Wednesday 20 September 2017

Barnet Audit Fiasco Part 2 - Capita penalised £55,000 but disaster looms after 2020

Last night we had the re-run of the Barnet Audit Committee, this time with a largely complete audit report. I blogged about the previous meeting here.

Most of the issues identified at the previous meeting still exist but we now had a largely complete report with just a few odds and ends in need of completion. Before the meeting got under way the Chair of the committee Cllr Hugh Rayner made a statement, one which was critical of Capita's performance and one which sought to build bridges with the external auditor after the unjustified pummelling they received from certain Conservative members at the previous meeting. He said that the reason for the late production of the audit report was not just the external auditor's (BDO) fault but the format in which Capita had provided the information to BDO "almost as if Capita were talking to BDO in a foreign language". He noted  that there would be a service credit (a penalty) to be paid by Capita of £55,000, some or all of which may have to be paid to BDO for all the extra and unbudgeted time they expended to get the accounts into a usable format. He praised BDO "for doing a magnificent job in difficult circumstances". Cllr Rayner went on to say that he was satisfied by the financial state of Barnet but not about the process of collecting financial data and that he was commissioning a review to be carried out by the Section 151 Officer to understand what happened and to bring that review to the November audit meeting.

I mention all of this as it seems unprecedented in Barnet's history and suggests some very serious problems have been encountered. Normally this would not have been so openly addressed so it is refreshing to see Cllr Rayner be so open and transparent about this.

Next up were three of the Barnet Bloggers, Barnet Eye and myself who addressed the committee, and then Mrs Angry as well for the questioning. As is so often the way, comments are received in silence and questions dealt with in a perfunctory manner. Often answers are supplied but not necessarily to the question asked. A copy of the questions and the answers provided can be read here.

After the questions, the Partner from BDO went through their report page by page. The key issue that became apparent is that the auditor can still provide a true and fair judgement on the report if the variation is less than 1.5% of the total council budget which the auditor said was in the region of £13 million pounds. That may seem a small amount in audit terms but that is a massive amount in terms of the amount raised through Council Tax (9%) and to set it in context the cuts to the library service were aimed at saving £2.3 million.

This becomes more important when the issue of bad debts were discussed. This included a debt of £4.6 million from Re, the Capita joint venture. It appears that this is a shortfall against guaranteed income targets. The auditor said that he was satisfied with the management representation that the debt is recoverable even though nothing has been billed and no confirmation of liability has been received from Re. At this point the Partnership Director from Capita spoke to say that he "acknowledged the disputed £4.6 million" but that would be subject to debate. My interpretation is clear, that the chances of recovering all £4.6 million are slim to nil. When the auditor was questioned he made the point that all of it or none of it might be recovered but because it was below the 1.5% threshold it didn't matter from an audit perspective. The auditor has covered his backside and preserved the auditors professional indemnity cover by getting management to make a signed representation that it is recoverable but the sum is still at risk. Interestingly Cllr Finn made the point that Capita compiled the accounts which recognised the debt and Capita owed the money therefore they must recognise the debt. Unfortunately, it doesn't work that way although it highlights the massive conflict of interest of having a contractor that owes money who also prepares the accounts.

There were many disturbing comments raised during the meeting but perhaps two of the most shocking were both on the same subject, one made by the auditor and one made by an independent member of the audit committee.  First of all the external auditor said when discussing the use of reserves that in the medium term till 2020 the council could manage its budget drawing off reserves but after 2020 the council "will need a complete re-write of what you do" if there is any hope of balancing the budget. This was then reinforced by the independent member Richard Harbord. Now Mr Harbord rarely speaks up and some may wonder why he is on the committee but he is a local government finance expert having previously been a local authority CEO and is a regular contributor to a local authority finance website Room 151. He confirmed that indeed after 2020 local authorities "haven't got the faintest idea how they will be financed in any way shape or form". He made the point that so many changes to local authority finance need primary legislation but the legislative timetable was full because of Brexit. The Director of Resources also made the point that they don't have enough funding to meet next years requirements and that is why further cuts are on the way. It looks like we are in a complete mess and based on both Mr Harbord's and the external auditors comments this must be the biggest single risk to the future of the council.

Towards the end the external auditor was asked how Barnet rated compared to other local authorities in the preparation of their accounts. I suspect some councillors were expecting a positive answer but no. Some clients could be worse than this "but taken in the round I would put you on the not so good step of the range I am dealing with".

To be clear, the audit process has been a mess, there are "loads of issues" as noted by one committee member, which need to be addressed. There will be a review document in November but it will be essential to see how any action plan addresses these problems. My concern has always been that having such a key function as finance run by an external contractor, Capita, creates divisions, barriers and risks that key financial actions will not be undertaken properly. The fact that Capita are in effect being fined £55,000 for their miserable performance at this audit must raise doubts about their ability to continue to provide the financial function for the council. At some point in the very near future I believe that councillors will need to consider taking the finance team back in house where there can be proper control and insight into this vital function. The interchangeability of Capita and LBB staff makes for confusion and a real chance that matters get missed or fall down the cracks between the two organisations.

I will report back after the November meeting but watch out for a series of blogs coming up in the next week or so.

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