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Annual Audit Letter

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Annual Audit and Inspection Letter Epping Forest District Council Audit 2004/2005

© Audit Commission 2005 For further information on the work of the Commission please contact: Audit Commission, 1st Floor, Millbank Tower, Millbank, London SW1P 4HQ Tel: 020 7828 1212 Fax: 020 7976 6187 Textphone (minicom): 020 7630 0421 www.audit-commission.gov.uk

The Audit Commission is an independent body responsible for ensuring that public money is spent economically, efficiently and effectively, to achieve high-quality local services for the public. Our remit covers around 11,000 bodies in England, which between them spend more than £180 billion of public money each year. Our work covers local government, health, housing, community safety and fire and rescue services.

As an independent watchdog, we provide important information on the quality of public services. As a driving force for improvement in those services, we provide practical recommendations and spread best practice. As an independent auditor, we ensure that public services are good value for money and that public money is properly spent.

Document Control

Author Paul King

Filename EFDC Annual Audit and Inspection Letter 21 3 2006

Status of our reports to the Council Our reports are prepared in the context of the Statement of Responsibilities of Auditors and Audited Bodies issued by the Audit Commission. Reports are prepared by appointed auditors and addressed to members or officers. They are prepared for the sole use of the audited body, and no responsibility is taken by auditors to any member or officer in their individual capacity, or to any third party.

Copies of this report If you require further copies of this report, or a copy in large print, in Braille, on tape, or in a language other than English, please call 0845 056 0566.

Annual Audit and Inspection Letter │ Contents 3

Epping Forest District Council

Contents Key messages 5

Council performance 5

The accounts 5

Financial position 5

Other accounts and governance issues 5

Action needed by the Council 5

Council performance 7 Direction of travel report 7

Other performance work 10

Accounts and governance 11 Audit of 2004/05 accounts 11

Financial standing 12

Systems of internal financial control 16

Standards of financial conduct and the prevention and detection of fraud and corruption 16

Legality of transactions 16

Use of resources judgement 17

Other work 19 Grant claims 19

National Fraud Initiative (NFI) 19

Looking forward 20

Future audit and inspection work 20

Revision to the Code of Audit Practice 20

A new CPA framework 20

Closing remarks 21

Availability of this letter 21

Appendix 1 – Background to this letter 22 The purpose of this letter 22

Audit objectives 22

Inspection objectives 23

4 Annual Audit and Inspection Letter │Contents


Appendix 2 – Audit and Inspection reports issued 24

Appendix 3 – Audit and Inspection fee 25

Inspection fee update 25

Annual Audit and Inspection Letter │ Key messages 5


Key messages

Council performance 1 Epping Forest District Council is in a period of significant change including a

refocusing of corporate objectives, a revision of the performance management system and service delivery reviews. The impact of these changes and outcomes for local residents are not yet clear. The Council's performance is mixed with 58 per cent of performance indicators below the average for all district councils in England and 48 per cent per cent improving since 2002/03.

The accounts 2 The draft financial statements were approved by Council prior to the statutory

deadline of 31 July 2005. Following material amendments made as a result of our audit, the accounts were re-approved on 27 October 2005 and we were able to give an unqualified audit opinion on 28 October 2005.

Financial position 3 The Council is in a sound financial position, and has established proper

arrangements to monitor its financial position and take appropriate remedial action when necessary.

Other accounts and governance issues 4 Overall, we have found that the Council has arrangements in place to ensure the

proper conduct of its financial affairs but that risk management arrangements need to be improved.

Action needed by the Council 5 We recommend the Council:

• improves the systems in place to ensure value for money is being delivered in all service areas;

• ensures that the new performance management system is embedded and used effectively so that it contributes towards demonstrable and sustained improvement in service areas;

• ensures that the process to produce the accounts for 2005/06 and future years results in accounts that are free from material error and comply with the CIPFA/ LASAAC Statement of Recommended Practice (SORP); and

6 Annual Audit and Inspection Letter │ Key messages


• continues to progress with the risk management agenda to ensure it is embedded throughout the Council.

Annual Audit and Inspection Letter │ Council performance 7


Council performance Epping Forest District Council is in a period of significant change including a refocusing of corporate objectives, a revision of the performance management system and service delivery reviews. The impact of these changes and outcomes for local residents are not yet clear. The Council's performance is mixed with 58 percent of performance indicators below the average for all district councils in England and 48 per cent per cent improving since 2002/03.

Direction of travel report 6 Epping Forest DC was assessed as 'Good' in the Comprehensive Performance

Assessment (CPA) carried out in 2004. The overall performance for all district councils is set out in Figure 1.

Figure 1 Overall performance of district councils in CPA Three times as many district councils are rated 'Good' or 'Excellent' than 'Poor' or 'Weak'

Overall performance of district councils in CPA

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Source: Audit Commission

7 Epping Forest District Council is in a period of significant change. It is refocusing its priorities in the development of the new ‘Council Plan’ and linking more closely with those in the Community Plan. There are some examples of effective local partnership working.

8 Governance arrangements are effective although some key policies are not yet fully embedded. The Council has taken action to improve some aspects of its corporate systems, such as performance management, but this is at an early stage and has yet to make significant demonstrable impact. The Council is performing well with respect to financial management, though it needs to improve

8 Annual Audit and Inspection Letter │ Council performance


the way it manages and improves value for money. It maintains a debt free status and has generated significant income from the sale of capital assets. However the procurement function requires modernisation and further development.

9 The Council’s current performance is mixed. Only 42 per cent of the Council’s 2004/05 performance indicators are above average when compared to other councils in England. Since 2002/03 the Council has only improved 48 per cent of its performance indicators. The Council is investing in the improvement of some poorly performing services such as planning. Whilst early indicators suggest that this has resulted in some improvement, this will need to be maintained over time to show that the Council is making sustained improvement.

10 The Council is revising its priorities to allow it to focus more clearly on what it wants to achieve and also to link them more closely to those in the community strategy. The Council’s Executive has identified eleven priorities for 2005/06. These priorities are based on consultation with the public from 2002/03, and other data sources. The ‘Council Plan’ is being developed to cover the period from 2006 to 2010. Following Cabinet agreement to format and structure the plan will be submitted for formal consultation with the public and stakeholders. It identifies three key areas for development:

• housing and the provision of affordable homes; • planning and the protection of the special character of the district; and • waste management, refuse collection and recycling.

11 It is too soon to judge whether this revision of priorities has led to resources being moved to higher priority areas. The Council has no overall political control and the lack of consensus, in some areas, can lead to delays in decisions. Under these circumstances effective, professional communication between officers and members is key to the delivery of priorities.

12 The Council has developed some effective local partnership working. The Council works well with Epping Forest Primary Care Trust and makes a positive contribution to the Crime and Disorder Reduction Partnership. The Local Strategic Partnership has not sought to pool budgets and focuses primarily on the effective sharing of information and plans. The Community Strategy for the District was published in March 2005 and specific actions and responsibilities were agreed in May 2005. Action groups have been established to deliver aspects of the Community Strategy and progress is reported back to annual community conferences.

13 Governance arrangements are effective. The Council’s democratic services ensure that committee structures, decisions and processes are well documented. The basic processes are in place to ensure that decisions are made with the appropriate level of approval and accountability. Over the last year these systems have exposed and effectively dealt with some issues including the breaching of the member code of conduct and some small scale internal fraud.

14 Progress with developing and embedding corporate policies is variable. The asset management strategy is fit for purpose and has received a good external

Annual Audit and Inspection Letter │ Council performance 9


government assessment. Risk management is still developing and is not yet fully embedded across the organisation.

15 The Council has taken some steps to improve staff capacity but their impact is as yet not clear. The Council has made good progress in achieving single status for all of its staff, using internal communication systems to deal with issues arising in the process. New sickness management systems introduced in 2005 have led to some reductions in sickness absence. The Council identifies difficulties in appointing and retaining staff particularly in shortage areas. Steps to deal with this, for example an agreement to pay market supplements have not yet been fully tested.

16 The Council is investing in improving its understanding of the needs of the population it serves. The Council has established a customer consultation panel, although this has yet to have a demonstrable impact, and is in the process of adopting a new public consultation and engagement policy and strategy. Work undertaken by the Audit Commission in 2005 identified that the strengths of the Council’s approach to public consultation outweighed its weaknesses.

17 New management arrangements and systems to improve performance management are not yet fully embedded. There are new performance reporting lines between officers and members. A review of the overview and scrutiny function led to the establishment of a single Overview and Scrutiny Committee in September 2005. The Council has adopted 40 Key Performance Indicators covering key priorities, business areas and corporate direction. The introduction and use of these indicators is comparatively recent and their impact is as yet limited, but the Council is aiming for top quartile performance, and has developed action plans to achieve this.

18 The Council is performing well with respect to financial management. The budget setting process for both capital and revenue is basically sound and set out clearly for members. The Council is using whole life costing to assess capital investment and disposal decisions for some schemes although there was a significant overspend in the development of the Loughton Leisure Centre. There is a medium term financial strategy in place although this has not been effectively communicated to staff and other stakeholders.

19 The management of value for money is not fully effective. Whilst the Council currently performs adequately in delivering value for money it needs to enhance the way it manages and improves value for money in the future. The achievement of value for money is not an integral part of either service plans or capital plans. Expenditure on the majority of services is above average. However the Council has managed its resources effectively to achieve debt free status.

20 The Council’s approach to procurement is not fully effective. The Council currently has no procurement strategy and the responsibility for most procurement is delegated to service heads according to standing orders and a formal scheme of delegation. The potential to generate efficiencies through bulk purchase and collaboration with partner organisations has not been fully explored. The absence of an effective procurement strategy and implementation

10 Annual Audit and Inspection Letter │ Council performance


plan will detract from the Council's ability to procure effectively. The procurement function requires modernisation and further development.

21 The Council’s performance in delivering services is mixed. Since 2002/03 the Council has improved 48 per cent of its performance indicators. In 2004/05 42 per cent of performance indicators were above average when compared to other district councils in England. Some 21 per cent of the 2004/05 performance indicators are amongst the best performing councils in England, such as those relating to the achievement of the decent homes standard, compared to 25 per cent in 2002/03. However 29 per cent of the indicators are amongst the worst performing, such as performance relating to the speed of determining planning applications, compared to 15 per cent in 2002/03. On benefits, unaudited information for 2005/06 shows improved performance.

22 The Council is seeking to improve some poorly performing services. It has invested in a number of service areas including planning, waste collection and recycling, and benefits. Whilst some early indicators suggest service delivery has improved, this will need to be maintained over time to show that the Council is making sustained improvement.

Other performance work 23 The Council has made some improvements to its arrangements for the

production and publication of accurate and reliable performance indicators (PIs) but there was no analytical review or sample testing of the PIs by the Council prior to submission for audit. Of the eleven indicators tested by our audit, seven were amended and three were qualified. We were able to issue an unqualified opinion on the Council's Best Value Performance Plan because the errors made were relatively minor and the plan complied with the statutory requirements governing its preparation and publication.

24 A new quality assurance process has been introduced recently by the Council to assist Services in the compilation of their performance returns in future years.

Annual Audit and Inspection Letter │ Accounts and governance 11


Accounts and governance We gave an unqualified audit opinion on the Council's 2004/05 financial statements on 28 October 2005.

The Council's overall corporate governance arrangements are satisfactory in most key areas however further improvements need to made with respect to risk management.

Audit of 2004/05 accounts 25 The draft financial statements were approved by the Council prior to the statutory

deadline of 31 July 2005. Following material amendments made as a result of our audit the accounts were re-approved on 27 October 2005.

Matters arising from the final accounts audit 26 The Council did not supply a comprehensive set of working papers to support the

accounts at the start of the audit. We are working closely with Officers to ensure that the working papers meet our requirements for the 2005/06 audit.

Report to those with responsibility for governance in the Council 27 We are required by professional standards to report to those charged with

governance (in this case to the Finance and Performance Management Cabinet Committee) certain matters before we give an opinion on the financial statements. The following matters were reported:

• the draft accounts presented for audit did not meet the new requirements on intangible assets detailed in the 2004 SORP which states that items shown as deferred charges in prior years can only be carried forward as an asset on the balance sheet if they meet the criteria of intangible assets;

• the draft accounts did not recognise £1.3m of grants receivable from the Government in future years relating to reinstatement grants and the corresponding £1.3m deferred credit;

• the transfer of Robert Daniels Court was agreed at a cost to the Council of £1.4m. This amount represented a payment to a Housing Association for future refurbishment of the building. The draft accounts showed this cost as a fixed asset addition funded from the Major Repairs Reserve. After detailed consideration we asked for this payment to be treated as a deferred charge that should be written out in 2004/05, as it did not meet the criteria of an intangible asset;

• the draft accounts presented for audit included The Parade Ground within Fixed Assets which had been valued on an existing use basis at £1.5m. The Parade Ground is on the market to be sold and the Council has passed a resolution for planning permission for housing to be given on this site, subject to a section 106 agreement. The SORP states that such non-operational

12 Annual Audit and Inspection Letter │ Accounts and governance


assets should be valued at their open market value (OMV). The Council's Valuation Officer has stated that the OMV for this site is £7.5m and the accounts were amended to reflect this value; and

• the Council reached a mediation settlement with regard to the Loughton Leisure Centre dispute after 31 March 2005, with the Council agreeing to make an additional payment of £1.4m. This settlement was disclosed as a post balance sheet event in the draft accounts but we asked for an amendment to the accounts to reflect the mediation settlement as an adjusting post balance sheet event. The accounts were amended to reflect the cost of this settlement as a provision at 31 March 2005.

Financial standing The Council’s financial position is sound and it has established proper arrangements to monitor the financial position and take remedial action when necessary although regular financial reporting to members throughout the year has only started recently.

28 We have compared the Council's key financial ratios with other district councils nationally and highlighted some areas of interest.

General Fund 29 Figure 2 compares the level of the general fund reserve at the Council with other

district councils audited by The Audit Commission. The Council's reserves are relatively high which allows the Council to plan for the future on a sound financial basis.



Figure 2 General Fund balance as a percentage of net operating expenditure

The General Fund as a percentage of net operating expenditure is relatively high suggesting a sound financial position.

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Housing Revenue Account 30 Figure 3 compares the balance on the HRA account with other district councils

audited by the Audit Commission and again the Council has a relatively high level of reserve.

Figure 3 HRA balance per dwelling The HRA balance per dwelling is relatively high suggesting a sound financial position.

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Systems of internal financial control Overall we found that the Council has arrangements in place to ensure the proper conduct of its financial affairs but that risk management arrangements need to be improved.

Risk Management 31 The Council does not have an up to date risk register. Internal Audit has

highlighted a number of concerns over the effectiveness of the risk register in terms of it being realistic and identifying clear owners but did recognise that progress has been made.

32 The Council has re-established the Corporate Risk Management Group and the Corporate risk register is in the process of being finalised.

Internal Audit 33 All material financial systems have been reviewed by Internal Audit in 2004/05

and their work was compliant with CIPFA standards enabling us to place reliance upon their work in certain areas and deliver a managed audit.

Standards of financial conduct and the prevention and detection of fraud and corruption

34 We have not identified any significant weaknesses in your arrangements to prevent and detect fraud and corruption, but we have suggested that a code of conduct is adopted for staff as soon as possible.

35 There have been some small scale incidences of fraud detected at the Council during 2005 and the systems in place have enabled the Council to deal with these incidences in an appropriate way. The Council has implemented a training programme for 90 staff, which included a re-launch of financial regulations, designed to raise awareness of governance issues and reduce the risk of fraud occurring in the future. The Council's anti-fraud strategy is available on the Council's intranet and new staff are made aware of the strategy and its purpose at induction training.

Legality of transactions 36 There are adequate arrangements in place to deal with legality issues at the

Council and we have no recommendations to make.



Use of resources judgement 37 The use of resources judgement is a new assessment which focuses on financial

management but links to the strategic management of the Council. It looks at how the financial management is integrated with strategy and corporate management, supports council priorities and delivers value for money. It will be carried out annually, as part of each Council's external audit. We anticipate that in the future the Use of Resources judgements will form part of the CPA framework.

38 We have assessed the Council’s arrangements in five areas.



Table 1 Epping Forest District Council arrangements

Element Assessment

Financial reporting 1

Financial management 3

Financial standing 2

Internal control 2

Value for money 2

Overall 2

(Note: 1=lowest, 4=highest)

39 In reaching these judgements we have drawn on the above work and supplemented this with a review against specified Key Lines of Enquiry.

40 The most significant areas where further development is needed are:

• the final accounts process needs to be improved to ensure that the accounts are SORP compliant and free from material error and supported by adequate working papers;

• the Council needs to consult the public on how they want to receive summary financial information relating to the accounts and whether or not they would like the Council to produce an Annual Report;

• the Council should develop monitoring information for sundry debts to evaluate the effectiveness of recovery actions, associated costs and the cost of not recovering debt promptly;

• the Council should ensure that the risk management strategy or policy in place requires it to identify corporate and operational risks, assess the risks for likelihood and impact, identify mitigating controls, and allocate responsibility for the mitigating controls; and

• the Council should maintain a register of its corporate business risks linking them to strategic business risks and assigning ownership for each risk.

Annual Audit and Inspection Letter │ Other work 19


Other work

Grant claims 41 In accordance with Strategic Regulation, the Audit Commission has continued

with a more risk-based approach to the certification of grant claims. We have reduced our audit of these claims but our ability to reduce further depends on the adequacy of the Council’s control environment.

42 The Council’s arrangements for managing and quality assuring grant claims submitted for audit need to improve by ensuring that grant claims are only certified when they are supported by sufficient working papers including reconciliations between the general ledger and relevant feeder systems.

National Fraud Initiative (NFI) 43 In 2004/05, the Council took part in the Audit Commission’s National Fraud

Initiative NFI). The NFI, which is undertaken every two years, aims to help identify and reduce fraud by bringing together data from NHS bodies, local authorities and government departments and other agencies, to detect a wide range of frauds against the public sector. These include housing benefit fraud, occupational pension fraud, tenancy fraud and payroll fraud as well as, new for 2004/05, right to buy scheme fraud and providing new contact details for former tenants with arrears in excess of £1,000.

44 All matches for the Council were reviewed by Internal Audit in the first instance and, where the possibility of fraudulent activity was indicated, the matches were investigated in detail including liaison with other services and agencies. One specific housing benefit fraud of over £15,000 was identified and resulted in a prosecution.

20 Annual Audit and Inspection Letter │ Looking forward


Looking forward

Future audit and inspection work 45 We have an agreed plan for 2005/06 and we have reported in this letter those

aspects that have already been completed. The remaining elements of that plan, including our audit of the 2005/06 accounts, will be reported in next year’s Annual Letter.

46 We have sought to ensure, wherever possible, that our work relates to the improvement priorities of the Council. We will continue with this approach when planning our programme of work for 2006/07. We will seek to reconsider, with you, your improvement priorities and develop an agreed programme by 31 March 2006.

Revision to the Code of Audit Practice 47 The statutory requirements governing our audit work, are contained in:

• the Audit Commission Act 1998; and • the Code of Audit Practice (the Code).

48 The Code has been revised with effect from 1 April 2005. Further details are included in our Audit Plan which has been agreed with the Finance and Performance Management Cabinet Committee April 2005. The key changes include:

• the requirement to draw a positive conclusion regarding the Council’s arrangements for ensuring value for money in its use of resources; and

• a clearer focus on overall financial and performance management arrangements.

A new CPA framework 49 The Audit Commission is currently consulting on the proposals for revising the

CPA framework for District Councils. The consultation period ends in May 2006, and the Commission plans to publish the final framework in July 2006 along with a detailed methodology for underlying elements and a report on the analysis of consultation responses.

Annual Audit and Inspection Letter │ Closing remarks 21


Closing remarks 50 This letter has been discussed with the Joint Chief Executives and Head of

Finance. A copy of the letter will be presented at the Finance and Performance Cabinet Committee on 3 April 2006.

51 I would like to take this opportunity to express my appreciation for the Council’s assistance and co-operation with the audit and inspection.

Availability of this letter 52 This letter will be published on the Audit Commission’s website at

www.audit-commission.gov.uk and also on the Council’s website.

Paul King

District Auditor and Relationship Manager

March 2006

22 Annual Audit and Inspection Letter │ Appendix 1 – Background to this letter


Appendix 1 – Background to this letter

The purpose of this letter 1 This is our audit and inspection ‘Annual Letter’ for members which incorporates the

Annual Audit Letter for 2004/05, which is presented by the Council’s Relationship Manager and District Auditor. The letter summarises the conclusions and significant issues arising from our recent audit and inspections of the Council.

2 We have issued separate reports during the year setting out the findings and conclusions from the specific elements of our programme. These reports are listed at Appendix 2 for information.

3 The Audit Commission has circulated to all audited bodies a statement that summarises the key responsibilities of auditors. Our audit has been conducted in accordance with the principles set out in that statement. What we say about the results of our audit should be viewed in the context of that more formal background.

4 Appendix 3 provides information about the fee charged for our audit and inspections.

Audit objectives 5 Our main objective as your appointed auditor is to plan and carry out an audit that

meets the requirements of the Code of Audit Practice. We adopt a risk-based approach to planning our audit, and our audit work has focused on your significant financial and operational risks that are relevant to our audit responsibilities.

6 Central to our audit are your corporate governance arrangements. Our audit is then structured around the three elements of our responsibilities as set out in the Code and shown in Figure 4.

Figure 4 Code of Audit Practice Code of practice responsibilities

Annual Audit and Inspection Letter │ Appendix 1 – Background to this letter 23


7 The audit work completed under each of the code areas identified in figure 4 is:

• Accounts - Opinion.

• Financial aspects of corporate governance

Reviewing Council's arrangements for:

- financial standing; - systems of internal financial control; - standards of financial conduct and the prevention and detection of fraud and

corruption; and - legality of transactions with significant financial consequences.

• Performance management - Use of resources. - Performance information. - Best Value Performance Plan.

Inspection objectives 8 Inspection work is based around section 10 of the Local Government Act 1999, which

requires us to carry out inspections and deliver reports that will:

• enable the Council and the public to judge whether best value is being delivered; • enable the Council to assess how well it is doing; • enable the Government to assess how well its policies are being implemented; and • identify failing services where remedial action may be necessary.

24 Annual Audit and Inspection Letter │ Appendix 2 – Audit and Inspection reports issued


Appendix 2 – Audit and Inspection reports issued Table 2

Report title Date issued

Audit Plan March 2005

Joint Working Protocol July 2005

Financial Aspects of Corporate Governance July 2005

Core Process Review July 2005

Report on the 2004/05 financial statements to those charged with governance (SAS 610)

October 2005

Review of BVPIs January 2006

Final Accounts Memo March 2006

Use of Resources March 2006

Annual Audit and Inspection Letter │ Appendix 3 – Audit and Inspection fee 25


Appendix 3 – Audit and Inspection fee Table 3 Audit fee update

Audit area Plan 2004/05 (£) Actual 2004/05 (£)

Accounts 32,800 32,800

Financial aspects of corporate governance

34,400 34,400

Performance 39,800 39,800

Total Code of Audit Practice fee

107,000 107,000

Additional voluntary work (under section 35)

0 0

Total 107,000 107,000

Inspection fee update The full year inspection fee is £8,500. The work reported in this audit and inspection letter has been funded by an element of the fee covering 2004/05 and by an element of the fee covering 2005/06. In both years the actual fee will be in line with that planned.

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