Excel and use of collaborative contracts has increased by 80% over the last three years… It is also worth noting that councils use procurement spending to support local economic development and some have begun to use it to deliver other local benefits such as apprenticeships and environmental improvements."5

8. Scottish Labour’s local government spokeswoman Sarah Boyack commented: “Any area where local authorities can make much needed savings is welcome and cutting back on the cost of procurement has long been needed. Councils are under increasing financial strain from additional service requirements to cope with an ageing population and the cost implications of maintaining or replacing infrastructure that is no longer fit for purpose.”6

9. Scottish Liberal Democrats’ leader Willie Rennie pointed to savings through the use of an electronic system for procurement: "By bringing payments into the 21st Century councils could save the taxpayer £28 per invoice, amounting to £9m in total. It is in the taxpayers' interests for ministers to work with local authorities in order to enable this change to happen."7

10. Scottish Green MSP Alison Johnstone said council spending should be more geared towards supporting local economies or sustainability.8

Downloads

11. Between publication of Procurement in councils in April 2014 and the end of September 2015, there were:

• 4,216 downloads of the main national report, with 160 downloads in September 2015

• 154 downloads of the self-assessment checklist for use by councillors

• 128 downloads of the podcast.

2 Original 106, www.originalfm.com 3 Press release, Comhairle Commended For Procurement Procedures, Comhairle nan Eilean Siar, 24 April 2015. 4 Like other titles taken over by Trinity Mirror, the Paisley Daily Express has lost its own archive. 5 As reported by STV news, 24 April 2014. COSLA = Convention of Scottish Local Authorities. 6 Press statement, Scottish Labour, 24 April 2014. 7 As reported by STV news, 24 April 2014. 8 As reported by STV news, 24 April 2014.

106 Presentations

12. The Chair of the Accounts Commission gave the keynote presentation at the Capita conference about ‘procurement in public services in Scotland’, in May 2014. In June 2014, the audit team gave presentations to the Scottish Councils’ Heads of Procurement meeting and to Scotland Excel. The audit team also made a presentation to South Ayrshire Council. All presentations were well received.

Parliamentary consideration

13. The Scottish Parliament Infrastructure and Capital Investment (ICI) Committee took evidence from the Scottish Futures Trust (SFT) on 5 November 2014, concerning the committee's scrutiny of the Scottish Government's draft budget 2015/16. The SFT said it would seek a corporate commitment from the bodies accountable for procurement, and increase focus on getting the 'right project and right deal' by involving experienced individuals in planning.9 Local consideration of the report

Scotland Excel

14. Scotland Excel is the centre of procurement expertise for the local government sector, and a non-profit making organisation funded by participating local authorities. Through collaboration with councils and suppliers, it aims to raise procurement standards, secure best value, and improve the efficiency and effectiveness of public sector procurement.10

15. In response to the publication of Procurement in councils, the Director of Scotland Excel said “Scotland Excel welcomes the findings of Audit Scotland's report and is pleased that it recognises the progress that has been achieved. Scotland Excel remains committed to supporting local authorities as they transform procurement within their organisations, and we are confident that ongoing improvements in sector performance will deliver additional benefits in future."11

16. Scotland Excel has since conducted a consultation exercise in which councils’ procurement activity was discussed with their procurement teams and senior management; and the support available from Scotland Excel was considered. Scotland Excel has said that Procurement in councils has helpfully provided a credible, independent assessment of council procurement and remains valuable in shaping the agenda for discussions with councils.12

17. Scotland Excel produced an updated corporate strategy in June 2015 for the period 2015-18. Supporting the implementation of the strategy is a performance management framework in which four corporate goals cascade to a set of strategic objectives and these in turn map to objectives for teams and individuals.

18. Since Procurement in councils was published, Scotland Excel has developed a wider range of standardised contracts for services typically procured by councils. Developed in consultation with service managers and service clients, standardised contracts have the potential to save a

9 Page 37, Papers for the Finance Committee meeting on 5 November 2014, Scottish Parliament. 10 Scotland Excel FAQs, Scotland Excel website as at 10 November 2015. 11 News release: Audit Scotland report on local authority procurement published, Scotland Excel, website at 12 November 2015. 12 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015.

107 council a considerable investment in developing its own contracts; reduce risk by providing assurance that the contract has been informed by good practice; and potentially generate savings. Further information on the contacts is contained in Appendix 1.

Councils

19. It is difficult to identify how much of the improvement in councils’ procurement performance can be attributed to Procurement in councils; to Scotland Excel’s ongoing support for councils; and to councils’ own improvement work.

20. Audit Scotland has taken stock of changes in councils’ procurement performance, using data supplied by Scotland Excel. Between 2009 and 2014, councils’ procurement performance was assessed annually by Scotland Excel using the Procurement Capability Assessment (PCA) tool. The PCA tool used 52 questions across eight sections, resulting in a score for each section and an overall percentage score for a council. For Procurement in councils, Audit Scotland examined the PCA tool and concluded that it effectively assessed a council’s procurement arrangements.13 The audit was therefore able to place reliance on PCA results, and the audit report used PCA data for 2013 to analyse all councils’ procurement capability. For the purposes of this impact report, we have updated the analysis to include the most recent PCA results, for 2014.

21. Procurement in councils noted that between 2009 and 2013, the average overall PCA score for all councils rose from 22 per cent to 56 per cent (Exhibit 1, overleaf). In 2013, the average score was below 50 per cent for two of the eight PCA sections – contract & supplier management; and key purchasing processes & systems.

22. A total of 25 councils chose to participate in the 2014 PCA. Of the other seven, some chose not to participate because the PCA was about to be phased out and some councils would have liked to participate but were unable to due to limited staffing resources.14

23. Between 2013 and 2014, councils’ overall PCA scores improved further – from 56 per cent to 62 per cent on average.15 Councils improved in all eight PCA sections:

• Two sections improved to ‘superior performance’ (75 percent or over) – procurement strategy & objectives; people).

• A further two sections, although improving, remained below 50 per cent – contract & supplier management; and key purchasing processes & systems. However, both these sections improved steadily from 2009 to 2014.

• The section on contract & supplier management made the largest improvement (seven per cent).

• For the third consecutive year, no section was in the ‘non-compliance’ category.

13 Paras 65-67 of the main report, Procurement in councils, Accounts Commission, April 2014. 14 The seven councils were Angus, Dundee City, East Renfrewshire, Clackmannanshire, Perth & Kinross, Stirling and West Lothian. 15 For the seven councils that did not have a 2014 PCA, their 2013 scores are applied to 2014 to enable 32-council comparisons.

108 Exhibit 1 Overall changes in Procurement Capability Assessment scores, 2009-2014 Overall, councils improved in all areas between 2009 and 2013, and from 2013 to 2014. 0-24 per cent 25-49 per cent 50-74 per cent 75 per cent or over Non-compliance Compliance Improved performance Superior performance

Councils’ average score (per cent) PCA section 2009 2010 2011 2012 2013 2014 Procurement leadership & governance 25 38 48 58 63 66 Procurement strategy & objectives 31 43 58 64 73 77 Defining the supply need 13 23 30 45 54 60 Commodity/project strategies & collaborative procurement 25 32 40 53 61 67 Contract & supplier management 14 18 24 33 39 46 Key purchasing processes & systems 26 37 39 38 40 44 People 25 39 49 58 71 76 Performance measurement 22 22 34 39 50 55 Overall score 22 32 40 48 56 62 Note: the seven councils without a 2014 PCA have had their 2013 scores applied to 2014 to allow 32-council comparisons. Source: Scotland Excel, November 2015

24. Among the 25 councils that participated in the 2014 PCAs:

• Twenty-three councils improved their overall PCA score. North Lanarkshire Council’s score remained the same and East Lothian Council’s score fell by 2 per cent.

• Four councils were in the ‘superior performance’ category (Renfrewshire, 83 per cent; City of Edinburgh; 76 per cent; Glasgow City, 76 per cent; South Lanarkshire, 75 per cent).

• Nineteen councils were in the ‘improved performance’ category (50-74 per cent).

• Two councils were in the ‘compliance’ category (Shetland Islands, 40 per cent; Clackmannanshire, 45 per cent) (Exhibit 2, overleaf).

25. Some councils improved significantly from 2013 to 2014 (eg East Dunbartonshire, City of Edinburgh, Falkirk, North Ayrshire, South Lanarkshire). Progress has been slower in certain larger councils that performed relatively well in the early years of the PCA (eg Aberdeen City, Aberdeenshire, Highland, North Lanarkshire).

109 Exhibit 2 Councils’ PCA scores, 2009-2014 All councils’ performance has improved since 2009.

100%

2009 (%) 2013 (%) 2014 (%)

75%

50%

25%

0% Fife Angus Moray Falkirk Stirling Orkney Dundee Glasgow Shetland Highland Edinburgh Eilean Siar Inverclyde Midlothian East Lothian East Ayrshire West Lothian Argyll & Bute Argyll Renfrewshire Aberdeen City Aberdeen Aberdeenshire South Ayrshire South North Ayrshire Perth & Kinross Perth Scottish Borders Scottish South Lanarkshire North Lanarkshire North East Renfrewshire Clackmannanshire East Dunbartonshire East Dumfries & Galloway West Dunbartonshire

Note: seven councils did not participate in the 2014 PCA assessments. Eilean Siar = Western Isles.

Source: Scotland Excel, November 2015

26. Larger councils have tended to score more highly in the PCA and there is a statistically significant correlation between a council’s overall PCA score and its size, measured in terms of its population. The top three performing councils in terms of 2014 PCA scores (City of Edinburgh, Glasgow City, Renfrewshire) accounted for 23 per cent of Scotland’s population while the bottom three (Clackmannanshire, East Lothian, Shetland) accounted for three per cent. Nevertheless, some smaller councils (eg Eilean Siar) have performed better than other councils of a similar size. The strength of the link between council size and PCA scores has weakened since 2011, suggesting smaller councils are tending to catch up on larger ones.

27. Increasingly, councils are using standardised contracts developed by Scotland Excel. The total value of standardised contracts rose by 39 per cent between April 2014 and December 2015 – from £503 million to £698 million. Contracts’ total national values ranges between £1.5 million for waste disposal equipment and £75 million for children’s residential care.16

28. The PCA tool covered how well councils manage off-contract spend and control of maverick spend (spend outside of approved contracts). Scotland Excel reports that most councils have

16 Contract portfolio information supplied to Audit Scotland by Scotland Excel, January 2016.

110 improved their contract coverage since 2009. PCA data showed that in 2014, 80 per cent of councils tested demonstrated ‘improved performance’ (over 70 per cent of spend is covered by strategies) or ’superior performance’ (over 70 per cent of spend is covered by contracts). However, Scotland Excel found that most councils still needed to do more to ensure staff use contracted suppliers. Only one council (Glasgow City) was in the ‘superior performance’ category. Specific responses of a random sample of eight councils to Procurement in councils are summarised in Exhibit 3.

Exhibit 3 Some councils’ response to the Procurement in councils report Councils have reacted positively. • East Ayrshire – The council published a new corporate procurement strategy for 2014-2019. It referenced Procurement in councils and council officers assured the Cabinet that ‘the Council’s Procurement Strategy reflects the key messages… and that where appropriate, required actions have been incorporated into our Corporate Procurement Strategy Action Plan to respond to the key recommendations...’ • East Dunbartonshire – In June 2015, the council issued its Procurement Strategy for 2015-18. The 17 strategy acknowledged the contribution made by Procurement in councils. • East Renfrewshire – The Audit and Scrutiny Committee considered a council report on Procurement in 18 councils, profiling the council’s stance on each recommendation. • City of Edinburgh – A report to the Finance and Resources Committee outlined the council’s response to each recommendation in Procurement in councils. It noted, for example, that a programme of training and awareness sessions was being developed for delivery to elected members.19 • Midlothian – A report to the Audit Committee asked its members to consider the extent to which the council was working in accordance with the recommendations in Procurement in councils. It profiled the council against each recommendation and addressed work planned by the council to develop a local procurement policy to strengthen engagement with local businesses.20 • Moray – The Audit and Performance Review Committee noted that ‘…the Corporate Management Team had tasked the procurement team to challenge services to consider community and environmental benefits which would align themselves with the council’s social responsibility targets in the strategic plan.’21 The committee agreed further procurement training would be arranged for elected members.22 • Highland – The Resources Committee welcomed Procurement in councils ‘…as a positive contribution to the national Procurement Improvement Programme’. The committee agreed its response to each recommendation in the report.23 • Renfrewshire – The Audit, Petition and Scrutiny Board was briefed on Procurement in councils, and about the council’s standing in relation to each of its recommendation.24

Source: councils’ online meeting papers and reports

17 Para 1.1, Procurement Strategy 2015-2018, East Dunbartonshire Council, June 2015. 18 Report to the Audit and Scrutiny Committee, East Renfrewshire Council, 12 June 2014. 19 Item 7: Report to the Finance and Resources Committee, City of Edinburgh Council, 30 September 2014.

20 Item 6: Report to the Audit Committee, Midlothian Council, 16 June 2015. 21 Item 7: Report to the Audit & Performance Review Committee, Moray Council, 14 May 2014. 22 Item 6: Committee minutes, Audit & Performance Review Committee, Moray Council, 14 May 2014. 23 Item 13, Report to the Resources Committee, Highland Council, 24 February 2015.

24 Item 7: Report to the Audit, Petition and Scrutiny Board, Renfrewshire Council, 201

111 Contribution to national developments

29. The audit team for Procurement in councils was consulted during the development of the new Procurement and Commercial Improvement Programme (PCIP) tool for assessing councils’ performance in future. The PCIP focuses on policies and procedures driving procurement performance, the results they deliver, and has been endorsed by the Scottish Government.25 Scotland Excel anticipates rolling out the PCIP in local government during the first half of 2016.

Progress on implementing recommendations

30. Progress has been made across the recommendations in Procurement in councils, and is ongoing in some areas. Appendix 1 lists all the recommendations in the report and, where possible, profiles the progress that has been made.

Outlook

The method for assessing public bodies’ procurement is about to change

31. The PCA tool is about to be replaced by the PCIP. Some key points are that:

• PCA was used to assess bodies annually whereas PCIP will occur every two years.

• PCIP results will not be comparable to PCA results.

• There will be three types of PCIP depending on an organisation’s sector, size, complexity and uniqueness.26

New procurement legislation will take effect

32. The regulatory framework for procurement is changing across the public sector. For example:

• The Public Bodies (Joint Working) (Scotland) Act 2014 introduced a framework for integrating health and social care.27 Scotland Excel plans to work with local government and the NHS to ensure procurement services respond to the needs of Joint Boards.28

• The Procurement Reform (Scotland) Act 2014 establishes a legislative framework for sustainable public procurement. It provides ministers with powers to make regulations and issue statutory guidance. The new duties are to take effect from April 2016.29

• The Community Empowerment (Scotland) Act 2015 aims to empower communities in making decisions about their local areas, including how services are provided, and takes effect from April 2016.30

25 Procurement – Procurement and Commercial Improvement Programme, Scottish Government website as at 12 November 2015. 26 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015. 27 The Act, Explanatory notes, The Public Bodies (Joint Working) (Scotland) Act 2014. 28 Page 8, Shared Vision, Shared Success: our corporate strategy 2015-18, Scotland Excel, June 2015. 29 The Procurement Reform (Scotland) Act 2014 (Commencement No. 3 and Transitional Provisions) Order, January 2016. 30 The Community Empowerment (Scotland) Act 2015 (Commencement No. 3 and Savings) Order 2015, November 2015.

112 Scotland Excel faces financial challenges

33. When Scotland Excel was established in 2008, the Scottish Government granted it £4.5 million to fund its set-up costs and procurement reform activities. At March 2013, £1.2 million remained.31 In the annual audit report on 2014/15, the external auditor reported that the ring- fenced funding for reform, £0.3m as at 31 March 2015, is likely to be fully utilised in 2016, with no plans in place to fund reform work from 2016 onwards.32 The auditor recommended that the organisation should prepare options as part of its budget-setting process for 2016/17. Scotland Excel developed funding proposals for its Joint Committee on 27 November 2015, which approved that the requisition for each council increase by 9.4 per cent for 2016/17 as a means of beginning to fund all of Scotland Excel’s ongoing procurement activity sustainably.33

34. In October 2015, Scotland Excel advised Audit Scotland that resolving the organisation’s financial stability after 2016/17 will be challenging.34 A significant portion of its income derives from the sale of training and support to councils, and Scotland Excel has indicated that the financial climate is impinging on councils’ ability to pay for it. If Scotland Excel is compelled to scale back its support for councils, this could compromise the maintenance of the PCIP framework and periodic assessments of councils.

Councils continue to face staffing challenges

35. In 2014, the Procurement in councils report noted that ‘councils and Scotland Excel believe shortages of skilled purchasing staff remain, and that there is a limited pool of experienced purchasing staff in the public sector from which to draw. As the economy improves, there is a risk that councils will lose qualified staff to other public sector organisations and the private sector, where salaries are higher.’ Scotland Excel reiterated to Audit Scotland in October 2015 that these challenges remain and that some councils risk having an insufficient number of suitably qualified staff to properly plan and manage procurement.35

There is scope for a procurement-related audit about three years from now

36. With the roll-out of the PCIP to councils happening 2016, it is likely to be 2018 before the second PCIP cycle occurs and like-for-like comparisons become possible. PCIP will shortly be rolled out in the NHS. So in a few years’ time, it should also be possible to map the changing performance of NHS procurement between 2016 and 2018. There is also some potential to consider thematic aspects of procurement across the public sector.

Fraser McKinlay Director of Performance Audit and Best Value Audit Scotland

February 2016

31 Para 71, Procurement in Scotland, Accounts Commission, April 2014. 32 Scotland Excel: Annual audit report to Members and the Controller of Audit, 2015. 33 Page 27, Agenda document pack, Scotland Excel Joint Committee, 27 November 2015. 34 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015. 35 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015.

113 Appendix 1. Progress on implementing the recommendations

Recommendation Progress

The Scottish Government should work with councils to:

• review and update the Best Practice Indicators The Procurement Reform Delivery Group comprises the heads of centres of procurement expertise: (BPIs), drawing on councils' experiences, to • Scotland Excel (local government) reflect changes in procurement since 2008 and • Advanced Procurement for Universities and Colleges (APUC) improve their usefulness to councils. • NHS National Procurement, and • Scottish Government representatives at deputy director level. The Procurement and Commercial Improvement Programme Dashboard replicates some information from BPIs. In 2015, the Group therefore decided to drop BPIs except for indicators 1a and 1b, which relate to procurement savings. This does not affect the gathering of contract spend data into the Scottish Government’s procurement Hub, which continues.36

Scotland Excel should:

• maintain and improve its sharing of knowledge In its corporate strategy for 2015-18, Scotland Excel commits to “monitor the progress of the Review of Procurement in and experience with the Scottish Futures Trust, Construction, working with the Scottish Futures Trust (SFT) and partners to determine how our collaborative contracts 37 and with the associated joint venture can support the implementation of its recommendations.” companies

• set realistic timescales and savings targets for A year-end performance report about Scotland Excel was taken by its Executive Sub-Committee in May 2015, showing contracts, particularly in new areas of performance against the business plan. For 2014/15, the plan had 21 objectives: contracting • Nine objectives were fully achieved including: o achieve savings of between two per cent and seven per cent against the delivery programme o reduce and maintain sickness absence at below four per cent. • Seven objectives were partially achieved including: o eight extensions and 11 renewals were made to contracts o developing a new three-year corporate strategy, which has subsequently been approved.

36 Email from Scotland Excel to councils, 1 October 2015. 37 Page 26, Shared Vision, Shared Success: our corporate strategy 2015-18, Scotland Excel, June 2015.

114 Recommendation Progress

• Five objectives were not achieved, including: o eight new contracts were delivered against a target of 16 o the advertised annual value of contracts fell £102m below the target of £750m. Scotland Excel’s 2015/16 operating plan includes plans to deliver a rolling schedule of new contract opportunities, identified and agreed with local authority stakeholders.38

Scotland Excel’s corporate strategy 2015-18 commits to ongoing partnership working, specifically mentioning areas like a Review of Procurement in Construction.39 It claims that its ‘growing portfolio of collaborative contracts delivers around £4 in savings for every £1 invested by councils, not to mention the efficiency gains of developing one national contract instead of 32’.40

Scotland Excel and councils should:

• review and formalise arrangements to fund This has been flagged as a challenging issue by both Scotland Excel and its appointed auditor. In December 2014, procurement reform activity beyond 2016 Scotland Excel established a transformation programme to underpin the delivery of its corporate strategy. The programme comprises six project areas: funding; leading change; stakeholder engagement; organisational development; business intelligence; and governance, policy and process.41 Scotland Excel developed funding proposals for its Joint Committee on 27 November 2015, which approved that the requisition for each council increase by 9.4 per cent for 2016/17 as a means of beginning to fund all of Scotland Excel’s ongoing procurement activity sustainably.42

38 Pages15-16, Scotland Excel: Annual audit report 2014/15 to Members and the Controller of Audit, August 2015. 39 Page 26, Shared Vision, Shared Success: our corporate strategy 2015-18, Scotland Excel, June 2015. 40 Total savings from the use of standardised contracts versus Scotland Excel’s requisitions on councils, information supplied to Audit Scotland in January 2016. 41 Page 42, Shared Vision, Shared Success: our corporate strategy 2015-18, Scotland Excel, June 2015. 42 Page 27, Agenda document pack, Scotland Excel Joint Committee, 27 November 2015.

115 Recommendation Progress

Council staff involved in procurement should

• submit accurate and complete information to Scotland Excel reports that councils are now much better at submitting their procurement data annually and on time. the procurement Hub on a regular and timely However, it also recognises the benefits to councils of quarterly reporting, which could provide a more timely national basis (ideally quarterly, and as a minimum overview and useful benchmarking data for councils themselves.43 within three months of the end of the financial year)

• examine the costs and benefits of differentiating Not assessed. ALEO and council expenditure in their Hub submissions • make greater use of the tools and facilities The Procurement Reform Delivery Group comprises the heads of centres of procurement expertise: provided by the Hub, including the use of BPIs • Scotland Excel (local government) in their performance reporting and to • Advanced Procurement for Universities and Colleges (APUC) benchmark their progress • NHS National Procurement • Scottish Government representatives at deputy director level. The PCIP reporting Dashboard replicates some information from the BPIs. In 2015, the Group therefore decided to drop the BPIs except for indicators 1a and 1b, which relate to procurement savings. This decision does not affect the gathering of contract spend data into the Scottish Government’s procurement Hub, which continues. The first cycle of PCIP assessments will be conducted in councils in 2016.

• engage earlier with suppliers and the people The standardised contracts developed by Scotland Excel are devised following research with a range of stakeholders, who use public services to help develop including councils, service providers, and service clients. For example, a framework for care home services for adults contract specifications that more accurately with learning disabilities is now available as part of Scotland Excel’s social care contracts portfolio. People with learning reflect service user requirements and allow for disabilities who had direct experience of living in care homes were involved in the development and evaluation of the greater innovation within contracts framework, and their views were embedded in the service specification.44

43 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015. 44 Page 3, Scotland Excel News: Summer 2015, Scotland Excel, Summer 2015.

116 Recommendation Progress

• use the Public Contracts Scotland tender The Procurement Reform (Scotland) Act 2014 requires all public sector contracting organisations to keep and maintain a module for all applicable contracts contract register, and to provide an internet-based publicly viewable version of it from 18 April 2016. While the onus is on individual organisations to produce and publish contract registers, in order to provide support to the public sector, Public Contracts Scotland (PCS) will provide functionality on the portal to produce a contract register that meets the requirements of the Act.45

• make full use of national collaborative contracts Scotland Excel has developed contracts in areas including Construction and maintenance (16 contracts); Transport & and provide a clear explanation for non- environment (10); Social care (8); Education & corporate services (4). Councils are using many existing contracts. New participation in these contracts to the relevant contracts under development by Scotland Excel address: Surveying & construction management; Playground equipment council committee & artificial surfaces; Home energy efficiency programme; Road services; Adult supported living; Architecture services.46

• develop a systematic approach to collecting Scotland Excel has included community benefits as a scored element in tenders since 2013. information on non-financial benefits including The Community Empowerment (Scotland) Act received Royal Assent in July 2015. The Act empowers communities in economic, community and environmental 47 making decisions about their local areas, including how services are provided. benefits and report the benefits to the relevant council committee on a regular basis

• calculate procurement savings using a Scotland Excel calculates that its standardised contracts have generated £85 million of savings in comparison to consistent and transparent methodology that councils’ £22 million of fees for membership of Scotland Excel, and that £1.4 billion has been spent through councils’ use demonstrates clearly how the savings are of its contracts since 2008.48 calculated and their relationship to improved procurement

th 45 Forward Plan 30 October 2015, Public Contracts Scotland, website as at 26 November 2015. 46 Presentation by Scotland Excel to councils during consultation events in 2015. 47 Explanatory Notes, Community Empowerment (Scotland) Act, July 2015. 48 Presentation by Scotland Excel to councils during consultation events in 2015.

117 Recommendation Progress

• make better use of market research, cost Scotland Excel claims its contracts follow this approach.49 avoidance and improved contract management Between 2013 and 2014, the number of councils in this category increased from one (Renfrewshire, 80 per cent) to four: to identify savings and potential service Renfrewshire (83 per cent and the top performer in 2013 and 2014), City of Edinburgh (76), Glasgow City (76), South improvements Lanarkshire (75). • aim to achieve the superior performance level Standardised contracts designed by Scotland Excel now cater for fluctuations in commodity prices. in the PCA, particularly in relation to: Scotland Excel has advised Audit Scotland that, on average, councils use 42 out of 48 available contracts, ranging o spend covered by an agreed commodity strategy between 31 contracts used (East Ayrshire, Glasgow City) and all 48 (West Dunbartonshire).50 o participation in Scotland Excel contracts Please refer to the recommendation below on electronic procurement. o automation of procurement and payment processes Scotland Excel does not maintain a list of spend on councils’ contract registers but, against this, a contract register is a key area of focus for the organisation.51 o spend captured in the council’s contract register

Councils’ corporate management teams should:

• benchmark their procurement staffing against The gap between high- and low-performing councils has been closing. Scotland Excel indicates that councils have been similar-sized councils with higher PCA scores recruiting procurement experts, but that the pool of suitable staff is limited.52 and, where appropriate, produce a business case for employing additional qualified procurement staff where they have lower staffing levels

• examine the benefits of joint working or joint Scotland Excel indicates that it continues to promote the potential benefits of councils’ pooling qualified expertise. procurement teams as a way of securing Scotland Excel has also advised Audit Scotland that there is considerable scope for further progress on this issue, economies of scale and creating collaborative especially given the limited pool of procurement professionals in Scotland.53 contracts

49 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015. 50 Email from Scotland Excel to Audit Scotland, 12 November 2015. 51 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015. 52 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015. 53 Audit Scotland meeting with the Head of Customer and Business Services, Scotland Excel, 29 October 2015.

118 Recommendation Progress

• phase out paper purchasing systems and The purchase-to-pay process encompasses all the steps that are followed from the time someone orders a consider the business case for moving all product/service that they need, through the authorisation process, to sending the supplier the purchase order and purchasing systems to an electronic ‘purchase- ultimately to receiving the products/services and paying the suppliers invoice. Using systems to automate this process to-pay’ basis can help to deliver greater efficiencies.54 A number of improvement programmes have been led by the Scottish Government, eg: • Public Contracts Scotland (PCS) provides suppliers with free access to all essential information on public sector business opportunities. All public sector bodies in Scotland are expected to use PCS. • PCS-Tender is the national eSourcing system provided free of charge by the Scottish Government. The system provides buying organisations with a set of web-based procurement tools. • eInvoicing is an electronic service that facilitates information exchange between buyers and suppliers. It allows invoices and related documents to be issued, received and reconciled electronically through a secure channel. In April 2015, the Scottish Government announced that eInvoicing had been extended to all Scottish public sector bodies in Scotland.55 Scotland Excel has advised Audit Scotland that local government has been actively engaged in these initiatives, but that electronic procurement remains an area of weakness, and also of opportunity.56 • raise staff awareness of accountability and The timescale for this impact assessment precluded a survey of all 32 councils. controls by: o implementing a written code of ethics o requiring staff involved in procurement to complete a register of interest statement o require internal audit to conduct a regular assessment of procurement risk, including the risk of fraud

54 Scottish Government Procurement: eCommerce, Scottish Government website as at 26 November 2015. 55 Public Contracts Scotland – Tender, Scottish Government website as at 10 November 2015. 56 Email correspondence between Scotland Excel and Audit Scotland, 10 November 2015.

119 Recommendation Progress

Councils should:

• require a report on procurement savings and Councils continue to seek savings from procurement, although reporting practices vary. For example: non-financial procurement benefits to be • Angus Council’s Policy & Resources Committee took a report on ‘…changes required to maximise Community submitted to the appropriate committee on a Benefits from Angus Council’s procurement activity in accordance with duties emerging from the Procurement regular basis Reform (Scotland) Act 2014 and aligned to the Tayside Sustainable Procurement Policy.’ • East Renfrewshire Council’s Cabinet took a report on the benefits of the council joining a nationwide telecommunications infrastructure for use by public bodies.57 • The City of Edinburgh Council prepared an Equality and Rights Impact Assessment in relation to procurement savings on independent contracts for Older People’s and Disability services.58

• encourage elected members sitting on the main A total of 3,585 council delegates have attended Scotland Excel training courses since January 2009.59 Some delegates committee(s) dealing with procurement to have comprised elected members. In response to Procurement in councils, some councils have said procurement complete specific training to help them training is already in place, and some others have committed to improving training and support for elected members, eg: undertake their governance role more 60 • Angus – the council has committed to deliver procurement training and briefing session(s) to councillors. effectively • Moray – procurement training has been offered to elected members and can be repeated if requested.61 • Renfrewshire – procurement awareness training sessions are available to elected members.62 However, the timescale for this impact assessment precluded a survey of all 32 councils. Final

57 Report by the Deputy Chief Executive to Cabinet, East Renfrewshire Council, March 2015. 58 Equality and Rights Impact Assessment, City of Edinburgh Council, February 2015.

59 Presentation by Scotland Excel to councils in consultation events during 2015. 60 Outcome 4, Procurement Annual Report 2014/15 and Improvement Plan for 2014/17, Angus Council, September 2015. 61 Item 7: Report to the Audit & Performance Review Committee, Moray Council, May 2014. 62 Item 7: Report to the Audit, Petition and Scrutiny Board, Renfrewshire Council, September 2014.

120 NORTH AYRSHIRE COUNCIL

Agenda Item 10 23 May 2016

Audit Committee

Title: Audit Scotland report: Why the Accounts Matter

Purpose: To inform the Audit Committee of the findings of the recent Audit Scotland report entitled 'Financial Reporting and Scrutiny: Why the Accounts Matter'.

Recommendation: That the Audit Committee notes the findings and makes use of the Elected Members questionnaire to scrutinise the Council's financial statements.

1. Executive Summary

1.1 Audit Scotland has prepared a short report summarising the issues faced by Scottish Councils in closing their accounts for 2014/15 and providing a useful checklist for Elected Members.

2. Background

2.1 Effective planning, management and scrutiny of the use of public funds are a key part of a local authority's responsibilities. The financial statements are a vital part of the accountability framework as they demonstrate how the Council has spent its resources.

2.2 Audit Scotland has recently published a short report summarising the findings from the audit of all Scottish Councils' accounts for 2014/15.

2.3 This report highlights the challenge faced by Councils in preparing their accounts for 2014/15 within tighter timescales prescribed by the new Local Authority Accounts (Scotland) Regulations 2014.

2.4 External auditors felt that Councils generally met the challenge well but also noted some areas for improvement. These are detailed within the Audit Scotland report which is attached at Appendix 1.

2.5 The Audit Scotland report also includes an 'Elected Members checklist' which is based on the key findings from 2014/15. This can be used to help scrutinise the accounts for 2015/16.

121 3. Proposals

3.1 It is proposed that the Committee notes the Audit Scotland report, attached at Appendix 1, and makes use of the checklist when reviewing the Council's 2015/16 accounts later in the year.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: Good governance arrangements help to underpin the delivery of the Council's key priorities. Community Benefits: None.

5. Consultation

5.1 No consultations have been required in the preparation of this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

122 Appendix 1

Financial Reporting & Scrutiny: Why the Accounts Matter

Prepared for Local Government February 2016

123

Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission check that organisations spending public money use it properly, efficiently and effectively.

124

Financial Reporting & Scrutiny: Why the Accounts Matter

The role of financial reporting

1. Effective planning, management and scrutiny of the use of public funds are a key part of a local authority's responsibilities. The financial statements (commonly known as the accounts) are a vital part of the accountability framework, as they demonstrate how an authority has spent its resources. They also record assets used, and liabilities incurred, in delivering services.

2. Audited accounts provide the public with reliable information about the stewardship of funds and the financial position of the authority. They provide elected members with information to scrutinise the use of funds in each year, and to make budgetary decisions for the future.

3. The accounts are prepared based on International Financial Reporting Standards (IFRS). Under local government accounting rules councils make a number of adjustments to the IFRS financial results to determine the impact on the General Fund, and consequently the level of council tax set for future years. For example large adjustments are made for the accounting treatment of fixed assets and pension costs. Councils monitor their financial results relative to the General Fund, and not on an IFRS basis. In taking decisions, it is therefore important that members understand the link between what the accounts show on the council's spending, assets and liabilities, and the budgetary outturn information.

Your role in the accounts process

Role of the s95 officer Role of elected members Role of the auditor  Responsible for the  To scrutinise and approve the  To provide an independent preparation and accounts. auditor's report on whether submission of the  To consider the financial the accounts show a 'true financial statements, results reported in setting and fair view' of the financial in accordance with future budgets and reserves position. proper accounting policies.  To provide an annual audit practice.  To consider the annual audit report addressed to  To support the Audit report and hold officers to members and the Controller Committee in their account on areas of concern of Audit, reporting significant scrutiny role. reported. audit findings.

Financial Reporting & Scrutiny: Why the Accounts Matter Page 3 125

Developments in financial reporting in 2014/15

4. In 2014/15 council’s faced the challenge of producing the accounts to tighter timescales as prescribed by new accounts regulations1.

5. External auditors said that councils generally met this challenge well. They commented as follows:  The councils did well to bring forward the completion of the accounts for approval by members by 30 September.  Members welcomed receiving the audited accounts for approval alongside the auditors' annual audit reports.

6. The auditors also commented on some areas for improvement:  The accounts are complex and lengthy documents. Some s95 officers could do more to explain to the Audit Committee the role of the accounts, and what they show about the council’s performance.  The management commentaries could do more to explain the overall picture regarding the council’s financial performance and challenges.  Some members need more guidance on what they are looking for when reviewing and approving the accounts.  It is disappointing that members do not ask more questions about the issues raised in our annual audit reports.  The standing orders in some councils need to be updated to reflect the processes adopted for approving the accounts under the new regulations.

7. In light of these key messages we have compiled a list of questions, at Appendix 1, for members to consider when reviewing the accounts.

8. Your local auditor will request an opportunity to discuss this paper with members of the audit committee prior to the June meeting at which they consider the draft accounts. The expectation is that the audit committee members could then use the questions in considering the accounts and annual audit report at their meetings in June and September.

9. This paper complements the messages in the 2011 Local Authority (Scotland) Accounts Advisory Committee's publication 'Holding to Account, Using Local Authority Financial Statements.'

1 The Local Authority Accounts (Scotland) Regulations 2014

Page 4 Financial Reporting & Scrutiny: Why the Accounts Matter 126

Appendix 1

Questions for elected members to consider as part of the accounts scrutiny and approval process

Stewardship of the council’s funds Your answer

1. Does the auditor's report included in the accounts give you independent assurance on how the financial position of the council has been reported?

2. Does the council’s governance statement provide you with assurance that the internal controls and governance arrangements are operating effectively? Does it adequately disclose any risk areas that you are aware of?

3. Does the annual audit report provide you with assurance that:  financial management of the council is effective?  financial sustainability of the council is demonstrated?  the council reports on its financial and service performance in a transparent way?  the council demonstrates Best Value in how its funds are used?  management have responded appropriately to any audit recommendations?

Sustainability of services

4. Does the management commentary in the accounts clearly explain to you the financial position of the council?

5. Do you understand how the figures in the comprehensive income and expenditure statement link to the budgetary outturn information that you have considered for this year?

Financial Reporting & Scrutiny: Why the Accounts Matter Page 5 127

6. Do you understand how the council's reserves, shown in the movement in reserves statement (MIRS), will be used in the future?

7. The value of fixed assets is shown in the balance sheet. Do you understand how these assets are managed to secure the delivery of services in the future?

8. Are you satisfied that the council’s commitments for funding the capital programme, shown as liabilities in the balance sheet, are affordable into the future?

9. If the council has significant borrowings have you received assurances that the council can afford the interest and is keeping up with the repayment of capital?

10. Do you understand what any provisions included in the balance sheet are for? Is there risk that further significant liabilities could arise in the future?

11. If there is a significant movement in the pension liability, do you understand what has caused the change, and the implications for the council?

12. Do you understand the reason for any large movements in this year's figures compared with those shown for last year? Are those movements in line with strategic decisions to shift resources?

13. Do you have suggestions for the s95 officer on how information in the accounts could be presented in a different or more understandable way?

14. After considering the accounts and the budget outturns you have seen how the council is funding current services. Are you satisfied that adequate plans have been made to realise efficiencies or deliver services in a different way with reduced budgets in the future?

Page 6 Financial Reporting & Scrutiny: Why the Accounts Matter 128 NORTH AYRSHIRE COUNCIL

Agenda Item 11 23 May 2016

Audit Committee

Title: Audit Scotland: Major Capital Investment in Councils - Follow Up

Purpose: To advise the Committee of the recent Audit Scotland follow up report on capital investment by local authorities.

Recommendation: That the Committee notes the findings of the recent Audit Scotland report, the current position in North Ayrshire Council and further actions being taken to implement best practice in North Ayrshire.

1. Executive Summary

1.1 In March 2013, Audit Scotland reported on major capital investment in local authorities. The report provided a comprehensive review of major capital projects over £5m and assessed how well Councils directed, managed and delivered capital investment. This audit found that Councils early estimates of the expected costs and timetables were often inaccurate improving as projects progressed. It also found that Councils had weak processes for developing and using business cases, and they did not provide enough monitoring information to elected members.

1.2 This more recent audit, published in January 2016, is a targeted follow up to assess to what extent Councils have improved performance in managing their capital investment programmes and projects since the 2013 report.

1.3 This report highlights the main issues from the Audit Scotland report which is attached at Appendix 1. Appendix 2 highlights the further work that is required by North Ayrshire Council in relation to post project evaluations and a more consistent use of business cases in evaluating projects, This will ensure compliance with best practice recommended within the report.

129 2. Background

2.1 The Audit Scotland report provides: -

 an overview of capital investment in Councils since the 2013 report and  a view on Councils management of capital investment programmes and projects

2.2 This report highlights the main issues from each of these sections. Appendix 2 to this report identifies the key recommendations from the Audit Scotland report and the relevant work that has been undertaken or is planned to be undertaken by North Ayrshire Council in response to this report.

Capital Investment in Councils Since the 2013 Report

2.3 Between 2012/13 and 2014/15 Councils have invested £7 billion on capital projects, representing 53 % of the capital investment undertaken within the public sector.

2.4 149 major capital projects were completed across Scotland between April 2012 and October 2015 mainly within Schools and Roads and Transportation. There are currently 245 projects worth £6 billion under way, with 42 % of these within Schools.

2.5 Capital projects continue to be funded mainly from government grants and borrowing, representing 76 % of the funding in 14/15. However the trend from 2011/12 illustrates an increase in the proportion of funding received from government grants, and a corresponding reduction in borrowing. 2014/15 is the first year where Councils used more capital grants than borrowing to fund their capital programmes.

2.6 Councils also continue to explore other funding mechanisms in partnership with the private sector including Private Finance Initiatives (PFI) and non-profit-distributing model (NPD). As at October 2015 Councils reported there were 39 operational PFIs and 4 operational NPD projects. Councils also continue to access the hub programme which operates across Scotland to deliver community facilities through private finance. This report highlights that in the three years from 2012/13 to 2014/15 Councils were involved in a further 7 hub projects with a total value of £0.250 billion.

2.7 Other funding methods are considered by Councils to supplement direct funding including Tax Incremental Funding (TIF), Growth Accelerator Model (GAM), City Deal and UK Green Investment Bank. However the use of these varies across Councils and is determined by individual circumstances.

130 Councils' Management of Capital Investment and Projects

2.8 The report recognises that many Councils have made good progress in responding to the recommendations of the 2013 report, however concludes that further work is required to fully meet it conclusions and particularly highlights the following areas : -

(i) Capital Investment Strategies and Plans Only one third of Councils have these in place, and although some display the features of good practice, councils need to improve them further to include an assessment of future need, consideration of how these plans can be funded sustainably in the future, demonstrate links between individual projects and wider programmes and identify opportunities for collaborative working with other Councils, public bodies and the private sector.

(ii) Capital Plans All Councils have a capital plan in place across a variety of different time periods, with only one third of Councils having plans in place for ten years or more. Most plans outline the annual programme and costs for the period, however they fail to set out clearly were projects have changed between financial years either as a result of cost changes or timing of spend. They also fail to outline the rationale for progressing with major projects and the expected benefits of these and why they have been identified as a priority for investment.

(iii) Arrangements for Management and Monitoring of Capital Investment The Audit reviewed arrangements in eight Councils and found that all had adequate arrangements in place to manage and monitor capital investment, including links with treasury management functions to ensure that cash is available when needed.

(iv) Business Cases for Major Capital Projects All eight Councils reviewed demonstrated that they had clear procedures for preparing outline and full business cases but they do not always apply them fully. The review also found that the content of business cases was not consistent for all capital projects. The majority of Councils reviewed did not routinely revisit and review business cases throughout projects and this limits their ability to identify benefits that individual projects have realised.

131 (v) Mid Term Reviews and Post Project Evaluations The review found that most Councils do not carry out independent expert reviews of projects at key stages, known as gateway reviews. It also found that Councils do not routinely carry out post project evaluations although they have been performed on an ad hoc basis. The approaches can differ for individual projects. The report notes that failure to review projects can limit the ability of Councils to identify areas of good practice, share lessons learned and monitor benefits that the investment activity realises.

(vi) Information on Capital Investment to Elected Members The report recognised that the vast majority of Councils currently provide elected members with capital monitoring reports that allow elected members to scrutinise total annual capital spending against budget, as well as details on individual projects in the current financial year. However they did find that over a third did not provide information on the cumulative capital spending on a project by project basis. Officer led project boards primarily have responsibility for managing risks as part of the operational management of the capital programme and the report concludes that it would be useful if elected members could be provided with this information and the actions taken to mitigate this risks as part of their scrutiny of capital investment activity. Councils could also do more to provide members with information on the benefits realised by individual projects.

(vii) Training for Elected Members The review found that Councils do provide training opportunities for elected members on capital investment matters, largely on a one-off basis but recognise there is a willingness to provide further training if required. North Ayrshire Council recently provided training on Treasury Management which included high level information on capital funding, however there has been no training specifically on Capital programming.

2.9 Progress within North Ayrshire Council has been measured against the key recommendations within the report. This is contained within Appendix 2 and recognises that good progress has been made in relation to the Council's capital programme management and monitoring, however it recognises that further work is required to comply fully with best practice.

132 3. Proposals

3.1 It is proposed that the Committee notes the findings of the Audit Scotland report which are summarised above with a copy of the full report attached at Appendix 1. It is further proposed that the Committee notes the work which has already been undertaken and the further planned actions by North Ayrshire Council, detailed at Appendix 2, in tackling the actions points highlighted by Audit Scotland.

4. Implications

Financial: None Human Resources: None Legal: None Equality: None Environmental & None Sustainability: Key Priorities: A commitment to improvement underpins the delivery of our priorities. Community Benefits: None

5. Consultation

Full consultation has taken place with PMI in preparing this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Margaret Hogg, Senior Manager, Financial Management on 01294 324551 Background Papers Audit Scotland: Major Capital Investment in Councils, Audit Committee 27 May 2013

133 134 Appendix 1 Major capital investment in councils Follow-up

Prepared by Audit Scotland January 2016

135 The Accounts Commission The Accounts Commission is the public spending watchdog for local government. We hold councils in Scotland to account and help them improve. We operate impartially and independently of councils and of the Scottish Government, and we meet and report in public.

We expect councils to achieve the highest standards of governance and financial stewardship, and value for money in how they use their resources and provide their services.

Our work includes: • securing and acting upon the external audit of Scotland’s councils and various joint boards and committees • assessing the performance of councils in relation to Best Value and community planning • carrying out national performance audits to help councils improve their services • requiring councils to publish information to help the public assess their performance.

You can find out more about the work of the Accounts Commission on our website: www.audit-scotland.gov.uk/about/ac

Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission check that organisations spending public money use it properly, efficiently and effectively. 136 Major capital investment in councils: follow-up | 3

Contents

Key facts 4

Summary 5

Part 1. Capital investment in councils since the 2013 report 11

Part 2. Councils’ management of capital investment programmes and projects 22

Endnotes 31

Appendix 1. Councils selected for the targeted follow-up 32

Appendix 2. Good practice examples in managing capital investment 34

Appendix 3. Alternative funding methods 37

Appendix 4. Update on the 15 projects reviewed in the 2013 report 38

137 4 |

Key facts

The total value of councils' capital £7 The number and investment between cost of major April 2012 and billion 149 projects capital projects that March 2015 councils completed (£3.2 billion) between April 2012 and October 2015

Councils' capital spend as a proportion of 53 total public per cent The number and sector capital 245 estimated cost of spend between projects major capital projects April 2012 and that councils were (£6 billion) March 2015 progressing as at October 2015

138 Summary | 5

Summary

Key messages 1 Between 2012/13 and 2014/15, councils spent £7 billion on capital investment. They have taken a range of actions in response to the recommendations in the 2013 report. This included implementing revised structures to help them manage and monitor capital investment activity more effectively. There are examples of councils displaying aspects of good practice but, overall, they need to increase the pace of improvement to comply fully with the 2013 good practice guide. 2 Councils need to improve the quality of their capital investment strategies and plans. The strategies which exist demonstrate how planned capital investment is expected to contribute to councils' overall strategic priorities. But only just over a third of councils have a long-term capital investment strategy in place and these do not identify opportunities for collaboration with other bodies. All councils councils have have a capital plan outlining expected programme and project costs. The plans do not set out the rationale for prioritising and progressing improved major projects, and the expected benefits of these projects. Some their councils choose to not have a separate capital investment strategy and plan. Instead they combine the features of both in a single document management but these rarely demonstrate how capital investment contributes to of capital councils' strategic objectives. investment 3 There are some examples of where councils have improved their but they need structures and processes to help them manage and monitor capital investment activity more effectively. But they need to do further work to increase to comply fully with the 2013 good practice guide, such as developing the pace of processes to routinely revisit and review business cases throughout the life of every capital project. Similarly, most councils are not carrying out improvement formal mid-term reviews of projects, or post-project evaluations. Those that do are not doing so regularly or in a consistent manner. This limits councils' ability to identify areas of good practice, share lessons learned and identify the benefits that individual projects have realised. 4 Elected members are not able to scrutinise the performance of capital programmes effectively because they are not receiving adequate information on capital investment. The majority of councils' progress reports to elected members on major capital projects focus on reporting capital spending in the current financial year. Some councils do not report cumulative capital spending, covering several years, against the total capital budget for individual projects. Councils do not routinely report to elected members project risks or non-financial information, such as the benefits realised from capital investment 139 6 |

activity. Councils provide some training to elected members on capital investment matters but no council has a continuing programme of training in place on capital issues.

Recommendations

As already recommended in the 2013 report, all councils should have a long-term capital investment strategy. These should demonstrate to elected members and service users how planned capital investment will help achieve councils' long-term strategic priorities as defined in corporate plans and Single Outcome Agreements (SOAs). Councils should also ensure that their capital investment strategies and plans follow good practice as set out in the 2013 good practice guide.

Councils should ensure that they:

• prepare business cases that comply with good practice for every capital project

• revisit and monitor business cases throughout every capital project

• regularly carry out post-project evaluations to help establish whether planned benefits are realised and to identify good practice or lessons learned

• consider how best to review projects at key stages, using independent experts as necessary, to help provide assurance about project progress and to identify any potential problems

• are proactive in sharing lessons learned from projects, both, successful ones or those that ran into significant difficulties, within the organisation and with other councils.

Councils should ensure that they provide elected members with regular, appropriate and accurate information to allow them to scrutinise properly capital investment activity. Within this, councils should ensure that they:

• develop their capital monitoring reporting to include: –– cumulative spending against total capital budget and the progress of each significant project against its key milestones –– reasons for and consequences of slippage, or delays, of capital projects and any changes in the timing of capital spending –– clear outlines of the benefits that individual projects have realised, and how these compare with the expected benefits outlined in business cases –– updates of the risks associated with capital projects and programmes, including their financial and non-financial implications.

• provide elected members with regular training on capital investment to enable them to scrutinise effectively capital investment activity.

140 Summary | 7

Background

1. Public sector capital investment is essential for delivering high quality, effective public services and for improving wellbeing of people in Scotland. Councils’ capital investment is spending on property and other assets such as schools, social housing, roads and community centres. This includes spending on new buildings as well as maintaining and repairing existing assets.

2. In March 2013, the Accounts Commission reported on major capital investment in councils.1 The audit focused on major capital projects over £5 million and assessed how well councils directed, managed and delivered capital investment. It also examined how well councils managed their investment spending as a programme, and their performance in delivering major capital projects against time and cost targets.

3. The audit found that councils’ early estimates of the expected costs and timetables were often inaccurate, although this improved as projects progressed. It also found that councils had weak processes for developing and using business cases, and that they did not provide enough monitoring information to elected members.

4. The report recommended actions councils should take to help them improve performance in managing their capital investment programmes and projects. Based on the report’s findings, the Accounts Commission developed a good practice guide and checklist to help councils improve how they manage and scrutinise capital projects.

About this audit

5. This targeted follow-up audit assesses to what extent councils have improved performance in managing their capital investment programmes and projects since the 2013 report. This includes councils’ actions to strengthen monitoring, their use of the checklists and whether they have applied lessons learned to their latest capital projects.

6. The audit does not review funding of capital projects in detail. Aspects of this were covered by the Accounts Commission’s Borrowing and treasury management in councils [PDF] , published in March 2015.

7. The audit draws on baseline assessments performed by councils’ external auditors during 2014/15. We performed a more detailed evaluation at a sample of eight councils (Angus, City of Edinburgh, Dundee, East Ayrshire, Fife, Highland, Inverclyde and South Lanarkshire), selected for the targeted follow-up on the basis of the:

• value and type of their major capital projects

• level of capital spending and financing requirement.

141 8 |

8. During the audit we:

• collated, reviewed and analysed external auditor assessments to identify common issues in councils

• interviewed representatives (senior officers and elected members) and reviewed business cases for a sample of 13 major capital projects from the eight councils reviewed in detail (Appendix 1)

• reviewed council documents and other published documents as appropriate.

9. The report has two parts:

• Part 1 outlines how councils’ capital spending has changed between 2011/12, the last financial year captured in the 2013 report, and October 2015.

• Part 2 reviews to what extent councils have implemented recommendations from the 2013 report.

Councils have taken a range of actions in response to the 2013 report’s recommendations but they need to increase the pace of improvement

10. Councils have taken a range of actions in response to the 2013 report’s recommendations but they need to make further progress. The majority of councils have either developed an action plan based on the report’s recommendations or progressed recommendations without preparing a formal action plan. The extent of planned action varies across councils. Overall, many councils display aspects of good practice but they need to do further work to comply fully with the 2013 good practice guide. Exhibit 1 (page 9) provides an overview of how councils have responded to the 2013 report. Some of the findings are based on all 32 councils and some on the sample of eight councils reviewed in detail. Appendix 2 outlines good practice examples of managing capital investment in the eight councils reviewed in detail.

142 Summary | 9

Exhibit 1 Councils' actions to implement recommendations from the 2013 report Councils have made more progress in implementing some recommendations than others and they need to take further action.

Recommendations from the 2013 The extent to which councils have implemented the report – councils should: recommendations

Develop and confirm long-term A third of all councils have a long-term capital investment strategies to set out the needs investment strategy in place and only two cover a and constraints for local capital investment period of over ten years. The majority of these set out and consult with stakeholders, such Limited the needs and constraints for local capital investment. as service users and suppliers, as they progress But councils need to improve them further to include develop these strategies. other features of good practice such as providing clear links between individual projects and wider programmes. Councils consult with stakeholders, such as service users and suppliers, although the extent of this varies by the council. (Paragraphs 47, 55 and Exhibit 7)

Assess the overall appropriateness of A third of all councils have a long-term capital investment using borrowing and private finance within strategy in place. Two-thirds of these assess funding the investment strategy. The strategy methods and consider how councils might use them. should balance the costs, risks and Limited But councils need to improve them further to include rewards of using these methods to ensure progress other features of good practice such as coordinating plans are financially sustainable and help investment requirements from across each service area. each council achieve value for money. (Paragraph 47 and Exhibit 7)

Actively look for opportunities for joint Councils told us that they were actively exploring working with other councils, community opportunities for joint working but this is often not planning partnerships and public bodies reflected in their capital investment strategies. to improve the efficiency of their capital Limited Evidence of successful joint projects or sharing staff programmes. This should cover joint progress resources is limited. projects, sharing resources such as (Paragraphs 48 – 50 and Exhibit 7) facilities and staff, sharing good practice and taking part in joint procurement.

Develop and use clearly defined project All eight councils reviewed in detail have clear milestones for monitoring and reporting. procedures for preparing outline and full business This should include a clear process cases. But they do not routinely revisit and review for preparing and approving business Partially business cases throughout the life of projects. Based cases as a key part of decision-making on the detailed review of eight councils, about a third of and continuous review of all major them do not routinely report cumulative spending on a capital projects. project-by-project basis. (Paragraphs 59, 60 and 64)

Collect and retain information on all The detailed review of eight councils shows that projects including explanations for cost, councils do not carry out mid-term reviews of projects time and scope changes and lessons or post-project evaluations regularly or consistently. learned. Report this information publicly No This limits councils' ability to identify areas of good to improve transparency and scrutiny of practice, share any lessons learned and monitor project delivery and share lessons learned benefits realised from the investment activity. across services and other councils. (Paragraphs 61 and 62) Cont. 143 10 |

Exhibit 1 (continued)

Recommendations from the 2013 The extent to which councils have implemented the report – councils should: recommendations

Improve the quality of capital project • The vast majority of councils report annual capital and programme information that spending against budget. is routinely provided to members. • Based on the review of eight councils, about a Limited Information should cover: third of them do not routinely report cumulative progress • annual financial performance against spending against total capital budget on a project- the capital budget by-project basis. • project and programme level • The eight councils reviewed in detail provide limited performance against cost, time and information to elected members on project risks scope targets and overall capital programme risks. • risk reporting (including identification, • Business cases identify intended benefits but likelihood, financial impact and monitoring reports do not outline benefits that actions taken) individual projects have realised. • an assessment of intended and (Paragraphs 63 – 67) realised benefits.

Carry out early assessments of risk and Officer-led project boards of the eight councils uncertainty to improve the accuracy of reviewed in detail are primarily responsible for early-stage estimating of the cost and managing risks. While officers may alert elected timescale of projects. Partially members to specific risks, they often provide them with information on project risks and overall capital programme risks on an ad hoc basis. (Paragraph 66)

Consider developing a continuing The detailed review of eight councils shows that programme of training for elected councils provide members with a variety of training members on capital issues, using opportunities on capital investment matters but no independent external advisers No council has a continuing programme of training on if necessary. capital issues in place. (Paragraph 69)

Source: Audit Scotland

144 Part 1. Capital investment in councils since the 2013 report | 11

Part 1 Capital investment in councils since the 2013 report

Key messages 1 Between 2012/13 and 2014/15, councils spent £7 billion on capital investment. This represented over a half of the total public sector capital spend during the period. Councils decreased their annual capital spending from £2.5 billion in 2011/12 to £2.2 billion in 2014/15. As at October 2015, they were planning to spend a further £2.6 billion on capital projects in 2015/16. 2 Councils continue to fund their capital spending through a variety of means, including capital grants from the Scottish Government and borrowing. Between 2011/12 and 2014/15, councils borrowed less and funded more capital spending from capital grants. The availability of the Scottish Government capital grant increased in 2014/15 to compensate for earlier reductions. The proportion of funding from capital grants increased from 28 per cent in 2011/12 to 43 per cent in councils 2014/15. Borrowing reduced from 54 per cent to 33 per cent over the same period. spent £7 billion 3 Between April 2012 and October 2015, councils completed 149 major capital projects and had a further 245 in progress as at October 2015. on capital In line with the findings of the 2013 report, schools projects continued investment to perform better to cost and time targets. between April 2012 and March Councils spent £7 billion on capital investment between 2012/13 2015 and 2014/15

11. In 2013, the Accounts Commission reported that councils had spent £24 billion between 2000/01 and 2011/12 on capital investment projects, including new schools, care homes and sports facilities.2 Between 2012/13 and 2014/15, they spent another £7 billion (the equivalent of £6.4 million a day), at 2014/15 prices, on capital projects. This represented just over a half (53 per cent) of total public sector capital investment during the period (Exhibit 2, page 12). Seven councils (Aberdeenshire, City of Edinburgh, Fife, Glasgow, Highland, North Lanarkshire and South Lanarkshire) were responsible for half of this expenditure. Individual councils spent between £44 million and £795 million each, at 2014/15 prices, over the three years from 2012/13 to 2014/15.

145 12 |

Exhibit 2 Public sector capital spend from 2012/13 to 2014/15, at 2014/15 prices Between 2012/13 and 2014/15, councils spent almost £7 billion on capital investment, just over a half of total public sector capital investment spend during the period. 53% 38%

9%

Councils Health Central Government £6.96 £5.01 £1.13 billion billion billion

Source: Audit Scotland

12. Councils decreased their annual capital spending in the last three years, from £2.5 billion in 2011/12 to £2.2 billion in 2014/15 (Exhibit 3, page 13). In 2014/15 councils’ capital spend represented 11 per cent of their total spend of £20.9 billion. Councils’ spending on services remained constant over the same period at about £18.5 billion a year. As at October 2015, councils were planning to spend a further £2.6 billion on capital investement in 2015/16.

13. Council’s capital investment over the years has made a significant difference to the condition of their assets. For example, in April 2014, 83 per cent of schools were in satisfactory condition, compared to only 61 per cent in April 2007.3 Councils rebuilt or substantially refurbished 526 schools between 2007 and 2014, 123 of which were completed in 2012/13 and 2013/14.4

146 Part 1. Capital investment in councils since the 2013 report | 13

Exhibit 3 Councils' capital spending from 2000/01 to 2014/15, at 2014/15 prices After several years of growth, councils' annual capital spending fell from £2.5 billion in 2011/12 to £2.2 billion in 2014/15. As at October 2015, they were planning to spend £2.6 billion in 2015/16.

3000

2500

2000

1500 £ million 1000

500

0

2000/012001/022002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/132013/142014/152015/16

Capital spending Planned capital spending

Note: 2015/16 capital spending (dotted line) as planned by the councils at the time of the audit (October 2015). Source: Audit Scotland

Councils use a variety of funding sources for capital investment

Councils are borrowing less and funding more capital investment from capital grants 14. Over the four years from 2011/12 to 2014/15, councils funded an increased proportion of their capital spending from capital grants (from the Scottish Government and others such as other central government bodies, National Lottery and EU). Capital grant funding increased from £720 million in 2011/12 to £925 million in 2014/15 (at 2014/15 prices).

15. The Scottish Government provides the vast majority of capital grant funding to councils (an average of 80 per cent of total grant funding to councils over the four years from 2011/12 to 2014/15). The Scottish Government rescheduled its capital allocations as part of its 2011/12 Spending Review. It moved capital grant funding of £120 million and £100 million, originally due to councils in 2012/13 and 2013/14, to the following two years. This allowed the Scottish Government to provide additional funding to those sectors that can’t borrow, for example to the central government sector. It hoped that councils would work with the Scottish Ministers and use their ability to borrow to supplement capital spending and so contribute to local economic recovery.5

147 14 |

16. Rescheduled capital grant funding meant that the Scottish Government increased its capital allocations to councils by £120 million in 2014/15 and £94.2 million in 2015/16. The increase in 2015/16 does not match the reduction in 2013/14 due to the transfer of responsibility for policing from local to central government.6 The Police and Fire Reform (Scotland) Act 2012 created a new structure for providing police services in Scotland. It brought together the eight police forces, the Scottish Police Services Authority and the Scottish Crime and Drug Enforcement Agency into two new national bodies: the Scottish Police Authority and the Police Service of Scotland (Police Scotland). The new structure became operational on 1 April 2013.7

17. Councils’ funding sources for capital spending have changed. Over the four years from 2011/12 to 2014/15, the proportion of funding from capital grants increased from 28 per cent to 43 per cent, and borrowing for capital investment reduced from 54 per cent to 33 per cent. In 2014/15, councils used more capital grants than borrowing to pay for capital projects, the first year they have done so since 2008/09 (Exhibit 4).

Exhibit 4 Sources of funding councils' capital spending, 2011/12 to 2014/15 Funding from capital grants increased as a proportion of total capital investment funding, from 28 per cent in 2011/12 to 43 per cent in 2014/15. Borrowing for capital investment reduced from 54 to 33 per cent over the same period.

3,000

2,500

2,000 1,500 54% 49% £ million 48% 33% 1,000 500 28% 33% 33% 43% 0 2011/12 2012/13 2013/14 2014/15

Capital grants Borrowing Revenue to Asset sales Other income from government capital transfers

Source: Audit Scotland

148 Part 1. Capital investment in councils since the 2013 report | 15

Councils are using alternative funding mechanisms for capital projects 18. As well as using borrowing or Scottish Government capital grants, councils have also funded capital projects in partnership with private sector investors. These partnerships include the private finance initiative (PFI) and the non-profit- distributing model (NPD). Under these models, the private sector investor pays the upfront building costs and ongoing maintenance costs of an asset. The council pays an annual charge from its revenue budget for using the asset before gaining ownership of the asset at the end of the contract. Under the NPD model, there is a limit on how much of the profits the private sector operator may retain. Any surplus profit is returned to the public sector.

19. Councils have also increasingly used the hub programme, a Scotland-wide initiative for delivering new community facilities through private finance. The hub programme operates across five geographical territories: South East, East Central, West, South West and North. In each territory, the participating public bodies such as health boards, councils, police and fire and rescue services, have teamed up with a private sector development partner to form a joint venture company known as a hubCo. Each hubCo takes a strategic approach to delivering local services. While projects are mostly new buildings, they can include refurbishment and management of existing buildings. They include many schools in the Scottish Government’s Schools for the Future programme which aims to rebuild or refurbish schools.

20. The hub and Schools for the Future programmes are led by the Scottish Futures Trust (SFT), an independent company established in 2008 by the Scottish Government. Its aim is to ‘improve the effectiveness and efficiency of infrastructure investment in Scotland by working collaboratively with public bodies and industry leading to better value for money and ultimately improved public service’.8

21. Councils reported they had 50 revenue-funded projects as at October 2015. Of these, 39 were operational PFIs and four were operational NPD projects. Councils are involved in a further seven projects with a total capital value of £0.25 billion, signed through hub contracts in the three years from 2012/13 to 2014/15. Two of these seven projects are complete and the other five are currently in construction. Another 14 revenue-funded hub projects are still in development. Since 2012/13, all council revenue-funded projects have been procured through the hub route.

22. Between 2012/13 and 2014/15, councils paid £1.5 billion (at 2014/15 prices) of annual charges relating to non-hub revenue-funded projects. They have not yet made any such payments for revenue-funded hub projects. Councils will have to continue to pay significant charges for all types of revenue-funded projects and this represents a significant long-term commitment on their future revenue budgets.

23. In March 2015, the Accounts Commission reported that almost all councils had reduced staff numbers to help make savings.9 This has affected all areas of councils’ operations, including how they manage their capital investment programmes and projects. Councils are increasingly using the hub programme and seeking the expertise of the SFT to collaborate, gain access to additional funding and supplement their in-house skills and experience. There are also examples of councils sharing staff resources but these are not yet widespread (paragraph 50).

149 16 |

24. Councils are considering other funding methods to supplement direct funding of their capital projects, or as alternatives to established forms of revenue funding. These are at relatively early stages of development and so it is unlikely that, in the short-term, they will provide a significant proportion of councils’ available capital funding. They include:

• Tax Incremental Financing (TIF)

• Growth Accelerator Model (GAM)

• City Deal

• UK Green Investment Bank (UKGIB).

Appendix 3 provides more information about each of these funding models.

25. The use of these alternative funding models varies greatly among councils. While PFIs, NPDs and procurement using the hub initiative are widely used, individual councils’ circumstances influence how they use other funding methods. For example, the City of Edinburgh Council and Dundee City Council are currently proceeding with, or considering, GAM projects, which are only open to Scotland’s seven cities.

26. Similarly, while some councils are progressing with TIF models, others have expressed concerns about their viability. While we have not audited the current TIF pilot projects, the risk of not attracting enough private sector investment is a risk to all of them. For example, Inverclyde Council told us that it is concerned that any potential TIF initiative would not attract enough further private sector investment to generate the additional local taxes necessary to repay associated borrowing.

Councils completed 149 major capital projects between April 2012 and October 2015 and had 245 in progress as at October 2015

27. The 2013 report outlined that councils were progressing 203 major capital projects, each costing over £5 million. They have completed 149 major capital projects worth £3.2 billion between April 2012 and October 2015. As at October 2015, councils reported they had 245 projects worth about £6 billion under way, with over 40 per cent of these schools. This reflects Scottish Government policy, such as the Schools for the Future programme (announced in 2009), and councils’ own strategic priorities.10

28. The largest of all major capital projects in progress is the £745 million Aberdeen Western Peripheral Route (AWPR), with Aberdeen City and Aberdeenshire Councils each contributing 9.5 per cent of this cost (£71 million each). Other areas of significant capital spending in councils include roads and transport, flood prevention and office accommodation (Exhibits 5 and 6, page 17). This is broadly similar to the findings of the 2013 report.

29. The 2013 report highlighted that, overall, schools projects performed better to cost and time targets. The review of major capital projects that councils completed between April 2012 and October 2015 found that schools projects continue to perform better. Councils completed over 80 per cent of schools projects on time, compared to two-thirds of non-school projects. Similarly, councils delivered over two-thirds of schools projects to cost targets, compared to just over a half of non-school projects. 150 Part 1. Capital investment in councils since the 2013 report | 17

Exhibit 5 Completed major capital projects between April 2012 and October 2015 Councils completed 149 major capital projects worth £3.2 billion between April 2012 and October 2015.

£1,011 £909 million million 32% 29% £371 £313 million £259 million million £161 £139 12% 10% 8% million million 5% 4%

Schools Roads and Other1 Sports Flood Office Housing 57 projects transport 34 projects 15 projects prevention 9 projects 14 projects 12 projects 8 projects

Note: 1. These projects include day care centres, harbour improvements, land regeneration and others. Source: Audit Scotland

Exhibit 6 Major capital projects in progress as at October 2015 As at October 2015, councils were progressing 245 major capital projects worth about £6 billion. £2,551 million 42% £1,217 million £878 20% million £531 £472 15% million million £205 9% 8% £151 million million 3% 3%

Schools Other1 Roads and Housing Office Arts Flood 101 projects 70 projects transport 19 projects 8 projects 9 projects prevention 29 projects 9 projects

Note: 1. These projects include day care centres, harbour improvements, land regeneration and others. Source: Audit Scotland

151 18 |

Nine out of the 15 capital projects reviewed in the 2013 report were complete as at October 2015 30. Of the 15 capital projects reviewed in the 2013 report, and in progress at that time, nine were complete and five were still under way as at October 2015. The Scottish Borders Council waste treatment project has been cancelled (Appendix 4). The final costs of the completed projects were £497 million, £30 million (7 per cent) more than the original budgets.

31. Councils delivered six projects at a total cost of £47 million under their original budget but overspent on three projects by a total of £77 million (49 per cent). Four projects were completed on schedule and five overran by between eight months and almost four years. The three projects that were overspent were also delayed by at least eight months. Councils reported varied reasons for overspends and delays, from planning and procurement delays to changes in scope and adverse weather. This data suggests that some councils still need to do more to deliver major capital projects to their initial time and cost estimates. Councils also need to ensure they are proactive in sharing lessons learned from successful projects or those that ran into significant difficulties.

32. One of the projects outlined in the 2013 report was the Dunfermline flood prevention scheme. Case study 1 (page 19) provides a high-level update of the project, largely based on the findings of Fife Council internal audit’s review of the scheme, reported to the council’s Executive Committee in August 2015. Internal audit concluded that the council acted appropriately throughout the project. Poor design work and construction supervision enabled the contractor to seek contract variations, leading to cost increases. The council is currently seeking £10 million compensation from the design consultant.

McClelland’s report on the Victoria and Albert Museum of Design project made a number of recommendations to Dundee City Council 33. The Victoria and Albert (V&A) Museum of Design project in Dundee was not part of the sample of projects reviewed for this report. But it has run into significant difficulties over the last few years and has been subject to considerable local and media interest. In January 2015, Dundee City Council’s Policy and Resources Committee commissioned John McClelland CBE to carry out a review of the project after planned construction costs increased by £31.1 million between June 2011 and January 2015. The main focus of his review was to examine the reasons for costs increasing significantly, to identify any lessons learned and to make appropriate recommendations.

34. The main findings of the review, published in July 2015, included:

• The costs increased because of the complexity of the design, including the decision to build over water. Additional time required to revise cost plans and design caused delays to the project, and inflationary cost increases.

• There was a lack of investment in skilled and experienced in-house technical and project management staff, and not enough external professional help.

• Dundee City Council did not integrate the V&A Museum of Design project into its normal way of working in the same way it does with other construction projects. This led to uncertainties around responsibilities and reporting arrangements.11

152 Part 1. Capital investment in councils since the 2013 report | 19

Case study 1 Fife Council’s flood prevention scheme in Dunfermline

The Accounts Commission's 2013 report outlined that Fife Council approved the design of the Dunfermline flood prevention scheme in December 2002 with an estimated cost of £3.75 million. The Scottish Government provided formal approval for the project in June 2004, and a month later the council awarded the design contract for the scheme. Based on the initial consultants' design work, the council approved the project with a revised estimated cost of £9.8 million in November 2005. In February 2007, it awarded the construction contract to a preferred bidder at a tendered price of £14.13 million, including £3 million consultants' fees. The Scottish Government intended to provide a grant of up to 80 per cent of the tendered price. The estimated completion date at that time was May 2009.

Delivery of the project was problematic. There were problems with its design and specialist nature, and conflicts between the contractor and the council. In January 2014, the council terminated the construction contract as it assessed that the contractor had performed poorly against it. It awarded the contract for the remaining work to another contractor who completed the project in December 2014, under the supervision of the council's roads and design construction team. At the time of publishing this report, the council was seeking compensation of about £10 million from the design consultant due to its alleged negligence during the project.

The final cost of the scheme was £34.5 million which is £24.7 million (252 per cent) above the outline business case estimate of £9.8 million. Any recovery from the design consultant will reduce the total completion cost. The Scottish Government provided a grant of £11.7 million to the council, £3.8 million of this directly and £7.9 million as part of the council's overall capital allocation. Fife Council reviewed the project after its completion and identified a number of areas for improvement such as the need to change the form of contract and the appointment process.

Source: Audit Scotland and Audit and Risk Management Manager’s report to Fife Council’s Executive Committee on 18 August 2015

35. The report made a number of recommendations that Dundee City Council’s Policy and Resources Committee accepted in August 2015. The chief executive’s covering report to the committee noted that the council had taken a number of steps since January 2015 to improve the structures, monitoring, communication and project management arrangements. This had included establishing a project board and providing additional expertise to help the operation of the board. The external auditor will continue to monitor developments and will report as appropriate as part of the annual audit process.

153 20 |

Office for National Statistics’ review of revenue-funded capital projects 36. The Office for National Statistics (ONS) is responsible for assessing bodies and transactions against EU rules to decide how they should be treated in the Statistical National Accounts. HM Treasury uses the Statistical National Accounts to inform some aspects of guidance on UK fiscal budgets. In relation to public sector capital projects funded from revenue, the ONS can classify individual projects as being either under public sector control or private sector control. This depends on the balance of control over the special purpose vehicles (SPV), normally established to manage the delivery and operation of such projects. A privately classified project sees the debt classified to the private sector. In contrast, a project classified to the public sector counts towards the national debt. This can require budget cover to be provided over the construction period of the asset, rather than over the period in which it is used and maintained.

37. In July 2015, the ONS concluded that the public sector controlled the SPV associated with the AWPR. The AWPR is an NPD project and will incur annual unitary charges over the life of the contract. But the ONS decision means that an expense, equal to its construction cost, will be charged against the Scottish Government’s capital budget. This will not be a cash payment but it will result in a reduced amount of budget available for spending on other capital projects. The ONS based its decision on the extent of the Scottish Government’s influence over the SPV and on its share of the economic rewards from the asset.

38. To avoid any further charges against the Scottish Government’s capital budget, the Scottish Government asked the SFT to look at how it could ensure that SPVs of other revenue-funded capital projects remained under private sector control. While the SFT considered available options, revenue-funded capital projects in the hub programme which were planned to reach financial close during 2015 could not do so. These included how best to reduce the public sector’s influence over the SPVs associated with these projects.

39. In November 2015, the Deputy First Minister announced that the ONS had advised that, based on the current EU guidance, SFT’s proposals would result in revenue-funded projects procured through the hub route being classified to the private sector. These changes will result in the establishment of SPVs which sit outside of the hub company corporate structure, known as Design, Build, Finance and Maintain Companies (DBFM Cos). Public sector ownership of the DBFM Cos will be reduced to 20 per cent, compared to 40 per cent under the previous SPV regime. Private sector ownership will remain at 60 per cent and the remaining 20 per cent will be owned by a newly established private sector charity.

40. The Deputy First Minister also advised in November 2015 that the two NHS projects and ten council school projects affected by the AWPR classification review, with a combined capital value of about £330 million, could proceed to financial close. The projects include schools such as Midlothian Council’s £35 million Newbattle High School and Dundee City Council’s £25 million Baldragon Academy. The SFT has confirmed that the delay in reaching financial close would lead to the cost of some projects increasing. This is largely due to the likely need to renegotiate the previously agreed contract prices of some projects. It is not possible to quantify by how much costs might increase until the negotiations are concluded.

154 Part 1. Capital investment in councils since the 2013 report | 21

41. The Scottish Government and the SFT continue to review options for potential changes to the AWPR project and similar revenue-funded projects. The Scottish Government is also discussing with HM Treasury the budgetary implications of the ONS' classification of the AWPR project. In the meantime, the Scottish Government has set aside £150 million from underspends in 2014/15 to meet any future charge on its capital budget. HM Treasury has also agreed to provide additional budget cover of £300 million. It is likely to be some time before the situation arising from the ONS' classification work is fully resolved. Audit Scotland will continue to monitor developments and report as appropriate.12

155 22 |

Part 2 Councils’ management of capital investment programmes and projects

Key messages 1 Councils have taken a range of actions in response to the recommendations in the 2013 report. There are examples of councils displaying aspects of good practice but, overall, they need to increase the pace of improvement to comply fully with the 2013 good practice guide. 2 A capital investment strategy is an essential component of a council's capital investment management as it provides clear links between investment objectives and the council's wider strategic objectives and sets out a vision for major capital investment. Councils' strategies which exist demonstrate how planned capital investment is expected to contribute to councils' overall strategic priorities. But only just over a third of councils have a long-term capital investment strategy in place and these do not identify opportunities for collaboration with other bodies. councils have 3 To support the long-term capital investment strategy, councils should improved also have in place a capital plan that outlines annual investment their commitments and plans over the medium term. All councils have a capital plan but they need to develop them further. While the plans management outline expected programme and project costs, they do not set out of capital the rationale for prioritising and progressing major projects, and the expected benefits of these projects. The councils with a combined projects capital investment strategy and plan need to better demonstrate how but further capital investment contributes to their strategic objectives. progress is 4 Councils have improved their structures and processes to help them needed manage and monitor capital investment activity more effectively. This included establishing a dedicated team to manage capital investment, or appointing a lead officer to oversee and develop the monitoring framework. They need to do further work to comply fully with the 2013 good practice guide, such as routinely reviewing business cases throughout the life of every capital project to ensure the effective monitoring of expected benefits. 5 Few councils are carrying out formal mid-term reviews of projects, or post-project evaluations. Those that do are not doing so regularly or in a consistent manner. They are more likely to formally evaluate projects that ran into significant difficulties. This limits councils' ability to identify areas of good practice, share lessons learned and identify the benefits that the investment activity realises.

156 Part 2. Councils’ management of capital investment programmes and projects | 23

6 Elected members are not able to scrutinise the performance of capital programmes effectively because they are not receiving adequate information on capital investment. The majority of councils focus on reporting capital spending in the current financial year. Councils could do more to provide reports to members that clearly outline cumulative capital spending for individual projects, project risks and non-financial information, such as the benefits that individual projects realise. Councils provide some training to elected members on capital investment matters but no council has a continuing programme of training in place on capital issues.

Almost all councils considered the 2013 report but they need to take further action to implement its recommendations

42. Thirty of Scotland’s 32 councils considered the 2013 report at the full council or at a relevant committee meeting. The report was considered by officers only at Clackmannanshire and Dumfries and Galloway Councils. Thirty-one councils have either developed an action plan based on the report’s recommendations, or progressed recommendations without preparing a formal action plan. Common actions include:

• making organisational changes, for example establishing a dedicated team to manage capital investment or appointing a lead officer to oversee and develop the monitoring framework

• developing internal project and programme management practices, for example reviewing and developing their business case requirements for capital projects or reviewing the format of capital reports to increase the effectiveness of scrutiny and monitoring.

43. Twenty-six councils distributed and used the 2013 good practice guidance to assess how well they were managing capital investment projects and a further three councils are planning to use it. About two-thirds of councils have also used the good practice checklist to help to develop their business case methodologies, or to review internal capital monitoring documentation.

44. As at October 2015, Comhairle nan Eilean Siar has taken no specific action in response to the 2013 report. It is planning to use the good practice guidance to help it review project management arrangements.

Councils need to improve the quality of their capital investment strategies and plans

45. In 2013 the Accounts Commission recommended that councils should have a clear capital investment strategy, covering the long term (over ten years), to direct and control their investment activities. A capital investment strategy is an essential component of a council’s capital investment management as it provides clear links between investment objectives and the council's strategic objectives defined in corporate plans or Single Outcome Agreements (SOAs). SOAs are agreements on local service priorities between councils and their partners such as NHS boards, and the Scottish Government. A strategy should also set out a vision for major capital investment, and provide clear priorities for deciding on the level and nature of investment spending within available resources and the overall funding strategy. 157 24 |

46. To support the long-term capital investment strategy, councils should also have in place a capital plan that outlines annual investment commitments and plans over the medium term (typically 3-5 years). These plans should include the rationale for all of the main capital investment projects, forecasts of project costs and how they are to be funded. This allows officers and elected members to consider capital investment plans when assessing the affordability and design of long-term financial plans.

A third of councils have a capital investment strategy in place and none of these fully complies with good practice 47. Twelve councils have a capital investment strategy in place. Most of these cover a period of between five and ten years, with two covering a period of over ten years. Councils’ strategies display some features of the good practice guide (Exhibit 7, page 25). These include setting out clearly how councils expect their planned capital investment to contribute to their strategic priorities. Elected members of all eight of the councils reviewed in detail considered that the links were particularly well set out for the councils’ schools programmes. The review of capital investment strategies and 13 business cases of major capital projects across the eight councils confirmed this view. Councils need to improve their capital investment strategies further, for example by showing clear links between individual projects and wider capital investment programmes.

48. Councils told us they were actively exploring opportunities for joint investment in assets but this was often not reflected in their capital investment strategies. There are some examples of councils jointly procuring support services but little evidence of them investing in assets jointly with other public bodies. For example, councils in the Highlands and Islands (Argyll and Bute, Highland, Comhairle nan Eilean Siar, Orkney, Moray and Shetland) jointly procured engineering consultancy services but they terminated this agreement in March 2015. Angus Council is a member of Tayside Procurement Consortium which is shared with Perth and Kinross and Dundee City Councils, and with Tayside Contracts.

49. Joint procurement through the five Scottish hubs is becoming more widespread, with councils seeking to supplement their in-house skills and expertise. For example, Inverclyde Council procured St Patrick’s Primary School jointly with East Dunbartonshire Council’s Lenzie Primary School through the West hub. Other examples of joint hub projects include community hubs that comprise several local services such as schools, health centres and libraries.

50. There are also examples of councils sharing accommodation with other public bodies, particularly with Police Scotland or the NHS. This is a result of councils reviewing their offices to identify the most efficient way to use them, and selling some properties. For example, Angus Council shares office accommodation with Police Scotland and NHS Tayside. Police Scotland staff also operate from other council offices, for example in Highland and Fife Councils. Health and social care integration will require further joint working by councils.

51. Officers and elected members of the eight councils reviewed in detail stated there were a number of barriers to successful joint working and sharing resources. The main ones were differences in systems and processes between different organisations, for example some councils perceived that the approval process in the health sector can lead to time delays. Geographical barriers could, they added, also prevent successful joint working, particularly for councils in more remote areas.

158 Part 2. Councils’ management of capital investment programmes and projects | 25

Exhibit 7 Comparison of councils' capital investment strategies against the 2013 good practice guide Capital investment strategies of the 12 councils that have them display some features of good practice although councils need to improve them further.

Do capital investment strategies comply with Good practice criteria for an investment strategy good practice?

Shows the council's consideration of its potential Two-thirds of strategies future service and community infrastructure needs Partially (8/12) and ambitions compared to the current position. Shows how investment may be funded sustainably and outlines a method for choosing capital Two-thirds of strategies Partially investment priorities within available resources and (8/12) the overall funding strategy.

Provides clear links between investment objectives All strategies Yes and the council's strategic objectives. (12/12)

Identifies and coordinates investment requirements Half of strategies Partially from across each service area. (6/12)

Provides clear links between individual projects and One-third of strategies Limited progress wider programmes. (4/12)

Clearly outlines investment plans over a number About 60 per cent of of years, including contractually committed and Partially strategies (7/12) uncommitted projects. Provides an assessment of the various funding About 60 per cent of options available to the council and how these may Partially strategies (7/12) be used.

Provides clear information on asset management Over 80 per cent of activity and the overall condition of the council estate. Yes strategies (10/12)

Identifies opportunities for collaboration with other Only a quarter of Limited progress councils, public bodies and the private sector. strategies (3/12)

Source: Audit Scotland

All councils have a capital plan in place although they need to develop them further 52. All councils have a capital plan in place. Two-thirds of capital plans cover between three and eight years, with the remaining ones covering ten years or more. Most plans outline annual capital programme and project costs for the period the plan covers but do not set out clearly changes in timing of capital spending between financial years. They do not provide details of slippage, or delays, between years and how this affects the delivery of the plan. Capital plans also do not outline the rationale for progressing major projects, the expected benefits of these or which projects are a council’s priority (Exhibit 8, page 26).

159 26 |

Exhibit 8 Comparison of councils' capital investment plans against the 2013 good practice guide Capital investment plans comply with some elements of good practice but councils need to develop them further.

Good practice criteria for a capital investment plan Do capital investment plans comply with good practice?

The rationale for all the main capital investment Seven out of 32 capital plans projects identified as priorities within the plan No explain the rationale for

period, including the expected benefits and prioritising projects. Only any options around the selection of projects. one plan provides expected benefits of these projects and none provides options for project selection.

Includes details of the planned annual project Most capital plans and programme costs. Yes (29/32)

Details funding arrangements, including grant Most capital plans funding, borrowing, use of private finance. Yes (30/32) Details any shortfalls or surpluses in available Most capital plans (30/32); funding and actions to address these. Yes councils also address this by linking their capital investment activity with treasury management functions.

Sets out clearly re-profiling of capital spending Less than a quarter of capital between years. Limited progress plans (7/32) Provides details of project or programme Less than a quarter of capital slippage between years and how this affects Limited progress plans (7/32) the delivery of the plan. Provides clear links between the overarching Only five out of 12 capital plans1 capital investment strategy and annual capital Limited progress (5/12) budget monitoring.

Note: 1. Only 12 councils have a capital investment strategy in place (paragraph 47). Source: Audit Scotland

53. It is important that the capital plans of the 20 councils that do not have a capital investment strategy in place demonstrate good practice features that a capital investment strategy would normally include. Two-thirds of capital plans do not demonstrate how councils expect planned capital investment to contribute to their strategic objectives. Three plans consider joint working and none provides clear information on asset management activity. These issues, especially a lack of clear links between councils’ capital investment and their strategic objectives, are particularly concerning in the absence of a capital investment strategy. It is not clear how these councils demonstrate how planned capital investment is expected to contribute to delivering their strategic objectives.

160 Part 2. Councils’ management of capital investment programmes and projects | 27

54. Highland and Fife Councils both use scoring methodologies to prioritise planned capital investment and to demonstrate how it will contribute to achieving strategic priorities and outcomes. In Highland Council, the Capital Planning Officers Group scores each capital project against asset condition and performance, political priorities and financial implications. They attach a higher weighting to meeting the council’s programme of priorities. Fife Council is planning to redevelop its scoring mechanism for 2016 to ensure it better takes into account qualitative factors such as expected benefits and risks.

55. All eight councils selected for detailed review have consulted with stakeholders, such as service users and suppliers, on their capital programme or individual projects, although this varies across councils. Some councils carry out formal consultations for higher-profile major capital projects, or for the overall capital programme. Consultations in other councils are more informal. Three councils are planning to improve how they consult with stakeholders. For example, East Ayrshire Council plans to prepare a communication plan at the start of each major capital project outlining how the council will communicate with the stakeholders it identifies. Angus Council will add capital investment to its existing budget consultation processes, and Fife Council is planning to expand consultation to non-school projects.

Councils have improved arrangements for management and monitoring of capital investment

56. Since the Accounts Commission published the 2013 report, four out of the eight councils selected for more detailed review have implemented revised structures to help them manage and monitor capital investment activity more effectively. This included establishing a dedicated team to manage capital investment, or appointing a lead officer to oversee and develop the monitoring framework. The remaining four councils already had a capital projects monitoring group or equivalent in place before the 2013 report.

57. In Angus Council the group’s membership includes elected members, enhancing their ability to scrutinise capital investment programmes. The Policy and Budget Strategy Group (PBSG) and the Capital Projects Monitoring Group (CPMG) in Angus Council include seven and three elected members, respectively. The PBSG is responsible for setting the council’s overall budget strategy. The CPMG is a sub-group of the PBSG and is responsible for overseeing delivery of the agreed capital programme. This means that elected members scrutinise both strategic and operational aspects of the council’s capital investment.

58. The review of the eight councils identified that they were linking capital investment activity with their treasury management functions to ensure that cash is available when needed.13 This is in line with the findings of the Accounts Commission’s Borrowing and treasury management in councils [PDF] , published in March 2015, and helps to ensure that capital plans are affordable and appropriately funded. All eight councils refer to capital investment activity within their treasury management strategies, and at least two have a single manager in charge of both areas to promote joined-up working.

161 28 |

Business cases for major capital projects identify expected benefits but councils do not routinely monitor them

59. In 2013 the Accounts Commission reported that councils had weak processes for developing and using business cases. All eight councils reviewed in detail have clear procedures for preparing outline and full business cases but they do not always apply them fully. The review found that the content of business cases is not consistent for all capital projects. Five out of eight councils do not routinely revisit and review business cases throughout projects and this limits their ability to identify benefits that individual projects have realised. Three of the eight councils are currently reviewing their practices for preparing business cases, including how they measure and monitor intended benefits.

60. The review of 13 major capital projects across the eight councils showed that most were based on sound business cases. In some councils business cases existed for the wider schools modernisation programme rather than for the individual projects. Twelve of the 13 business cases clarified timescales and project values, and clearly demonstrated how projects were expected to contribute to the councils’ strategic priorities. The exception to this was Dundee City Council’s Longhaugh Primary School, where the project was in the early stages of development and a detailed business case had yet to be prepared. The majority of projects had appropriate governance arrangements in place with roles and responsibilities clearly allocated.

Few councils are doing formal mid-term reviews of projects and post-project evaluations

61. Most councils do not carry out independent expert reviews of projects at key stages, known as gateway reviews. In contrast, South Lanarkshire Council has implemented a review process of the key stages of its long-term Primary Schools Modernisation Programme, which includes reviews of design, maintenance and servicing issues, contract management and community benefits. Similarly, the City of Edinburgh Council has established a council-wide Programme, Project and Change Management Community as an informal forum for officers involved in capital investment to share good practice and lessons learned. The community meets several times a year and any good practice or lessons learned are reflected in the council’s approach to managing capital projects.

62. Councils do not routinely carry out post-project evaluations. They perform these on an ad hoc basis and their approaches can differ for individual projects. Councils are more likely to formally evaluate projects that ran into significant difficulties. For example, the City of Edinburgh Council completed a comprehensive post-project evaluation of phase one of its Water of Leith flood prevention project and used lessons learned in developing phase two of the project. It is important that councils evaluate all major capital projects on completion, not only the ones with one or more phases or those that did not go to plan. Failure to review projects can limit the ability of councils to identify areas of good practice, share lessons learned and monitor benefits that the investment activity realises.

162 Part 2. Councils’ management of capital investment programmes and projects | 29

Elected members are not receiving adequate information on capital investment

63. The 2013 report emphasised that elected members should be provided with regular, appropriate and accurate information to allow them to properly scrutinise councils’ capital investment activity. The vast majority of councils currently provide elected members with capital monitoring reports that allow elected members to scrutinise total annual capital spending against budget. Most councils also provide capital spending on individual projects in the current financial year.

64. Councils often need to spend money on individual capital projects over a number of years. It is important for elected members to receive information on this cumulative capital spending. About a third of councils do not routinely provide information to elected members on cumulative spending against total capital budget on a project-by-project basis. There were varied views among the eight councils’ elected members on the information they need for scrutinising capital investment effectively. Some felt that cumulative spending against total capital budget on a project-by-project basis should be reported to them. Others thought this information would be too detailed and they were content for the councils’ officers to alert them to any issues as appropriate. There is a risk that not providing cumulative spending on a project-by-project basis limits the ability of elected members to scrutinise effectively the performance of the capital programme.

65. Some councils provide better information to elected members. For example, East Ayrshire Council presents cumulative capital spending on a project-by-project basis in its quarterly ‘East Ayrshire Performs’ report (Appendix 2). Members can also access annual spending information in supplementary papers to help them scrutinise capital investment. Similarly, Dundee City Council has recently revised the format of its capital monitoring report to ensure this reports total capital spending against total project budgets as well as project completion dates to elected members.

66. Officer-led project boards are primarily responsible for managing risks as councils see this as part of the operational management of capital projects. As a result, councils only provide limited information to elected members on project risks and overall capital programme risks. Elected members indicated that officers could alert them to significant risks earlier and, in some cases, also provide them with a better explanation of possible actions that could reduce the risks. Failing to provide information about significant risks to elected members does not allow them to oversee capital investment effectively.

67. Councils could do more to provide reports to members that clearly outline the benefits that individual projects realise. We found that, while business cases included expected benefits, these were not monitored or set out in the reports to members. Three out of the eight councils are currently developing performance measures to enhance how they evaluate their overall capital programme. Members of some councils indicated that they wished to be involved in shaping councils’ capital programmes much earlier in the process.

68. Overall, councils need to improve scrutiny of capital investment. The Accounts Commission reported the same finding for councils’ borrowing and treasury management in its March 2015 report. Like treasury management, capital investment is a complex and technical subject, and officers need to provide councillors with better information through clear, good-quality reports.

163 30 |

Councils provide elected members with a variety of training opportunities 69. Councils provide members with a variety of training opportunities on capital investment matters. They largely provide one-off training and are willing to organise further training if elected members ask but no council has a continuing programme of training in place on capital issues. A limited number of councils have recently provided training in response to the 2013 report and the recent Accounts Commission’s report on borrowing and treasury management in councils.14 This included training on treasury management, capital finance and scrutiny training that highlighted elected members’ responsibilities.

164 Endnotes | 31

Endnotes

 1 Major capital investment in councils [PDF] , Accounts Commission, March 2013.

 2 The 2013 report used 2011/12 as the last year for the analysis of capital spending figures.

 3 Summary Statistics for Schools in Scotland, Statistical Bulletin (Education Series), Scottish Government, February 2015.

 4 2013/14 is the latest year for which information is available.

 5 Scottish Spending Review 2011 and Draft Budget 2012-13, Scottish Government, September 2011.

 6 Local Government Funding: Draft Budget 2015-16 and provisional allocations to local authorities, Financial Scrutiny Unit Briefing, November 2014.

 7 Police reform: Progress update 2013 [PDF] , Audit Scotland, November 2013.

 8 Scottish Futures Trust’s Aim .

 9 An overview of local government in Scotland 2015 [PDF] , Accounts Commission, March 2015.

 10 Building Better Schools: Investing in Scotland’s Future, Scottish Government, September 2009.

 11 Review of the Construction project for the Victoria and Albert Museum of Design, John F. McClelland C.B.E., July 2015.

 12 ESA10: Classification of privately funded capital projects – Briefing paper [PDF] , Audit Scotland, October 2015.

 13 Treasury management includes managing cash to ensure enough is available to meet day-to-day expenses like paying salaries or electricity bills, and for building new assets, such as a new school, or improving existing ones, such as roads. It also involves ensuring that any temporary surplus cash is safely invested.

 14 Borrowing and treasury management in councils [PDF] , Accounts Commission, March 2015.

165 32 |

Appendix 1 Councils selected for the targeted follow-up

We performed a more detailed evaluation of capital investment at a sample of eight councils.

Capital spending Planned capital between 2012/13 spending in Number and and 2014/15, at 2015/16 as at value of projects Thirteen major capital 2014/15 prices October 2015 in progress at the projects selected for a Council (£m) (£m) council business case review

Brechin Community 4 projects 124.0 55.0 Campus £62.8 million (£26.2 million)

Angus

Water of Leith flood 11 projects prevention scheme 794.7 201.2 £233.7 million (phase 2) (£25 million) City of Edinburgh

Harris Academy (£32.4 million) 7 projects 248.3 75.1 £197 million Longhaugh Primary School (£16 million) Dundee

Bellfield and Kirkstyle Primary School merger 6 projects (£12.4 million) 160.7 46.1 £135.2 million Knockroon Learning and Enterprise Campus (£63.5 million) East Ayrshire Cont. 166 Appendix 1. Councils selected for the targeted follow-up | 33

Capital spending Planned capital between 2012/13 spending in Number and and 2014/15, at 2015/16 as at value of projects Thirteen major capital 2014/15 prices October 2015 in progress at the projects selected for a Council (£m) (£m) council business case review

Dunfermline Museum and Art Gallery 19 projects (£12.7 million) 506.3 265.9 £482.2 million Kirkcaldy East High School (£26.2 million) Fife

Wick new Noss Primary School 16 projects (£16.7 million) 397.9 178.3 £285.1 million A862 Muir of Ord Railway Bridge (£5.4 million) Highland

St. Patrick's Primary School 3 projects (£7 million) 107.9 30.0 £23.1 million Ardgowan Primary School (£6.2 million) Inverclyde

Halfmerke 4 projects 472.4 143.0 Primary School £425.9 million (£12.1 million)

South Lanarkshire

Source: Audit Scotland

167 34 |

Appendix 2 Good practice examples in managing capital investment

The eight councils reviewed in detail displayed the following good practice in managing capital investment.

Area of managing capital investment Good practice examples

Linking capital Highland and Fife Councils both use scoring methodologies to prioritise planned capital investment with investment and to demonstrate how it will contribute to achieving strategic priorities and councils' strategic outcomes. In Highland Council, the Capital Planning Officers Group scores each capital project objectives against asset condition and performance, political priorities and financial implications. They attach a higher weighting to meeting the council’s programme of priorities. Fife Council is planning to redevelop its scoring mechanism for 2016 to ensure it better takes into account qualitative factors such as expected benefits and risks. (Paragraph 54)

Membership of In Angus Council the group's membership includes elected members, enhancing elected capital projects members' ability to scrutinise capital investment programmes. The Policy and Budget monitoring group Strategy Group (PBSG) and the Capital Projects Monitoring Group (CPMG) in Angus Council include seven and three elected members, respectively. The PBSG is responsible for setting the council's overall budget strategy. The CPMG is a sub-group of the PBSG and is responsible for overseeing delivery of the agreed capital programme. This means that elected members are involved in both strategic and operational aspects of the council's capital investment to help them scrutinise. (Paragraph 57)

Mid-term reviews of South Lanarkshire Council has implemented review process of the key stages of its long-term capital projects Primary Schools Modernisation Programme, which includes reviews of design, maintenance and servicing issues, contract management and community benefits. (Paragraph 61)

Sharing good The City of Edinburgh Council has established a council-wide Programme, Project and Change practice and lessons Management Community as an informal forum for officers involved in capital investment to learned share good practice and lessons learned. The community meets several times a year and any good practice or lessons learned are reflected in the council's approach to managing capital projects. (Paragraph 61)

Post-project The City of Edinburgh Council completed a comprehensive post-project evaluation on phase evaluations one of its Water of Leith flood prevention project and used lessons learned to develop phase two of the project. (Paragraph 62)

Provision of good- East Ayrshire Council presents cumulative capital spending on a project-by-project basis in quality information its quarterly 'East Ayrshire Performs' report. Members can also access annual spending to elected members information in supplementary papers to help them scrutinise capital investment (page 35). Similarly, Dundee City Council has recently revised the format of its capital monitoring report to ensure that this reports total capital spending against total project budgets as well as project completion dates to elected members. (Paragraph 65)

168 Appendix 2. Good practice examples in managing capital investment | 35

Example of a good-quality capital monitoring report provided to elected members

East Ayrshire Council presents cumulative capital spending on a project-by-project basis in its quarterly 'East Ayrshire Performs' report. Members can also access annual spending information in supplementary papers to assist them with their scrutiny of capital investment.

The council’s quarterly performance report provides performance information in a range of key areas, including finance. The range of information provided includes: current financial position, progress against expenditure reduction measures, performance against treasury indicators, progress of the capital programme, absence management rates, numbers of complaints received, health and safety issues, and risk management. Presenting the capital programme information with other performance themes gives wider operational context to members.

The report also advises members that additional supporting information is available on the Members’ Portal, and that Depute Chief Executives and Heads of Service are available to discuss any aspect of performance. Additional information available on the Members’ Portal includes:

• summarised revenue information by department

• capital programme monitoring report

• employee statistics

• health and safety performance report

• council performs: key statistics

• corporate risk register.

An executive summary provides an overview of all areas of performance. In respect of capital projects, this includes information on individual projects covering:

• the type of project and its purpose

• latest progress against the timetable and description of the recent stages

• reasons behind any delays

• the estimated financial impact of identified changes and variances

• any proposals for amendments to a project, together with the reasons for this

• funding sources for any additional costs

• any additional budget requests.

The executive summary ends with a list of recommendations for members. The list refers to individual paragraphs and asks members to note, agree and approve specific points and changes for the outlined projects. It also has contact details for the responsible council officer and a list of background papers.

The report then goes into more detail about individual projects, presented in a series of tables covering each of the council’s main service areas. Cumulative spending and forecast spending for each project are shown against the approved budget, with delivery status indicated using colour coding to ease interpretation of performance.

169 36 |

The council’s colour coding system uses the following classifications to highlight performance.

Significantly off target +/– 2% or more budget, or £0.500m, whichever is less

Slightly off target +/– 0.5% to 2% of budget, or £0.125m, whichever is less

Broadly on target Within +/– 0.5% of budget

An example of how this information is presented is shown below.

Cumulative Forecast Budget expenditure to expenditure Current Project allocation (£m) date (£m) (£m) milestone Delivery status

Project 1 5.000 0.075 5.000 Design

Project 2 2.500 1.250 2.700 Development

Project 3 1.500 0.033 1.500 Tender

Project 4 10.250 10.200 10.250 Complete

General Projects 4.422 2.850 2.850 N/A N/A

Below each service table, the report provides further information on individual projects including:

• current stage of the project and main activities undertaken during the period

• anticipated works start and completion dates

• explanations for budget and time variances

• highlighted risks and planned responses

• early indications of changes that might be required

• estimated financial impact of the changes

• details of discussions with internal and external stakeholders

• description of upcoming work stages

• recommendations for members.

170 Appendix 3. Alternative funding methods | 37

Appendix 3 Alternative funding methods

Councils are considering alternative funding methods to supplement direct funding of their capital projects, or as alternatives to established forms of Public Private Partnerships.

City Deal Growth Accelerator Model (GAM) Agreement between the Scottish Government, the UK Similar to TIF, the GAM model involves public sector Government and councils to stimulate the economy in investment that promotes further private sector Scottish cities and their regions. The UK and Scottish investment. This is expected to result in additional Governments provide specific capital grants to city local tax income, which councils use to repay their regions over ten to 20 years for infrastructure and borrowing. The GAM scheme attaches specific economic development projects. The councils borrow conditions to creating the circumstances for the further funds to supplement government grants. In private sector to invest, including job creation targets, August 2014, the two governments agreed to provide training opportunities and a share of any private £500 million funding each, over 20 years, to the sector profits. GAM is currently available in Scotland's Glasgow and Clyde Valley City Deal, the first deal of seven cities. An example is the St James Quarter in its kind in Scotland. Eight councils across Glasgow Edinburgh, with an estimated value when finished of and Clyde Valley are expected to provide an additional approximately £850 million. Of this, City of Edinburgh £130 million to improve transport infrastructure and Council is planning to invest about £61 million in public transport, and provide new sites for housing and enabling infrastructure, such as improvements to public employment. Several other councils have submitted transport, pavements and cycle facilities. It will also or are currently preparing bids for further City Deals, invest in building a sustainable energy centre that will including the City of Edinburgh Council, Fife Council, provide power, heating and cooling to Dundee City Council and Highland the new development. Council. The councils are mainly doing this in collaboration with their neighbouring authorities.

Tax Incremental Financing (TIF) UK Green Investment Bank A new financial model that combines (UKGIB) public and private sector investment in UKGIB invests in environmentally local infrastructure to deliver economic friendly areas with the aim of attracting growth. Councils use borrowing to fund investments in further private sector investment into green projects. public infrastructure with the aim of attracting further In particular, it helps to fund new energy and waste private sector investment. As a result of this, councils infrastructure across the UK to achieve environmental are expected to receive higher local tax income which targets, such as reducing the amount of waste sent to they use to repay their borrowing. Six councils are landfill. UKGIB investments in Scotland so far include currently piloting TIF schemes in Scotland: Argyll & Scottish wind farms, low-energy street lighting through Bute, City of Edinburgh, Falkirk, Fife, Glasgow and the bank's green loans scheme, recycling and waste North Lanarkshire. The councils are expected to borrow plants, and community renewables. Councils told us about £350m under this scheme to fund enabling that the UK Green Investment Bank is currently not a infrastructure such as improvements to local roads and popular choice for funding capital projects since interest railway links. rates on borrowing are usually higher than other sources of borrowing.

171 38 |

Appendix 4 Update on the 15 projects reviewed in the 2013 report

Of the 15 capital projects that were in progress at the time of the 2013 report, nine were complete, five were under way and one had been cancelled as at October 2015.

Ravenscraig Percentage change from Elgin Flood initial cost estimate 0% N/A Regeneration Site N/A Alleviation Scheme +38 North Lanarkshire Change in timescale Moray months £73m Initial: 2018 from initial estimate £83m Initial: Jun 12 Not known Completion/estimate: Not known £82.8m Completion/estimate: Aug 15

Council House 0% New Council New Build 0 -3% North Lanarkshire months House Build 0 Moray months £150m Initial: 2020 £150m Completion/estimate: 2020 £14.4m Initial: Mar 13 £14m Completion/estimate: Mar 13

Pre-12 Schools Ellon 39% strategy +8 -16% Academy +2 months Glasgow Aberdeenshire months £128m Initial: Dec 12 £43.5m Initial: May 15 £178m Completion/estimate: Aug 13 £36.6m Completion/estimate: Jul 15

Care homes 29% Glasgow +28 Dunfermline Flood months 252% Prevention +45 £71.2m Initial: Mar 15 Fife months £91.8m Completion/estimate: Jul 17 £9.8m Initial: Mar 11 £34.5m Completion/estimate: Dec 14 Linwood -7% Sports Hub +1 Bankhead Depot % Renfrewshire month 13 Rationalisation +34 months £24.1m Initial: Jan 13 Fife £22.3m Completion/estimate: Feb 13 £18.3m Initial: Feb 13 £20.7m Completion/estimate: Dec 15

Park Mains Portobello -14% High School -1 -3% High School Renfrewshire month N/A City of Edinburgh £33.7m Initial: Aug 12 £39m Initial: Not known £29.1m Completion/estimate: Jul 12 £38m Completion/estimate: Aug 16

Garnock Edinburgh International -2% Academy +16 -30% Conference Centre +47 North Ayrshire months Extension months £43m Initial: Aug 15 City of Edinburgh £42m Completion/estimate: Dec 16 £112.2m Initial: Jun 09 £79m Completion/estimate: May 13 Waste N/A Treatment N/A Scottish Borders £18.2m Initial: Oct 12 Completed Operational In progress Cancelled £2.4m Completion/estimate: N/A with final costs to be confimed 172 Appendix 4. Update on the 15 projects reviewed in the 2013 report | 39

Reasons for overspends and delays:

Bankhead Depot Rationalisation Fife Council revised the budget in February 2012 to take account of additional design works and extended the construction programme. The installation of a biomass boiler was subject to planning delays but this did not delay the use of the facility. The council is still to complete sub-metering that will detail energy use in different locations, a small element of the project with the estimated cost of £0.07 million.

Dunfermline Flood Prevention Phase 1 was delayed significantly because of contractual disputes, and design and site supervision failures. The council terminated the contract in January 2014 due to problems with the contractor’s performance and delays in project delivery. This led to additional costs and significant professional fees for recovering costs but any recovery from the design consultant will reduce the total completion cost (Case study 1, page 19).

Pre-12 Schools Strategy (Phase 4) As reported in the 2013 report, the movements in cost were due to problems with identifying a site and with planning approval, changes to design requirements and unforeseen additional ground works. The council increased the budget to £178m in November 2012. Delays were mainly due to adverse weather, unforeseen ground conditions and additional structural works in one of the existing buildings. There were also delays in procurement and in agreeing changes to the project's scope.

Edinburgh International Conference Centre extension The project was delayed significantly because the original contractor withdrew in 2007 and because the council reappraised the project's scope with a reduced budget of £84.6 million. The revised budget included £71 million for the main construction phase and £15 million for development costs and the lease of the land. The council delivered the construction phase at £64 million, £7 million under the revised budget.

Ravenscraig Regeneration Site In September 2015 Ravenscraig Ltd, the joint venture company overseeing the development of the former Lanarkshire steelworks site, announced its intention to update the Ravenscraig regeneration plan. As a result, the town centre element of the original plan was temporarily put on hold. Between 2006 and 2015 Ravenscraig Ltd. invested over £200m in the project and is now working with North Lanarkshire Council to finalise a revised plan for the site.

Reason for project cancellation:

Waste Treatment facility The Scottish Borders Council cancelled the project due to project-specific issues. In particular, the council failed to demonstrate the project's technical viability and was therefore unable to secure funding for the project. External auditors are satisfied that it followed appropriate procedures in relation to this decision.

Source: Audit Scotland's analysis of supporting documentation

173 Major capital investment in councils Follow-up

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This publication is printed on 100% recycled, uncoated paper 174 APPENDIX 2

Key Actions Points Lead Officer (s) Current NAC Position Planned NAC Actions Responsibility / Date Councils should have a long Laura Friel The Council has a corporate asset The corporate asset Executive Director term capital investment Executive investment strategy in place which investment strategy of Finance strategy which demonstrates Director of ensures a strategic approach to asset was produced in 2013. October 2016 to elected members and Finance and management including governance It is proposed to service users how planned Corporate and investment. On 17 February update this strategy as capital investment will help Support 2016 Council approved an updated part of a wider review achieve the councils’ long 10 year capital investment plan, of property asset term strategic priorities as covering the period 2016/17 to management which is defined in corporate plans 2025/26. In preparing the plan already underway. and Single Outcome • projects were linked to the delivery Agreements. of the Council objectives • elected members were advised how projects were prioritised for inclusion • plans were linked to the ability to fund the programme on a long term sustainable basis • changes to the original programme were also clearly demonstrated

Business cases should be The Council has an agreed Further work is Executive Director prepared which comply with framework for the use of business required to ensure that of Finance good practice for every cases. business cases are September 2016 project and these should be used consistently monitored and revisited when considering new throughout the project. investment proposals.

175 Post-project evaluations Post Occupancy Evaluations have To ensure a more Head of Physical should be undertaken to help previously been undertaken on an ad- coherent approach Environment establish whether planned hoc basis, the process differing from staff training has been September 2016 benefits are realised and to project to project. carried out (via the identify good practice or Building Research lessons learned. Establishment). A pilot project has been identified to trial the new process (Dirrans Rehabilitation Unit); this will then be adapted and rolled out during 2016 /17.

Projects progressed via the SWHub are subject to a Design Quality Indicator process. The usefulness of this process will be assessed when complete and, if appropriate applied to other projects. Consider how best to review Project Boards are provided with PMI are currently Head of Physical projects at key stages, using monthly project summary information developing a best Environment independent experts as for all major projects to enable project practice manual which September 2016 necessary, to provide progress to be reviewed. These will contain some key assurances about project Boards are also the vehicle for sample documents, progress and to identify any approval at gateway review points. this will make Project potential problems. Boards review of

176 Project information is also provided information more monthly to the Corporate Property consistent from project Asset Group and provides a further to project, illustrate the level of governance and scrutiny in key information more relation to programme delivery. clearly and ensure a more efficient and In some cases cost consultants have informed review and been employed to validate internal decision making cost estimates, on an ad-hoc basis. process.

Projects progressed via the SWHub are subject to the SFT gateway review (NPR, Stage One and Stage Two). Proactively share lessons Lessons learned are gathered The more structured Head of Physical learned from projects, both, through the post occupancy process commenced in Environment successful ones or those that evaluation process and shared at the Schools for the June 2016 ran into significant difficulties, Team meetings within PMI. A lesson Future team will be within the organisations and learned log has been established for developed and rolled with other councils. the projects progressed via the out during 2016/17. SWHub and a formal lessons learned exercise, facilitated by an external Lessons Learned will consultant, was carried out to ensure continue to be an knowledge transfer from one project agenda item at team team to another. meetings within PMI and will be shared with the relevant Project Boards. Capital monitoring reports The Council provides a wide range of Reporting to members Head of Finance should be developed to capital monitoring reports which are will be developed to September 2016 include :- presented to various forums include delivery of • cumulative spending responsible for the monitoring of benefits of all major

177 against total capital capital programme delivery. projects. budget and the progress • Summary capital monitoring of each significant project reports which highlight on a against its key project by project basis annual milestones. budget, year to date budget, • Reasons for and spend to date and forecast for consequences of year. This report highlights in year slippage, or delays, of variances and provides capital projects and any explanations for over and changes in the timing of underspends and the capital spend. consequences of slippage and • clear outlines of the delays. This is reported to the benefits that individual Capital Programme and Assets projects have realised Group (CPAG) and Cabinet. This and how these compare report also highlights changes in with the expected total project costs and the benefits outlined in implications of this for the capital business cases programme. • update of the risks • Project Board Summary Reports associated with capital are completed for all major projects and projects and provide a project programmes, including update on physical and financial their financial and non- performance including financial implications performance against key milestones, risks, mitigations, reasons and consequences for slippage, delays and cost overruns and actions required within the project. This is reported to CMT, Service Project Boards, and CPAG. • All major projects are reported to

178 the Physical Environment Advisory Panel. Reports to this group summarise project progress, highlighting major issues relating to cost or programme on a “by exception” basis giving members an opportunity to understand fully projects. Elected members should be Training has been undertaken with Specific training on Head of Finance provided with regular training elected members, including the capital investment will October 2016 on capital investment to recent training on Treasury be considered as part enable them to scrutinise Management, which references of the elected member effectively capital investment capital investment. training and activity. development programme.

179 180 NORTH AYRSHIRE COUNCIL

Agenda Item 12 23 May 2016

Audit Committee

Title: Audit Scotland report: Health and Social Care Integration

Purpose: To provide the Audit Committee with an overview of the recent national report by Audit Scotland on the integration of Health and Social Care services and to provide a local context for North Ayrshire.

Recommendation: That the Audit Committee notes the findings of the Audit Scotland report.

1. Executive Summary

1.1 Audit Scotland published a national report in December 2015 entitled ‘Health and Social Care Integration’ which sought to review early progress made in implementing the Public Bodies (Joint Working) (Scotland) Act 2014. This audit provides a progress report during 2015/16.

1.2 This is first of three planned audits which Audit Scotland will carry out on integration. Subsequent audits will look at the progress made by Integration Authorities after their first year of being established, and their longer-term impact in shifting resources to preventative services and community-based care and in improving outcomes for service users.

1.3 This report provides an overview for the Audit Committee of the findings of the Audit Scotland work and some local context for North Ayrshire and was previously reported to the North Ayrshire Integration Joint Board in March 2016.

1.4 The Audit Scotland report provides a useful overview of the background to integration and the national progress so far. A number of the issues highlighted have already been addressed locally as the North Ayrshire partnership is at a more advanced stage than many across the country.

181 2. Background

2.1 The Audit Scotland report (attached in full at Appendix 1) is structured in four main sections, covering expectations for integrated services, current progress, current issues and recommendations. This report will cover each of these four areas in turn.

Expectations for Integrated Services

2.2 The first section of the report provides background information around the reasons for integration and the process which must be followed in establishing an Integration Authority.

2.3 The Public Bodies (Joint Working) (Scotland) Act 2014 sets out a significant programme of reform for the public sector, with the overarching aim of breaking down barriers to joint working between NHS Boards and Councils and improving the support given to people using health and social care services.

2.4 The new partnerships will manage more than £8 billion of resources that Councils and NHS Boards previously managed separately. Integration Authorities will coordinate health and social care services, commissioning Councils and NHS Boards to deliver services in line with the local strategic plan. Over time, the intention is that this will lead to a change in how services are provided, with a greater emphasis on preventative and community-based services.

2.5 The Act sets out a broad framework for creating Integration Authorities and, together with supporting regulations and guidance, gives Councils and NHS Boards a great deal of flexibility. There are two possible models, either the 'body corporate' model which involves establishing a Joint Board or the 'lead agency' model, where service provision is delivered by a lead partner, with scope to determine locally which services are included within the partnership in addition to a statutory minimum. Integration Joint Boards are local government bodies as defined by section 106 of the Local Government (Scotland) Act 1973.

182 2.6 NHS Boards and Councils delegate budgets to the IJB which then decides how to use these resources to achieve the objectives of the strategic plan and directs the Council and NHS Board to deliver services.

2.7 Board members of IJBs are a mix of voting and non-voting members, with the voting members coming in equal numbers from the Council and NHS Board. Initially, IJBs are not expected to employ any staff, although this may change over time as the Act does make provision for this, subject to approval by Scottish Ministers.

2.8 The report notes that the changes will have an impact on everyone who needs to access, provide or plan health and social care services, as part of the Scottish Government's focus on developing person-centred care. It is not only statutory services that need to change, with voluntary and private-sector providers employing two-thirds of the social services workforce across Scotland.

Current Progress

2.9 The report notes that 31 Integration Authorities (IA) are being established across Scotland, with one for each Council area and a shared IA between Stirling and Clackmannanshire Councils. All are following the ‘body corporate’ model with the exception of Highland, which implemented a ‘lead agency’ model in 2012 and will continue with this.

2.10 As the Audit Committee will be aware, the three Ayrshire partnerships were the first to become operational in April 2015. Most Integration Authorities were not operational until just before the statutory deadline in April 2016.

2.11 The scope of the services being integrated varies widely across Scotland. All partnerships have delegated more services than the statutory minimum, but there are a variety of combinations of children’s social work services, children’s health services, criminal justice social work services and planned acute health services being delegated. The North Ayrshire partnership bodies have delegated children's social work and health services and criminal justice social work. The report notes the importance of good clinical and care governance arrangements to ensure that service users using integrated and non-integrated services experience high standards of care.

2.12 Audit Scotland also note that various ‘hosting’ arrangements are being implemented, particularly for specialist services, and cite the example of North Ayrshire providing services such as inpatient and child and adolescent mental health services for East and South Ayrshire.

183 2.13 The report outlines arrangements for appointing board members and the Chief Officer; again North Ayrshire is well ahead of most partnerships in this regard. The complex reporting lines of the Chief Officer are noted, with dual accountability to the IJB for the Board’s responsibilities under the Act, and to the NHS Board and Council for any operational responsibility for integrated services.

Current Issues

2.14 Audit Scotland notes that there is widespread support for the significant opportunities offered by integration, which include improving services and therefore their impact on local people, improving outcomes and using resources more effectively. The Scottish Government expects integration to emphasise preventative care and reduce both the level of hospital admissions and the time that some patients spend in hospital.

2.15 The Government also expects integration to generate estimated annual savings of between £138 million and £157 million; these will result from reducing delayed discharge, using alternative forms of care to prevent people being admitted to hospital in the first place and reducing inefficiencies between different Integration Authorities in the same Health Board area. The Government has also estimated that the initial cost of making the reforms will be £34.2 million in the five years to 2016/17 and £6.3 million thereafter.

2.16 The report notes that it is unclear whether the anticipated savings will release money that IJBs can reinvest or how the Scottish Government will monitor and report progress towards these savings.

2.17 The importance of having good governance arrangements in place is noted; the outline governance framework for North Ayrshire was approved by the IJB on in June 2015 and is in the final stages of being established. The framework was the subject of a review by Internal Audit to provide assurance on the arrangements. The outcome of this audit will be reported to the Performance and Audit Committee of the IJB in June 2016.

2.18 The report notes the importance of IJB members understanding and respecting each other’s differing backgrounds and organisational cultures and in particular the need for voting members, drawn exclusively from Councils and NHS Boards, to have a shared vision and purpose. It is also seen as important that Boards do not become too large and that good development, training and support arrangements are in place. Again, an Internal Audit review of organisational development arrangements in the North Ayrshire IJB has been carried out and will be reported to the Performance and Audit Committee of the IJB in June 2016.

184 2.19 Audit Scotland notes that IJB Members and senior officers will have to manage conflicts of interest. For example, the role of IJB Members is to represent the IJB’s interests, but will also continue in their roles of Councillor or NHS board member, where they are required to represent the interests of those bodies. Equally, the Chief Finance Officer is required to support the needs of the IJB but will also have a role with the Council or NHS Board. The importance of taking action to minimise these tensions is emphasised.

2.20 There is also a risk that the complex interrelationship between IJBs, Councils and NHS Boards will get in the way of clear lines of accountability. The respective roles appear to be clear, with IJBs responsible for planning and commissioning services, and Councils and NHS Boards responsible for delivering those services. However, the understanding of accountabilities could be tested when there is a service failure.

2.21 This emphasises the need to have good clinical and care governance arrangements in place, and to ensure that these are consistent and aligned to the existing arrangements in the Council and NHS Board.

2.22 It is also important that good scrutiny arrangements are in place to monitor progress against the IJB strategic objectives and the nine national outcomes and to hold partners to account. In North Ayrshire this role will be carried out by the Performance and Audit Committee of the IJB. The report notes that IJB Members must also use performance measures to help redesign services and ensure they become more effective.

2.23 Audit Scotland notes that Integration Authorities are establishing sound financial procedures but that there are significant concerns about funding. These arise from financial constraints over a number of years and increasing demands for services. There are further difficulties in agreeing budgets for Integration Authorities arising from set-aside budgets (budgets retained by the NHS for larger hospital sites that provide both integrated and non-integrated services) and differing planning cycles between Councils and NHS Boards. The report notes the specific example of North Ayrshire Council agreeing its 2015/16 budget in December 2014, while NHS Ayrshire and Arran agreed its budget in March 2015. It is also noted that very few IJBs have informed the Scottish Government of their agreed budgets, although again this comment does not apply in North Ayrshire.

185 2.24 Many Integration Authorities are still developing their Strategic Plans, with North Ayrshire one of only six to have published these at the time of the audit review in late 2015. Audit Scotland notes the importance of ensuring that Strategic Plans are clear about local priorities and the money and staff that are in place over the longer term to deliver these priorities, as well as being clear about how they will shift resources towards community-based care and the performance measures that are in place.

2.25 It is noted that strategic planning is even less developed at a locality level. Localities are intended to be the key drivers of change, bringing together service users, carers, and health and social care professionals to help redesign services. North Ayrshire has identified six localities and these arrangements will be further developed during 2016.

2.26 Audit Scotland notes that Integration Authorities require to produce supporting strategies, covering areas such as workforce planning, risk management, data sharing and how they will work with service users. Workforce planning in particular is highlighted as a critical area to the success of integration, and the report highlights challenges in long-term workforce planning such as financial pressures, difficulties in recruiting and retaining social care staff and GPs and the role of the private and voluntary sectors. Workforce planning arrangements are being developed on a pan-Ayrshire basis and as part of the change workstreams within the partnership.

2.27 The report expresses concern that the proposed performance measurement systems will not provide information on some important areas or help to identify good practice. In particular, it is noted that the core integration indicators do not take account of all the expected benefits of the reform programme, the process of linking measures and outcomes is incomplete making it difficult to measure success, and that it is important that there is a balance between targeted local measures and national reporting on impact.

2.28 Audit Scotland carried out a comparison between the performance management arrangements in North Ayrshire and North Lanarkshire. They found that some different measures were being used and each partnership had linked a different mix of performance measures to different national outcomes, making it difficult for the Government to compare performance.

2.29 Finally, the report recognises the wide variation in arrangements that are being put in place across the 31 Integration Authorities and notes that, in the future, it would be beneficial for the Scottish Government to review the initial arrangements and consider how these might evolve to reflect good practice from across Scotland.

186 Recommendations

2.30 The Audit Scotland report concludes with a range of recommendations to help organisations address potential risks to the success of health and social care integration. This includes recommendations for both the Scottish Government and Integration Authorities; these are summarised in Appendix 2 of this report together with details of relevant actions both taken and planned locally.

3. Proposals

3.1 It is proposed that the Audit Committee notes the findings of the Audit Scotland report.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The Audit Scotland report provides a national overview on progress towards Health and Social Care integration which will help support the Council's key priority of 'Supporting People to stay healthy, safe and active.' Community Benefits: None.

187 5. Consultation

5.1 Consultation took place with the Director of the Health and Social Care Partnership and the IJB Chief Financial Officer in the preparation of this summary report.

IONA COLVIN Director (North Ayrshire Health and Social Care Partnership)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

188 Appendix 1

Health and social care series Health and social care integration

Prepared by Audit Scotland December 2015

189 The Accounts Commission The Accounts Commission is the public spending watchdog for local government. We hold councils in Scotland to account and help them improve. We operate impartially and independently of councils and of the Scottish Government, and we meet and report in public.

We expect councils to achieve the highest standards of governance and financial stewardship, and value for money in how they use their resources and provide their services.

Our work includes: • securing and acting upon the external audit of Scotland’s councils and various joint boards and committees • assessing the performance of councils in relation to Best Value and community planning • carrying out national performance audits to help councils improve their services • requiring councils to publish information to help the public assess their performance.

You can find out more about the work of the Accounts Commission on our website: www.audit-scotland.gov.uk/about/ac

Auditor General for Scotland The Auditor General’s role is to: • appoint auditors to Scotland’s central government and NHS bodies • examine how public bodies spend public money • help them to manage their finances to the highest standards • check whether they achieve value for money.

The Auditor General is independent and reports to the Scottish Parliament on the performance of: • directorates of the Scottish Government • government agencies, eg the Scottish Prison Service, Historic Scotland • NHS bodies • further education colleges • Scottish Water • NDPBs and others, eg Scottish Police Authority, Scottish Fire and Rescue Service.

You can find out more about the work of the Auditor General on our website: www.audit-scotland.gov.uk/about/ags

Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission check that organisations spending public money use it properly, efficiently and effectively. 190 Health and social care integration | 3

Contents

Key facts 4

Summary 5

Part 1. Expectations for integrated services 9

Part 2. Current progress 20

Part 3. Current issues 25

Part 4. Recommendations 39

Endnotes 42

Appendix 1. Audit methodology 44

Appendix 2. Scottish Government core integration indicators 45

191 4 |

Key facts

Health and social Over care resources will be £8 delegated to integration billion authorities in 2016/17

Scottish Government National estimate of the outcomes that increase in the integration 18-29 need for health authorities 9 per cent and social care are required services between to contribute 2010 and 2030 towards

Scottish Government £138- Integration authorities estimates of 31 are required to be annual savings £157m operating by April 2016 from integration

192 Summary | 5

Summary

Key messages 1 The Public Bodies (Joint Working) (Scotland) Act 2014 introduces a significant programme of reform affecting most health and care services and over £8 billion of public money. The reforms aim to ensure services are well integrated and that people receive the care they need at the right time and in the right setting, with a focus on community-based and preventative care. The reforms are far reaching, creating opportunities to overcome previous barriers to change. 2 We found widespread support for the principles of integration from the individuals and organisations implementing the changes. The Scottish Government has provided support to partnerships to establish the new arrangements, including detailed guidance on key issues and access to data to help with strategic planning. Stakeholders are putting in place the required governance and management arrangements and, as a there are result, all 31 integration authorities (IAs) are expected to be operational by the statutory deadline of 1 April 2016. significant risks which need to 3 Despite this progress, there are significant risks which need to be addressed if integration is to fundamentally change the delivery of be addressed if health and care services. There is evidence to suggest that IAs will not integration is to be in a position to make a major impact during 2016/17. Difficulties in agreeing budgets and uncertainty about longer-term funding mean fundamentally that they have not yet set out comprehensive strategic plans. There is change the broad agreement on the principles of integration. But many IAs have still to set out clear targets and timescales showing how they will make delivery of a difference to people who use health and social care services. These health and issues need to be addressed by April 2016 if IAs are to take a lead in improving local services. care services 4 There are other important issues which also need to be addressed. The proposed governance arrangements are complex, with some uncertainty about how they will work in practice. This will make it difficult for staff and the public to understand who is responsible for the care they receive. There are significant long-term workforce issues. IAs risk inheriting workforces that have been organised in response to budget pressures rather than strategic needs. Other issues include different terms and conditions for NHS and council staff, and difficulties in recruiting and retaining GPs and care staff.

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Recommendations

Stakeholders have done well to get the systems in place for integration, but much work remains. If the reforms are to be successful in improving outcomes for people, there are other important issues that need to be addressed:

• Partners need to set out clearly how governance arrangements will work in practice, particularly when disagreements arise. This is because there are potentially confusing lines of accountability and potential conflicts of interests for board members and staff. There is a risk that this could hamper the ability of an IA to make decisions about the changes involved in redesigning services. People may also be unclear who is ultimately responsible for the quality of care. In addition, Integration Joint Board (IJB) members need training and development to help them fulfil their role.

• IAs must have strategic plans that do more than set out the local context for the reforms. To deliver care in different ways, that better meets people’s needs and improves outcomes, IAs need to set out clearly: –– the resources, such as funding and skills, that they need –– what success will look like –– how they will monitor and publicly report on the impact of their plans. • NHS boards and councils must work with IAs to agree budgets for the new IAs. This should cover both their first year and the next few years to give them the continuity and certainty they need to develop and implement strategic plans. IAs should be clear about how they will use resources to integrate services and improve outcomes.

Integration authorities need to shift resources, including the workforce, towards a more preventative and community-based approach. Even more importantly, they must show that this is making a positive impact on service users and improving outcomes.

A more comprehensive list of recommendations is set out in (Part 4).

Background

1. The Public Bodies (Joint Working) (Scotland) Act 2014 (the Act) sets out a framework for integrating adult health and social care services. Social care services include supporting people to live their daily lives and helping them with basic personal care like washing, dressing and eating. People are living longer and the number of people with long-term conditions such as diabetes, and complex needs, such as multiple long-term conditions, is increasing. Current health and social care services are unsustainable; they must adapt to meet these changing needs. This means shifting from hospital care towards community-based services, and preventative services, such as support to help prevent older people from falling at home or to encourage people to be more active.

194 Summary | 7

2. Integrating health and social care services has been a key government policy for many years. Despite this, there has been limited evidence of a shift to more community-based and preventative services. The Act sets out an ambitious programme of reform affecting most health and social care services. The scale and pace of the changes anticipated are significant, with a focus on changing how people with health and social care needs are supported.

3. The Act creates new partnerships, known as IAs, with statutory responsibilities to coordinate local health and social care services. The Act puts in place several national outcomes for health and social care and IAs are accountable for making improvements to these outcomes. The Act also aims to ensure that services are integrated, taking account of people’s needs and making best use of available resources, such as staff and money. Each IA must establish at least two localities, which have a key role, working with professionals and the local community to develop services local people need.

4. IAs are currently at various stages in their development; all are required to be operational, that is taking on responsibility for budgets and services, by April 2016. The Scottish Government has estimated that IAs will oversee annual budgets totalling over £8 billion, around two-thirds of Scotland’s spending on health and social work.

About this audit

5. This is the first of three planned audits of this major reform programme. Subsequent audits will look at IAs’ progress after their first year of being established, and their longer-term impact in shifting resources to preventative services and community-based care and in improving outcomes for the people who use these services.

6. This first audit provides a progress report during this transitional year. We reviewed progress at this relatively early stage to provide a picture of the emerging arrangements for setting up, managing and scrutinising IAs as they become formally established. This report highlights risks that need to be addressed as a priority to ensure the reforms succeed. The audit is based on fieldwork that was carried out up to October 2015. We hope that the issues raised in the report are timely and helpful to the Scottish Government and local partners as they continue to implement the Act.

7. We gathered audit evidence by:

• reviewing documents available at the time of our work, including integration schemes, strategic plans, and local progress reports on integration arrangements1

• drawing on the work of local auditors, the Care Inspectorate, and Healthcare Improvement Scotland

• issuing a short questionnaire to IAs on their timetable for reaching various milestones

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• interviewing stakeholders who included, board members, chief officers and finance officers from six IAs, and representatives from the Scottish Government, the British Medical Association, the voluntary sector, the Convention of Scottish Local Authorities and NHS Information Services Division.2

Appendix 1 provides further information on our audit approach.

8. This work builds on previous audits that have examined joint working in health and social care. For example, our Review of Community Health Partnerships [PDF] highlighted the organisational barriers to improving partnership working between NHS boards and councils, and the importance of strong, shared leadership across health and social care.3 Our subsequent report Reshaping care for older people [PDF] found continuing slow progress in providing joined up health and social care services.4 This lack of progress in fundamentally shifting the balance of care from hospital to community settings, coupled with the unsustainability of current services, mean that there is a pressing need for this latest reform programme to succeed.

9. The Accounts Commission and Auditor General are currently conducting two other audits which complement this work:

• Changing models of health and social care examines the financial, demographic and other pressures facing health and social care and the implications of implementing the Scottish Government’s 2020 vision for health and social care. We will publish the report in in spring 2016.

• Social work in Scotland will report on the scale of the financial and demand pressures facing social work. It will consider the strategies councils and integration authorities are adopting to address these challenges, how service users and carers are being involved in designing services, and leadership and oversight by elected members. We will publish the report in summer 2016.

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Part 1 Expectations for integrated services

Integration authorities will oversee more than £8 billion of NHS and care resources

10. The Public Bodies (Joint Working) (Scotland) Act 2014 sets out a significant programme of reform for the Scottish public sector. It creates a number of new public organisations, with a view to breaking down barriers to joint working between NHS boards and councils. Its overarching aim is to improve the support given to people using health and social care services.

11. These new partnerships will manage more than £8 billion of resources that NHS boards and councils previously managed separately. Initially, service users may not see any direct change. In most cases, people seeking support will continue to contact their GP or social work services. But, behind the scenes, IAs are expected to coordinate health and care services, commissioning NHS boards and councils to deliver services in line with a local strategic plan. Over time, the intention is that this will lead to a change in how services are provided. There will the be a greater emphasis on preventative services and allowing people to receive care and support in their home or local community rather than being admitted significant to hospital. changes Change is needed to help meet the needs of an ageing under way population and increasing demands on services will have an

12. Around two million people in Scotland have at least one long-term condition, impact on and one in four adults has some form of long-term illness or disability. These everyone become more common with age (Exhibit 1, page 10). By the age of 75, almost two-thirds of people will have developed a long-term condition.5 People who needs in Scotland are living longer. Combined life expectancy for males and females at to access, birth has increased from 72 to 79 years since 1980, although there are significant variations across Scotland, largely linked to levels of deprivation and inequalities.6 provide or The population aged over 75 years is projected to increase by a further 63 per 7 plan health cent over the next 20 years. and social 13. The ageing population and increasing numbers of people with long-term care services conditions and complex needs have already placed significant pressure on health and social care services. The Scottish Government estimates that the need for these services will rise by between 18 and 29 per cent between 2010 and 2030.8 In the face of these increasing demands, the current model of health and care services is unsustainable:

• The Scottish Government has estimated that in any given year just two per cent of the population (around 100,000 people) account for 50 per cent of hospital and prescribing costs, and 75 per cent of unplanned hospital bed days.

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• A patient’s discharge from hospital may be delayed when they are judged to be clinically ready to leave hospital but unable to leave because arrangements for care, support or accommodation have not been put in place. In 2014/15, this led to the NHS in Scotland using almost 625,000 hospital bed days for patients ready to be discharged.9

14. As a result of these pressures, there is widespread recognition that health and social care services need to be provided in fundamentally different ways. NHS boards, councils and the Scottish Government have focused significant efforts on initiatives to reduce unplanned hospital admissions and delayed discharges, yet pressures on hospitals remain. There needs to be a greater focus on anticipatory care, helping to reduce admissions to hospitals. There also needs to be better support to allow people to live independently in the community.

Exhibit 1 Long-term conditions by age The number of long-term conditions that people have increases with age.

Source: Reprinted with permission from Elsevier (The Lancet, 2012, 380, 37-43)

198 Part 1. Expectations for integrated services | 11

15. None of this is unique to Scotland. Other parts of the UK and Europe face similar challenges. There have been various responses across the UK, but all try to deal with the changing needs of an ageing population, putting more emphasis on prevention and anticipatory care and seeking to shift resources from hospitals to community-based care.

16. A series of initiatives in Scotland over recent years has aimed to encourage a more joined-up approach to health and social care (Exhibit 2). Perhaps the most significant of these was creating Local Health Care Cooperatives (LHCCs) in 1999 and replacing them with Community Health Partnerships (CHPs) in 2004. While these reforms led to some local initiatives, LHCCs and CHPs lacked the authority to redesign services fundamentally. As a result, they had limited impact in shifting the balance of care, or in reducing admissions to hospital or delayed discharges.10

Exhibit 2 A brief history of integration in Scotland

1999 Seventy-nine Local Health Care Cooperatives (LHCCs) established, bringing together GPs and other primary healthcare professionals in an effort to increase partnership working between the NHS, social work and the voluntary sector. 2002 Community Care and Health (Scotland) Act introduced powers, but not duties, for NHS boards and councils to work together more effectively. 2004 NHS Reform (Scotland) Act, required health boards to establish CHPs, replacing LHCCs. This was a further attempt to bridge gaps between community-based care, such as GPs, and secondary healthcare, such as hospital services, and between health and social care. 2005 Building a Health Service Fit for the Future: National Framework for Service Change. This set out a new approach for the NHS that focused on more preventative healthcare, with a key role for CHPs in shifting the balance of care from acute hospitals to community settings. 2007 Better Health, Better Care set out the Scottish Government's five-year action plan, giving the NHS lead responsibility for working with partners to move care out of hospitals and into the community. 2010 Reshaping Care for Older People Programme launched by the Scottish Government. It introduced the Change Fund to encourage closer collaboration between NHS boards, councils and the voluntary sector. 2014 Public Bodies (Joint Working) (Scotland) Act introduced a statutory duty for NHS boards and councils to integrate the planning and delivery of health and social care services. 2016 All integration arrangements set out in the 2014 Act must be in place by 1 April 2016.

Source: Audit Scotland

17. The relative lack of progress of earlier attempts at integration led to the Public Bodies (Joint Working) (Scotland) Act 2014. This is the first attempt in the UK to place a statutory duty on the NHS and councils to integrate health and social care services. The Act abolished CHPs, replacing them with a series of IAs (Exhibit 3, page 12). These bodies will manage budgets for providing all integrated services. Most will not initially employ staff, but instead direct NHS boards and councils to deliver services in line with a strategic plan.

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Exhibit 3 The public sector bodies overseeing health and social care services

32 Community planning 32 partnerships

32 32 Councils

14 14 NHS boards

31 Integration 31 authorities, including:

• 1 Lead Agency (NHS Highland and Highland Council)

• 30 Integration Joint Boards (for the remaining NHS boards and councils, including a joint arrangement in Stirling and Clackmannanshire)

• Localities: The number of localities is still to be finalised in all areas. As a minimum, there will be two localities in each IA but the final number is likely to be higher.

Note: See Exhibit 4 for details of Integration Joint Board and lead agency approaches. Source: Audit Scotland

The Scottish Government has set out a broad framework that allows for local flexibility

18. The Public Bodies (Joint Working) (Scotland) Act 2014 sets out a broad framework for creating IAs. The Act and the supporting regulations and guidance give councils and NHS boards a great deal of flexibility, allowing them to develop integrated services that are best suited to local circumstances. The main aspects of this flexible framework follow below.

Timing for establishing the new integration authorities 19. Scottish ministers must formally approve integration schemes for IAs: these set out the scope of services that are to be integrated and broad management and governance arrangements, including the structures and processes for

200 Part 1. Expectations for integrated services | 13

decision-making and accountability, controls and behaviour. Within this overall framework, IAs can choose when they become operational but all IAs must be established and operational, with delegated responsibility for budgets and services, by 1 April 2016.11 Subject to the approval of their integration scheme, they can take on delegated responsibility for budgets and services at any time between April 2015 and 1 April 2016.

Scope of services to be integrated 20. Councils and NHS boards are required to integrate the governance, planning and resourcing of adult social care services, adult primary care and community health services and some hospital services. The hospital services included in integration are the inpatient medical specialties that have the largest proportion of emergency admissions to hospital. These include:

• accident and emergency services

• general medicine

• geriatric medicine

• rehabilitation medicine

• respiratory medicine

• psychiatry of learning disability

• palliative care

• addiction and substance dependence service

• mental health services and services provided by GPs in hospital.

Other, non-integrated, hospital services continue to be overseen directly by NHS boards. The Act also allows NHS boards and councils to integrate other areas of activity, such as children’s health and social care services and criminal justice social work.

How IAs are structured 21. IAs will be responsible for overseeing certain functions that are delegated from the local NHS board and council(s). IAs can follow one of two main structural models (Exhibit 4, page 14).

22. All areas, apart from Highland, are planning to follow the body corporate model, creating an Integration Joint Board to plan and commission integrated health and social care services in their areas. IJBs are local government bodies, as defined by Section 106 of the Local Government (Scotland) Act 1973. Partners will need to understand the implications of differences between how councils and NHS boards carry out their business, so they are able to fulfil their duties. For example:

• IJBs must appoint a finance officer. The finance officer, under the terms of Section 95 of the Local Government (Scotland) Act 1973, has formal responsibilities for the financial affairs of the IJB.

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Exhibit 4 Integration authorities will follow one of two main models

Body corporate or Integration Joint Board model Body corporate

Scottish ministers Scottish Parliament Electorate • NHS boards and councils delegate health and social The IJB is jointly accountable to the NHS board and the care functions to council through its membership, the integration scheme an Integration Joint and the strategic plan. Board (IJB)

Integration Joint Board • The Act allows for partners to work jointly, for example, NHS board Council for two councils to work with their local NHS board to create Accountability a single IJB Functions and resources Resources and directions to deliver services

Integrated services delivered via localities

Lead agency model

Lead agency Scottish ministers Scottish Parliament Electorate • NHS boards and Functions and resources can be delegated either entirely to the NHS board or councils delegate the council, or they can both delegate functions and resources to each other some of their but one agency must hold the minimum functions prescribed by the legislation. functions to each other

NHS board Council • Carrying out of functions is Integration Joint overseen and Monitoring Committee scrutinised by an Integration Accountability Joint Monitoring Committee Functions and resources Recommendations

Integrated services delivered via localities

Source: Audit Scotland

202 Part 1. Expectations for integrated services | 15

• The way local government bodies make decisions differs to NHS boards. Local government bodies in Scotland must take corporate decisions. There is no legal provision for policies being made by individual councillors.

• A statutory duty of Best Value applies to IJBs.

23. NHS boards and councils delegate budgets to the IJB. The IJB decides how to use these resources to achieve the objectives of the strategic plan. The IJB then directs the NHS board and council to deliver services in line with this plan. Only Highland has chosen the lead agency model, continuing arrangements established in earlier years for integrated services.12 Under powers first set out in the Community Care (Scotland) Act 2002, NHS Highland is the lead for adult health and care services, with Highland Council the lead for children’s community health and social care services. This provides continuity with lead agency arrangements in place in Highland since 2012. The council and the NHS board cannot veto decisions taken by the lead agency. Instead, as required by the legislation, they have established an integration joint monitoring committee (IJMC). The IJMC cannot overturn a decision made by the council or NHS board, but it can monitor progress in integrating services and make recommendations.

24. Whichever model is chosen, the underlying objective remains the same. The IA is expected to use resources to commission coordinated services that provide care for individuals in their community or in a homely setting and avoid unnecessary admissions to hospital.

Membership of Integration Joint Boards (IJBs) 25. For the IAs that follow the body corporate model, board members of IJBs are a mix of voting and non-voting members. Councils and NHS boards are each required to nominate at least three voting members. The NHS board and council can nominate more members, but both partners need to agree to this and the number from each body needs to be equal. The NHS board nominates non- executive directors to the IJB, and the council nominates councillors. Where the NHS board is unable to fill their places with non-executive directors, it is able to nominate other members of the NHS board. At least two of the NHS members should be non-executive directors. The IJB should also include non-voting members, including a service user and a representative from the voluntary sector (Exhibit 5, page 16).13

26. Initially, IJBs are not expected to directly employ staff, operating only as strategic commissioning bodies.14 This may change over time as the Act allows IJBs to employ staff, but this needs to be approved by Scottish ministers, rather than decided locally. A chief officer and finance officer provide support for the IJB, but they are employed by either the council or NHS board and seconded to the IJB. The finance officer, under the terms of Section 95 of the Local Government (Scotland) Act 1973, has formal responsibilities for the financial affairs of the IJB.

Scrutinising integrated health and social care 27. Various scrutiny bodies have an interest in the integration of health and social care:

• The Accounts Commission is responsible for appointing auditors to IJBs and so has an interest in financial management and governance arrangements. As local government bodies, IJBs are also covered by the duty of Best Value as set out in the Local Government in Scotland Act 2003. The Accounts Commission has the power to audit the extent to which local government bodies are discharging their Best Value duty. 203 16 |

• Health and social integration is a significant national policy development. Therefore, the Auditor General for Scotland (alongside the Accounts Commission) has an audit interest in the extent to which it is being implemented at a national and local level, and in its impact on NHSScotland.

• The Care Inspectorate and Healthcare Improvement Scotland are responsible for scrutinising and supporting improvement in health and care services. Both organisations inspect individual services and work together to perform joint inspections of health and care services. These organisations will inspect the planning, organisation or coordination of

Exhibit 5 Organisation chart for a typical IJB

Non-voting members include: • council chief social work officer • chief officer of IJB Chair from either the NHS board or the council • finance officer of IJB • at least one staff representative • voluntary sector The IJB representative • service user Voting members parity of membership • registered nurse from the NHS board • registered medical and council practitioner (one from primary care and one from other services) • unpaid carer

Membership includes: Chief Officer • health professionals Employed by either the • social care professionals NHS board or council • service users • carers • private sector providers of health and care services • non-commercial providers of health, care Strategic and housing services Planning • voluntary sector bodies. Finance Officer Group Employed by NHS or To prepare strategic plan council (role may be fulfilled To divide into localities by the chief officer)

Source: Audit Scotland

204 Part 1. Expectations for integrated services | 17

integrated health and social care services. From April 2017, the Care Inspectorate and Healthcare Improvement Scotland are required by legislation to assess progress in establishing joint strategic commissioning and the early impact of integration.

Implications for the public, voluntary and private sectors 28. The significant changes under way will have an impact on everyone who needs to access, provide or plan health and social care services. Integration is part of the Scottish Government’s focus on developing person-centred care. This is aimed at improving services, ensuring people using health and social care services can expect to be listened to, to be involved in deciding upon the care they receive and to be an active participant in how it is delivered. The aim is that this will result in improved outcomes for people, enabling them to enjoy better health and wellbeing within their homes and communities.

29. Health and social care integration is complex and it is important that IAs engage with the public on an ongoing basis so that they understand the purpose of integration and are able to influence the way services change. People may not see a significant difference in the services they receive immediately, but the reforms are focused on making better use of all health and social care services. Therefore there are implications for how people use services, for example GP, A&E and community-based services. If the reforms are to be successful, IJBs, NHS boards and councils need to involve people in decisions about the implications for local services. To help with this, there is a requirement that a service user and unpaid carer are members of the IJB and that IJBs consult and engage with local people as they develop their strategic and locality plans. It is also important that IAs are clear about how they link into the wider community planning process.

30. It is not only statutory services that need to change, other providers need to be involved. Voluntary and private sector providers employ two-thirds of the social services workforce and provide many social care services across Scotland. They are significant partners in developing integrated services, with the voluntary sector represented on the IJB as a non-voting member. Our previous report Self-directed support [PDF] highlighted some of the ways that councils have started to change how they work with the voluntary and private sectors.15 There are lessons here for IJBs.

Localities 31. The Act requires IAs to divide their area into at least two localities, but they can choose to create more. Localities have an important role in reforming how to deliver services. They bring together local GPs and other health and care professionals, along with service users, to help plan and decide how to make changes to local services. A representative from each locality is expected to be part of the IA’s strategic planning group, helping to ensure that specific local needs are taken into account. Localities also have a consultative role. When an IA is planning a change that is likely to affect service provision in a locality significantly, it must involve representatives of the local population in that decision.

32. As part of their role in planning services, localities are expected to plan expenditure on integrated health and social care services in their area, based on local priorities and to help shift resources towards preventative and community- based health and care services.

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Outcomes and performance measures 33. IAs are required to contribute towards nine national health and wellbeing outcomes (Exhibit 6). These high-level outcomes seek to measure the quality of health and social care services and their impact in, for example, allowing people to live independently and in good health, and reducing health inequalities. This is the first time that outcomes have been set out in legislation, signalling an important shift from measuring internal processes to assessing the impact on people using health and social care services. IAs are required to produce an annual performance report, publicly reporting on the progress they have made towards improving outcomes.

The Scottish Government is providing resources to help support integration

34. The integration of health and social care is a complex reform and the Scottish Government is providing support to help organisations as they establish the new arrangements. The Scottish Government will provide more than £500 million over the three years from 2015/16 to 2017/18 to help partnerships establish new ways of working that focus on prevention and early intervention in a bid to reduce

Exhibit 6 National health and wellbeing outcomes IAs are required to contribute to achieving nine national outcomes.

1 People are able to look after and improve their own health and wellbeing and live in good health for longer. 2 People, including those with disabilities or long-term conditions, or who are frail, are able to live, as far as reasonably practicable, independently and at home or in a homely setting in their community. 3 People who use health and social care services have positive experiences of those services, and have their dignity respected. 4 Health and social care services are centred on helping to maintain or improve the quality of life of people who use those services. 5 Health and social care services contribute to reducing health inequalities. 6 People who provide unpaid care are supported to look after their own health and wellbeing, including to reduce any negative impact of their caring role on their own health and wellbeing. 7 People who use health and social care services are safe from harm. 8 People who work in health and social care services feel engaged with the work they do and are supported to continuously improve the information, support, care and treatment they provide. 9 Resources are used effectively and efficiently in the provision of health and social care services.

Source: National Health and Wellbeing Outcomes, Scottish Government

206 Part 1. Expectations for integrated services | 19

long-term costs. This money is not directly to support integration, but to continue initiatives that were already under way to improve services. The money is made up as follows:

• £300 million is an integrated care fund to help partnerships achieve the national health and wellbeing outcomes and move towards preventative services

• £100 million to reduce delayed discharges

• £30 million for telehealth

• £60 million to support improvements in primary care

• £51.5 million for a social care fund.

35. The Scottish Government has provided guidance to partnerships, covering issues such as strategic commissioning of health and care services, clinical and care governance, and the role of housing services and the voluntary sector. The timescales to implement the Act are tight. For some partnerships, guidance came too late. For example, the Scottish Government issued its guidance on localities in July 2015, yet localities play an important part in strategic plans and many partnerships had already begun the strategic planning process by then. The Scottish Government plans to issue further guidance on performance reporting late in 2015. However, for some areas this is coming too late – the three Ayrshire IJBs will present their first performance reports on or before 2 April 2016 and are developing these in advance of the guidance being issued.

36. The Scottish Government is supplementing this formal guidance with a series of support networks for IJB chairs and finance officers, such as regular learning events, and through the work of the Joint Improvement Team (JIT), including support for IJBs in developing their strategic plans.16 Healthcare Improvement Scotland and the Care Inspectorate are currently developing a support programme for IAs, tailoring training and development events to fit local needs.

37. IAs are also being supported by the Information Services Division (ISD) of NHS National Services Scotland. ISD is creating a single source of data on health, social care and demographics. It is making this information available to NHS boards, councils and IAs to help them to gain a better understanding of:

• the needs of their local population

• current patterns of care

• how resources are being used.

38. This is the first time this detailed information on activity and costs will be routinely available to partnerships to help them with strategic planning. It will also help inform decisions on how to better use resources to improve outcomes for service users and carers. ISD is also providing data and analytical support through a Local Intelligence Support Team initiative, where partnerships can have an information specialist from ISD working with them in their local area.

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Part 2 Current progress

Integration authorities are being established during 2015/16

39. Thirty-one IAs are being established, with one for each council area and a shared one between Clackmannanshire and Stirling. All partners submitted their draft integration schemes to Scottish ministers by the April 2015 deadline. Some, such as East Dunbartonshire, already plan to extend the scope of services being integrated and will resubmit their integration scheme for approval. By October 2015, 25 integration schemes had been formally approved, with the remainder expected to be agreed by the end of 2015.

40. By October 2015, six IAs had been established and taken on operational responsibility for budgets and services (Exhibit 7, page 21). The remaining IAs plan to be operational just before the statutory deadline, in March and April 2016.

Most integration authorities will oversee more than the statutory minimum services, and their responsibilities vary widely the scope

41. The Act requires councils and NHS boards to integrate adult health and of the social care services. But it also allows them to integrate other services, such as services children’s health and social care services and criminal justice social work services. being 42. The scope of the services being integrated varies widely across Scotland. integrated Almost all the IAs will oversee more than the minimum requirement for health services, mainly by including some aspects of children’s health services. But varies widely there is a wide range in responsibilities for other areas, such as children’s social across work services, criminal justice social work services, and planned acute health services (Exhibit 8, page 22). These differences in the scope of services Scotland included create a risk of fragmented services in some areas. Good clinical and care governance arrangements will be important to ensure that vulnerable people using integrated and non-integrated services experience high standards of care.

43. Among the variations the most notable are in Argyll and Bute IJB and Dumfries and Galloway IJB. These IJBs will oversee all NHS acute services, including planned and unplanned hospital services. In theory, this should allow these IJBs to better coordinate all health and care services in their area.

44. Various ‘hosting’ arrangements are also being implemented across the country. Where the area covered by an NHS board has more than one IJB it is often not practical or cost-effective to set up separate arrangements to deliver services for individual IJBs. This is particularly the case for specialist services, such as certain inpatient mental health services with small numbers of patients or staff. For example, North Ayrshire IJB hosts the following services on behalf of East Ayrshire and South Ayrshire IJBs:

208 Part 2. Current progress | 21

Exhibit 7 Services will be delegated to IAs throughout 2015/16 with most delegating in April 2016

2015

East Ayrshire North Ayrshire April South Ayrshire May June Highland July West Dunbartonshire August September East Dunbartonshire October East Renfrewshire November Shetland December

2016 January February Renfrewshire March South Lanarkshire April Deadline Aberdeen City Falkirk Aberdeenshire Fife Angus Glasgow Argyll and Bute Inverclyde Borders Midlothian Clackmannanshire and Stirling Moray Curam Is Slainte North Lanarkshire Dumfries and Galloway Orkney Dundee City West Lothian East Lothian Edinburgh

Notes: 1. The date of becoming operational is still to be agreed in Perth and Kinross. 2. Curam Is Slainte is the name for the partnership between NHS Western Isles and Comhairle nan Eilean Siar. Source: Audit Scotland

209 22 |

Exhibit 8 Additional integrated services Partnerships are integrating a wider range of services in addition to the statutory minimum.

Argyll and Bute Key East Ayrshire – Children's social work services East Renfrewshire –

Glasgow – Criminal justice social work services

Inverclyde – Children's health services North Ayrshire – Planned acute health services Orkney –

South Ayrshire –

West Dunbartonshire –

Aberdeen City – –

Aberdeenshire – –

Curam Is Slainte – –

East Lothian – –

Midlothian – –

Moray – –

Shetland – –

Highland – –

Dumfries and Galloway – –

Angus – – –

Borders – – –

Clackmannanshire and – – – Notes: Stirling 1. Criminal justice social work services can include services such as providing reports to Dundee – – – courts to assist with decisions on sentencing. Planned acute health services can include East Dunbartonshire – – – services such as outpatient hospital services. 2. The range of children's health services Edinburgh – – – delegated varies by IA. They may include universal services (such as GPs) for people Falkirk – – – aged under 18, or more specialised children's health services such as school nursing Fife – – – or health visiting, or both universal and specialised services. North Lanarkshire – – – 3. IAs may also be responsible for additional integrated services not listed here. Perth and Kinross – – – 4. East Dunbartonshire plan to amend their integration scheme to include children's Renfrewshire – – – primary and community health services before 1 April 2016. South Lanarkshire – – – 5. Where integration schemes have not yet been approved by ministers, the final West Lothian – – – integration scheme may vary from the information included here.

Source: Scottish Government, 2015 and Audit Scotland, 2015

210 Part 2. Current progress | 23

• inpatient mental health services

• learning disability services

• child and adolescent mental health services

• psychology services

• community infant feeding service

• family nurse partnership

• child health administration team

• immunisation team.

IJBs are appointing voting board members and most have chief officers in post

45. Most IJBs are currently appointing board members. Our review of the 17 IJB integration schemes that Scottish ministers had approved at the time of our audit shows the following:

• Thirteen IJB boards will initially be chaired by a councillor, with the remaining four chaired by a non-executive from the local NHS board.

• Only three areas have chosen to nominate the minimum of three voting members each from the council and NHS board.17 In 13 schemes, councils and NHS boards have each nominated four voting members. In Edinburgh, the council and NHS board each have five voting members.

• There are also local variations in the number of additional non-voting members. For example, East Renfrewshire has appointed an additional GP member to help provide knowledge on local service needs. In most cases, these variations do not add significantly to the number of IJB board members. But some IJBs have very large boards. For example, Edinburgh has 13 non-voting members, in addition to its ten voting members. The IJB board for Clackmannanshire and Stirling is expected to be even larger, reflecting the joint arrangements between the two council areas, with 12 voting members and around 23 non-voting members.

46. Almost all IJBs have now appointed a chief officer.18 Edinburgh and Falkirk expect to have their chief officers in post by the end of 2015.19 Chief officers are employed by either the NHS board or the council and then seconded to the IJB. Terms and conditions of employment vary between councils and NHS boards, so successful candidates choose their preferred employer, based on the packages offered.

Chief officer accountability 47. Accountability arrangements for the IJB chief officer are complex and while there may be tensions in how these arrangements will work in practice, we have attempted to set out the technical arrangements as clearly as possible. The chief officer has a dual role. They are accountable to the IJB for the

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responsibilities placed on the IJB under the Act and the integration scheme. They are accountable to the NHS board and council for any operational responsibility for integrated services, as set out in the integration scheme.

Accountability to the IJB • The chief officer is directly accountable to the IJB for all of its responsibilities. These include: strategic planning, establishing the strategic planning group, the annual performance report, the IJB’s responsibilities under other pieces of legislation (for example, the Equalities Act and the Public Records Act), ensuring that its directions are being carried out, recommending changes and reviewing the strategic plan.

• Integration schemes can pass responsibility for overseeing the operation of specific services from the NHS board or council to the IJB. In these circumstances, the chief officer is accountable to the IJB for establishing the arrangements to allow it to do this. This includes setting up performance monitoring, reporting structures, highlighting critical failures, reporting back based on internal and external audit and inspection. If the council or NHS board passes responsibility for meeting specific targets to the IJB, the IJB must take this into account during its strategic planning, and the chief officer is accountable for making sure it does so.

Accountability to the NHS board and council • All integration schemes should set out whether the chief officer also has operational management responsibilities. Where the chief officer has these responsibilities, they are also accountable to the NHS board and the council.

• Where the chief officer has operational management responsibilities, the integration scheme makes the chief officer the responsible operational director in the council and NHS board for ensuring that integrated services are delivered. The chief officer is therefore responsible to the NHS board and council for the delivery of integrated services, how the strategic plan becomes operational and how it is delivered. They are also responsible for ensuring it is done in line with the relevant policies and procedures of the organisation (for example staff terms and conditions).

• Although this is untested, the accountable officers for delivery should still be the chief executives of the NHS board and the council. But they must discharge this accountability through the chief officer as set out in their integration scheme. The chief executives of the NHS board and council are responsible for line managing the chief officer to ensure that their accountability for the delivery of services is properly discharged.

48. Although employed by one organisation only, most chief officers are line managed by the chief executives of both the council and the NHS board. This means that in some NHS board areas the chief executive is line managing several IJB chief officers. South Lanarkshire has adopted a more streamlined approach, where the chief officer reports to both the council and NHS board chief executive, but the organisation that employs the chief officer performs day-to-day line management.

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Part 3 Current issues

There is wide support for the opportunities offered by health and social care integration

49. Integrated health and social care offers significant opportunities. These include improving the services that communities receive, the impact these services have on people, improving outcomes and using resources, such as money and skills, more effectively across the health and care system. The Scottish Government expects integrated services to emphasise preventative care and reduce both the level of hospital admissions and the time that some patients spend in hospital. A measure of success will be the extent to which integration has helped to move to a more sustainable health and social care service, with less reliance on emergency care.

50. Because integrated services with a focus on improving outcomes should result in more effective use of resources across the health and social care system, the Scottish Government expects integration to generate estimated widespread annual savings of £138 - £157 million. The savings are as follows: support for • Annual savings of £22 million if IAs can meet the current target to limit the the policy of delay in discharging patients to no more than two weeks and £41 million if they can reduce this further, to no more than 72 hours. health and social care • Annual savings of £12 million by using anticipatory care plans for people with conditions that put them at risk of an unplanned admission to hospital. integration, These plans provide alternative forms of care to try to avoid people being but concerns admitted to hospital. about how • Annual savings of £104 million from reducing the variation between this will work different IAs in the same NHS board area. The Scottish Government expects that IAs will identify the inefficiencies that cause costs to vary and, in practice over time, reduce them.20

51. The Scottish Government estimated the initial cost of making these reforms to adult services to be £34.2 million over the five years up to 2016/17, and £6.3 million after this. It has not estimated the additional costs, or savings, from integrating other services such as children’s health and social care or some criminal justice services.21 It is unclear whether these anticipated savings will release money that IJBs can invest in more community-based and preventative care or how the Scottish Government will monitor and report progress towards these savings.

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52. There have been previous attempts at integration, as listed in Exhibit 2 (page 11). Our Review of Community Health Partnerships [PDF] highlighted that CHPs had a challenging remit, but lacked the authority needed to implement the significant changes required.22 We also found limited progress with joint budgets across health and care services. This latest reform programme contains important new elements to help partnerships improve care. The Act:

• provides a statutory requirement for councils and NHS boards to integrate services and budgets, in contrast to previous legislation that encouraged joint working with resources largely remaining separate

• provides, for the first time, a statutory requirement to focus on outcome measures, rather than activity measures

• introduces a requirement for co-production as part of strategic planning. Co-production is when professionals and people who need support combine their knowledge and expertise to make joint decisions

• has clear links to other significant legislation, including The Children and Young People (Scotland) Act 2014 and the Community Empowerment (Scotland) Act 2015, where similar principles of co-production, engagement and empowerment apply.

53. Throughout our audit, we found there is widespread support for the policy of health and social care integration, but concerns about how this will work in practice. In this part of our report, we summarise the most important risks and issues we have identified through our audit. These are significant and need to be addressed as a priority nationally and locally to integrate health and care services successfully.

NHS boards, councils and IJBs need to be clear about how local arrangements will work in practice

Sound governance arrangements need to be quickly established 54. Good governance is vital to ensure that public bodies perform effectively. This can be a particular challenge in partnerships, with board members drawn from a wide range of backgrounds. Previous audit reports on community planning partnerships (CPPs) and CHPs have highlighted the importance of issues such as:

• a shared leadership, which takes account of different organisational cultures

• a clear vision of what the partnership wants to achieve, with a focus on outcomes for service users

• a shared understanding of roles and responsibilities, with a focus on decision-making

• an effective system for scrutinising performance and holding partners to account.

214 Part 3. Current issues | 27

Members of IJBs need to understand and respect differences in organisational cultures and backgrounds 55. IJBs include representatives from councils, NHS boards, GPs, the voluntary sector, and service users. Everyone involved in establishing the new arrangements needs to understand, respect and take account of differences in organisational cultures so these do not become a barrier to progress. Members of the IJB need quickly to establish a shared understanding of their new role, how they will work together and measure success.

56. Voting members are drawn exclusively from councils and NHS boards and it is particularly important that they have a shared vision and purpose. There are important differences in how councils and NHS boards operate. Councils, for example, are accountable to their local electorate, while NHS boards report to Scottish ministers. There are also differences in how councils and the NHS work with the private sector. Councils have had many years of contracting services out to the voluntary and private sectors; for example, around 25 per cent of home care staff are employed in the private sector.

57. IJBs are aware of the need to establish a common understanding of the roles and responsibilities of board members. We found that many are planning opportunities for board development by providing training and support to board members. Other IJBs are also reinforcing this by developing codes of conduct to ensure that their board members follow the same standards of behaviour.

58. IJBs include representatives from a wide range of organisations and backgrounds. This inclusive approach has benefits, including a more open and inclusive approach to decision making for health and care services, but there is a risk that boards are too large. For example, the Edinburgh IJB will have 23 members and the Clackmannanshire & Stirling IJB will have around 35. As we have highlighted in previous audits of partnerships across Scotland, there is a risk that large boards will find it difficult to reach agreement, make decisions and ensure services improve.

IJB members will have to manage conflicts of interest 59. The design of IJBs brings the potential for real or perceived conflicts of interest for board members. The NHS board and council nominate all voting members of the IJB. Their role is to represent the IJB's interests. Voting members will also continue in their role as an NHS board member or councillor. As a result, there is a risk that they may have a conflict of interest, particularly where there is a disagreement as part of IJB business.23

60. There is a similar potential for a conflict of interest for senior managers. IJB finance officers, for example, are required to support the needs of the IJB, but may also have responsibilities to support their employer – either the local NHS board or council. Similarly, legal advisers to the IJB will be employed by the council or the NHS board and, at a time of disagreement, may have a conflict of interest.

61. There is also a particular issue for NHS board members. Some NHS boards have to deal with several IJBs, and this places significant demands on their limited number of non-executive members. As a result, the Act and its associated regulations allow for NHS executive members to be appointed as voting members of the IJB. This means that there is the possibility of individuals acting as IJB board members who commission a service, and as NHS board members, responsible for providing that service. IJBs need to resolve this tension as part of their local governance arrangements.

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62. IJBs are taking action to manage these tensions. For example, they are providing training to alert board members to the need to act in the IJB’s interests when taking part in IJB meetings, and declaring conflicts of interest when they arise. But underlying conflicts of interest are likely to remain a risk, particularly at times of disagreement between local partners.

Although IJBs will lead the planning of integrated services, they are not independent of councils and NHS boards 63. IJBs set out how they will deliver services in their strategic plans, which they develop through strategic planning groups. The legislation allows NHS boards and councils jointly to ask IJBs to change their strategic plans only if they think it hinders their work in achieving the national health and wellbeing outcomes. As such, NHS boards and councils cannot individually veto an IJB decision. However IJBs are not fully independent of NHS boards and councils which can influence them through the following:

• Membership of IJBs: Chairs, vice chairs and voting members are all nominated by NHS boards and councils.

• The approval process to agree future budgets: Guidance issued by the Scottish Government’s Integrated Resources Advisory Group (IRAG) suggests that, for future years, each IJB develops a business case and budget request and submits this to the NHS board and council to consider.

• Control of integration schemes: NHS boards and councils can decide to resubmit their integration schemes, changing the terms under which the IJB operates, or replacing it with a lead agency approach.

64. IJBs may overcome the challenges of working with a large board, with different organisational cultures and tensions, but once difficult decisions have been made there are still complex relationships back to the NHS board and council to negotiate. As a result, it is not clear if IJBs will be able to exert the necessary independence and authority to change fundamentally the way local services are provided.

Only a few IJBs will oversee the operation of acute services in their area, potentially limiting their impact 65. Regulations allow NHS boards and councils to choose what role IJBs will have in relation to operational management of services, in addition to commissioning and planning services. This flexibility allows, for example, NHS boards to remain solely responsible overseeing the operation of large hospital sites. The alternative is a more complex arrangement where responsibility for overseeing the operation of an A&E department is shared across several IJBs. Where the IJB has no operational management of hospital services, the IJB will receive regular performance reports from the NHS board on hospital services, so the IJB can assess whether the NHS board is delivering services in line with the IJB strategic plan. From the 17 schemes we reviewed that establish IJBs, we found the following:

• All 17 IJBs oversee the operation of non-acute integrated services, such as district nursing.

• To date, only Argyll and Bute, and Dumfries and Galloway IJBs will oversee the operation of the acute hospital integrated services in their areas, and

216 Part 3. Current issues | 29

the chief officer will operationally manage these services. In Argyll and Bute, this continues an arrangement that existed previously and arises because the NHS board contracts most acute services from NHS Greater Glasgow and Clyde. Argyll and Bute CHP received information from the NHS board as part of the contract monitoring process. The IJB and NHS Greater Glasgow and Clyde are in the process of agreeing the information the chief officer and IJB board members will receive on the operational performance and delivery of these services.

• In Dumfries and Galloway, the IJB will oversee the operation of all integrated services, including all acute hospital services. The chief officer will be responsible for managing the operation of these integrated services, receiving regular information from the council Chief Social Work Officer and the NHS board acute services management team. The geographical circumstances in Dumfries and Galloway help to make this arrangement possible, as there is only one IA in the NHS board area, with only one acute hospital.

There needs to be a clear understanding of who is accountable for service delivery 66. There is a risk that the complex interrelationship between IJBs and councils and NHS boards will get in the way of clear lines of accountability. Their respective roles appear to be clear: IJBs are responsible for planning and commissioning services; councils and NHS boards are responsible for delivering those services.

67. But this understanding of accountabilities could be tested when there is a service failure, either in the care of an individual or in meeting outcome targets. The consensus amongst those we spoke with during our audit is that responsibility would lie with the council or NHS board delivering the service. But it could also be argued that ultimate responsibility might lie with IJBs, which plan and direct councils and NHS boards in how services are to be delivered. All parties need to recognise this risk and set out clearly an agreed understanding of each other’s roles and responsibilities. It is essential that the chief officer is clear about how this joint accountability will work in practice from the start.

68. Clear procedures also need to be in place for clinical and care governance. These are procedures for maintaining and improving the quality of services and safeguarding high standards of care. NHS boards use long-established clinical governance approaches within the NHS. Similarly, councils follow well-established approaches for social care. IJBs have a great deal of flexibility over this issue and are required only to consider what role they will have in supporting the councils’ and NHS boards’ clinical and care governance work and how integration might change some aspects of this.

69. The Act introduced a requirement that IJBs set out in their integration scheme how they will work with NHS boards and councils to develop an integrated approach to clinical and care governance. We found that, at present, most IJBs plan to retain existing arrangements, with NHS boards directly overseeing clinical governance and councils overseeing care governance. However, IJBs will need to have a role in monitoring clinical and care standards without duplicating existing arrangements. Perth and Kinross IJB has developed a new clinical and care governance framework that other IJBs are now considering. In addition, the Royal College of Nursing has developed an approach that helps IJBs, councils and NHS

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boards review their clinical and care governance arrangements. The aim is to ensure consistent approaches within each integrated service, and that these are aligned to existing clinical and care governance arrangements in the NHS and councils.24

IAs need to establish effective scrutiny arrangements to help them manage performance 70. IAs need to establish effective arrangements for scrutinising performance, monitoring progress towards their strategic objectives, and holding partners to account. Using the nine statutory outcome measures, listed at Exhibit 6, will help IAs to focus on the impact of health and care services. But as well as simply monitoring performance, IJB members will need to use these to help redesign services and ensure services become more effective.

71. There is also a need for regular reporting to partner organisations. This is particularly important where most members of the local council or NHS board are not directly involved in the IJB’s work. Aberdeenshire Council, for example, has 68 councillors, with only five sitting on the IJB. Those not directly involved need to be kept informed on how the budgets provided to the IJB have been used and their effectiveness in improving outcomes for local people.

Councils and NHS boards are finding it difficult to agree budgets for the new integration authorities

72. At this stage, IAs are establishing financial procedures that look to be sound. While there is a range of approaches to financial monitoring and dealing with overspends and underspends, the processes outlined in the integration schemes are reasonable.

73. There are, however, significant concerns about funding. Councils and NHS boards are having great difficulty in agreeing budgets for the new IAs. At October 2015, six months before they were required to be established and commissioning health and care services, the Scottish Government had only been informed of the agreed budgets for six IAs. This uncertainty about budgets is likely to continue until early 2016. The results of the UK spending review were not announced until November 2015, and the Scottish Government will only publish its financial plans on 16 December 2015.

74. NHS boards and councils have faced several years of financial constraints and this is expected to continue in the coming years. There is a risk that, if NHS boards and councils seek to protect services that remain fully under their control, IAs may face a disproportionate reduction in their funding, despite the focus on outcomes that all partners should have. We have reported previously on increasing pressures on health and care budgets. This risk of budget overspends is a significant risk for IJBs. Other specific factors add to these difficulties in agreeing budgets:

• Set-aside budgets: These relate to the budgets retained by NHS boards for larger hospital sites that provide both integrated and non-integrated services. There are difficulties in agreeing these set-aside budgets, despite the Scottish Government issuing specific guidance. The current difficulties relate to how to determine the integrated and non-integrated costs for these hospitals and how to allocate a fair share to each IJB within the NHS board area. More fundamentally, however, there is a risk that NHS

218 Part 3. Current issues | 31

boards may regard this funding as continuing to be under their control, making it difficult for IAs to use the money to shift from acute hospital care to community-based and preventative services. As a result of these uncertainties, not all of the strategic plans published so far consider the set- aside budgets or plan for the level of acute services that will be needed in future years.

• Different planning cycles: NHS boards and councils agree budgets at different times. In North Ayrshire, for example, the council agreed its 2015/16 budget in December 2014, while the NHS agreed its budget in March 2015. NHS budgets and allocations can change during the financial year. This could bring further challenges for IJBs. Similar budget-setting cycles exist across Scotland. If councils and NHS boards continue with these cycles, then IJBs will be involved in protracted negotiations for budgets and ultimately cannot expect partners to approve their plans until just before the start of each financial year. In response, NHS Forth Valley has adapted its budgeting process to allow it to provide an earlier indication of the integrated health budget to its local IAs. In addition, as part of the community planning process, there is an expectation that community planning partners will share information on resource planning and budgets at an early stage, before formal agreement.25 This should help IAs' financial planning.

Integration authorities need to make urgent progress in setting out clear strategic plans

Most IAs are still developing their overall strategic plans, but those that are in place tend to be aspirational and lack important detail 75. Strategic planning is central to the role that IAs will have in commissioning and helping redesign local health and care services. Scottish Government guidance emphasises the importance of localities in this process, and of strategic plans to reflect the different priorities and needs of local areas.

76. At the time of our audit, only six IAs had published their strategic plans. Some, such as Aberdeen City, Aberdeenshire and Moray, have developed draft plans in advance of the formal approval of the integration schemes. Difficulties with reaching agreement on budgets are an important factor hindering IAs from developing comprehensive strategic plans. This raises concerns about the readiness of IAs to make an immediate impact in reshaping local services. Our audit involved speaking to people involved with strategic planning, including IJB board members. Many of them felt it would be at least another year before most IAs have established plans that are genuinely strategic and can redesign future service delivery rather than simply reflect existing arrangements.

77. Even where strategic plans are in place, there tend to be weaknesses in their scope and quality. They often set out the broad direction of how to provide integrated health and social care services in their areas over the next three or so years, identifying local priorities for their area and for localities. But they can be unclear about what money and staff are available, particularly over the longer term, or how to match these to priorities. They lack detail on what level of acute services is needed in an area and how they will shift resources towards preventative and community-based care. They generally lack performance measures that directly relate to the national outcomes.

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78. Strategic planning is even less developed at the locality level. There is a risk that strategic planning is not joined up with locality planning. Some IAs have completed strategic needs assessments, helping to identify the different needs and priorities of individual localities. They are using these to develop local priorities and budgets. There are also significant challenges in involving a wide range of service users, voluntary organisations, GPs and other clinicians and other professional staff in the planning process. These groups are represented at IJB board level, as non-voting members. But involving these groups more widely and actively at locality level is crucial to providing community-based and preventative health and social care services.

Most IAs have still to produce supporting strategies 79. In addition to their overall strategic plans, IAs need to establish supporting strategies for important areas such as workforce, risk management, data sharing, and how they will work with people who use health and social care services. They are required to set out a broad timetable for producing these in their integration schemes.

80. We analysed the timetables in the approved integration schemes available at the time of our audit. This reveals some significant variations (Exhibit 9, page 33). Some risk management and workforce strategies have been developed and are scheduled to be agreed well in advance of the IA becoming operational. In others, however, it will be up to 12 months after the IA becomes operational before these strategies are due to be agreed and can start to contribute to progress with integrating services.

81. This raises questions about the effectiveness of some IAs, at least in the first year of their operation. It is important that IA strategies are well thought through, built on an analysis of local needs and resources and meaningful consultation, clearly setting out how the IA will deliver against the aspirations of the Act. We did not look in detail at the strategies produced at this early stage. But there is a risk that strategies produced quickly lack the detail needed to show how IAs will take practical steps that:

• improve outcomes

• integrate services

• make best use of the funds, skills and other resources available to them.

Equally, there are risks where the IA will not have plans in place until they have been operational for many months. It is important that IAs have clear strategic priorities and use these in developing:

• a workforce strategy, showing how they will redesign health and care services

• a risk management strategy to demonstrate that they are properly prioritising their work and their resources.

220 Part 3. Current issues | 33

Exhibit 9 Range of timescales for supporting strategies It will be up to a year before some IJBs have established workforce and risk management strategies.

-8 -6 -4 -2 0 2 4 6 8 10 12

Months before becoming operational Months after becoming operational

Workforce strategy Risk management

Source: Audit Scotland analysis of available integration schemes

There is a pressing need for workforce planning to show how an integrated workforce will be developed

82. The health and social care workforce is critical to the success of integration. Health and social care services are personal services; it is important that staff have the skills and resources they need to carry out their roles, including providing emotional and physical support and clinical care.

83. At present, few IAs have developed a long-term workforce strategy. Developing a suitably skilled workforce is crucial to the success of integrated health and social care services. This is particularly challenging, given the wide range of people involved and the size of the workforce. NHS Scotland employs around 160,000 staff.26 Social services employ almost 200,000, both directly employed council staff and others from the private and voluntary sector.27 Furthermore, an estimated 759,000 people in Scotland are carers for family members, friends or neighbours.28 IJBs need to work closely with professional and regulatory bodies in developing their workforce plans.

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84. IJBs do not directly employ staff, but they are responsible for coordinating services from this varied mix of staff and carers. There will be implications for the skills and experience that staff will need to deliver more community-based support as services change. Developing and implementing workforce strategies to meet these needs will be challenging.

85. The following will add to these difficulties:

• Financial pressures on the NHS and councils. NHS boards and councils continue to face pressures from tightening budgets and rising demand for services. Most councils have responded to these pressures in part by reducing staff numbers and outsourcing some services to the private and voluntary sectors. These changes are less evident in the health sector. As a result, there are concerns that any future changes to the workforce will not affect health and care staff equally.

• Difficulties in recruiting and retaining social care staff. Over many years, councils have had difficulties recruiting and retaining care home and home care staff. Organisations in areas such as Edinburgh and Aberdeen, with high living costs, have had particular difficulties. There is a need to develop a valued, stable, skilled and motivated workforce. We found examples of organisations developing new approaches to making careers in caring more attractive. For example in Dumfries and Galloway and Aberdeen City they are considering creating caring roles that are part of a defined career path, to encourage more people into these roles.

• The role of the voluntary and private sectors. Voluntary and private organisations play an important role in providing care and support, but there are particular challenges in how IJBs can involve these diverse organisations as part of a coordinated workforce plan. The introduction of the national living wage will have a significant impact on the voluntary sector and their ability to provide the same level of support for health and care services. We will comment on this further in our audit of Social Work in Scotland.

86. GPs have a particularly important role but there are concerns over GPs having time available to contribute actively towards the success of integrated services. Most GPs are independent contractors, not employed by the NHS. GPs have a crucial role in patient referrals and in liaising with other health and care services. Ultimately, if there are concerns about the quality or availability of community- based services, there is a risk that GPs will refer patients to hospital to ensure they receive the care they need.

87. Throughout Scotland, there are difficulties in recruiting and retaining GPs. As a result, GPs are facing increasing pressures, at a time when a planned shift to community care and support can be expected to increase their workload. The Scottish Government has recognised this issue and has announced £2.5 million to fund a three-year programme to improve recruitment and retention of GPs and improve the number of people training to be GPs. It also has plans to revise GP contracts, to allow GPs to delegate some services to other healthcare professionals, freeing up GPs' time. However, it will be many years before these measures will have a significant impact.

222 Part 3. Current issues | 35

The proposed performance measurement systems will not provide information on some important areas or help identify good practice

88. There is wide support for the Scottish Government’s focus on health and wellbeing outcomes (set out earlier at Exhibit 6). In addition to the nine national outcomes, the Scottish Government developed core integration indicators to measure progress in delivering the national health and wellbeing outcomes and to allow national comparison between partnerships. These 23 measures, listed in Appendix 2, cover a mixture of outcome indicators – based on people’s perception of the service they received – and indicators based on system or organisational information, such as people admitted to hospital in an emergency or adults with intensive care needs receiving care at home.

89. The Scottish Government has provided further support through the Information Services Division (ISD) of NHS National Services Scotland. It provided access to local data and technical support to help partnerships understand and plan for their areas’ health and social care needs. The ISD data brings together health, social care and demographic information for the first time and is a significant step forward in providing partnerships with the information they need to plan locally and to measure the impact of their activity. Much of the data is already available for partnerships to use, and ISD plans to develop the data further including analysing the cost of end-of-life care.

90. Some IAs have been unable to make use of this resource as data-sharing agreements are not yet in place. ISD has access to health data but requires permission from councils to access the social work data they hold for their areas. Before councils can grant access they need to ensure they are not breaching data protection legislation and are doing this by agreeing data-sharing procedures. Most councils and NHS boards are making progress with this, but where information sharing has not been agreed IAs are having to plan without it.

91. National care standards were created in 2002 to help people understand what to expect from care services and to help services understand the standard of care they should deliver. Given the way that services have changed since then, in June 2014, the Scottish Government issued a consultation on new national care standards. The consultation proposed developing overarching standards, based on human rights, setting out the core elements of quality that should apply across all health and social care services.

92. The standards are an important part of integrating and scrutinising health and care services and it is important that they are in place quickly and publicised widely. However, overarching principles will not be finalised until April 2016; this will be followed by a consultation on specific and generic standards, with a view to them being implemented from April 2017.

93. While all these developments are clearly a step in the right direction, all partners need to consider the following issues:

• The core integration indicators do not fully take account of all the expected benefits of the reform programme. Overall, the Scottish Government’s reform programme is expected to shift the balance of care to community-based or preventative services. However, demographic pressure will create increased demand for both hospital and community-

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based services. It is not clear how the proposed indicators will measure progress in transferring from hospital to community care. There may be central data that the Scottish Government can use to track some of these changes but these should be set out clearly as part of measures to publicly monitor and report on progress. It is also unclear how the Scottish Government will track expected savings. An example is the expected annual savings of £104 million from reducing some of the variation evident in the cost of providing health and social care services across different parts of Scotland.29 The core set of integration indicators does not attempt to give a national measure of reductions in cost variation or the savings that arise from this. Anticipatory care plans are projected to yield savings of £12 million a year, but there are no proposed indicators to assess if IAs are using them, or what impact they have on releasing resources such as skills and equipment.30 This means the Scottish Government will not know if integration has freed up resources for other uses, in line with its expectations, or if it has achieved a shift from institutional to community- based care.

• The process of linking measures and outcomes is incomplete and it may be difficult to measure success. This means that the Scottish Government will be unable to see what progress is being made nationally, or to compare the different approaches adopted by IAs to identify which are most effective. For example, one of the measures seen as indicating success is ‘reducing the rate of emergency admission to hospitals for adults’. (A reduction in this is seen as evidence of a positive impact on outcomes 1, 2, 4, 5 and 7, as listed at Exhibit 6.) But hospital emergency admission rates can reduce for many reasons. At present, it is up to individual partnerships to decide which additional local measures they will adopt to explore why hospital emergency admission rates are changing.

Councils and NHS boards are required to set out in their strategic plans which local measures they will use. We compared plans for North Lanarkshire and North Ayrshire IAs, both relatively advanced in their performance management arrangements at the time of our audit. We found the following: –– They will use different measures from each other. This has the benefit of allowing IAs to focus on their local priorities. However, it will make it difficult for the Scottish Government to compare performance across IAs to identify what approaches are working best (Exhibit 10, page 37). –– In various places, both IAs have associated a different mix of indicators to an outcome from that set out in Scottish Government guidance. This occurs more frequently in North Ayrshire which developed its plans before the Scottish Government published its approach. But North Lanarkshire also has taken a different view on which indicators it will use to measure progress on some of the national outcomes, making it difficult for the Scottish Government to measure progress at a national level. –– We have provided a more detailed comparison of the approaches used by North Lanarkshire and North Ayrshire IAs in a supplement to assist other IJBs when developing their plans (Exhibit 10, page 37).

224 Part 3. Current issues | 37

Exhibit 10 Integration authorities can use different information to measure progress towards national outcomes

National Outcome Core integration indicator Number of additional local indicators mapped to national outcome

Mapped Not mapped to national outcome by both North North to national Ayrshire Lanarkshire outcome by both People are able to Percentage of • Premature mortality rate NL 5 19 look after and improve people who say their own health and they are able to wellbeing and live in look after their good health for longer health very well • Emergency admission rate or quite well AL

People who work in None • Percentage of staff who say they would 8 8 health and social care recommend their workplace as a good services feel engaged place to work with the work they do and are supported to continuously improve the information, support, care and treatment they provide Resources are used None • Percentage of adults supported at home NL 10 31 effectively and who agree that their health and care services efficiently in the seemed to be well coordinated provision of health and • Readmission to hospital within 28 days NL social care services

• Proportion of last six months spent at home or NL in community setting

• Falls rate per 1,000 population aged 65+ NL

• Number of days people spend in hospital NL when clinically ready to be discharged per 1,000 population

NL = North Lanarkshire map this to outcome

= North Ayrshire map this to outcome

AL = Neither map this to outcome

Source: Audit Scotland analysis of performance frameworks

225 38 |

• It is important that there is a balance between targeted local measures and national reporting on impact. This has the benefit of providing flexibility so that local partnerships can focus their efforts on priority areas. It is important that local partnerships set ambitious targets. The reforms bring the opportunity to have local outcome measures that local people recognise as responding to specific issues in their community. However, the Scottish Government and IAs need to resolve tensions between introducing better local measures and the need for clarity at national level about the impact that IAs are having. An increasing focus on local measures means it is timely to review whether existing national measures are fit for purpose.

The role of localities still needs to be fully developed

94. Localities are intended to be the key drivers of change, bringing together service users, carers, and health and care professionals to help redesign services. The Act requires IAs to establish at least two localities within their area. Scottish Government guidance, issued in July 2015, suggests that localities should be formed around natural clusters of GP practices. Naturally, the number and size of localities vary. Edinburgh, for example, has established four localities, with an average population of around 120,000. By contrast, Shetland has seven localities, each with an average population of around 4,000. Under the Act, localities need to be involved in both planning services and play a consultative role about service change in their local area. This raises an issue about the scale and size of localities – the optimal scale for locally planning services may not be the same as that for consulting on service change.

95. With IAs still focusing on their overall budgets and governance arrangements, the arrangements for localities are relatively underdeveloped. Some have now agreed priorities and budgets for individual localities, but in most cases, work at locality level has initially focused on networking with stakeholders and on needs assessments. Localities are key to the success of integration, therefore IJBs must focus on how localities will lead the integration of health and care.

96. We found that GPs are becoming involved in locality planning. But, in many areas, there are concerns about their ability to remain fully involved in locality planning. Some GPs are also sceptical, given earlier experiences with LHCCs and CHPs, which failed to provide a fundamental shift towards preventative and community-based services. In response, the Scottish Government is piloting a new approach in ten health centres across the country. These centres will form ‘community care teams’ and test different ways of delivering healthcare. It is important that there is a clear link between the work of these teams and locality planning arrangements to avoid confusion.

There will be a continuing need to share good practice and to assess the impact of integration

97. The 31 IAs are putting different arrangements in place to deliver integrated health and social care services. This high level of variation is permitted by the Act and, in allowing IAs to respond to their local context and priorities, has many advantages. However, at some point, the Scottish Government and individual IAs will need to review their initial arrangements and consider how these might evolve to reflect good practice in other parts of Scotland. We hope that this report, and our subsequent audits, will contribute towards this wider review.

226 Part 4. Recommendations | 39

Part 4 Recommendations

We have made recommendations to help organisations address potential risks to the success of health and social care integration. We will monitor progress as part of our future work on integration.

The Scottish Government should: • work with IAs to help them develop performance monitoring to ensure that they can clearly demonstrate the impact they make as they develop integrated services. As part of this: –– work with IAs to resolve tensions between the need for national and local reporting on outcomes so that it is clear what impact the new integration arrangements are having on outcomes and on the wider health and social care system • monitor and publicly report on national progress on the impact of integration. This includes: –– measuring progress in moving care from institutional to community settings, reducing local variation in costs and using anticipatory care plans –– reporting on how resources are being used to improve outcomes and how this has changed over time –– reporting on expected costs and savings resulting from integration • continue to provide support to IAs as they become fully operational, including leadership development and sharing good practice, including sharing the lessons learned from the pilots of GP clusters.

Integration authorities should: • provide clear and strategic leadership to take forward the integration agenda; this includes: –– developing and communicating the purpose and vision of the IJB and its intended impact on local people –– having high standards of conduct and effective governance, and establishing a culture of openness, support and respect

• set out clearly how governance arrangements will work in practice, particularly when disagreements arise, to minimise the risk of confusing lines of accountability, potential conflicts of interests and any lack of clarity about who is ultimately responsible for the quality of care and scrutiny.

227 40 |

This includes: –– setting out a clear statement of the respective roles and responsibilities of the IJB (including individual members), NHS board and council, and the IJB's approach towards putting this into practice –– ensuring that IJB members receive training and development to prepare them for their role, including managing conflicts of interest, understanding the organisational cultures of the NHS and councils and the roles of non-voting members of the IJB • ensure that a constructive working relationship exists between IJB members and the chief officer and finance officer and the public. This includes: –– setting out a schedule of matters reserved for collective decision- making by the IJB, taking account of relevant legislation and ensuring that this is monitored and updated when required. –– ensuring relationships between the IJB, its partners and the public are clear so each knows what to expect of the other

• be rigorous and transparent about how decisions are taken and listening and acting on the outcome of constructive scrutiny, including: –– developing and maintaining open and effective mechanisms for documenting evidence for decisions –– putting in place arrangements to safeguard members and employees against conflict of interest and put in place processes to ensure that they continue to operate in practice –– developing and maintaining an effective audit committee –– ensuring that effective, transparent and accessible arrangements are in place for dealing with complaints –– ensuring that an effective risk management system in in place

• develop strategic plans that do more than set out the local context for the reforms; this includes: –– how the IJB will contribute to delivering high-quality care in different ways that better meet people’s needs and improves outcomes –– setting out clearly what resources are required, what impact the IJB wants to achieve, and how the IA will monitor and publicly report their progress –– developing strategies covering the workforce, risk management, engagement with service users and data sharing, based on overall strategic priorities to allow the IA to operate successfully in line with the principles set out in the Act and ensure these strategies fit with those in the NHS and councils –– making clear links between the work of the IA and the Community Empowerment (Scotland) Act and Children and Young People (Scotland) Act

228 Part 4. Recommendations | 41

• develop financial plans that clearly show how IAs will use resources such as money and staff to provide more community-based and preventative services. This includes: –– developing financial plans for each locality, showing how resources will be matched to local priorities –– ensuring that the IJB makes the best use of resources, agreeing how Best Value will be measured and making sure that the IJB has the information needed to review value for money and performance effectively

• shift resources, including the workforce, towards a more preventative and community-based approach; it is important that the IA also has plans that set out how, in practical terms, they will achieve this shift over time.

Integration authorities should work with councils and NHS boards to: • recognise and address the practical risks associated with the complex accountability arrangements by developing protocols to ensure that the chair of the IJB, the chief officer and the chief executives of the NHS board and council negotiate their roles in relation to the IJB early on in the relationship and that a shared understanding of the roles and objectives is maintained

• review clinical and care governance arrangements to ensure a consistent approach for each integrated service and that they are aligned to existing clinical and care governance arrangements in the NHS and councils

• urgently agree budgets for the IA; this is important both for their first year and for the next few years to provide IAs with the continuity and certainty they need to develop strategic plans; this includes aligning budget-setting arrangements between partners

• establish effective scrutiny arrangements to ensure that councillors and NHS non-executives, who are not members of the IJB board, are kept fully informed of the impact of integration for people who use local health and care services

• put in place data-sharing agreements to allow them to access the new data provided by ISD Scotland.

229 42 |

Endnotes

 1 This included reviewing 18 approved integration schemes, 17 of which were for integration joint boards following the body corporate model and one of which was for Highland’s lead agency model.  2 Clackmannanshire and Stirling, Dumfries and Galloway, East Renfrewshire, Edinburgh City, North Ayrshire and North Lanarkshire.

 3 Review of Community Health Partnerships [PDF] , Audit Scotland, June 2011.

 4 Reshaping care for older people [PDF] , Audit Scotland, February 2014.

 5 Maximising Recovery, Promoting Independence: An Intermediate Care Framework for Scotland, Scottish Government, 2012.

 6 Scotland Performs, Scottish Government, 2015.

 7 Projected Population of Scotland (2014-based), National Records Scotland, 2015.

 8 Finance Committee. 2nd Report, 2013 (Session 4): Demographic change and an ageing population. Scottish Parliament, 11 February 2013.  9 Bed days occupied by delayed discharge patients, ISD Scotland, May 2015.

 10 Review of Community Health Partnerships [PDF] , Audit Scotland, 2011.

 11 After approval of its integration scheme, an IJB is established by parliamentary order. An IJB is operational when it has delegated responsibility from the NHS board and council for integrated budgets and services.  12 The lead agency is between Highland Council and NHS Highland. NHS Highland also has an IJB with Argyll and Bute Council.

 13 Where the IJB spans across more than one council area, the minimum number of voting members is different. For IJBs of two council areas, at least two councillors from each council are required. For IJBs of more than two areas at least one councillor from each council is required. In both cases, the NHS board must nominate board members equal to the total number of councillors.  14 As IJBs have no plans to directly employ staff in this early stage of development, we are not commenting on related potential risks and issues. We are likely to return to this issue in more detail in future reports on integration.  15 Self-directed support [PDF] , Audit Scotland, June 2014  16 The Joint Improvement Team is a partnership between the Scottish Government, NHSScotland, COSLA (Convention of Scottish Local Authorities) and the voluntary, independent and housing sectors.  17 East Dunbartonshire, Shetland and West Dunbartonshire.

 18 Some areas, have a chief officer designate. This happens where, although recruitment for a chief officer is complete, until the IJB is established it cannot formally appoint the chief officer.  19 Falkirk currently has an interim chief officer in post and expects to make a permanent appointment to this role by the end of the year.  20 Public Bodies (Joint Working) (Scotland) Bill, Financial Memorandum, 2013.  21 Ibid.  22 Review of Community Health Partnerships [PDF] , Audit Scotland, June 2011.

 23 We explore these tensions more fully in our report Arm’s-length external organisations (ALEOs): are you getting it right? [PDF] , Audit Scotland, June 2011.  24 RCN briefing 2: Clinical and care governance in an integrated world, May 2015, Royal College of Nursing.  25 Agreement on joint working on community planning and resourcing, Scottish Government and COSLA, September 2013.

230 Endnotes | 43

 26 NHS Scotland Workforce Information Quarterly update of Staff in Post, Vacancies and Turnover at 30 June 2015, ISD Scotland, 2015. This figure refers to all staff in NHS Scotland, not just those working in integrated services.

 27 Scottish Social Service Sector: Report on 2014 Workforce Data, Scottish Social Services Council, 2015.

 28 Scotland’s Carers, Scottish Government, March 2015.

 29 Public Bodies (Joint Working) (Scotland) Bill, Financial Memorandum, 2013.

 30 Ibid.

231 44 |

Appendix 1 Audit methodology

We reviewed a range of documents during our audit. Where available, this included:

• the Act and national guidance and regulations on implementing the Act • 18 approved integration schemes1 • strategic and related financial plans • minutes, papers and agendas for IJB meetings • internal audit reports and local reports on integration arrangements • financial audit information • joint inspection reports from the Care Inspectorate and Healthcare Improvement Scotland.

We interviewed stakeholders in the following IA areas:

• Clackmannanshire and Stirling • Dumfries and Galloway • East Renfrewshire • Edinburgh City • North Ayrshire • North Lanarkshire.

We drew on the work already carried out by:

• the Care Inspectorate • Healthcare Improvement Scotland • local auditors.

We also interviewed staff from:

• the Scottish Government • the Joint Improvement Team • the British Medical Association • the Convention of Scottish Local Authorities • NHS Information Services Division • the Care Inspectorate • Healthcare Improvement Scotland • the voluntary sector.

Note: 1. We reviewed 17 integrations schemes establishing IJBs for Argyll & Bute, East Ayrshire, East Dunbartonshire, East Lothian, East Renfrewshire, City of Edinburgh, Eilean Siar, Inverclyde, Midlothian, North Ayrshire, North Lanarkshire, Renfrewshire, Shetland Isles, South Ayrshire, South Lanarkshire, West Dunbartonshire and West Lothian, and Highland's integration scheme setting out its lead agency232 approach. Appendix 2. Scottish Government core integration indicators | 45

Appendix 2 Scottish Government core integration indicators

Outcome indicators, based on survey feedback, available every two years, include:

• Percentage of adults able to look after their health very well or quite well. • Percentage of adults supported at home who agree that they are supported to live as independently as possible. • Percentage of adults supported at home who agree that they had a say in how their help, care or support was provided. • Percentage of adults supported at home who agree that their health and care services seemed to be well coordinated. • Percentage of adults receiving any care or support who rate it as excellent or good. • Percentage of people with positive experience of care at their GP practice. • Percentage of adults supported at home who agree that their services and support had an impact in improving or maintaining their quality of life. • Percentage of carers who feel supported to continue in their caring role. • Percentage of adults supported at home who agree they felt safe. • Percentage of staff who say they would recommend their workplace as a good place to work.*

Outcome indicators derived from organisational/system data, primarily collected for other reasons, available annually or more often, include:

• Premature mortality rate. • Rate of emergency admissions for adults.* • Rate of emergency bed days for adults.* • Readmissions to hospital within 28 days of discharge.* • Proportion of last six months of life spent at home or in community setting. • Falls rate per 1,000 population in over 65s.* • Proportion of care services graded ‘good’ or better in Care Inspectorate Inspections. • Percentage of adults with intensive needs receiving care at home. • Number of days people spend in hospital when they are ready to be discharged. • Percentage of total health and care spend on hospital stays where the patient was admitted in an emergency. • Percentage of people admitted from home to hospital during the year, who are discharged to a care home.* • Percentage of people who are discharged from hospital within 72 hours of being ready.* • Expenditure on end-of-life care.*

* Indicates indicator is under development.

233 Health and social care integration

This report is available in PDF and RTF formats, along with a podcast summary at: www.audit-scotland.gov.uk

If you require this publication in an alternative format and/or language, please contact us to discuss your needs: 0131 625 1500 or [email protected]

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Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN T: 0131 625 1500 E: [email protected] www.audit-scotland.gov.uk

ISBN 978 1 909705 76 0 AGS/2015/10

This publication is printed on 100% recycled, uncoated paper 234 Appendix 2

AUDIT SCOTLAND RECOMMENDATIONS FOR INTEGRATION AUTHORITIES

Audit Scotland recommends that NAIJB Current Position NAIJB Planned Actions Integration Authorities should: Provide clear and strategic leadership IJB established since April 2015, with Chief Officer and No further action required. to take forward the integration agenda. Shadow Integration Board in place for preceding year. Representation from Council, NHS and third and independent sectors. The IJB meets monthly to ensure that the integration agenda is being met. Set out clearly how governance High-level governance framework approved by the IJB in Finalise and approve remaining arrangements will work in practice. June 2015. elements of the governance framework, including Clinical and Care Governance arrangements, Risk Strategy and Complaints Strategy. Ensure that a constructive working This is in place. Code of Conduct for IJB Members was No further action required. relationship exists between IJB approved in April 2015. members, the Chief Officer, Chief Finance Officer and the public. Be rigorous and transparent about Performance and Audit Committee established during how decisions are taken and listening 2015/16. This Committee provides the scrutiny role for the and acting on the outcome of IJB. constructive scrutiny. Develop strategic plans that do more Strategic Plan agreed for 2015/16 and plans in place to Refresh Strategic Plan and establish than set out the local context for the establish locality planning forums. Locality Planning Forums by summer reforms. 2016. Develop financial plans that clearly Financial Plans in place for 2015/16 and under Finalise financial plans for 2016/17 and show how they will use resources such development for 2016/17. beyond. as money and staff to provide more community-based and preventative services.

235 Audit Scotland recommends that NAIJB Current Position NAIJB Planned Actions Integration Authorities should: Shift resources, including the Outlined in Strategic Plan. Shared management structure Refresh Strategic Plan and establish workforce, towards a more in place between NHS Ayrshire and Arran and North Locality Planning Forums by summer preventative and community-based Ayrshire Council. 2016. approach. A Change Programme Board has been set up comprised of officers, IJB members, service users and service providers. This Board is overseeing the projects designed to deliver effective shift in service delivery models and resources. Recognise and address the practical High-level governance framework approved by the IJB in Finalise and approve remaining risks associated with the complex June 2015. elements of the governance framework accountability arrangements. by NAIJB. Review clinical and care governance Draft clinical and care governance arrangements outlined. Finalise and approve clinical and care arrangements to ensure a consistent governance arrangements by June approach. 2016. Agree budgets, both for the first year Budgets agreed for 2015/16 to 2017/18 in April 2015 as Finalise budget for 2016/17 by end June and for the next few years to provide part of the Strategic Plan. Revised budget for 2016/17 in 2016 once NHSAAA budget is agreed. continuity and certainty. progress due to funding changes since the original three There are difficulties in agreeing budgets year budget was developed. for future years as no longer-term settlement information has been provided by the Scottish Government. Establish effective scrutiny The Strategic Planning Group has a wide range of Continue to develop performance arrangements to ensure that membership both from within and outwith the Partnership. reporting arrangements to the IJB, councillors and NHS non-executives As part of its work this Group receives regular feedback on Performance and Audit Committee as are kept fully informed of the impact of the impacts of integration for local people. well as NHS Ayrshire and Arran and integration for local people. North Ayrshire Council. In addition, a robust performance management reporting process has been developed. Reports are considered by managers and the Performance and Audit Committee to ensure that integration and performance KPIs are being met. Put in place data-sharing agreements An information sharing protocol is in place. Further work required with Partners on to allow access to new data provided this. by ISD Scotland.

236 NORTH AYRSHIRE COUNCIL

Agenda Item 13 23 May 2016

Audit Committee

Title: External Audit Plan 2015/16

Purpose: To inform the Audit Committee of the External Audit plan for 2015/16.

Recommendation: That the Committee notes the External Audit plan.

1. Executive Summary

1.1 External Audit activity is focused on the identification and assessment of the risk of material misstatement in the Council's financial statements. The Audit Plan attached at Appendix 1 summarises Audit Scotland's assessment of the key risks and challenges facing the Council and sets out the audit work they propose to undertake in respect of the 2015/16 financial year, which is the final year of Audit Scotland's five year audit appointment.

1.2 A full audit is also required of all registered charities where the Council is the sole trustee. North Ayrshire Council has 12 trusts having charitable status. Audit Scotland will perform the audit of these charitable trusts in parallel with the audit of the Council's financial statements.

1.3 In addition to auditing the financial statements, Audit Scotland will also provide a view on the Council's performance and use of resources.

2. Background

2.1 In carrying out its audit of the year 2015/16, the work of Audit Scotland will include:

 an audit of the financial statements and an opinion on whether they present a true and fair view and have been prepared in accordance with relevant legislation and codes of practice;  reporting the findings of the shared risk assessment process in Local Scrutiny (this is elsewhere on the agenda for this meeting);  a review and assessment of the Council's governance and performance arrangements in a number of key areas;  provision of an opinion on a range of grant claims and returns, including Whole of Government Accounts;

237  reporting of National Fraud Initiative (NFI) arrangements and results, and;  collection of relevant financial and performance information to inform Audit Scotland's national reports.

2.2 Auditing standards require internal and external auditors to work closely together to make optimal use of available audit resources. Audit Scotland has undertaken an assessment of the council's Internal Audit function, which is reported elsewhere on the agenda. Based on the review, formal reliance in respect of the financial statements will be placed on the work of Internal Audit on Treasury Management and aspects of the Payroll system. For governance and performance work, Audit Scotland will also place reliance on Internal Audit work on revenue budget monitoring, performance indicators, workforce planning, IT disaster recovery and business continuity and the National Fraud Initiative (NFI).

3. Proposals

3.1 It is proposed that the Audit Committee notes the audit plan attached at Appendix 1.

4. Implications

Financial: The Audit Scotland fee for the 2015/16 audit of North Ayrshire Council is £301,830, which represents a reduction of £2,000 from 2014/15 (£303,830). In addition, there is an audit fee of £3,600 for the audit of the 12 charitable trusts referred to in 1.2 above (unchanged from 2014/15). In compiling the 2015/16 fee, Audit Scotland has taken account of the Council's risk exposure, the planned management assurances in place and the level of reliance they plan to take from Internal Audit. Financial provision has been made for this sum in the Council's approved 2016/17 revenue budget. The areas covered by the fee are outlined at paragraph 51 of the attached Audit Plan. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The work of External Audit helps to support the efficient delivery of the strategic priorities within the Council Plan 2015-2020.

238 Community Benefits: None.

5. Consultation

5.1 No consultations have been required in the preparation of this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

239 240 Appendix 1

North Ayrshire Council

Annual Audit Plan 2015/16

Prepared for Members of North Ayrshire Council

March 2016

241

Key contacts Contents Fiona Mitchell-Knight, Assistant Director [email protected] Summary ...... 3 Paul Craig, Senior Audit Manager Responsibilities ...... 5 [email protected] Audit Approach ...... 6

Sandra Boyd, Senior Auditor Audit issues and risks ...... 10 [email protected] Fees and resources ...... 13 Audit Scotland Appendix 1: Planned audit outputs ...... 15 4th floor (South Suite) 8 Nelson Mandela Place Appendix 2: Significant audit risks ...... 16

Glasgow G2 1BT Telephone: 0131 625 1500 Website: www.audit-scotland.gov.uk

The Accounts Commission is a statutory body which appoints external auditors to Scottish local government bodies (www.audit-scotland.gov.uk/about/ac/). Audit Scotland is a statutory body which provides audit services to the Accounts Commission and the Auditor General (www.audit-scotland.gov.uk/about/).

The Accounts Commission has appointed Fiona Mitchell-Knight as the external auditor of North Ayrshire Council for the period 2011/12 to 2015/16.

This report has been prepared for the use of North Ayrshire Council and no responsibility to any member or officer in their individual capacity or any third party is accepted.

The information in this report may be used for the Accounts Commission’s annual overview report on local authority audits published on its website and presented to the Local Government and Regeneration Committee of the Scottish Parliament.

North Ayrshire Council Page 2 242 Summary

council's charitable trusts in parallel with the audit of the council's Summary financial statements.

Introduction Summary of planned audit activity

1. This is the final year of our five year audit appointment. Our audit is 4. Our planned work in 2015/16 includes: focused on the identification and assessment of the risks of material  an audit of the financial statements and provision of an opinion misstatement in North Ayrshire Council's financial statements. on whether:

2. This report summarises the key challenges and risks facing North  they give a true and fair view of the state of affairs of North Ayrshire Council and sets out the audit work that we propose to Ayrshire Council and its group as at 31 March 2016 and its undertake in 2015/16. Our plan reflects: income and expenditure for the year then ended  the risks and priorities facing North Ayrshire Council  the accounts have been properly prepared in accordance with the Local Government (Scotland) Act 1973 and the  current national risks that are relevant to local circumstances 2015/16 Code of Practice on Local Authority Accounting in  the impact of changing international auditing and accounting the United Kingdom (the Code) standards  reporting the findings of the shared risk assessment process in  our responsibilities under the Code of Audit Practice as a Local Scrutiny Plan. This will summarise identified scrutiny approved by the Auditor General for Scotland risks and/or any changes to the Local Area Network’s (LAN’s)  issues brought forward from previous audit reports. assessment since last year

3. The Charities Accounts (Scotland) Regulations 2006 specifies the  a review and assessment of North Ayrshire Council's accounting and auditing rules for Scottish registered charities. governance and performance arrangements in a number of key Irrespective of the size of the charity, as a consequence of the areas including: internal controls, adequacy of internal audit interaction of section 106 of the Local Government (Scotland) Act and the management of Arm’s Length External Organisations 1973 with the regulations, a full audit is required of all registered (ALEOs) charities where the local authority is the sole trustee. North Ayrshire  provision of an opinion on a number of grant claims and Council has 12 trusts having charitable status with total assets of returns, including Whole of Government Accounts £0.644 million. Accordingly, we will perform the audit of the  reporting of National Fraud Initiative arrangements and results

North Ayrshire Council Page 3 243 Summary

 collection of relevant financial and performance information to inform Audit Scotland’s national reports.

North Ayrshire Council Page 4 244 Responsibilities

 preparing financial statements which give a true and fair view of Responsibilities the state of affairs of North Ayrshire Council and its group as at 31 March 2016 and its expenditure and income for the year 5. The audit of the financial statements does not relieve management then ended. or the Audit Committee, as the body charged with governance, of their responsibilities. Format of the accounts

Responsibility of the appointed auditor 9. The financial statements should be prepared in accordance with the Code, which constitutes proper accounting practice. 6. Our responsibilities, as independent auditor, are established by the Local Government (Scotland) Act 1973 and the Code of Audit 10. North Ayrshire Council prepares a Whole of Government Accounts Practice, and guided by the auditing profession’s ethical guidance. consolidation pack annually for the Scottish Government. To enable summarisation common accounting principles and standard formats 7. Auditors in the public sector give an independent opinion on the should be used. financial statements. We also review and report on the arrangements set in place by the audited body to ensure the proper conduct of its financial affairs and to manage its performance and use of resources. In doing this, we aim to support improvement and accountability.

Responsibility of the Executive Director (Finance & Corporate Support)

8. It is the responsibility of the Executive Director (Finance & Corporate Support), as the appointed "proper officer", to prepare the financial statements in accordance with relevant legislation and the Code of Practice on Local Authority Accounting in the United Kingdom (the Code). This means:  maintaining proper accounting records

North Ayrshire Council Page 5 245 Audit Approach

to focus audit testing on higher risk areas during the audit of the Audit Approach financial statements. The main areas of assurance for the audit come from planned management action and reliance on systems of Our approach internal control. Planned management action being relied on for 2015/16 includes: 11. Our audit approach is based on an understanding of the  comprehensive closedown procedures for the council and characteristics, responsibilities, principal activities, risks and group financial statements accompanied by a timetable issued governance arrangements of North Ayrshire Council and its group. to all relevant staff We also consider the key audit risks and challenges in the local government sector generally. This approach includes:  clear responsibilities for preparation of financial statements and the provision of supporting working papers  understanding the business of North Ayrshire Council and its group and the risk exposure which could impact on the financial  delivery of unaudited financial statements to agreed timescales statements with a comprehensive working papers package  assessing the key systems of internal control, and considering  completion of the internal audit programme for 2015/16.

how risks in these systems could impact on the financial 13. Auditing standards require internal and external auditors to work statements closely together to make best use of available audit resources.  identifying major transaction streams, balances and areas of Internal audit services are provided by the Internal Audit section of estimation and understanding how North Ayrshire Council will the council. We seek to rely on the work of internal audit wherever include these in the financial statements possible and as part of our planning process we carry out an early  assessing and addressing the risk of material misstatement in assessment of the internal audit function to determine whether it has the financial statements sound documentation standards and reporting procedures in place and complies with the main requirements of the Public Sector  determining the nature, timing and extent of the audit Internal Audit Standards (PSIAS). procedures necessary to provide us with sufficient audit evidence as to whether the financial statements give a true and 14. There is no systems work being done by internal audit on which we fair view. will be placing formal reliance to support our audit opinion on the financial statements. However we will take cognisance of aspects of 12. We have also considered and documented the sources of work planned by Internal Audit within the following areas: assurance which will make best use of our resources and allow us

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 payroll statements, we assess the materiality of uncorrected misstatements  treasury management. both individually and collectively.

15. In respect of our wider governance and performance audit work we 18. Based on our knowledge and understanding of North Ayrshire also plan to review the findings and consider other areas of internal Council we have set our planning materiality at £4.813 million (1% audit work including: of gross expenditure).

 revenue budget monitoring 19. We set a lower level, known as performance materiality, when  statutory performance indicators defining our audit procedures. This is to ensure that uncorrected and undetected audit differences do not exceed our planning  workforce planning materiality. This level depends on professional judgement and is  national fraud initiative informed by a number of factors including:  IT disaster recovery and business continuity.  extent of estimation and judgement within the financial statements Materiality  nature and extent of prior year misstatements 16. Materiality can be defined as the maximum amount by which  extent of audit testing coverage. auditors believe the financial statements could be misstated and still not be expected to affect the decisions of users of financial 20. For 2015/16 performance materiality has been set at £3.610 million. statements. A misstatement or omission, which would not normally We will report, to those charged with governance, all misstatements be regarded as material by amount, may be important for other identified which are greater than £0.050 million. reasons (for example, the failure to achieve a statutory requirement or, an item contrary to law). In the event of such an item arising, its Reporting arrangements

materiality has to be viewed in a narrower context; such matters 21. The Local Authority Accounts (Scotland) Regulations 2014 (the would normally fall to be covered in an explanatory paragraph in the 2014 Regulations) require that the unaudited annual accounts are independent auditor’s report. submitted to the appointed external auditor no later than 30 June

17. We consider materiality and its relationship with audit risk when each year. The authority (or a committee whose remit includes planning the nature, timing and extent of our audit and conducting audit or governance) is required to consider the unaudited annual our audit programme. Specifically with regard to the financial accounts at a meeting by 31 August. The council plan to consider the unaudited accounts on 22 June.

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22. Local authorities must publish the unaudited accounts on their Key stage Date websites and give public notice of the inspection period. Consideration of unaudited financial statements by 22 June 2016 23. The 2014 Regulations require the local authority (or a committee those charged with governance (full council meeting) whose remit includes audit or governance) to meet by 30 Latest submission date of unaudited council financial By 30 June September to consider whether to approve the audited annual statements with complete working papers package 2016 accounts for signature. Immediately after approval, the annual accounts require to be signed and dated by specified members and Progress meetings with lead officers on emerging As required officers and then provided to the auditor. The Controller of Audit issues throughout the requires audit completion and issue of an independent auditor's audit process report (opinion) by 30 September each year. Latest date for final clearance meeting with 16 September 24. The authority is required to publish its signed audited annual Executive Director of Financial Services 2016 accounts, and the audit certificate on its website by 31 October. Agreement of audited unsigned financial statements, 26 September The local authority is also required to publish a copy of the accounts and issue of the proposed Annual Audit Report 2016 of its subsidiaries. The annual audit report is required to be which includes the ISA 260 report to those charged published on the website by 31 December. with governance

25. A proposed timetable for the audit of the 2015/16 financial Independent auditor’s report signed 26 September statements is included at Exhibit 1 below. Discussions are still 2016 ongoing on the timing of committee dates to ensure compliance with Latest date for signing of WGA return 30 September the 2014 Regulations. 2016

Exhibit 1: Financial statements audit timetable 26. Matters arising from our audit will be reported on a timely basis and Key stage Date will include agreed action plans. Draft management reports will be issued to the responsible head of service and relevant officers to Testing and review of internal control systems and January to confirm factual accuracy. Responses to draft reports are expected transactions May 2016 within two weeks of submission. A copy of all final agreed reports Meetings with officers to clarify expectations of By 31 March will be sent to the Chief Executive, Executive Director (Finance & working papers and financial system reports 2016

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Corporate Support), relevant senior manager(s), Internal Audit and 31. As part of our commitment to quality and continuous improvement, Audit Scotland's Performance Audit and Best Value Group. Audit Scotland will periodically seek your views on the quality of our service provision. We do, however, welcome feedback at any time 27. We will provide an independent auditor’s report to North Ayrshire and this may be directed to the engagement lead, Fiona Mitchell- Council and the Accounts Commission that the audit of the financial Knight. statements has been completed in accordance with applicable statutory requirements. The combined ISA 260 and Annual Audit Independence and objectivity Report will be issued by 30 September. 32. Auditors appointed by the Accounts Commission must comply with 28. All annual audit reports produced are published on Audit Scotland's the Code of Audit Practice. When auditing the financial statements, website: www.audit-scotland.gov.uk. auditors must also comply with professional standards issued by the 29. Planned outputs for 2015/16 are summarised at Appendix 1. Auditing Practice Board (APB) and those of the professional accountancy bodies. These standards impose stringent rules to Quality control ensure the independence and objectivity of auditors. Audit Scotland has in place robust arrangements to ensure compliance with these 30. International Standard on Quality Control (UK and Ireland) 1 standards including an annual “fit and proper” declaration for all (ISQC1) requires that a system of quality control is established as members of staff. The arrangements are overseen by the Assistant part of financial audit procedures. This is to provide reasonable Auditor General, who serves as Audit Scotland’s Ethics Partner. assurance that those professional standards and regulatory and legal requirements are being complied with and that the 33. Auditing and ethical standards require the appointed auditor to independent auditor’s report or opinion is appropriate in the communicate any relationships that may affect the independence circumstances. The foundation of our quality framework is our Audit and objectivity of audit staff. In significant cases we would change Guide, which incorporates the application of professional auditing, the audit team, however where there are potential issues that are quality and ethical standards and the Code of Audit Practice issued not fundamental to the delivery of the audit, we advise the senior by Audit Scotland and approved by the Accounts Commission. To finance officer of the circumstances and of the steps we have taken ensure that we achieve the required quality standards, Audit to manage this. We are not aware of any other such relationships Scotland conducts peer reviews and internal quality reviews and pertaining to the audit of North Ayrshire Council. has been subject to a programme of external reviews by the Institute of Chartered Accountants of Scotland (ICAS).

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income and expenditure relating to both the IJB and the council that Audit issues and risks is processed in the council’s accounting records, and will review the procedures for agreeing year end balances – including how to Audit issues and risks address any overspends.

34. Based on our discussions with staff, attendance at committee 37. Risk 2 - Management override of controls: ISA 240 requires that meetings and a review of supporting information we have identified audit work is planned to consider the risk of fraud, which is the following main risk areas for North Ayrshire Council. We have presumed to be a significant risk in any audit. ISA 240 states that categorised these risks into financial risks and wider dimension audit procedures should be responsive to risks related to risks. The financial statements issues and risks, which require management override of controls. We will design and perform audit specific audit testing, are summarised below and detail contained in procedures to address these risks within North Ayrshire Council.

Appendix 2. 38. Risk 3 - Income: Auditing standards (ISA 240 The auditor’s responsibility to consider fraud in an audit of financial statements) Financial statement issues and risks requires auditors to presume a risk of fraud where income streams

35. Risk 1 – Group accounts consolidation of Integration Joint are significant. North Ayrshire Council receives a significant amount Board: The North Ayrshire Integration Joint Board (IJB) became of funding from the Scottish Government, however around £268 operational in April 2015 and will be included in the council’s group million is received from other sources, including service income, accounts for the first time in 2015/16. The social work transactions council tax, NDR, housing revenue, capital receipts and grants. The of the IJB are being processed through the council’s financial complexity of income means there is an inherent risk that income systems. A timetable and procedure is being agreed between the could be materially misstated. It is our opinion that the council has council and the IJB to ensure that accurate figures are provided to strong mitigating controls in place to reduce this risk. To reinforce the IJB to enable them to prepare their accounts which, in turn, will this view, we will be undertaking controls system testing of accounts form the basis for the council’s group account figures. receivable, and transaction testing which will cover each service income area. This is in addition to our coverage of Revenue 36. The council will therefore need to ensure that accurate financial Support Grant, NDR and council tax income received during the information is provided to the IJB within the agreed timescale. year. There is a risk that transactions relating to the IJB are not correctly classified by the council, and balances between the council and 39. Risk 4 - Equal pay provision: The 2014/15 financial statements NHS Ayrshire and Arran are not agreed. We will sample test contained a provision covering all known equal pay claims. The

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potential liability resulting from equal pay claims remains uncertain 42. Risk 6 – Integration Joint Board (IJB): Whilst preparation for and is subject to the outcome of several national test legal cases. establishing the IJB and agreeing budgets have been good, the There is a risk that the ultimate cost to the council is significantly effectiveness of the IJBs in delivering health and social care different from that provided in the financial statements. The council services is unproven. There has been a recurring overspend in reviews its exposure to equal pay claims on an annual basis and health and social care services in recent years. determines the level of the provision to be included in the financial 43. Given the needs led nature of health and social care services, there statements. We will continue to monitor developments throughout is a risk of overspends if scrutiny of partnership budgets is not the year and will review the provision as part of the 2015/16 effective. Any overspends by the IJB will directly impact the financial statements audit. council’s budget. We will review the council’s arrangements to Wider dimension issues and risks ensure its share of IJB services are delivered on budget and establish what steps are taken to help prevent overspends from 40. Risk 5 - Financial pressures: Councils are facing significant recurring. financial pressures with reductions in funding combined with 44. Risk 7 – Performance indicators: The audit of 2014/15 increasing unavoidable costs such as national insurance changes performance indicators resulted in some indicators requiring to be and the impact of welfare reform. There is a risk that the council is re-calculated. As a result, performance data reported may be based not able to identify sustainable savings measures or meet cost on information that is not robust. We will ascertain whether pressures as they arise. There is also a risk that increased demand, procedural instructions and definitions of all performance indicators combined with the need to find further efficiency savings, will have are prepared and whether back up is retained to support all an adverse effect on council services. indicators reported. 41. We will review the position, in light of the delayed agreement of the 45. Risk 8 – Data sharing with NHS Ayrshire & Arran: The sharing of most recent financial settlement, as the council sets its budget for information between the council, NHS Ayrshire and Arran, and the 2016/17 and beyond. We will review what progress the council is IJB is essential to planning and delivering integrated care. The joint making to address demographic and financial pressures through working between health and social care professionals will result in a transformational change and will report, as appropriate, in our significant amount of data traffic between local government systems Annual Audit Report. We will also monitor the council’s which are compliant with the Public Services Network (PSN) and the arrangements for reporting its periodic budgetary control information Scottish Wide Area Network (SWAN) used by the NHS. There will to Members. also be a need for NHS staff to access systems of the council.

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There is the risk that access to council information or data may not work to collect relevant financial and performance information to be handled securely or could be accessed inappropriately, which inform Audit Scotland’s national reports. could result in reputational risk to the council, or a fine by the

Information Commissioner for Scotland. We will review the arrangements in place for ensuring that data shared by both bodies is held securely.

46. Risk 9 – Workforce management: Efficiencies being sought as a result of the constrained financial position will result in reductions in the council workforce. Council decisions to approve reductions in workforce or authorise termination payments need to be based on strategic decisions that are evidence based and risk assessed. Recent high profile public sector severance cases have highlighted the need for full transparency in the reporting and agreement of early departures. There is a reputational risk to the council if payments are seen to be inappropriate.

47. Audit Scotland published a report on Scotland's Public Sector Workforce in November 20131. We will carry out local follow up work this year based on the recommendations in the 2013 report.

National performance audit studies

48. Audit Scotland’s Performance Audit and Best Value Group undertake a programme of studies on behalf of the Auditor General and Accounts Commission. In line with Audit Scotland’s strategy to support improvement through the audit process, we will carry out

1 Scotland’s Public Sector Workforce, Audit Scotland, November 2013

North Ayrshire Council Page 12 252 Fees and resources

Fraud Initiative), support costs and auditors’ travel and Fees and resources subsistence expenses.

52. In addition, there will be a fee of £3,600 for the audit of the 12 Audit fee charitable trusts at North Ayrshire Council.

49. Over the past four years, Audit Scotland has reduced audit fees by 53. Where our audit cannot proceed as planned through, for example, 24% in real terms, exceeding our 20% target. Due to further late receipt of unaudited financial statements or being unable to take refinement of our audit approach we have been able to maintain planned reliance from the work of internal audit, a supplementary audit fees for all our audited bodies in 2015/16 at the same level as fee may be levied. An additional fee may also be required in last year. This represents an additional real term fee reduction of relation to any work or other significant exercises outwith our 1.6%. planned audit activity.

50. In determining the audit fee we have taken account of the risk exposure of North Ayrshire Council, the planned management Audit team

assurances in place, and the level of reliance we plan to take from 54. Fiona Mitchell-Knight, Assistant Director, Audit Services is your the work of internal audit. We have assumed receipt of a complete appointed auditor. The local audit team will be led by Paul Craig set of unaudited financial statements and comprehensive working who will be responsible for day to day management of the audit and papers package by 30 June 2016. who will be your primary contact. Details of the experience and

51. The proposed audit fee for the 2015/16 audit of North Ayrshire skills of our team are provided in Exhibit 2. The core team will call Council is £301,830. This is a cash reduction of £2,000 from last on other specialist and support staff as necessary.

year. Our fee covers:  the costs of planning, delivering and reporting the annual audit including auditor’s attendance at committees  your organisations allocation of the cost of national performance studies and statutory reports by the Auditor General for Scotland  a contribution towards functions that support the local audit process (e.g. technical support and coordination of the National

North Ayrshire Council Page 13 253 Fees and resources

Exhibit 2: Audit team

Name Experience

Fiona Mitchell-Knight BA (Hons), FCA Fiona took up post as Assistant Director of Audit in August 2007. Fiona has over 20 years Assistant Director of Audit Services (certifying experience of public sector audit with Audit Scotland. auditor)

Paul Craig, CA Paul joined Audit Scotland in 1994. Before this, he worked for accountancy firms in the private Senior Audit Manager (client manager) sector providing a variety of audit, accounting, and business services roles. Since joining Audit Scotland, Paul has managed a variety of clients in the local government and central government sectors.

Sandra Boyd, MAAT, CISA Sandra joined Audit Scotland in 1997, having previously worked for Ayrshire and Arran Health Senior Auditor Board in a variety of Finance and Internal Audit roles. Since joining Audit Scotland, Sandra has worked in the local government, central government and health sectors with responsibility for both

financial audit and ICT audit work. She also undertook a two year secondment to the Scottish Government.

Stephanie Harold BA (Hons), MSc, CA Stephanie has four years experience in public sector audit working within the local government Senior Auditor and health sectors.

North Ayrshire Council Page 14 254 Appendix 1: Planned audit outputs

Appendix 1: Planned audit outputs

The diagram below shows the key outputs planned for North Ayrshire Council in 2015/16.

Combined ISA 260 / Annual Audit Report: Review of adequacy of internal Internal Controls Reporting: The Draws significant matters arising from our audit audit: An assessment of the overall conclusion from our testing to the attention of those charged with internal audit function. governance prior to the signing of the of the operation of the key financial independent auditor’s report. controls.

November December January February March April May June July August September October 2015 2015 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016

Independent auditors’ report: Provides audit WGA: Provides audit Annual Audit Plan: Planned opinion on the Whole of audit work. opinion on the financial statements. Government Accounts.

North Ayrshire Council Page 15

255 Appendix 2: Significant audit risks

Appendix 2: Significant audit risks

The table below sets out the key audit risks, the related sources of assurance received and the audit work we propose to undertake to address the risks during our audit work.

Audit Risk Source of assurance Audit assurance procedure

Financial statement issues and risks

1 Group accounts consolidation of  Monthly monitoring of financial  Verification of the balances recorded in Integration Joint Board information. the council ledger pertaining to health and social care services. The North Ayrshire Integration Joint Board  Bi-monthly reporting to the IJB. (IJB) became operational in April 2015 and  Strong working relationships between  Sample test income and expenditure will be included in the council’s group the council and NHS Ayrshire and relating to health and social care. accounts for the first time in 2015/16. Arran.  Confirm balances between the council and NHS Ayrshire and Arran have Risk: There is a risk that:  Due diligence completed on the budget setting process. been agreed.  transactions relating to the IJB are not  Ensure any overspends or correctly classified by the council  Agreement on how to account for overspends and underspends is underspends are accounted for in  balances between the council and outlined in the Integration Scheme. accordance with the integration NHS Ayrshire and Arran are not scheme. agreed

 the council is unable to provide accurate financial information within the timescales required by the IJB.

2 Management override of controls  A sound system of budgetary control,  Detailed testing of journal entries. ISA 240 highlights that management is in a including regular budget monitoring.  Review of accounting estimates for unique position to perpetrate fraud because  Regular updates of Standing Orders bias. of their ability to manipulate accounting and Financial Regulations, which  Evaluating significant transactions that records and prepare fraudulent financial require approval by the council. are outside the normal course of North Ayrshire Council Page 16 256 Appendix 2: Significant audit risks

Audit Risk Source of assurance Audit assurance procedure statements by overriding controls that  Appropriate segregation of duties. business. otherwise appear to be operating effectively.  Focussed testing of the regularity and cut-off assertions during the financial statements audit.

3 Income  Sound controls arrangements have  Audit of the Accounts Receivables North Ayrshire Council receives a significant been reported in previous years of the system. audit. amount of income in addition to Scottish  Detailed testing of revenue Government.  Internal audit reviews of various transactions across each service area. income sources. Risk: The extent and complexity of income  Testing of significant grants received.  Appropriate segregation of duties. means there is an inherent risk that income  Focused testing of the Non Domestic could be materially misstated in accordance Rates and Council Tax Income with ISA240. Account.

4 Equal pay provision  A provision of £2.867 million was in  Continue to monitoring of The potential liability resulting from equal pay place for all known claims against the developments throughout the year and council at 31 March 2015. A further review of the equal pay provision as claims remains uncertain and is subject to £1.012 million was earmarked for any part of the 2015/16 financial the outcome of several national test legal future potential claims. This is based statements audit process. cases. on evidence available at the time. Risk: The ultimate cost to the council is The council will review its exposure to significantly different from that provided in the equal pay claims on an annual basis financial statements. and determine the level of the provision to be included in the financial statements. The council's legal service is consulted in arriving at the provision.

North Ayrshire Council Page 17 257 Appendix 2: Significant audit risks

Audit Risk Source of assurance Audit assurance procedure

Wider dimension issues and risks

5 Financial pressures  The council continues to review its  Review the process for setting the Councils are facing significant financial budget on a rolling 3 years basis and 2016/17 budget. the estimated funding gap was pressures with reductions in funding and the  Monitor and review the budget setting considered during the 2016/17 budget need to reconfigure services, increasing process for 2017/18 and beyond, setting process. unavoidable costs, increasing demand for including the identification of funding  “Transformation 2” seeks to address gaps and how the council intends to services and the uncertainty around the demographic and financial pressures address them. newly created IJBs. Good financial through transformational change. information to support strategic cost  Review the council's budget monitoring  A People Strategy “Our People reports to cabinet, including those for reduction measures will be critical to Connect” was approved by the Cabinet the IJB. achieving this. in May 2015. This aims to enable staff  Monitor the council’s progress in the Risk: The council is not able to identify to deliver the strategic priorities in the areas of transformational change, sustainable savings measures or meet cost Council Plan and to identify more welfare reform, and workforce pressures as they arise. efficient ways of achieving this. management.  Budget monitoring reports for both capital and revenue are prepared and submitted to Cabinet every two months. This includes a high level budget paper looking at the Council as a whole, together with more detailed reports for each service.

6 Integration Joint Board Budget  The council and IJB s95 officers work  We will review the council’s There has been a recurring overspend in closely to ensure there is a clear arrangements to ensure its share of understanding of the IJB’s financial IJB services are delivered on budget. health and social care services in recent performance and any corrective action years. required to deliver services within

North Ayrshire Council Page 18 258 Appendix 2: Significant audit risks

Audit Risk Source of assurance Audit assurance procedure Risk: Given the needs led nature of health available resources. and social care services, there is a risk of  Financial performance of the IJB overspends if scrutiny of partnership budgets reported to Cabinet alongside the is not effective. council’s revenue budget monitoring statements.

7 Performance indicators  The council agreed to carry out further  Carry out testing of a sample of There are insufficient procedural instructions work to ensure there are robust performance indicators, including procedures and clear audit trails for all establishing whether there are robust on how to collect data for some performance performance indicators. procedures in place for the collection indicators. In other cases sample tested, of the data. there was little or no evidence in support of  Review of performance indicators included in internal audit work plan for the indicator reported. 2015/16. Risk: Performance data reported may be

based on information that is not robust.

8 Data sharing with NHS Ayrshire & Arran  The IJB joined the Ayrshire Data  Monitor the arrangements in place for The sharing of information between the Sharing Partnership and is party to the data sharing and access to council Information Sharing Protocol between systems. council, NHS Ayrshire and Arran, and the IJB North Ayrshire Council and NHS is essential to planning and delivering  Monitor progress of the project to Ayrshire and Arran. integrated care. deliver an integrated network solution.  A contract has been awarded to a Risk: If data is not shared effectively it could consultant on behalf of the three impact the quality of services. There is also Ayrshire councils and NHS Ayrshire the risk that inappropriate access to council and Arran to review each information or data may not be handled organisation's infrastructure and supply securely, which could result in reputational the options to deliver a suitable risk to the council. solution to integrate the networks. Cost, security, PSN compliance and support of the infrastructure will all be

North Ayrshire Council Page 19 259 Appendix 2: Significant audit risks

Audit Risk Source of assurance Audit assurance procedure taken into consideration.

9 Workforce management  The council considers workforce  Audit Scotland published a report on The constrained financial position may result planning requirements through its Scotland's Public Sector Workforce in directorate plans. November 2013. We will carry out local in reductions in the council workforce. All follow up work this year based on the reductions in workforce should be  A People Strategy was introduced in recommendations in the 2013 report. strategically based and all costs and savings June 2015.  We will review the findings of internal arising from workforce reductions should be  Review of aspects of workforce audit prior to commencing our work in provided to members. management by internal audit in 2016. this area. Risk: The delivery of council services could be adversely impacted or the workforce may not have the skills to deliver the change programmes planned.

North Ayrshire Council Page 20 260 NORTH AYRSHIRE COUNCIL

Agenda Item 14 23 May 2016

Audit Committee

Title: External Audit overview of Internal Audit

Purpose: To inform the Committee of the outcome of the annual assessment of the Internal Audit function by the external auditor.

Recommendation: That the Committee notes the outcome of the External Audit assessment.

1. Executive Summary

1.1 Audit Scotland has completed its annual assessment of the Council's Internal Audit function.

1.2 This has provided a positive assessment and the full findings are attached in full at Appendix 1 to this report.

2. Background

2.1 Audit Scotland’s Code of Audit Practice requires the external auditor to undertake an annual assessment of the adequacy, strengths and weaknesses of the Internal Audit function. In addition, based on this assessment, Audit Scotland outline the areas where they plan to place formal reliance on the work of Internal Audit.

2.2 Audit Scotland have recently carried out their assessment of Internal Audit and the full findings are detailed in the letter attached at Appendix 1 to this report.

2.3 The annual review is based on a standard series of questions and discussion with the Senior Manager (Internal Audit, Risk and Fraud).

2.4 The review has concluded that Internal Audit is operating in accordance with the Public Sector Internal Audit Standards (PSIAS), noting that "the Senior Manager continues to demonstrate that he is implementing the new standards and complying with the principles contained within this guidance". The report further identifies that a risk based approach to planning is adopted and sound arrangements are in place for monitoring and reporting progress against the plan.

261 2.5 Audit Scotland will place formal reliance on some aspects of the work of Internal Audit; this is detailed in the External Audit plan which is elsewhere on the agenda for this meeting.

3. Proposals

3.1 It is proposed that the Committee notes the outcome of the External Audit assessment, namely that Internal Audit is operating well and in line with expectations.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The work of Internal Audit helps to support the efficient delivery of the strategic priorities within the Council Plan 2015-2020. Community Benefits: None.

5. Consultation

5.1 Audit Scotland consulted with the Senior Manager (Internal Audit, Risk and Fraud) in carrying out their assessment of Internal Audit.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

262 Appendix 1 4th Floor, South Suite The Athenaeum Building T: 0131 625 1500 8 Nelson Mandela Place E: [email protected] Glasgow G2 1BT www.audit-scotland.gov.uk

Ms Laura Friel 26 February 2016 Executive Director - Finance & Corporate Support North Ayrshire Council Cunninghame House IRVINE KA12 8EE

Dear Laura

North Ayrshire Council 2015/16 Corporate Governance – Review of internal audit

Audit Scotland’s Code of Audit Practice (the ‘Code’) sets out the wider dimension of public sector audit. The Code requires external auditors to carry out an annual assessment of the adequacy of the internal audit function. Also, this assessment enables us to incorporate into our planned approach to the audit, areas of assurance performed by internal audit work upon which we can rely on in terms of International Standard on Auditing 610 (Considering the Work of Internal Audit).

This letter sets out the results of our assessment and indicates possible areas of formal reliance on the work of Internal Audit which support our overall approach to the audit of the council's financial statements. This ensures the effective and efficient use of available audit resources and directs audit attention to the areas of highest risk. It also reduces the risk of duplication of any audit work.

The internal audit function for the council is provided by the in-house internal audit service. All internal audit functions within the public sector are required to adopt the requirements of the Public Sector Internal Audit Standards (PSIAS) which were effective from 1 April 2013. We have used these standards as part of our assessment of the adequacy of the council's internal audit function. The Senior Manager (Audit, Risk and Performance) continues to demonstrate that he is implementing the new standards and complying with the principles contained within this guidance.

The PSIAS require that internal audit carry out an internal self assessment annually and an external self evaluation every five years. The last internal self assessment was undertaken in January 2014 and a second one is currently underway. We reported last year that an external assessment would be undertaken during the second half of 2015. This will now be achieved through the internal audit service taking part in the ‘peer to peer’ review network arranged by the Scottish Local Authorities Chief Internal Auditor’s Group. This means that North Ayrshire Council’s internal audit service will review another council internal audit service and vice versa. This approach has been agreed by the Audit Committee and is likely to occur in 2016/17 and 2017/18. While we are drawing this to your attention, PSIAS do not require this to be carried out until five years from April 2013.

A risk based approach to planning is adopted and sound arrangements are in place for monitoring and reporting progress against the plan. We note that due to a staffing shortfall Internal Audit identified earlier in the year that they would not have enough resources in house to complete the audit plan by 31 March 2016. To address this, internal audit services were secured from Glasgow City Council (trading as Audit Glasgow). Six audits are scheduled to be carried out by Audit Glasgow to North Ayrshire Council specifications, with a reporting deadline of 31 March 2016. We are therefore satisfied that Internal Audit is on target to deliver the full audit plan by 31 March 2016.

Providing services to the Auditor General for Scotland and the Accounts Commission 263

Our evaluation of the internal audit service is designed to establish whether we can place reliance on pre-determined aspects of internal audit work during 2015-16. This enables us to direct our resources to those financial systems and governance areas we have assessed as being of high risk, which are not being reviewed by internal audit this year.

There are no full systems audits being done by internal audit on which we will be placing formal reliance in terms of International Statement on Auditing 610 (Using the work of internal auditors), for our financial statements audit work. However we will take cognisance of aspects of work planned by Internal Audit within the following areas:  Payroll  Treasury Management

In terms of our wider scope of public audit, we intend to obtain assurances from internal audit work on other aspects of our Code responsibilities as follows:  Revenue Budget Monitoring  Performance Indicators  Workforce Planning  NFI  IT Disaster Recovery and Business Continuity

We will continue to monitor and review completed internal audit assignments to ensure that work on which we are placing reliance has been delivered. Any failure to complete areas where formal reliance has been agreed could impact on our plan. Any such areas would be discussed in detail with Internal Audit. A copy of our annual audit plan will be made available to Internal Audit and the Audit Committee.

If you have any questions about the contents of this letter, please do not hesitate to contact me.

Yours sincerely

Paul Craig Senior Audit Manager

Direct Tel: 0131 625 1928 Email: [email protected] cc Elma Murray, Chief Executive Paul Doak, Senior Manager (Internal Audit, Risk and Performance). Lesley Aird, Head of Finance

Providing services to the Auditor General for Scotland and the Accounts Commission 264 NORTH AYRSHIRE COUNCIL

Agenda Item 15 23 May 2016

Audit Committee

Title: Local Scrutiny Plan and National Scrutiny Plan 2016/17

Purpose: To advise the Audit Committee of the Local Scrutiny Plan (LSP) for 2016/17 prepared by the Local Area Network of external scrutiny bodies and the National Scrutiny Plan, which brings together all LSPs and is prepared by the Strategic Scrutiny Group.

Recommendation: That the Audit Committee notes the Local and National Scrutiny Plans.

1. Executive Summary

1.1 An annual Shared Risk Assessment is carried out by the Local Area Network (LAN) of the Council's external scrutiny bodies to determine any scrutiny risks for the Council.

1.2 For the fourth successive year, the LAN has concluded that no specific scrutiny is required in North Ayrshire. This is an extremely positive position for the Council.

1.3 To ensure the positive assurance from the Local Scrutiny Plan is sustained, it is essential that the Council continues to monitor the key risks and deliver improved performance in relation to its strategic objectives in order to meet the standards expected by the external scrutiny bodies.

1.4 Planned scrutiny activity across all Scottish Councils informs the National Scrutiny Plan, with all planned activity in North Ayrshire forming part of nationally-driven scrutiny plans.

2. Background

Local Scrutiny Plan

2.1 An annual Shared Risk Assessment (SRA) approach is in place to ensure a well co-ordinated, proportionate and risk-based approach to external scrutiny plans.

265 2.2 The shared assessment is undertaken by a Local Area Network (LAN) of external scrutiny bodies, including Audit Scotland, Education Scotland (formerly HMIE), the Care Inspectorate and the Scottish Housing Regulator.

2.3 The Local Scrutiny Plan was published on 31 March 2016 and is attached in full at Appendix 1 to this report.

2.4 The conclusion of the shared risk assessment is that no scrutiny risks have been identified for North Ayrshire Council which require specific external review in the year ahead. Scrutiny activity undertaken in the last 12 months was either at the request of the Council or part of national activity.

2.5 This does not mean that the Council has addressed all risks or that all areas of performance are improving. However, it does mean that the LAN is satisfied that the Council continues to demonstrate sound corporate governance and performance management frameworks.

2.6 The Local Scrutiny Plan details some scrutiny work which took place during 2015/16; this included a performance audit of the Council's Housing Benefit function, follow-up work on the national Community Planning Partnerships audit from 2013 and a joint thematic review of Multi Agency Public Protection Arrangements (MAPPA).

2.7 The review of the Housing Benefit service followed up on 8 risks that had been identified in the previous review in 2010; it was noted that 7 had been addressed in full and one relating to analysing overpayments remained outstanding. An action plan to address this and 2 new risks was agreed.

2.8 Follow-up work on CPP arrangements in North Ayrshire concluded that satisfactory progress had been made on the CPP's approach to strategic direction, performance reporting and community engagement.

2.9 The key message from the MAPPA review was that current arrangements are making an effective contribution to public safety and sex offender management, with a number of recommendations and areas for improvement which are intended to improve process efficiency.

2.10 The Plan also notes the Council's strong financial management arrangements, the introduction of the second phase Transformation Programme (T2) and the establishment of the Health and Social Care Partnership.

266 2.11 The appendix to the Local Scrutiny Plan details a range of nationally-driven scrutiny to which the Council may be subject during 2016/17. For some of this activity, the scrutiny bodies have still to determine their work programmes and which specific Council areas will be reviewed. Planned work includes:

 planned performance audits by Audit Scotland covering social work, early learning and childcare, and equal pay, as well as follow-up audits on self-directed support and maintaining Scotland's roads;  work by the Care Inspectorate with Alcohol and Drug Partnerships (ADAPs) and their partners to support the validation of the Partnerships' self-assessments of performance;  a validated self-evaluation of educational psychology services by Education Scotland;  a programme of thematic inquiries by the Scottish Housing Regulator.

2.12 It should be noted that the Local Scrutiny Plan only covers high-level scrutiny activity; the external scrutiny bodies will continue to carry out reviews within schools and care establishments which are outwith the scope of this plan.

National Scrutiny Plan

2.13 Planned scrutiny activity across all Scottish Councils informs the National Scrutiny Plan, which is attached at Appendices 2 and 3.

2.14 The National Scrutiny Plan highlights some scrutiny developments taking place during 2016/17, most notably a new approach to auditing Best Value. This will include assessment each year of aspects of Best Value as part of an integrated annual audit and a public report for each Council at least once in a five-year period that will bring together an overall picture of the Council drawn from a range of audit activity.

2.15 The Plan also notes that the national scrutiny agencies have considered their future direction in the context of a much changed and rapidly changing public sector landscape. As a group, the agencies have identified 3 priority areas for scrutiny development that will be taken forward over the next year:

 a shared vision and values for modern, effective scrutiny;  a route map for how scrutiny needs to adapt and change to meet the challenges of modern public service delivery, and;  the delivery of a step change in the alignment and integration of operational scrutiny activity.

267 3. Proposals

3.1 It is proposed that the Audit Committee notes the Local Scrutiny Plan and National Scrutiny Plan for 2016/17.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: Effective external scrutiny helps to ensure that good governance arrangements are in place, underpinning delivery of the Council's key priorities. Community Benefits: None.

5. Consultation

5.1 The LAN consulted with the Corporate Management Team in January 2016 during the preparation of the Local Scrutiny Plan.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

268 Appendix 1

North Ayrshire Council

North Ayrshire Council

Local Scrutiny Plan 2016/17

Introduction

1. This local scrutiny plan sets out the planned scrutiny activity in North Ayrshire Council during 2016/17. The plan is based on a shared risk assessment undertaken by a local area network (LAN) which comprises representatives of all the scrutiny bodies who engage with the council (Audit Scotland, Care Inspectorate, Education Scotland and Scottish Housing Regulator). The shared risk assessment process draws on a range of evidence with the aim of determining any scrutiny activity required and focusing this in the most proportionate way.

2. This plan does not identify or address all risks in the council. It covers only those risk areas that the LAN has identified as requiring scrutiny, or where scrutiny is planned as part of a national programme. Planned scrutiny activity across all councils in Scotland informs the National Scrutiny Plan for 2016/17, which is available on the Audit Scotland website.

Scrutiny risks

3. The conclusion of this year’s shared risk assessment is that no scrutiny risks have been identified which require specific scrutiny by the LAN in 2016/17. This is a positive position for the council and is consistent with the LAN view last year. Scrutiny activity undertaken in the last 12 months was either at the request of the council or part of national activity. A number of reports have been issued on this work.

4. This does not mean that the council have addressed all risks facing it or that all areas of council performance are improving. However, it does mean that the LAN is satisfied that the council continues to demonstrate a sound corporate governance and performance management framework. In service areas we are satisfied that there has been either:  information gathered by the LAN to demonstrate performance in areas where, previously, further information was required  the council has demonstrated self awareness of the standards of performance required at a service level  there is evidence to demonstrate the council’s awareness of, and monitoring of, the key risks to meeting outcomes and service delivery.

5. Financial management is strong with a robust budget setting process in place to deliver services in line with the council’s priorities. The LAN continues to monitor the council’s financial position and the challenges to service delivery in the future from increased

269 North Ayrshire Council

demand and reducing resources. The council carries out medium term financial planning on a rolling three year basis, and is currently refreshing its long term financial strategy to cover the next ten years.

6. Previous year budgets have identified both funding gaps and the proposed steps to address them. The 2016/17 budget, together with indicative budget for 2017/18, was approved by the council on 17 February 2016. Members were also advised of the initial assessment for 2018/19. Audit Scotland will report on the council’s progress in managing its three year funding gap as part of the annual audit.

7. The council has moved to Phase 2 of its Transformation Strategy. The strategy focusses on projects that will change current models of service delivery, and where appropriate enable efficiencies. The council acknowledges the ongoing requirement to achieve significant efficiency savings and recognises the challenges to meet these targets with some of the projects aimed at generating savings being in their early stages. The LAN will continue to monitor progress.

8. On 1 April 2015, the North Ayrshire Health and Social Care Partnership began delivery of services. The Integration Joint Board (IJB) approved the Partnership’s three year strategic plan in April 2015. This plan acknowledges that service redesign is required to meet future demand and proposes a high level model of change and the stepping stones to enable this. The IJB Chief Officer has implemented a Change Programme, with a steering group, supported by a change team to oversee the review and re-design of services. The Partnership aims to make efficiency savings. While progress has been made thus far, the Partnership is forecast to overspend in 2015/16. Audit Scotland will report progress in the annual audit report.

9. Audit Scotland carried out a performance audit of the council’s housing benefit service in 2015 as part of Audit Scotland’s housing benefit risk assessment programme. This included following up the eight risks that were identified in the previous risk assessment audit in November 2010. We noted that seven risks have been addressed in full. The one risk outstanding relates to analysing overpayments to minimise future occurrence which the council commits to addressing. An action plan addressing this, together with two new risks has been agreed with management.

10. In 2015, Audit Scotland carried out follow up work on the Community Planning Partnership (CPP) audit which was reported in March 2013. The follow-up report commented on the satisfactory progress made during the intervening period to the CPPs approach to strategic direction, performance reporting and community engagement.

11. The Joint Thematic Review of MAPPA in Scotland reported in November 2015. The Review involved a range of inspection activities undertaken in all Strategic Oversight Group (SOG) areas. These groups included representation from all local authorities, Police Scotland, Health Services and the Scottish Prison Service as Responsible Authorities for the MAPPA process. The key message is that MAPPA is making an

270 North Ayrshire Council

effective contribution to public safety and sex offender management. There are a number of recommendations and areas for development which are intended to improve efficiency in processes. The Care Inspectorate will contact Strategic Oversight Groups and Responsible Authorities to outline how these will be implemented and progress monitored and evaluated.

Planned scrutiny activity

12. As shown in Appendix 1, the council will be subject to a range of nationally driven scrutiny activity during 2016/17. Where appropriate, scrutiny activity will be carried out jointly by scrutiny bodies. For some of their scrutiny activity in 2016/17, scrutiny bodies are still to determine their work programmes and which specific council areas they will cover. Where North Ayrshire Council is to be involved, the relevant scrutiny body will confirm this with the council and the appropriate LAN lead. Where activity is planned this year we have summarised it below.

13. In addition to specific work shown in Appendix 1, routine, scheduled audit and inspection work will take place through the annual audit process and the ongoing inspection of school and care establishments by Education Scotland and the Care Inspectorate respectively. Audit and inspection agencies will continue to monitor developments in key areas of council activity and will provide support and challenge as appropriate. This will help to inform future assessment of scrutiny risk.

14. Audit Scotland plans to undertake performance audit work in three areas covering local government during 2016/17. It will undertake a performance audit on early learning and childcare and a follow-up on audit on self-directed support. Audit Scotland will also carry out audit work on equal pay, but is still considering the focus and outputs of work in this area. Any engagement with councils is still to be determined. Details of future audit work are available on the Audit Scotland website here.

15. In December 2014, the Accounts Commission concluded its review of Best Value and set out principles for a new approach to auditing Best Value. These principles include the need for more frequent assurance on Best Value across all 32 councils, integrating the audit processes, an increased emphasis on driving improvement, and a strong focus on the quality of service experienced by the public and the outcomes achieved.

16. The new approach will be rolled out from October 2016 but will continue to evolve. It will include assessment each year of aspects of Best Value as part of an integrated annual audit and a public report, (Controller of Audit report to the Accounts Commission) for each council at least once in a five year period, that will bring together an overall picture of the council drawn from a range of audit activity. The initial iteration of the rolling programme, which will be reviewed and refreshed annually in response to factors including the SRA, will be presented to the Accounts Commission in April 2016. The results of this current SRA will make a significant contribution to the audit intelligence that will underpin the new approach, and inform the development of the initial programme.

271 North Ayrshire Council

17. 2016 is a transition year. This includes development of the intelligence about each council for the new approach and the handover to new audit appointments. While preparation for the new approach progresses, Best Value audit work will continue. But, appropriate elements of the new approach, such as reporting mechanisms, will also be tested in some councils.

18. The Scottish Government has confirmed in its funding letters to Alcohol and Drugs Partnerships (ADPs) that the Care Inspectorate will undertake Validated Self-Evaluation (VSE) activity with Alcohol and Drug Partnerships. The purpose of this activity is to support the validation of ADP and services’ self-assessment of local implementation and service compliance with the Quality Principles: Standard Expectations of Care and Support in Drug & Alcohol Services. The findings from this validation work will be reviewed by the Scottish Government to consider and inform the future programme of national support that will further encourage and support delivery of continued improvements at ADP and service level. It is anticipated that all 30 ADPs will participate. On site activity is likely to commence in March 2016 with a national overview report completed by the end of 2016. The Care Inspectorate will also provide brief, customised feedback to each ADP in order to help build their capacity for self-evaluation.

19. Education Scotland will be working in partnership with councils to carry out a validated self-assessment of Educational Psychology Services. North Ayrshire Council involvement is scheduled for March to June 2016.

20. A joint review by Education Scotland and Skills Development Scotland covering Careers Information and Guidance Services is scheduled to be carried out at North Ayrshire in 2017/18.

21. The Scottish Housing Regulator (SHR) will publish the findings of its thematic inquiry work completed during 2015-16. It will carry out further thematic inquiries during 2016-17. SHR will also review the Charter data submitted by landlords and carry out data accuracy visits during the second quarter of 2016/17. If the council is to be involved in a thematic inquiry or a data accuracy visit SHR will confirm this directly with the council and the LAN lead.

22. To assess the risk to social landlord services SHR has reviewed and compared the performance of all Scottish social landlords to identify the weakest performing landlords. SHR has assessed that no additional scrutiny is required in North Ayrshire Council beyond statutory work during 2016/17.

23. The Care Inspectorate will work together with partner regulatory agencies to continue to deliver a coordinated programme of joint scrutiny of community planning partnerships and integration joint boards. Partner agencies are reviewing the methodology for joint inspections of Adults' services. As well as joint strategic scrutiny programmes, the Care Inspectorate will also be reviewing its approach to strategic commissioning and undertaking a variety of thematic programmes of work.

272 North Ayrshire Council

24. HMICS will continue to inspect local policing across Scotland during 2016/17 as part of its rolling work programme. These inspections will examine, amongst other things, local scrutiny and engagement between Police Scotland and councils. HMICS will identify and notify LANs and the local Policing Divisions to be inspected approximately three months prior to inspection.

March 2016

273 North Ayrshire Council

Appendix 1: Scrutiny plan

Scrutiny body Scrutiny activity Date

Audit Scotland Audit Scotland will carry out a programme of performance 2016/17 audits during 2016/17. It will undertake a performance audit on early learning and childcare and a follow-up on audit on self-directed support. Audit Scotland will also carry out audit work on equal pay.

Care Inspectorate The Care Inspectorate will work with Alcohol and Drug North Ayrshire Partnerships and their partners across Scotland to support involvement TBC the validation of the Partnerships’ self-assessment of performance.

Education Scotland will be working in partnership with the March – June 2016 Education Scotland council to carry out a validated self-assessment of Educational Psychology Services.

A joint review by Education Scotland and Skills 2017/18 Development Scotland will cover Careers Information and Guidance Services.

Scottish Housing The Scottish Housing Regulator (SHR) will publish the Timing to be confirmed Regulator (SHR) findings of its thematic inquiry work completed during 2015-16. It will carry out further thematic inquiries during

2016-17.

If the council is to be involved in a thematic inquiry or a

data accuracy visit SHR will confirm this directly with the council and the LAN lead.

SHR will review the Charter data submitted by landlords Quarter 2, 2016/17 and carry out data accuracy visits during quarter 2.

274 Appendix 2 National scrutiny plan 2016/17 A summary of local government strategic scrutiny activity

Prepared on behalf of the Strategic Scrutiny Group March 2016

Inspectorate of Prosecution in Scotland HMFSI 275 Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability (Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission check that organisations spending public money use it properly, efficiently and effectively. 276 National scrutiny plan 2016/17 | 3

Contents

Background 4

Part 1. Strategic context 5

Part 2. Scrutiny activity 6

Part 3. Strategic scrutiny group development and improvement priorities 8

Appendix 1. The Local Government Scrutiny Coordination Strategic Group members 10

Appendix 2. Glossary 11

277 4 |

Background

1. The National Scrutiny Plan for local government has been jointly prepared by members of the Strategic Scrutiny Group (SSG). This group comprises Scotland's main public sector scrutiny bodies – the Accounts Commission, Audit Scotland, Education Scotland, the Care Inspectorate, Healthcare Improvement Scotland, Her Majesty’s Inspectorate of Constabulary in Scotland, Her Majesty’s Fire Service Inspectorate, Her Majesty’s Inspectorate of Prisons, The Inspectorate of Prosecution in Scotland and the Scottish Housing Regulator. Details of each body can be found in Appendix 1. In this report, they are collectively referred to as scrutiny bodies.

2. The SSG was established in February 2008 to support the delivery of better coordinated, more proportionate and risk-based local government scrutiny. Since then, local government scrutiny bodies (Audit Scotland, Care Inspectorate, Education Scotland, the Scottish Housing Regulator and appointed auditors (including private sector Audit Firms)) have worked together through Local Area Networks (LANs) to share intelligence and agree the key scrutiny risks in each of Scotland's 32 councils. Annually, each LAN prepares a Local Scrutiny Plan (LSP) setting out the planned scrutiny activity for the council to respond to those specific risks. LSPs also include nationally programmed scrutiny, such as the Care Inspectorate's joint inspections of services for children, young people and families and joint inspections of adult health and social care services. This approach, called Shared Risk Assessment (SRA), is designed to ensure well coordinated proportionate and risk-based scrutiny.

3. This 2016/17 National Scrutiny Plan (NSP) for local government is one of the key outputs from the SRA process. It is the seventh such plan and summarises the strategic scrutiny work 1 from April 2016 to March 2017 in each of Scotland's 32 councils. It includes all strategic scrutiny activity of which we are currently aware. It also covers validating self-evaluation work between scrutiny bodies and councils that is designed to support improvement.

4. A separate table showing planned scrutiny activity is available on the Audit Scotland website [PDF] .

1 Strategic scrutiny work does not include scrutiny activity carried out at service unit or institution level, such as inspections of individual schools or care homes, or the annual financial audit of public bodies. 278 Part 1. Strategic context | 5

Part 1 Strategic context

5. This year's NSP has been prepared at a time of significant change in the public sector delivery landscape as a consequence of, among other things, the establishment of new statutory Integration Joint Boards (IJBs) to implement health and social care integration. Also the passing of the Community Empowerment (Scotland) Act, which places new statutory duties on public bodies to work together to improve outcomes and address inequalities through community planning.

6. Alongside those developments major changes are also taking place in the world of scrutiny, such as:

• the SSG develops its collective response to the Scottish Government's public service reform agenda (eg, health and social care integration and the Community Empowerment Act)

• the SSG reflects further on its experience of place-based audit and inspection and what that means for its work and the shared risk assessment (SRA) process

• the Accounts Commission develops its plan for implementing its new approach to auditing Best Value in local government, which will take effect as part of the new local government audit appointments from 1 October 2016

• the Care Inspectorate and its partners review their approach to joint inspections of services for children, young people and families and adult health and social care services to ensure that they reflect national priorities, the creation of IJBs and the new joint inspection responsibilities for the Care Inspectorate and Healthcare Improvement Scotland around integrated health and social care and joint strategic commissioning

• how Education Scotland considers best to provide public assurance on the extent to which Education Authorities are meeting their improvement duties under the Standards In Scotland’s Schools Act 2000.

279 6 |

Part 2 Scrutiny activity

National scrutiny programmes

7. There is a range of national scrutiny activity planned across councils over the next year and beyond. Where activity has been identified for 2016/17 that impacts on individual councils, it is included in the NSP. Significant pieces of national scrutiny activity that are planned during 2016/17 include:

• Audit Scotland's programme of national performance audits that it undertakes on behalf of the Accounts Commission and the Auditor General for Scotland. Audit Scotland has several performance audits covering local government planned during 2016/17. It will be carrying out audits covering social work, early learning and childcare, and equal pay, as well as follow- up audits on self-directed support and maintaining Scotland's roads. The performance audit programme for 2016/17 is available online. Audit Scotland will also continue to carry out a national programme of housing benefit risk assessments across councils.

• The Care Inspectorate will undertake Validated Self-Evaluation (VSE) activity with Alcohol and Drug Partnerships (ADPs). The purpose of this activity is to support the validation of ADPs and services’ self-assessment of local implementation and service compliance with the Quality Principles: Standard Expectations of Care and Support in Drug & Alcohol Services. The findings from this validation work will be reviewed by the Scottish Government to consider and inform the future programme of national support that will further encourage and support delivery of continued improvements at ADP and service level. It is anticipated that all 30 ADPs will participate. The Care Inspectorate will provide brief, customised feedback to each ADP in order to help build their capacity for self-evaluation. A national overview report will also be completed by the end of 2016.

• Education Scotland will continue to work in partnership with councils to carry out a VSE of educational psychology services across all councils over a two-year period during 2016/17. It will also review the quality of Careers Information Advice and Guidance services delivered by Skills Development Scotland across all council areas. This will be the second of a three-year programme that began in 2015/16. In addition, Education Scotland will continue to engage with councils for the purpose of VSE.

• HMICS will continue to inspect local policing divisions across Scotland. Divisional inspections will cover partnership working and in particular, local scrutiny and engagement between Police Scotland and councils and the local Community Planning Partnership and Community Safety Partnership. Local police inspections also include a ‘plus’ element, which aims to

280 Part 2. Scrutiny activity | 7

investigate national issues through a local lens. These elements are subject to separate reports published on its website www.hmics.org.uk .

• HMFSI will continue to inspect local fire and rescue services across Scotland over the next five years. These inspections will examine, among other things, local scrutiny and engagement between the Scottish Fire and Rescue Service and councils. As part of its programme, HMFSI will inspect four local fire and rescue services during 2016/17. HMFSI may also carry out ad hoc inspections in response to specific events, which can involve contact with local authorities.

• The Scottish Housing Regulator (SHR) will publish the findings of its thematic inquiry work completed during 2015/16. It will carry out further thematic inquiries during 2016/17. The SHR will also review the Scottish Social Housing Charter data submitted by landlords and carry out data accuracy visits during the second quarter of 2016/17. Where councils are to be involved in a thematic inquiry or a data accuracy visit, the SHR will confirm this directly with the council and the LAN lead.

Scrutiny developments

8. There is a range of scrutiny developments taking place during 2016/17.

9. In December 2014, the Accounts Commission concluded its review of Best Value and set out principles for a new approach to auditing Best Value. These principles include the need for more frequent assurance on Best Value across all 32 councils, integrating the audit processes, an increased emphasis on driving improvement, and a strong focus on the quality of service experienced by the public and the outcomes achieved.

10. The new approach will be rolled out from October 2016 but will continue to evolve. It will include assessment each year of aspects of Best Value as part of an integrated annual audit and a public report (Controller of Audit report to the Accounts Commission) for each council at least once in a five-year period that will bring together an overall picture of the council drawn from a range of audit activity. The initial iteration of the rolling programme, which will be reviewed and refreshed annually in response to factors including the SRA, will be presented to the Accounts Commission in April 2016. The results of this current SRA will make a significant contribution to the audit intelligence that will underpin the new approach, and inform the development of the initial programme. 2016 is a transition year which will involve the further development of the intelligence about each council for the new approach and the handover to new audit appointments. While preparation for the new approach progresses, Best Value audit work will continue as set out in the NSP. In addition, elements of the new approach, such as reporting mechanisms, will also be tested in some councils.

11. The Care Inspectorate, together with partner regulatory agencies (Healthcare Improvement Scotland, Education Scotland and HMICS) will continue to deliver a coordinated programme of joint scrutiny of Community Planning Partnerships and integration joint boards. Partner agencies are also reviewing the methodology for joint inspections of adults' services. As well as joint strategic scrutiny programmes, the Care Inspectorate will also be reviewing its approach to strategic commissioning, reviewing the validated self-assessment of alcohol and drug partnerships and undertaking a variety of thematic programmes of work.

281 8 |

Part 3 Strategic scrutiny group development and improvement priorities

12. The context in which the SSG operates has changed significantly since its establishment in 2008. A number of new scrutiny bodies have been created (Education Scotland, Care Inspectorate, Healthcare Improvement Scotland) and others have seen either their role and status amended (SHR) or the nature of the service that they inspect change from a local to national service (HMICS, HMFSI).

13. In August 2015, the SSG reflected on the progress that it has made since it was established in 2008. This acknowledged the SSG’s strong track record of delivery across a range of fronts, including:

• building relationships and trust across agencies

• implementing the SRA process, which has improved coordination of scrutiny activity across the local government sector, and

• establishing the SSG as a useful forum for discussing key issues of joint strategic concern.

14. The SSG has also considered its future direction in the context of a much changed and rapidly changing public sector landscape that includes:

• the increasingly complex web of public service delivery arrangements

• demographic and other demand pressures facing Scotland’s public services at a time of significantly reducing public finances

• new fiscal powers that are transferring to Scotland following the Smith Commission under the Scotland Act 2015

• the specific Scottish public policy approach of focusing on outcomes, prevention and partnership working, and

• Scotland’s public service reform agenda (eg, health and social care, community empowerment, welfare reform).

15. In the context of this changing public sector policy and delivery landscape, the SSG will continue to work on improving the value it adds by:

• acting as the main forum for scrutiny bodies to develop coordinated strategic responses to major public - sector legislative changes or policy developments (including public service reform)

282 Part 3. Strategic scrutiny group development and improvement priorities | 9

• broadening its scrutiny coordination role to include national thematic scrutiny activity and partnership-based audit and inspection work

• strengthening its focus on supporting improvement and promoting best practice in Scotland’s public services, and

• better driving continuous improvements in operational scrutiny practices (eg the alignment of scrutiny approaches, promoting more shared training across agencies, implementing more consistent approaches to self- evaluation and supporting improvement).

16. The SSG also continues to act as a forum for scrutiny bodies to discuss key strategic scrutiny developments (eg, the Accounts Commission’s new approach to auditing Best Value in local government; Healthcare Improvement Scotland’s new approach to inspecting and building improvement capacity in the NHS; Education Scotland’s developments in inspection approaches; and the Care Inspectorate’s review of its approach to inspecting children and adults’ services) and identifying opportunities for aligning assessment framework and methodologies.

17. The SSG has identified three priority areas for scrutiny developments that it wishes to take forward over the next year. These are:

• a shared vision and values for modern effective scrutiny, that sets out the added value that scrutiny brings and how it contributes to improvement

• a route map for how scrutiny needs to adapt and change to meet the challenges of 21st century public service delivery

• the delivery of a step change in the alignment and integration of operational scrutiny activity.

18. It plans to take forward these three interconnected strategic developments as a single programme of work over the coming year.

283 10 |

Appendix 1 The Local Government Scrutiny Coordination Strategic Group members

Accounts The Accounts Commission is a non-departmental public body (NDPB). The Accounts Commission Commission is the public’s independent watchdog for local government in Scotland. Its role is to examine how Scotland’s 32 councils manage their finances, help these bodies manage their resources efficiently and effectively, promote Best Value and publish information every year about how they perform. Audit Scotland Audit Scotland is a statutory body providing services to the Accounts Commission and the Auditor General for Scotland (AGS). Working together, the Accounts Commission, the AGS and Audit Scotland ensure that public sector bodies in Scotland are held to account for the proper, efficient and effective use of public funds. Care Inspectorate The Care Inspectorate (formally, Social Care and Social Work Improvement Scotland) is a non-departmental public body (NDPB). The Care Inspectorate’s purpose is to provide assurance and protection for people who use care, social work and children’s services and to support improvement in social care and social work provision. Education Education Scotland is an executive agency. It is the Scottish Government’s national Scotland development and improvement agency for education. It is charged with providing support and challenge to the education system, from early years to adult learning, in line with the government’s policy objectives. Healthcare Healthcare Improvement Scotland (HIS) is a health body. The function of HIS is to improve Improvement the quality of the care and experience of every person in Scotland every time they access Scotland healthcare by supporting healthcare providers. Her Majesty’s The Fire Service Inspectorate in Scotland exists to provide independent, risk based and Fire Service proportionate professional inspection of the Scottish Fire and Rescue Service. Its purpose is Inspectorate to give assurance to the Scottish public and Scottish Ministers that the Service is working in an efficient and effective way, and to promote improvement in the Service. Through this, the Inspectorate provides external quality assurance to the Service, and provides support to the Service in delivering its functions. Her Majesty’s Her Majesty's Inspectorate of Constabulary in Scotland (HMICS) provides independent Inspectorate of scrutiny of both Police Scotland and the Scottish Police Authority. Its approach is to support Constabulary in Police Scotland and the Authority to deliver services that are high quality, continually Scotland improving, effective and responsive to local needs. It can inspect other UK police services that operate in Scotland and are members of the National Preventive Mechanism, inspecting police custody centres to monitor the treatment and conditions for detainees. Her Majesty’s Her Majesty's Chief Inspector of Prisons for Scotland is required to inspect the 15 prison Inspectorate establishments throughout Scotland in order to examine the treatment of, and the conditions of Prisons for for prisoners. The Chief Inspector also has responsibility for the inspection of legalised police Scotland cells. These are cells and the treatment of and conditions for prisoners under escort. Her Majesty's The Inspectorate of Prosecution in Scotland is headed by HM Chief Inspector who reports Inspectorate of directly to the Lord Advocate. The aim of the Inspectorate is to enhance the quality of Prosecution service and public confidence in the Crown Office and Procurator Fiscal Service through independent inspection and evaluation. Scottish Housing The Scottish Housing Regulator (SHR) is a non-ministerial department. The statutory objective of Regulator the SHR is to safeguard and promote the interests of people who are or may become homeless, tenants of social landlords, or recipients of housing services provided by social landlords.284 Appendix 2. Glossary | 11

Appendix 2 Glossary

Local Scrutiny Plan A document which captures agreed areas of risk and good practice, and the resulting (LSP) scrutiny response for each council. It is the primary planning document for scrutiny bodies. Local Area Network There is a LAN for each council, comprising representatives of all the scrutiny bodies who (LAN) engage with the council. LAN members ensure that information and intelligence held by each scrutiny body is shared. Local Government The LGBF reports on how much councils spend on particular services, their performance Benchmarking and how satisfied people are with these services. It supports-evidence based Framework (LGBF) comparisons between similar councils so that they can work and learn together to improve their services. National Scrutiny The aggregation of the individual council’s scrutiny plans into a national plan detailing all the Plan (NSP) scrutiny work planned across Scottish councils. Scottish Social The Scottish Social Housing Charter sets the standards and outcomes that all social Housing Charter landlords should aim to achieve when performing their housing activities. The Charter was approved by the Scottish Parliament and came into effect from 1 April 2012. Shared Risk A joint approach using key information about local government to plan scrutiny activity Assessment (SRA) that is proportionate and based on risk. Validated Self- Assistance provided by Education Scotland to councils on request, to help them develop Evaluation (VSE) their own methods and quality of self scrutiny.

285 National scrutiny plan 2016/17 A summary of local government strategic scrutiny activity

This report is available in PDF and RTF formats, along with a podcast summary at: www.audit-scotland.gov.uk

If you require this publication in an alternative format and/or language, please contact us to discuss your needs: 0131 625 1500 or [email protected]

For the latest news, reports and updates, follow us on:

Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN T: 0131 625 1500 E: [email protected] www.audit-scotland.gov.uk

286 Appendix 3 National Scrutiny Plan for Local Government 2016/17

Q1 Q2 Q3 Q4 Council April May June July August September October November December January February March

Aberdeen City

HB review EPS review CIAG Aberdeenshire

Angus CSI

Argyll & Bute

EPS review LAN follow up work Clackmannanshire CIAG F/U SHR EPS review Dumfries & Galloway

HB review EPS review CIAG Dundee City

HB review EPS review CIAG East Ayrshire

BV work East Dunbartonshire SHR SHR East Lothian

HB review EPS review East Renfrewshire

City of Edinburgh ASI EPS review Eilean Siar

BV work EPS review CIAG Falkirk

HB review EPS review Fife

Fire Glasgow City CSI SHR EPS review CIAG Highland HB review HB review Inverclyde

CIAG Midlothian

Fire Moray EPS review CSI EPS review North Ayrshire EPS review CIAG F/U EPS review North Lanarkshire

EPS review ASI Orkney Islands

SHR Perth & Kinross

CIAG Renfrewshire

Fire ASI Scottish Borders

CIAG F/U Shetland Islands

Fire South Ayrshire BV work CSI HB review CIAG South Lanarkshire

Stirling

CSI West Dunbartonshire

CSI West Lothian

Key

Audit Scotland Care Inspectorate/Multi-agency HMICS Best Value (BV) Children’s Services Inspection (CSI) Local Policing + Follow-up Best Value (FBV) Adult Services Inspection (ASI) Targeted Best Value Audit (TBV) HMFSI Community Planning Partnership follow-up (CPP F/U) Education Scotland Local area inspections (Fire) Housing Benefit Risk Assessment (HB) Education Psychology Service (EPS) Scottish Housing Regulator

Auditor Careers Information (CIAG) Performance Investigation (SHR) Careers Information (CIAG) Follow-up Additional annual audit work (AAA) Local Area Network (LAN) LAN follow up work 287 288 NORTH AYRSHIRE COUNCIL

Agenda Item 16 23 May 2016

Audit Committee

Title: Internal Audit Annual Report 2015/16

Purpose: To provide the Committee with an annual report on the work of Internal Audit during 2015/16 and provide an opinion on the governance, risk management and internal control environment of the Council.

Recommendation: The Committee is asked to note the content of the annual report and the opinion of the Senior Manager on the Council's governance, risk management and internal control environment.

1. Executive Summary

1.1 The Internal Audit annual report attached at Appendix 1 provides information on the work carried out during the period of the 2015/16 audit plan.

1.2 It is the opinion of the Senior Manager (Internal Audit, Risk and Fraud) that reasonable assurance can continue to be placed on the adequacy and effectiveness of the Council’s systems of governance, risk management and internal control.

2. Background

2.1 The Public Sector Internal Audit Standards (PSIAS) require that the Chief Internal Auditor prepares an Annual Report on the activities of Internal Audit to demonstrate performance and that the report should contain a view on the soundness of the Council’s governance, risk management and internal control frameworks. The Annual Report for 2015/16 is attached at Appendix 1 and outlines the role of Internal Audit, the performance of the section during the year and the key audit findings. It also contains the annual audit assurance statement.

289 2.2 The report gives information on actual performance against the plan. Overall, 806 days of audit work took place, which was 131 days less than budgeted; this was largely due to part-year vacancies within the team. The shortfall was mainly managed by delivering less consultancy work and by withdrawing 2 audit assignments from the plan with Audit Committee approval. Paragraph 2.7 of the annual report details the actual time spent on each category of audit work.

2.3 Other than the 2 audit assignments that were withdrawn, all audits within the approved plan for 2015/16 were either completed during the year or were in progress at 31 March 2016; 6 draft reports were with Services and 10 planned audits were still being worked on and will be completed within the first quarter of 2015/16.

2.4 Section 3 of the annual report provides information on the main findings from four significant audits. Each of these audits, along with all other audit reports published, were reported to the Audit Committee.

2.5 These significant findings are detailed in the annual report to support and inform the opinion by the Senior Manager (Internal Audit, Risk and Fraud) on the adequacy of the Council's governance, risk management and internal control environment. The Public Sector Internal Audit Standards require this opinion to be given each year through an annual assurance statement. This is included within the annual report at section 7.

2.6 The opinion in the annual assurance statement also contributes to the Annual Governance Statement which is published as part of the Council's annual accounts and is elsewhere on the Audit Committee agenda for approval.

2.7 Based on the audit work carried out and in particular the significant audit findings detailed within the annual report, the opinion of the Senior Manager (Internal Audit, Risk and Fraud) is that reasonable assurance can be placed on the adequacy and effectiveness of the Council’s systems of governance, risk management and internal control.

2.8 At section 5, the annual report also provides information on some of the performance highlights for Internal Audit during 2015/16. These included regular reporting to the Audit Committee on all audit findings, the feedback from customer surveys, the establishment of the Corporate Fraud team and delivery of a series of awareness-raising presentations to senior management teams across all Council Services, highlighting the role of Internal Audit and the new Corporate Fraud team.

290 3. Proposals

3.1 It is proposed that the Committee notes the content of the annual report and opinion on the Council's governance, risk management and internal control environment.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The work of Internal Audit helps to support the efficient delivery of the strategic priorities within the Council Plan 2015-2020. Community Benefits: None.

5. Consultation

5.1 Council services are consulted on the findings of Internal Audit throughout the year. No specific consultations have taken place in relation to this annual report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

291 292 Appendix 1

INTERNAL AUDIT ANNUAL REPORT

2015-16

Version: Final Date: 04/05/2016 Author: Paul Doak Classification: PUBLIC

293

INTERNAL AUDIT ANNUAL REPORT 2015-16

1 Introduction

1.1 The Executive Director (Finance and Corporate Support) has overall responsibility for Internal Audit in North Ayrshire Council. The Senior Manager (Internal Audit, Risk and Fraud) reports directly to the Executive Director, with the right of access to the Chief Executive and the Chair of the Audit Committee on any matter. These rights of access help ensure the organisational independence of Internal Audit.

1.2 During 2015-16, the section operated in conformance with the ‘Public Sector Internal Audit Standards (PSIAS)’. The Standards define the way in which the Internal Audit section should be established and undertake its functions. Conformance can be evidenced by the introduction of a ‘quality assurance and improvement plan’ process; a self-assessment exercise is scheduled for early in 2016-17, in preparation for an external assessment later in the year through the peer-to-peer review network of the Scottish Local Authorities Chief Internal Auditors Group (SLACIAG).

1.3 The Internal Audit section also operated under an ‘Internal Audit Charter’ which was refreshed and approved by the Audit Committee in February 2016.

1.4 One of the requirements of the PSIAS is the publication of an annual report. The aim of this annual report is to give an overview of the work carried out during 2015-16. Some information is provided on the resources available to Internal Audit, the performance of the section and the opinion of External Audit on the adequacy of Internal Audit.

1.5 Finally, the report provides an assurance statement on the overall adequacy and effectiveness of the Council’s governance, risk management and internal control frameworks.

2 Planned and Actual Activity during 2015-16

2.1 The Internal Audit plan for the period 1st April 2015 to 31st March 2016 was approved by the Audit Committee in February 2015.

2.2 From the total of 937 available days, 817 days (87.2%) were budgeted as ‘productive’ and allocated for carrying out audit work. A further 120 days (12.8%) were budgeted for ‘non-productive’ time: management and strategy, attendance at meetings, administration and staff training and development. Time is determined as ‘productive’ or ‘non-productive’ in line with definitions produced by CIPFA.

2.3 During 2015-16, 806 days of actual audit work took place; this was 131 days less than budgeted. The main reason for the shortfall was two part-year vacant posts. This was partly offset by commissioning Audit Glasgow to carry out 6 audits from the approved plan and a further 2 audits were withdrawn from the plan; these related to ‘Committee Services’ and ‘European Grant Income’.

04/05/2016 Page 2 [PUBLIC] 294 2.4 There were 709 actual ‘productive’ days during 2015-16 and 97 ‘non-productive’ days. At 88% of total actual days, this meant productive days were marginally above the target of 87.2%.

2.5 This demonstrated an improvement in productive time since 2014-15, when productive days were 85.7% of the total. Actual productivity has increased in each of the last 5 years. The target for 2016-17 has been set at 87%, as it is not considered realistic to increase this any further.

2.6 Other than the audits that were withdrawn, every audit within the approved plan for 2015-16 was either completed during the year or was in progress at 31st March 2016; 6 draft reports were with Services and a further 10 planned audits were still being worked on and will be completed within the first quarter of 2015/16.

2.7 Budget and actual days, together with the variance from budget, are shown against the main headings from the audit plan in the table below. A full analysis of the time spent on individual audits is provided at pages 9 to 12 of this annual report.

Budget Actual Variance Key Corporate Systems 40 40 0 Other Systems 320 286 34 days under ICT auditing 65 62 3 days under Governance 80 47 33 days under Performance Monitoring 20 27 7 days over Regularity Audits 40 47 7 days over Following the Public Pound 12 9 3 days under Other Work 215 173 42 days under Investigations/Contingencies 25 18 7 days under

TOTAL 817 709 108 days under

2.8 The time spent on ‘Other Systems’ during 2015-16 was 34 days under budget. An audit of European grant income (20 days) was delayed until 2016-17, while 5 audits were ongoing at 31st March 2016 and will be completed within Q1 2016/17.

2.9 Within ‘Governance’, which was 33 days under budget, an audit of Committee Services (10 days) was withdrawn from the plan and 3 audits were ongoing at 31st March and will be completed during Q1 2015/16.

2.10 ‘Other Work’ was 42 days under budget. This largely related to audit consultancy and advisory work, where the audit team was involved in a number of projects across the Council, but where the full budgeted time was not required. Projects supported included the delivery of cash handling training, advising on Lean Six Sigma projects and IT system projects within Building Services, Roads and Finance.

2.11 In line with the Council’s defalcation procedures, all instances of suspected fraud and irregularity are to be reported to Internal Audit. These are investigated by the newly established Corporate Fraud team and a separate report has been prepared on the work of that team.

2.12 Two unplanned assignments were undertaken by Internal Audit during 2015/16. One was an investigation into the circumstances around a significant duplicate payment by the Council to a partner organisation and the other was a review of the controls around School Funds.

04/05/2016 Page 3 [PUBLIC] 295

3 Main Findings

3.1 Detailed below are the key findings from the audit work finalised during 2015-16.

3.2 Information Governance A review was carried out of security procedures relating to confidential waste and other similar documents across the Council. This found that the handling of confidential waste varied across Council premises, a number of different contractors were being used to dispose of confidential waste and there was a lack of internal guidance around the handling of confidential waste in properties that are being vacated.

A number of actions were identified but these have not all yet been implemented and further work is required by the Information Management team to ensure that arrangements are consistent and robust.

3.3 Performance Indicators 2014-15 Internal Audit carried out a review of a sample of 5 of the Council’s performance indicators for 2014-15. This was to provide assurance that procedures and processes for recording data were robust and that information for publication was accurate.

Some issues were identified with all 5 of the indicators sampled, covering a lack of written procedures, inadequate processes for recording data and inaccurate calculations. 2 of the indicators were not published as a result of the audit review.

Similar issues were identified by Audit Scotland in reviewing a separate sample, and further work is required by Council Services to ensure that robust information is always available for publication.

3.4 Payroll Transaction testing An audit of Payroll transactions was carried out, assisted by computer audit software. This identified weaknesses in the authorised signatories’ process, where in many cases staff that were authorising overtime payments did not appear on the signatories list, and a number of travel and subsistence claims were identified which did not fully comply with the terms and conditions.

Similar issues were identified during an audit assignment two years previously. The audit identified a number of actions for implementation and the matter has also been raised with the Corporate Management Team.

3.5 Duplicate Payment investigation In April 2015, a payment of just over £1m was made twice by the Council to a partner organisation, which notified the Council of the overpayment and repaid the money. An investigation was carried out by Internal Audit to identify the circumstances which allowed this to happen.

It was identified that the invoice had been received twice by the Council and passed for payment by both Education and Economy and Communities, once through PECOS and once as a manual invoice. Checks that were carried out by Accounts Payable were not adequate to identify the duplicate invoice and were tightened following the audit review.

04/05/2016 Page 4 [PUBLIC] 296 4 Audit Resources

4.1 The Internal Audit section is directly managed by the Team Manager (Internal Audit), who reports to the Senior Manager (Internal Audit, Risk and Fraud). The Senior Manager is responsible for Internal Audit, as well as Corporate Fraud, Risk Management, Insurance and the Directorate Performance Management team within Finance and Corporate Support.

4.2 As well as the Team Manager, the section included an Internal Auditor, a specialised Computer Auditor and an Audit Assistant.

4.3 In addition to the Senior Manager, three other staff within the section hold a relevant qualification, either through an institute which is part of the CCAB (Consultative Committee of Accountancy Bodies) or the IIA (Institute of Internal Auditors).

5 Performance

5.1 During 2015-16, Internal Audit provided quarterly updates on work carried out to the Council’s Audit Committee. Elected Members had the opportunity to discuss all Internal Audit reports and question either the Senior Manager or relevant officers from Council services. All elected members have access to full copies of all Internal Audit reports on a confidential basis through the Council’s intranet.

5.2 The Council’s performance management system, Covalent, is utilised to follow-up on audit recommendations. Officers with responsibility for implementing recommendations are required to update the Covalent system and updates are provided to the Audit Committee on a quarterly basis. During 2015-16, the Audit Committee expressed dissatisfaction at the time some Services were taking to implement actions and determined that a senior officer would be required to attend the Committee to provide an update on each action that was overdue for completion.

5.3 Internal Audit issues customer feedback questionnaires at the end of each audit assignment. This is designed to gather feedback from those who assisted with the audit and aims to help measure the effectiveness of audit work, ensuring it is targeted to best effect.

5.4 The questionnaire is completed online using Survey Monkey and requires participants to answer 9 questions. When each draft audit report is issued, the auditor e-mails a link to the survey to the staff who were most involved in assisting with the provision of information.

5.5 During 2015-16, 63 questionnaires have been issued and 31 responses were received, a response rate of 49%.

5.6 Feedback was generally extremely positive, with all respondents confirming that the auditor explained the purpose of the audit and answered any questions they had and that requests for information were reasonable. All respondents also advised that they found the audit useful. A number of very positive comments were received about the approach of individual auditors.

5.7 Almost all respondents found that the audit caused only minimal disruption to normal service delivery and that they would be happy to approach the auditor for advice in the future.

04/05/2016 Page 5 [PUBLIC] 297 5.8 The only issue raised by some respondents (just over 25%) was around the discussion of significant concerns during and/or at the end of the audit. Further exploration has revealed that this is due to different interpretations of what constitutes a ‘significant concern’ or the fact that the significant concerns may be discussed with the Head of Service at the end of the audit.

5.9 Other achievements during 2015/16 included: • Establishment of the new Corporate Fraud team within Internal Audit, following the transfer of benefit fraud investigation work to the Department for Work and Pensions (DWP) in February 2015. This brings together responsibility for investigating fraud within the Council (previously done by Internal Audit) and fraud against the Council. Reporting arrangements were established during 2015-16 to keep the Audit Committee fully informed about the outcomes from the work of the new team and a separate annual report has been prepared to provide more information on the work of that team. • Delivery of a series of awareness-raising presentations to senior management teams across all Council services, highlighting the role of Internal Audit and the new Corporate Fraud team.

5.10 A range of performance indicators is used to monitor performance within the section and these are detailed in full on page 13, along with the two previous years’ actual figures. These are tracked by the Senior Manager on a quarterly basis to drive further improvement in service standards; a team meeting is held following each quarter with all audit staff to discuss performance and identify opportunities for development.

5.11 A number of the indicators are slightly below target, but the section continues to increase its percentage of productive time as noted at 2.5 above. There were a number of staffing changes within the team during 2015-16 and this was the main factor in not achieving some of the performance targets.

5.12 ‘Draft reports returned within 14 days of issue’ were only 34% (2014/15: 47%) against a target of 80%. This equated to 11 of the 32 draft reports returned during the year. This indicator reflects the performance of Council services in returning a completed action plan to Internal Audit. There remain difficulties in getting completed action plans returned by some Heads of Service within the 14 day target; the average time taken was 22 days (2014/15: 19 days). It has been agreed by the Audit Committee that the target will be increased to 21 days for 2016-17; this is seen as a more achievable target. Had the target been 21 days during 2015/16, actual performance would have been 57%.

5.13 The Internal Audit section also calculates 2 annual performance indicators which are required by the CIPFA Directors of Finance group. These are as follows:

2015-16 2014-15 Productive days achieved per audit plan 86.8% 91.7% Cost of Internal Audit per £1m of net tbc £896.86 expenditure

5.14 The ‘productive days achieved per the audit plan’ were less than the 91.7% recorded in 2013/14; this was due to the reasons highlighted at 2.3 above.

5.15 The ‘cost of Internal Audit per £1m of Council net expenditure’ cannot be calculated until the closure of the Council’s 2015-16 accounts. This will be reported as part of the Council’s performance reporting arrangements at a later date.

04/05/2016 Page 6 [PUBLIC] 298 5.16 Based on the 2014/15 performance, the Council was ranked 11th from 32 authorities and the cost was well below the Scottish average of £974.

6 External Audit opinion of Internal Audit

6.1 Auditing standards require internal and external auditors to work closely together to make best use of audit resources.

6.2 The Council’s external auditors are currently Audit Scotland. This audit appointment runs for the 5-year period from 2011 to 2016.

6.3 Audit Scotland seeks to rely on the work of Internal Audit where possible. As part of their annual planning process, they carry out a review of the Internal Audit function. This review seeks to establish the effectiveness of the arrangements in place and to identify those areas of work on which they can place specific reliance as part of their audit of the 2015-16 financial year.

6.4 Audit Scotland has determined that North Ayrshire Council’s Internal Audit section operates in accordance with the Public Sector Internal Audit Standards (PSIAS).

6.5 In respect of the financial statements, formal reliance will be placed on the work of Internal Audit on Treasury Management and aspects of the Payroll system. For governance and performance work, Audit Scotland will also place reliance on Internal Audit work on revenue budget monitoring, performance indicators, workforce planning and IT disaster recovery and business continuity, as well as work carried out by the Corporate Fraud team on the National Fraud Initiative (NFI).

7 Assurance statement

7.1 This statement on the adequacy and effectiveness of the frameworks of governance, risk management and internal control is based on the audit work performed during 2015-16 as reported above. It also draws on the experience of audit work carried out in earlier years as well as assurances received from management and external audit findings.

7.2 Internal Audit staff have carried out work, both on a corporate basis and within each of the Service groups and, subject to the comments in section 3 above, the conclusion drawn from that work was that most of the anticipated governance, risk management and internal control frameworks were in place and operating effectively.

7.3 Where Internal Audit identified opportunities for improvement, the responses received from managers continued to be positive and there was commitment to implementing Internal Audit's recommendations.

7.4 On this basis, it is my opinion that reasonable assurance can be placed on the adequacy and effectiveness of the Council’s systems of governance, risk management and internal control.

Paul Doak Senior Manager (Internal Audit, Risk and Fraud) 4th May 2016.

04/05/2016 Page 7 [PUBLIC] 299 NORTH AYRSHIRE COUNCIL INTERNAL AUDIT PLAN 2015-16

FINAL REPORT

PRODUCTIVE TIME - AUDIT PLAN

Report to Planned Actual Days Variance Final Report Audit Key Corporate Systems Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee HR/Payroll system Examine a range of controls in the HR/Payroll system. 15 15 0 Complete 29/03/2016 23/05/2016 Review the use of Government Procurement Cards (GPCs) across the Procurement and Accounts Payable Council. 15 16 -1 Draft report issued Treasury Management Examine the Council's treasury management arrangements. 10 9 1 Complete 29/03/2016 23/05/2016 TOTAL AUDIT DAYS 40 40

Report to Planned Actual Days Variance Final Report Audit Other Systems Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Review controls in relation to the use of European grant income by Audit delayed until European grant income Economic Growth. 20 0 20 2016/17. n/a n/a Regeneration Carry out a review within the Regeneration section. 15 15 0 Complete 11/11/2015 15/02/2016 Complete - combined Review the use of education placements within other authorities or private with Residential Schools Education placements educational establishments. 15 23 -8 audit below. 19/10/2015 16/11/2015 SEEMIS / Click and Go system Examine the system controls within the SEEMIS/Click and Go system. 15 17 -2 Complete 19/10/2015 16/11/2015 Review the Council's implementation of the Children and Young People (Scotland) Act 2014 in relation to the provision of 600 hours of early Early Years service learning and childcare per annum. 15 18 -3 Complete 11/12/2015 15/02/2016 Agency staff and workers Examine the Council's use of agency staff and workers. 10 6 4 Fieldwork ongoing Revenues and Benefits Review a range of controls within the Benefits service. 20 20 0 Complete 09/03/2016 23/05/2016 Insurance Examine the Council's insurance arrangements. 10 10 0 Fieldwork ongoing Review the effectiveness of revenue budget monitoring arrangements Additional time required Revenue Budget Monitoring within one of the Council's directorates. 15 30 -15 due to sample size. 26/02/2016 23/05/2016 Examine the effectiveness of the Council's capital monitoring Capital Monitoring arrangements. 15 14 1 Fieldwork ongoing

Complete - combined Review the use of residential school placements by the Health and Social with Education Residential Schools Care Partnership. 10 5 5 Placements audit above. 19/10/2015 16/11/2015 Review controls within the home care service, including the Care at Home implementation of the CM2000 system. 20 17 3 Complete 17/06/2015 24/08/2015 Examine controls in relation to the procurement of services by the Health Contracts and Commissioning and Social Care Partnership. 15 5 10 Fieldwork ongoing IJB Governance and Assurance arrangements 9 8 1 Draft report issued IJB Organisational Development arrangements 6 3 3 Draft report issued Building Services job variations and Review controls within Building Services in relation to job variation orders recharging and charging for services. 15 12 3 Fieldwork ongoing

300 04/05/2016 Page 8 [PUBLIC] Report to Planned Actual Days Variance Final Report Audit Other Systems Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Carry out a full follow-up review of controls within the Commercial Refuse Commercial Refuse section following the audit carried out in 2013-14. 20 17 3 Draft report issued 07/04/2016 23/05/2016 Facilities Management - purchase of provisions Review the procurement of provisions by Facilities Management. 20 19 1 Complete 15/07/2015 24/08/2015 Transportation Review controls in the Transport Hub in relation to transportation. 20 22 -2 Complete 26/01/2016 15/02/2016 Roads sub-contractors Examine the use of sub-contractors by the Roads section. 15 15 0 Complete 29/03/2016 23/05/2016 Corporate Landlord Review controls within the Corporate Landlord section. 20 10 10 Fieldwork ongoing TOTAL AUDIT DAYS 320 286

Report to Planned Actual Days Variance Final Report Audit ICT Auditing Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Network Controls Review a range of controls within the Education network. 25 22 3 Complete 18/01/2016 15/02/2016 IT Disaster Recovery and Business Examine the adequacy of ICT disaster recovery and business continuity Continuity arrangements. 15 17 -2 Complete 25/11/2015 15/02/2016 IT assets Review controls over a range of ICT assets. 25 23 2 Fieldwork ongoing TOTAL AUDIT DAYS 65 62

Report to Planned Actual Days Variance Final Report Audit Governance Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee

Committee Services Review governance arrangements within Committee Services. 10 0 10 Audit removed from plan n/a n/a

Code of Corporate Governance Examine compliance with aspects of the Code of Corporate Governance. 15 15 0 Complete 29/01/2016 15/02/2016 Review the adequacy of the Council's arrangements in relation to Serious Serious and Organised Crime and Organised Crime. 15 13 2 Fieldwork ongoing Review the Council's preparation in relation to the GIRFEC (Getting it GIRFEC (Getting it Right for Every Right for Every Child) requirements of the Children and Young People Child) (Scotland) Act 2014. 15 2 13 Fieldwork ongoing Health and Safety policies Examine compliance with the Council's Health and Safety policies. 10 1 9 Fieldwork ongoing Workforce Planning Review the Council's workforce planning arrangements. 15 16 -1 Draft report issued 07/04/2016 23/05/2016 TOTAL AUDIT DAYS 80 47

Report to Planned Actual Days Variance Final Report Audit Performance Monitoring Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Provide assurance on the robustness and accuracy of a sample of Performance Indicators indicators. 20 27 -7 Complete 20/10/2015 16/11/2015 TOTAL AUDIT DAYS 20 27

301 04/05/2016 Page 9 [PUBLIC] Report to Planned Actual Days Variance Final Report Audit Regularity Audits Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Use computer audit software to interrogate the HR/Payroll system and HR/Payroll transaction testing examine any anomalies which arise. 20 21 -1 Draft report issued 07/04/2016 23/05/2016 Review financial and other controls within a sample of operational Health and Social Care establishments establishments within the Health and Social Care Partnership. 20 26 -6 Complete 27/01/2016 15/02/2016 TOTAL AUDIT DAYS 40 47

Planned Actual Days Variance Following the Public Pound Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016

Annual audit of Community Councils accounts' to ensure Council funding Community Councils is used in accordance with the Council's Scheme of Administration. 10 8 2 As required. Annual audit of the accounts of various Tenants and Residents Tenants and Residents Associations Associations. 2 1 1 As required. TOTAL AUDIT DAYS 12 9

Planned Actual Days Variance Other Work Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 All 14/15 audits were finalised within Q1 but Completing audits from the previous year's audit plan that were not fully more time required than Prior year audit work complete by the end of March 2014. 30 43 -13 anticipated. Audit consultancy: ad-hoc advice Providing advice to council services in response to ad-hoc queries 10 14 -4 As required. Participating in project work to support developments in other council Audit consultancy: project work services. 65 37 28 As required. Data matching Carry out data matching exercises using computer audit software. 10 0 10 As required. Governance documents Review of governance documents 5 1 4 As required. Follow up of previous audit reports to ensure that appropriate action has Follow-up been taken. 20 12 8 As required. Preparing audit plans and monitoring progress and performance against Additional work due to Audit planning and monitoring plans. 20 30 -10 staffing changes. Supporting the Council's Audit Committee and Cabinet by preparing reports, attending meetings and delivering training for elected members Audit Committee and Cabinet as required. 25 20 5 As required. Carry out developmental work to further enhance the efficiency of the Development of the Audit service audit section. 10 2 8 As required.

Undertake a quality assurance programme for Internal Audit in line with Quality assurance the requirements of the Public Sector Internal Audit Standards (PSIAS). 10 0 10 Fieldwork ongoing. Certification of expenditure funded by specific grants from external Grant claims funding bodies 5 12 -7 As required.

Work in relation to the Council's annual accounts, including stock counts, Annual Accounts reviewing imprests and preparing the Annual Governance Statement. 5 2 3 As required. TOTAL AUDIT DAYS 215 173

TOTAL PRODUCTIVE TIME - AUDIT PLAN 792 691 302 04/05/2016 Page 10 [PUBLIC] PRODUCTIVE TIME - CONTINGENCIES AND INVESTIGATIONS

Report to Planned Actual Days Variance Final Report Audit Special Investigations Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Spot-check audits 0 As required. Duplicate Payment 8 Complete 06/08/2015 16/11/2015 School Funds 10 Complete 18/01/2016 15/02/2016

TOTAL PRODUCTIVE TIME - CONTINGENCIES AND INVESTIGATIONS 25 18

PRODUCTIVE TIME - RESERVE AUDITS

Report to Planned Actual Days Variance Final Report Audit Reserve Audits Audit Objective Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 issued Committee Library and Information service Review a range of controls within the Library and Information service. 15 0 15 Audit not progressed Review a range of controls within the Council's Trading Standards Trading Standards service. 15 0 15 Audit not progressed Examine the controls around Throughcare payments within Finance and Throughcare payments the Health and Social Care Partnership. 10 0 10 Audit not progressed Vehicle replacement Review the Council's vehicle replacement programme. 15 0 15 Audit not progressed Council house building and buyback programmes Review the Council's house building and buyback programmes. 15 0 15 Audit not progressed Carry out a review of the controls around the Council's Performance Covalent system Management system, Covalent. 10 0 10 Audit not progressed Review the provision of small grants to local organisations and individuals External grant funding by the Council. 10 0 10 Audit not progressed Examine the controls around Parent Council funding provided by the Parent Council funding Council. 5 0 5 Audit not progressed

TOTAL PRODUCTIVE TIME - RESERVE AUDITS 95 0

303 04/05/2016 Page 11 [PUBLIC] NON-PRODUCTIVE TIME

Planned Actual Days Variance Audit Days @ 31/03/16 Fav / (Adv) Progress @ 31/03/2016 Additional time has been spent to due to staff recruitment and managing Audit Glasgow Management 10 24 -14 arrangements.

Less time than budgeted will be required for Administration 29 22 7 administration. Less time than budgeted will be required for attending Meetings 47 35 12 meetings. Less time has been spent on training due to staff Training 34 16 18 vacancies.

TOTAL NON-PRODUCTIVE TIME 120 97

TOTAL DAYS 937 806

ANNUAL BUDGET ACTUAL to 31/03/16

PRODUCTIVE DAYS 817 87.2% 709 88.0% NON-PRODUCTIVE DAYS 120 12.8% 97 12.0%

TOTAL DAYS 937 100.0% 806 100.0%

304 04/05/2016 Page 12 [PUBLIC] Internal Audit Performance Indicators

2013/14 2014/15 2015/16 2015/16 Actual Actual Target Actual

% of auditor time spent productively 84.9% 85.7% 87.2% 88.0% Training days per auditor 6.2 days 6.5 days 7 days 2.7 days information Final reports issued 46 40 only 30 Audits completed within budgeted days 70% 70% 75% 63% Draft reports issued within 21 days of fieldwork completion 100% 95% 100% 91% Draft reports returned within 14 days of issue 35% 47% 80% 34% Final reports issued within 14 days of return of action plan 100% 98% 100% 93% Actions implemented on time by Council services 84.5% 84.7% 80% 85.3% Ad-hoc requests for advice from Council 37 58 information 42 services requests requests only requests

04/05/2016 Page 13 [PUBLIC] 305 306 NORTH AYRSHIRE COUNCIL

Agenda Item 17 23 May 2016

Audit Committee

Title: Corporate Fraud Annual Report 2015/16

Purpose: To provide the Audit Committee with an annual overview of the work of the Corporate Fraud team during 2015/16.

Recommendation: That the Committee notes the work carried out by the Corporate Fraud team during 2015/16.

1. Executive Summary

1.1 The Corporate Fraud team was established within Internal Audit in February 2015, following the transfer of responsibility for housing benefit fraud investigation to the Department for Work and Pensions (DWP). The team provides the Council with the capacity to investigate fraud both within and against the organisation.

1.2 It was agreed that the Committee would receive bi-annual updates on the work of the team. A mid-year update on initial progress was provided to the Audit Committee in November 2015 and this report provides an overview of the key achievements during the first full year.

2. Background

Internal Investigations

2.1 The team has carried out 8 separate investigations involving Council employees since April 2015. Including reports elsewhere on the agenda for this meeting, 7 of these have been reported to the Audit Committee and one remains ongoing; this will be the subject of a future report to the Committee once it is concluded.

307 External Investigations

2.2 Referrals for investigation have been made to the team from a number of different sources, including Revenues and Benefits staff, members of the public and other agencies and local authorities. The publicity used by the team, including posters and leaflets in public areas, advertising on Council vans, payslip inserts and contact information on the Council website, has been successful in generating a stream of referrals to the team.

2.3 Investigations have been carried out across a range of areas including Council Tax Reduction, Council Tax Single Person Discount, Discretionary Housing Payments, Scottish Welfare Fund, Non-Domestic Rates, Blue Badges, Right to Buy applications and Housing tenancy issues.

2.4 Many referrals prove to be unfounded once they have been investigated; however, a number can result in backdated recoveries as well as an ongoing cost reduction for the Council. Council Tax, Discretionary Housing Payment and Scottish Welfare Fund cases investigated during 2015-16 have led to around £12,000 of backdated recoveries as well as an ongoing annual cost reduction of a further £10,000.

2.5 A pro-active review of all properties in receipt of 100% Empty Property Relief has been carried out by the team and this has resulted in the withdrawal of just over £60,000 of ongoing relief in respect of properties which are no longer empty, as well as the backdated recovery of a further £87,000.

2.6 The new Disabled Persons' Parking Badges (Scotland) Act 2014 was introduced on 30 March 2015. Local authorities now have the powers to confiscate blue badges where there is suspicion of fraud or misuse of a badge. During 2015/16, the team has worked with the Health and Social Care Partnership to develop a procedure for recovering Blue Badges and a number have been confiscated. The team has also worked in partnership with other local authorities where misuse of a North Ayrshire badge has been identified in other areas.

Other Work

2.7 The team continues to take the lead in co-ordinating the Council's participation in the National Fraud Initiative (NFI) exercise. Investigation work from the data matches which were released in January 2015 was concluded by the relevant Services in early 2016. There were no direct outcomes for the Council. Audit Scotland has reviewed the Council's participation in the NFI and confirmed that they are satisfied with our approach.

308 2.8 This is consistent with previous NFI exercises, when almost all outcomes have related to Housing Benefit frauds. The potential matches in relation to Housing Benefit were passed to DWP for investigation as the Council no longer has responsibility for Housing Benefit fraud.

2.9 New NFI matches in relation to Single Person Discounts and individuals who are approaching the age of eighteen were released in March 2016; the Corporate Fraud team is taking the lead in investigating these as other non-Council Tax issues may be highlighted for further work.

2.10 The Corporate Fraud team has assumed responsibility for delivering the programme of Cash Handling training, designed to ensure that adequate controls are in place over the security of cash and key holding at Council establishments. This course is delivered twice a year to relevant staff through the corporate training calendar, with additional sessions arranged as required.

2.11 A successful workshop on Immigration, Identity and Document fraud awareness was arranged in July involving speakers from the Home Office and Police Scotland. This was attended by around 80 staff from a range of Council services including Human Resources and Housing.

Planned Future Work

2.12 A range of plans are in place to further develop the work of the Corporate Fraud team during 2016/17. These include:

 the use of data matching software, taking data sets from different Council systems to identify potential frauds for further investigation. This will be the main focus of pro-active work during the year ahead;  developing fraud awareness sessions for key staff in relevant Council Services;  closer working with Housing around tenancy fraud issues;  liaison with the Crown Office and Procurator Fiscal Service (COPFS) to develop arrangements for referring relevant cases for possible prosecution;  information stands in public areas to raise further awareness of the Corporate Fraud team;  developing joint working with other Council services and agencies with enforcement powers to share intelligence and ensure that the best possible use is made of available powers.

309 3. Proposals

3.1 It is proposed that the Audit Committee notes the work carried out by the Corporate Fraud team during 2015/16 and the planned programme for 2016/17.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: The work of the Corporate Fraud team helps to support the efficient delivery of the strategic priorities within the Council Plan 2015-2020. Community Benefits: None.

5. Consultation

5.1 No consultation has been required in the preparation of this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

310 NORTH AYRSHIRE COUNCIL

Agenda Item 18 23 May 2016

Audit Committee

Title: External Audit Action Plans: Quarter 4 progress update

Purpose: To update the Committee on progress made in implementing the agreed action plans arising from the external audit of the Council's 2014/15 accounts.

Recommendation: That the Committee notes the good progress made in completing the 2014/15 action plan.

1. Executive Summary

1.1 Each year, on completion of the audit of the Council's annual accounts, a report is prepared by the External Auditor on their findings. This includes an action plan for the Council. In addition, the External Auditor publishes a report on the findings of their work on the Council's key financial systems, which also includes an action plan for the Council.

1.2 Internal Audit has been assigned responsibility for monitoring progress against these actions. This report provides the Audit Committee with an update on the progress at 31 March 2016.

2. Background

2.1 The action plan relating to the 2014/15 annual accounts was reported to the Audit Committee on 28 September 2015 and this contained 3 actions. The last update provided to the Committee in November 2015 indicated that none of these actions were due for completion at that time.

2.2 All three of these actions have now been completed and details are attached at Appendix 1.

2.3 The 2014/15 'Review of Main Financial Systems' action plan was reported to the Audit Committee on 24 August 2015 and contains 9 actions. The last update provided to the Committee in November 2015 indicated that only one action remained incomplete, which was not due until the end of December.

311 2.4 This action is not yet fully complete but it is anticipated it will be finalised by the end of May; details are attached at Appendix 2.

3. Proposals

3.1 It is proposed that the Committee notes the good progress made in completing the action plans.

4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: None. Community Benefits: None.

5. Consultation

5.1 No consultations have been required in the preparation of this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

312 Appendix 1

Parent Action Original Due Code Description Note Priority Progress Due Date Managed By Assigned To Date Annual Audit Action Plan 2014- EA2015AA 15 Sub Actions Original Due Code Description Latest Note Priority Progress Due Date Managed By Assigned To Date Issue: The general fund capital 2015/16 - Quarter Four Update: budget was reduced by 38.9% In 2015/16, the General Fund spent 89% during the year; and the HRA of its revised capital programme, a capital budget was reduced by significant improvement on 2014/15. The 16.4% during the year. A HRA spend was 70% with the majority of number of projects have been the slippage relating to a single project. All rescheduled and delayed. major capital projects are reported to CMT Risk: Strategic priorities that are on a monthly basis to ensure these remain dependent on capital projects on track. Reporting to Cabinet has been being completed may not be EA2015AA01 enhanced to highlight across Services 31-Mar-2016 31-Mar-2016 Laura Friel Laura Friel met. Service delivery may also where slippage is occurring. Governance be affected. around capital projects has been Recommendation: The timing of enhanced through the establishment of projects in the capital Service Programme Boards to ensure all programme should be fully projects are monitored closely. Given the aligned to council’s strategic number of recent enhancements to priorities and ensure that governance a more comprehensive review rescheduling has not had a of this in respect of capital projects is significant impact on meeting underway. the council’s strategic priorities.

1 313

2015/16 - Quarter Four Update: HSCP financial performance continues to Issue: Whilst preparations have be reported regularly to Cabinet. Similar to been good, the effectiveness of previous years an overspend has been the IJBs in delivering health and incurred. In line with the Integration social care services is Scheme there was a requirement for the unproven. There has been a HSCP to develop a Recovery Plan. The recurring overspend of Health Recovery Plan was considered by the IJB and Social Care services in at its meeting on 10 March 2016 and recent years. Cabinet considered this, alongside the Risk: Given the needs led draft HSCP budget for 2016/17, at its EA2015AA02 nature of health and social care 31-Mar-2016 31-Mar-2016 Laura Friel Laura Friel meeting on 29 March 2016. Cabinet services, there is a risk of agreed to provide non recurring funding for overspends in the Health and 2015/16 of around £1.2m to meet the in Social Care Partnership year overspend with assurance being budgets if scrutiny provided by the HSCP Chief Officer that arrangements are not effective. services would be provided within the Recommendation: The council agreed budget for 2016/17. The Council's should review its arrangements Chief Executive and Executive Director of to ensure that IJB services are Finance continue to meet with the HSCP delivered within budget. Chief Officer and Chief Finance Officer to discuss financial performance. Issue: There are no procedural instructions on how to collect data for some performance 2015/16 - Quarter Four Update: indicators. In other cases A template has been produced which sample tested, there was little or records several performance related areas no evidence in support of the including procedures for collecting the Andrew indicator reported. EA2015AA03 data, calculation instructions and rationale 31-Mar-2016 31-Mar-2016 Andrew Fraser Fraser; Risk: Performance data for target . This will be completed for all Caroline Frew reported may be based on performance measures. Performance information that is not robust. Officers from all Directorates were Recommendation: There should involved in the creation of the template. be a clear audit trail for all performance indicators reported.

2 314 Appendix 2

Parent Action Original Due Code Description Note Priority Progress Due Date Managed By Assigned To Date Key Controls Action Plan 2014- EA2015KC 15 Sub Actions Original Due Code Description Latest Note Priority Progress Due Date Managed By Assigned To Date We consider it good practice for employing departments to periodically confirm the 2015/16 - Quarter Four Update: Work existence of employees listed continues within ICT to finalise the report. on the payroll. This helps to The extract has been produced and is ensure that all employees on currently being tested to ensure Gavin Jackie EA2015KC05 the payroll are valid and still robustness of data content, it is anticipated 1 31-Dec-2015 31-Dec-2015 MacGregor Hamilton work for the council. that due to year end demands within both The last employee data check ICT and Employment Services that full was completed in June 2013. A sign off won't be achieved prior to 31 May data check was planned for 2016 September 2014, however this was not carried out.

3 315 316 NORTH AYRSHIRE COUNCIL

Agenda Item 19 23 May 2016

Audit Committee

Title: Strategic Risk Register 2016/17

Purpose: To inform the Audit Committee of the strategic risks faced by the Council in 2016/17.

Recommendation: That the Audit Committee notes the Strategic Risk Register for 2016/17.

1. Executive Summary

1.1 The Council's Strategic Risk Register has been reviewed by the Corporate Risk Management Group and Corporate Management Team for 2016/17.

1.2 Some changes to the register have been recommended which are detailed in Section 2 below. These are:

 the removal of the separate 'Welfare Reform' risk, with the impact on the local community now covered within the 'Inequalities' risk;  revising the 'Health and Social Care' risk to focus on the financial challenges;  widening the 'Strategic Workforce Issues' risk to cover 'People and Transformation', and;  adding a new risk relating to 'Climate Change'.

1.3 The risk matrix has been changed from a '6x4' scoring to a '5x5' scoring to reflect current best practice.

1.4 The Strategic Risk Register was approved by Cabinet on 29 March 2016.

2. Background

2.1 North Ayrshire Council is committed to ensuring that it is proactive in identifying, responding to and managing the risks impacting on the authority. The Council recognises that a certain amount of risk is inevitable if the organisation is to achieve its objectives.

317 2.2 A Risk Management Strategy has been established to support Services in managing these risks, helping to ensure that they are 'risk aware' rather than 'risk averse', and enabling them to identify opportunities that can enhance Service provision.

2.3 The Strategy provides a framework through which a consistent approach to the management of risk can be maintained. The framework is embedded within the Directorate Planning process and allows Services, and the Council, to identify the significant risks impacting on the authority.

2.4 The most significant risks are identified through the Council's Strategic Risk Register (SRR), recognising the challenges facing the Council and demonstrating the arrangements in place to manage these risks. The register forms part of a larger governance process with additional risks and issues identified through Directorate Plans, Audit Reports and Project Plans.

2.5 The aim of risk management is to reduce the likelihood and/or impact of risk by identifying and controlling risks to the Council. If risk is to be managed appropriately, and Services are aware of these risks, risk management can contribute positively towards the organisation's decision making processes, making the Council more innovative and effective in its approach to service delivery.

2.6 The Strategic Risk Register has been reviewed for 2016/17 and is attached at Appendix 1. For each of the risks detailed within the register, a number of components are identified:

 current status (very high/high) and the risk score;  senior officer(s) with lead responsibility for the risk;  potential effect on the Council's priorities; and  internal controls currently in place.

2.7 To assist in the assessment of each risk, a risk matrix was used to ensure consistency across the Council. Only those risks rated as high or very high (10 or above) will feature on the SRR. A copy of the matrix is included within Appendix 1. The matrix has been updated to reflect a '5x5' scoring rather than the previous '6x4'; this will bring the Council into line with current best practice.

318 2.8 The following changes have been made in relation to each of the existing Strategic Risks:

 Financial Environment - using the new matrix, this has been scored as a very high risk at 20 (previously 18).  Inequalities - this has been scored as a very high risk at 20 (previously 18).  Welfare Reform - as a number of the reforms have now been implemented, this no longer appears on the register as a separate risk. The impact on the local community is reflected under the 'Inequalities' risk.  Health and Social Care Partnership - this risk previously related to the transition process towards integration. As the HSCP has now been established, the focus of the risk has been updated to reflect the need for effective partnership working to ensure financial control and sustainability and this is scored as a high risk at 12 (previously 15).  Strategic Workforce Issues - this risk has been redefined as ' People and Transformation' to reflect the wider risks associated with delivering the Transformation programme (T2) as well as the potential impact on the workforce arising from the programme. This has been scored as a high risk at 12 (unchanged from 2015/16).  Community Capacity Building and Empowerment - this has been scored as a high risk at 12 (unchanged from 2015/16).

2.9 One new strategic risk has been identified in relation to 'Climate Change'. This reflects the impact to Council infrastructure, property and service delivery which may arise through the increasing impact of climate change. This has been assessed as a high risk, scored at 12.

2.10 Council Services have identified actions within their draft directorate plans for 2016/19 to help the Council mitigate against its strategic risks; these actions have been linked to the strategic risks to assist with performance monitoring and reporting.

2.11 The Council's Internal Audit Plan 2016/17, which was approved by the Audit Committee on 15th February 2016, is risk-based and clear links are in place between the audit plan and the key risks the Council faces.

3. Proposals

3.1 It is proposed that the Audit Committee notes the Strategic Risk Register for 2016/17.

319 4. Implications

Financial: None. Human Resources: None. Legal: None. Equality: None. Environmental & None. Sustainability: Key Priorities: A successful risk management framework helps to underpin the delivery of the Council's strategic priorities in the Council Plan 2015-2020. Community Benefits: None.

5. Consultation

5.1 Consultation has taken place through the Corporate Risk Management Group and the Corporate Management Team.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Paul Doak, Senior Manager (Internal Audit, Risk and Fraud) on 01294-324561. Background Papers

None.

320 Appendix 1

Risk Matrix and Consequence Impact Guide

Introduction

Risk should be analysed consistently across the council in terms of the significance of its impact and the likelihood of occurrence. The Risk Matrix is therefore the tool that is to be used for this purpose. The impact element of the same matrix may be used for the grading of adverse events, complaints or claims.

Impact When considering the consequences of a potential risk, all scenarios must be considered with scoring based on the most likely outcome. It may be appropriate to consider the worst case scenario, however, those undertaking the risk analysis must be able to provide a robust rationale and have evidence to support their selection. For example, if ‘death’ could be the ultimate potential impact in relation to a specific problem, the risk assessors must have knowledge that this outcome has occurred in the past either internal or external to North Ayrshire Council. (A full list of descriptions to assist in analysing consequence is contained on the following two pages of this document);

Likelihood Similarly when considering the likelihood of occurrence, the risk assessor’s judgement must be based on the prevalence of the event/ circumstance and outcome, backed up by experience and data such as relevant incidents/ events, complaints and/ or claims.

Evaluation As shown in the matrix below, Impact x Likelihood produces an evaluation of the significance of risk, described as ‘Low’, ‘Moderate’, ‘High’ or ‘Very High’.

How a risk is evaluated will determine how the risk is then treated:

Consequent Impact Likelihood 1 2 3 4 5 Insignificant Minor Moderate Major Extreme

5 5 10 15 20 25 Almost Certain

4 4 8 12 16 20 Likely 3 3 6 9 12 15 Possible 2 2 4 6 8 10 Unlikely 1 1 2 3 4 5 Remote

Low (1-3), Moderate (4-9), High (10-16), or Very High (17-25)

321

Consequence Impact Guide

“Domains” 1 2 3 4 5 Insignificant Minor Moderate Major Extreme

Objectives and ° Barely ° Minor reduction ° Reduction in ° Significant ° Inability to meet Projects noticeable in scope / scope or reduction in project reduction in quality / quality, project ability to meet objectives, scope / quality / schedule objectives or project reputation of schedule schedule. objectives or the schedule. organisation seriously damaged and failure to appropriately manage finances. Injury (physical ° Adverse event ° Minor injury or ° Significant ° Major injuries ° Incident leading and leading to illness, first-aid injury requiring or long term to death or psychological) minor injury not treatment medical incapacity/ major to clients/staff. requiring first needed. No treatment disability (loss permanent aid. staff absence and/or of limb), incapacity. required. counselling. requiring medical treatment and/or counselling. Client ° Reduced ° Unsatisfactory ° Unsatisfactory ° Unsatisfactory ° Unsatisfactory experience / quality of client client client client client outcome experience / experience / experience / experience / experience / outcome not outcome outcome, short outcome, long outcome, directly related directly related term effects – term effects - continued to service to service expect recovery expect recovery ongoing long delivery. provision – < 1Wk > 1Wk term effects. readily resolvable Complaints / ° Locally ° Justified ° Below excess ° Claim above ° Multiple claims claims resolved complaint claim. excess level. or single major complaint peripheral to ° Justified ° Multiple claim. direct service complaint justified provision involving complaints. inappropriate service. Staffing and ° Short term low ° Ongoing low ° Late delivery of ° Uncertain ° Non delivery of competence staffing level (< staffing level key objective / delivery of key key objective/ 1 day), where results in minor service due to objective / service due to there is no reduction in lack of staff. service due to lack of staff. disruption to quality of client ° Moderate error lack of staff. ° Loss of key service. care due to ° Major error due staff. ° Minor error due ineffective to ineffective ° Critical error to ineffective training / training / due to training / implementation implementation insufficient implementation of training. of training. training/ of training. ° Ongoing implementation problems with of training. staffing levels

322 “Domains” 1 2 3 4 5 Insignificant Minor Moderate Major Extreme

Service / ° Interruption in a ° Short term ° Some ° Sustained loss ° Permanent loss business service which disruption to disruption in of service of core service interruption does not impact service with service with which has or facility. on the delivery minor impact unacceptable serious impact ° Disruption to of client care or on client care. impact on client on delivery of facility leading the ability to care. client care to significant continue to ° Temporary loss resulting in “knock on” provide service of ability to major effect. provide service. contingency plans being invoked. Financial ° Negligible ° Minor ° Significant ° Major ° Severe organisational organisational organisational organisational organisational financial loss financial loss financial loss financial loss financial loss (£< 1k). (£1-10k). (£10-100k). (£100k-1m). (£>1m). Inspection / ° Small number ° Minor ° Challenging ° Enforcement ° Prosecution. assessment / of recommend- recommend- recommend- Action. ° Zero Rating. ations which ations made ations but can audit ° Low rating. ° Severely critical focus on minor which can be be addressed ° Critical report. report. quality addressed by with improvement low level of appropriate issues. management action plan. action. Adverse ° No media ° Local Media – ° Local Media – ° National Media ° National Media publicity / coverage, little short term. long term. (< 3 days). (> 3 days). reputation effect on staff ° Minor effect on ° Impact on staff ° Public ° MP / MSP morale. staff morale / morale and confidence in Concern public attitudes. public the (Questions in perception of organisation Parliament). the undermined. organisation. ° Usage of services affected. Council / ° Damage, loss, ° Damage, loss, ° Damage, loss, ° Damage, loss, ° Damage, loss, Personal theft (£< 1k). theft (£1-10k). theft (£10- theft (£100k- theft (£>1m). Security, and 100k). 1m). Equipment

Likelihood

1 2 3 4 5 Remote Unlikely Possible Likely Almost Certain

Probability ° Will only occur ° Unlikely to ° Reasonable ° Likely to occur ° The event will in exceptional occur but chance of – strong occur in most circumstances definite occurring – possibility circumstances potential exists has happened before on occasions

323 Current Title SRR01 - Financial Environment Risk Matrix Risk The risk is that due to the anticipated continuation of austerity the Council will be required to take increasingly difficult and challenging decisions, potentially operating with increasing levels of risk.

Government funding has been reducing since 2010/11. This, together with the demographic pressures, in particular that of an ageing population, Background impacts on the ability of services to meet need with resources. L5

I4 The 2016/17 local government settlement represents a significant reduction in funding. Planning for future years reflects further anticipated reductions in 2017/18 and 2018/19.

Elections are taking place this year and next which may create further uncertainty around government priorities, the longer term national financial plan and the availability of funding for local government. Very Assigned Risk Status Current Risk Score 20 High To Less funding means that there will be a reduction in delivery of some service Potential Effect Laura Friel areas potentially resulting in higher risks for service users. The Council continues to be proactive in responding to the financial challenge and seeks to ensure that budget decisions are taken in line with key priorities.

Robust monitoring of the Council’s revenue and capital budgets is in place.

The Council has a 10 year capital investment programme to Risk Next Internal 2025/26. The current long-term financial strategy to 2022/23 will Review 30/09/16 Controls be extended to 2025/26. Date

The Council has agreed a balanced budget for 2016/17 and work has already begun to identify the remaining savings for 2017/18. The Council has established a programme of work to identify savings to bridge the anticipated future funding gap. This forward looking process supports greater financial security and stability and provides an opportunity for longer term service redesign plans to be implemented.

324 Current Title SRR02 - Inequalities Risk Matrix Risk The risk to the Council is that North Ayrshire residents will experience increasing levels of poverty and its effects. In addition, the area would experience widening gaps between the less well-off and better-off and increasing levels of inequality.

North Ayrshire residents have persistently poorer health compared to Background Scotland as a whole and the gap is increasing. Inequality in the local area may continue to increase unless the Council takes action, however this must be managed effectively due to the increase in demand for Council Services which may occur.

Ongoing welfare reforms will exacerbate local needs placing greater L5 demands upon Council Services at a time when budgets are under I4 significant pressure. A focus on economic regeneration and effective targeting of resources is essential to maximise opportunity and minimise the impact of the current economic climate on our communities.

There are also significant differences in the health of people living in the wealthier parts of North Ayrshire compared to its more deprived areas. Life expectancy in the most deprived areas is 15 years less than the more affluent communities. Health inequality is closely linked to poverty, employment and people's earliest experiences as children. Drug and alcohol misuse is also a major factor.

Very Assigned Risk Status Current Risk Score 20 High To Failure to address the current challenges will result in increased levels of deprivation, reduced health and wellbeing of our communities and higher demand for Council Services. Inequalities at an early age will impact adversely on children’s social and emotional development, affecting their overall life chances. Children living in poverty and with poor health are more Karen likely to require crisis interventions and have lower levels of educational Yeomans; Potential Effect attainment and achievement. Adults affected by drug and alcohol misuse and John by chronic health problems are less likely to sustain employment and it is Butcher; more likely that they will require support to ensure their own and their Iona Colvin children’s safety and wellbeing. Older people affected by long term health conditions are more likely to require service provision earlier, have a greater incidence of hospital admission and require long term care at a younger age.

325 The Council will be launching a new Economic Strategy in April 2017 and this will include a focus on inclusive growth. The Council will lead partners in building community resilience, providing support to remove barriers to opportunity for unemployed people (e.g. childcare, transport and health), upskilling of people in disadvantaged communities including providing 250 MA opportunities within the Council and providing employability services through our network of hubs.

The Council has led the development of a new Financial Inclusion Strategy and with support from partners, and subject to Risk Next Internal a successful Lottery bid, will be rolling out a £3m programme of Review 30/09/16 Controls activity. This strategy will focus on a number of new areas of Date support such as provision of low cost credit, access to white goods/furniture, food and fuel as well as supporting improved linkages between existing services.

Tackling inequalities is a strategic priority of the Community Planning Partnership (CPP) and the Council.

An ‘Inequalities Strategy’ is being developed and is at draft stage.

326 SRR03 - Effective Interaction with the Integrated Health and Social Care Current Title Partnership to ensure financial control and sustainability Risk Matrix Risk The introduction of pooled budgets with Health presents a risk to the Council in terms of the potential burden of additional demographic/demand related costs and a decrease in direct financial control.

In April 2015, the North Ayrshire Health and Social Care Partnership was Background created.

L4 This has entailed a major change in the way that the Council works in I3 partnership with NHS Ayrshire & Arran and other stakeholders.

Effective integration is made more difficult in a time of financial austerity when demand is rising and resources are diminishing. Differences in culture, historic structures, priorities and systems are being addressed in order for the Health and Social Care Partnership to achieve significant improvements for service users and patients. High Assigned Risk Status Current Risk Score 12 Risk To Growing demand for services across Health and Social Care at a time of decreasing resources creates a financial pressure for Partnerships. In order to address this, Partnerships need to make decisions about where to reduce costs and make savings while still delivering core statutory functions and ensuring people are kept safe and well.

There is a risk that decisions made by the new Partnership and Integration Iona Colvin; Potential Effect Joint Board (IJB) could result in negative publicity and adverse scrutiny of the Lesley Aird authority and its partners.

Aligned to this there is a risk that if the Partnership fails to manage its budgets effectively that the Council and Health Board may be required to provide additional funding support which could significantly impact on Partner resources.

The IJB meets monthly and monitors progress against the Strategic Plan and the Partnership financial position on a regular basis. Finance reports include projected outturns and are reviewed by Partnership Management and the IJB on a regular basis. These monitoring reports are also shared with the Risk Next Internal Directors of Finance of the Council and Health Board to ensure Review 30/09/16 Controls full transparency. These identify emerging financial issues as Date early as possible to enable corrective recovery actions to be put in place to address these.

A change programme is in place within the new Partnership to assist with service redesign.

327 Current Risk Title SRR04 - People and Transformation Matrix Risk There is an overarching corporate risk that transformation and change management activities which are core to the Council's future delivery models and long-term financial sustainability, fail to deliver and potentially disengage employees. L3 Background The workforce context of significant organisational change, pay restraint I4 and budget efficiencies may impact on employee engagement and the stability of employee relations which further impacts on the Council’s capacity to meet service requirements and deliver key objectives.

High Risk Status Current Risk Score 12 Assigned To Risk Any gaps in workforce planning and organisational development arrangements may lead to difficulties in having a workforce with the Laura Friel; appropriate knowledge, engagement levels and skills to meet service Potential Effect Gavin demand and achieve desired outcomes. It will further impact on the Macgregor Council's ability to continue to deliver change, meet Council objectives and achieve the required efficiencies. Continuing focus on implementing Organisational Development interventions through the People Strategy which supports the Council’s transformation, improves effectiveness and capability as well as develops an organisational culture which fosters involvement, engagement and high performance.

Development of a corporate, co-ordinated approach to transformational change through an agreed Transformation 2 (T2) approach.

Risk Mechanisms for consultation and engagement with Trades Internal Next Unions enable open dialogue with unions and elected members 30/09/16 Controls Review on key strategic workforce issues. Date

Key strategic organisational change issues are developed through regular leadership team conferences.

Ensuring that the Redeployment and VER programmes support service redesign and help manage workforce change.

Clearly defined workstreams with People and Transformation and Customer and Digital Services to drive forward corporate transformation.

328 Current Risk Title SRR05 - Community Capacity Building and Empowerment Matrix Risk The risk facing the authority is that community capacity and community resilience in North Ayrshire will not develop sufficiently quickly to meet the economic and social challenges which are emerging in the current economic climate.

Background The additional demands placed on the public sector by the Community Empowerment Act (Scotland) 2015 is an emerging risk, with timescales for implementation of and reaction to certain strands of legislation, e.g. community asset transfer, now being set by the Scottish Government. L3 I4 The development of community capacity and appropriate support mechanisms to allow local communities to determine their own objectives and have their voices heard in the planning and delivery of services is a key priority of North Ayrshire Council. The ability of communities and organisations to do this varies and the Council is committed to providing the appropriate support, according to local need, to ensure that communities are able to achieve their potential in this challenging economic climate. High Risk Status Current Risk Score 12 Assigned To Risk Where the risk is not managed effectively the potential benefits of community capacity building and empowerment may be lost.

There remains a potential disconnect between those communities where levels of capacity and engagement with the empowerment agenda are high and those with less social capital where interest remains low. This could widen the inequality gap between communities with the ability to Karen influence the planning and delivery of more responsive services and those Yeomans; Potential Effect communities who do not. Audrey

Sutton The potential also exists for a disconnect between what the Council wishes to see in terms of communities embracing the opportunities for increasing ownership of assets and what communities themselves feel able and prepared to commit to. In terms of the asset transfer agenda the potential remains for community assets to revert back to Council ownership due to ineffective community engagement/participation and a lack of effective business planning for sustainable use of community assets.

329 North Ayrshire Council has made a public commitment to community capacity building and empowerment, through the Community Planning Partnership and through the Economy and Communities directorate plan. North Ayrshire Council has also identified that the value of continuing to support the community and voluntary sector to develop capacity is central to the well- being of the community and wishes to continue to fund activities which contribute to this.

A strategic Community Empowerment Action Plan is being developed within the Council and with all CPP partners, to identify how the Council can shift from delivery to enabling mode with many of our community partners to build their capacity and identify opportunities for growth and sustainability.

The introduction of Locality Planning will enhance local Risk resilience and placemaking initiatives to strengthen how Internal Next communities work together to lessen the impact of external 30/09/16 Controls Review changes. Date

The Council has refined and enhanced its asset transfer, allotment and Community Council guidance and support, and in addition, the Council has also introduced support for individuals and communities in relation to developing excellence in arts and culture and sports, whilst reviewing the way in which it awards community development grants to ensure that capacity building is a central feature of support to communities and voluntary organisations. Groups are also supported to make a greater number of successful funding bids to external bodies. Additional resources will be available through ongoing projects with Creative Scotland and Sport Scotland with good practice being shared and promoted. The Community Development Fund is underpinning the ability of community organisations to undertake sustainable projects.

330 Current Risk Title SRR06 - Climate Change Matrix Risk Severe weather is already affecting public services across Scotland, with operational, reputational, financial and legal consequences. The risk is that the Council is increasingly affected as this trend continues into the future, with potentially more serious consequences that compound some of the other long-term challenges faced, such as resource scarcity and social and economic inequalities.

Background Climate change is expected to continue and worsen in the future, with changes to mean temperatures, the increasing frequency and severity of L3 storms and higher rainfall levels potentially causing rising water levels and I4 resulting in more flooding and coastal erosion.

The Council is required to comply with the ‘Public Bodies Climate Change Duties’, required under the Climate Change (Scotland) Act 2009.

These duties require the Council to assess the risks, threats and opportunities associated with climate change and identify actions to increase resilience to climate change. High Risk Status Current Risk Score 12 Assigned To Risk An increased frequency of severe weather conditions may lead to more instances of damage to Council infrastructure and property, interruptions to service delivery and increased demands on services, often with little notice. Potential Effect CMT This could also cause risk to life, transport disruption and pollution to the local environment, as well as impact adversely on the local economy if businesses are unable to operate. A strategic approach to climate change adaptation will help manage this risk. The Council has been proactive and has a number of strategies and plans in place to help reduce vulnerability. These include:

• Environmental Sustainability and Climate Change Strategy • Flood Risk Management Strategy Risk • Local Development Plan Internal Next • Vacant and Derelict Land Strategy 30/09/16 Controls • Review Core Paths Plan Date • Outdoor Access Strategy • Weather and Winter Emergencies Plan

The Council has business continuity arrangements in place and, through the Ayrshire Civil Contingencies Team, there are also emergency planning arrangements in place.

Mutual aid arrangements are in place with other Councils.

331 332 NORTH AYRSHIRE COUNCIL

Agenda Item 20 23 May 2016

Audit Committee

Title: Internal Controls update

Purpose: To update the Audit Committee on Audit Scotland’s Annual Review of Systems of Internal Control.

Recommendation: That the Committee notes the content of the attached report and the progress made in completing the Management Actions.

1. Executive Summary

1.1 Audit Scotland’s Code of Audit Practice requires Audit Scotland to assess an Authorities’ system of internal control on an annual basis.

1.2 The main purpose of this assessment is to determine that North Ayrshire Council;

 has a sound basis for the preparation of the financial statements and the management of assets and interests  has an adequate means of preventing or detecting material misstatement, error, fraud or corruption  complies with all established policies, procedures, laws and regulations.

1.3 Audit Scotland base their judgements on current years testing of controls and where appropriate results obtained in the previous year which allows for a three year cyclical approach to testing the systems of internal controls.

1.4 The relevant sections within Finance and Corporate Support will progress the two outstanding actions over the coming year.

1.5 Updates will be provided to the Audit Committee as required.

2. Background

2.1 The conclusion of this audit was that the authority’s main financial systems were operating satisfactorily and that there are no areas of significant risk.

333 2.2 There are however a number of areas for improvement which are detailed in the attached report together with planned management action.

2.3 Of the five issues raised, three of these are already compete.

2.4 Regarding the follow-up of the 2014/15 internal control management letter there were a total of nine issues and risks reported and one of those risks was accepted by management and no action was taken.

2.5 Of the remaining eight actions one remained outstanding and has been carried forward as the first issue on this years planned management action.

2.6 The progress on the attached Action Plan demonstrates the importance the organisation places on its systems of internal control and demonstrates the commitment to address any issues raised.

3. Proposals

3.1 It is proposed that the Committee notes the content and progress made as detailed in this report.

4. Implications

Financial: None Human Resources: None Legal: None Equality: None Environmental & None Sustainability: Key Priorities: This report provides assurance in respect of effectiveness of the Council's systems of internal control and overall governance. Community Benefits: None

334 5. Consultation

5.1 No consultation was required in preparing this report.

LAURA FRIEL Executive Director (Finance and Corporate Support)

Reference : For further information please contact Caroline Clark, Senior Manager (Financial Management) on 01294 324561. Background Papers 0

335 336 Appendix 1

4th Floor, South Suite The Athenaeum Building T: 0131 625 1500 8 Nelson Mandela Place E: [email protected] Glasgow G2 1BT www.audit-scotland.gov.uk

Ms Laura Friel 9 May 2016 Executive Director (Finance & Corporate Support) North Ayrshire Council Cunninghame House Irvine KA12 8EE

Dear Laura

North Ayrshire Council 2015/16 Review of Systems of Internal Control -

Audit Scotland’s Code of Audit Practice requires us to assess the systems of internal control put in place by management. In carrying out this work, we seek to gain assurance that North Ayrshire Council:

 has systems for recording and processing transactions which provide a sound basis for the preparation of financial statements and the effective management of its assets and interests

 has systems of internal control which provide an adequate means of preventing or detecting material misstatement, error, fraud or corruption

 complies with established policies, procedures, laws and regulations.

The purpose of this review was to evaluate whether the internal controls operating within the main financial systems are adequate so as to enable us to place reliance on them when forming an opinion on the 2015/16 financial statements. It should be highlighted that these reviews were restricted to the key controls in place to meet our audit objectives for each system.

In accordance with International Standard on Auditing (ISA) 330: the auditor's response to assessed risk paragraphs 14 and 15 our audit judgements are based on current year testing of controls and where appropriate, prior year results. Our risk based audit approach allows us to take a 3 year cyclical approach to system controls testing. This enables us to place assurance on previous years' audit work where the system controls are unchanged and no significant weaknesses were identified.

The table overleaf summarises the main financial systems that were tested during 2015/16. It also identifies those where we are placing reliance on prior years' testing and those where we have placed formal reliance on internal audit work to avoid duplication of effort. Where we have relied on prior year work we have still carried out some audit testing to ensure the key controls remain in place.

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System External audit Reliance on prior Consideration of testing in year audit work aspects of internal 2015/16 audit work in 2015/16

General ledger 

Payroll  

Trade payables (including corporate  procurement cards)

Trade receivables 

Cash and cash equivalents 

Non-domestic rates billing & collection 

Council tax billing and collection 

Housing rents 

Treasury management  

Internal audit findings do not feature in this letter and are reported separately to management.

Audit Findings

Overall, we have concluded that the key controls within the council’s main financial systems are operating satisfactorily. Where controls have not been tested or where the evidence of a control’s effective operation does not exist, we will adjust our planned coverage of the financial statements to obtain sufficient evidence that they are free of material misstatement.

Based on the audit work we carried out we did not identify any areas exposed to significant risk. However, there are some areas where there is scope for improvement and these are included in the action plan agreed with management which accompanies this management letter.

A number of other minor issues were also identified and notified to management during the course of our audit work but these do not feature in this letter.

Follow-up of 2014/15 internal controls management letter

We also followed up the issues reported to management in 2014/15 to ensure that progress has been made in implementing the agreed actions. Of the nine issues and risks reported last year, one risk was accepted by management and therefore no action taken. We have not repeated this here. Of the remaining eight issues, seven of them are fully implemented and the controls working satisfactorily. One action from the 2014/15 report currently remains outstanding. This has been included in the 2015/16 action plan (action point 1) and we will continue to monitor progress in this area.

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Management Action

The weaknesses identified in this management letter are only those that have come to our attention during the course of our normal audit work and, therefore, are not necessarily all the weaknesses that may exist.

Although we have identified a number of areas for improvements to the systems of internal control, it is the responsibility of management to decide on the extent of the internal control systems appropriate to North Ayrshire Council. We would stress, however, that an effective system of internal control is an essential part of the efficient management of any organisation.

The contents of this management letter have been agreed with relevant officers to confirm factual accuracy. The co-operation and assistance we received during the course of our audit is gratefully acknowledged.

I would be grateful if you would arrange for this report to be included in the agenda for the next appropriate audit committee meeting.

Yours sincerely

Paul Craig Senior Audit Manager

Direct Tel: 0131 625 1928 Email: [email protected] Enc cc by email: Elma Murray, Chief Executive, North Ayrshire Council Paul Doak, Senior Manager (Internal Audit, Risk and Insurance), North Ayrshire Council Margaret Hogg, Head of Finance, North Ayrshire Council

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Action Plan

Key Risk Areas and Planned Management Action

Point Issues and Risk Identified Planned Management Responsible Action Officer / Completion Date

Payroll

1 Employee Data Check It is considered good practice for employing Work has been undertaken to Employment departments to periodically confirm the develop an online employee Services existence of employees listed on the payroll. data check via HR21. IT Manager This helps to ensure that all employees on testing and sign off will be February 2017 the payroll are valid and still work for the complete by July 2016 with

council. live implementation planned The last employee data check was on a phased basis starting completed in June 2013. Last year we were August 2016 and completing advised that the annual exercise would in Feb 2017. resume in 2015, however we note that this was not carried out. Risk: The payroll system may not accurately reflect services' staffing levels and leavers may go undetected.

Reported in 2014/15 - outstanding

Trade Payables

2 Procurement Card suspense account balance The procurement card suspense account The suspense account Corporate (cost centre PJAA91) is used to record the PJAA91 will not reconcile to Procurement payments to Royal Bank of Scotland (RBS) zero on a monthly basis Manager and the subsequent recharge to services. because there is a timing The recharge of expenditure to services is difference between the Complete done based on reports of approved payment of the RBS bill and transactions taken from the RBS Secure the ledgering of service Data Online System (SDOL). spend. The reconciliation of the suspense account A monthly review of is compiled and reviewed on a timely basis Procurement Card (Imprest)

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340 Point Issues and Risk Identified Planned Management Responsible Action Officer / Completion Date by the Corporate Finance team. expenditure has now been However, the suspense account includes a set up to review transactions monthly reconciling item recorded as billed and not yet journalised, 'cash/card transactions billed not yet including processes to issue journalised'. At the end of January 2016 this reminders to ensure journals figure was £19,833. There is no detailed can be processed as quickly breakdown of this unreconciled difference as possible after the as the SDOL system is a real time system. transaction date. A 26 % We noted that this balance is steadily reduction in outstanding increasing as a result of cash transactions imprest has been delivered not being posted to the ledger on a timely following completion of the basis (see also action point 3 below). first review. Risk: The existence of an unreconciled difference on the suspense account increases the risk of errors or inappropriate transactions not being detected. It also results in services not being recharged on a timely basis for all expenditure incurred via procurement cards.

3 Procurement Card (Imprest) expenditure Our review of 'cash/card transactions billed A monthly review of Corporate not yet journalised' noted that a high Procurement Card (Imprest) Procurement proportion of these related to cash expenditure has now been Manager drawdowns for expenditure relating to the set up to review transactions Health and Social Care Partnership (HSCP) billed and not yet journalised, Complete. which, in turn, impacts on the expenditure including processes to issue which will be charged to the Integration reminders to ensure journals Joint Board (IJB). can be processed as quickly Further examination of the activity on a as possible after the sample of two HSCP cardholders transaction date. A 26 % highlighted that: reduction in outstanding imprest has been delivered  nine cash drawdowns, totalling £2k, following completion of the dating back to July 2015 remained first review. unposted.

 Six cash drawdowns, totalling £2k, dating back to August 2015 remained unposted.

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341 Point Issues and Risk Identified Planned Management Responsible Action Officer / Completion Date Risk: Some cash drawdowns on procurement cards are not being reviewed, approved by services, or followed up by the e-procurement team on a timely basis. This increases the risk of fraud or irregularity around the use of cards to withdraw cash. While not material, it could also impact amounts recharged to services, including the HSCP.

4 PECOS batch controls checks and secondary review (£10k payments) All PECOS batch header information This was a training issue with Corporate (number of records, total value) require to someone relatively new to Procurement be agreed to the PECOS batch control the role. Manager listing (cognos report) by the accounts Additional training was given payable section before the batches are immediately. Complete released into the account payable module. A subsequent check of In addition, all payments greater than £10k batches processed by the should be subject to a secondary check. individual shows that the Audit testing highlighted that these controls training has been effective. were working satisfactorily between April 2015 and January 2016. However, our review of February 2016 batches highlighted that:  in three cases there was no evidence that the batch control totals had been checked before the batches were released.  in four cases there was no evidence that the £10k secondary check had been undertaken. We were advised that this was a training issue which was addressed immediately. It was restricted to batches processed by one member of staff during February. Risk: Errors or payments processed for inappropriate transactions could be undetected.

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342 Point Issues and Risk Identified Planned Management Responsible Action Officer / Completion Date

Non Domestic Rates Billing & Collection

5 Review of discounts and reliefs It is council policy for reliefs to be reviewed The non-domestic rates team Senior Manager at intervals not exceeding every five years has a 2016/17 programme of Revenues and to confirm that the eligibility criteria are still reviews as follows: Benefits being met by the claimant. Sample testing of a variety of discounts and Mandatory and Discretionary May to July reliefs highlighted a small number which 2016 had breached the five year review ( i.e. Disabled Persons Reduction August to some sports clubs, nursing homes, September charities). Our enquiries established that 2016 these have all been scheduled for review

during 2016/17. We note that Small Unlicensed sports clubs and Business Bonus Reliefs, which we reported 100% discretionary relief October 2016 last year had not been reviewed for over five years, were reviewed as planned during Community Amateur Sports November 2016 2015/16. Clubs Risk: Non domestic rates relief may be

granted to claimants who are no longer eligible. Mandatory relief only November 2016

Rural January 2017

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