Agenda item

A report of the Director of Finance (S151 Officer) was submitted, the purpose of which was for Ernst & Young (EY), the Council’s External Auditor, to present their Value for Money interim report for the 2021/22 and 2022/23 financial years.

The report set out EY’s findings and commentary on the Council’s systems and arrangements over this period and highlighted any deficiencies that required improvement for the future.  It also covered other findings that EY wished to raise with the Audit Committee following this work.  These matters related to either governance-related issues or to the accounts for the relevant two-year period, which currently remained open and not yet signed off by EY.

The Interim Report was attached at Appendix 1.

For background context, the Committee heard that the previous Value for Money commentary had been provided for the period up to March 2021.  A governance update was provided in December 2022 which highlighted ongoing risks, and a further update was issued in August 2023.  This Interim Report covered the period four-months prior to the statutory notice being issued.  Guidance was currently awaited from the government in relation to the conclusion of financial statements.  Once received, the report would be finalised.

The External Auditor referred Members to the statutory recommendations and six areas of significant risk that had been identified.  The following points were made:

• Regarding organisational culture, it was indicated that following issues raised in 2021/22, a response plan had commenced in 2022/23.  A report on the Council’s progress was provided in December 2022.  Mention was made of the change to the Council’s administration since that time.  Regarding governance arrangements and the Council’s Constitution, it was noted that the previously constituted Corporate Affairs and Audit Committee had since been separated into two and were now Corporate Affairs Committee and Audit Committee.
• Regarding financial sustainability, Members heard that during 2021/22 initial concerns in terms of the direction of travel were raised, but there was no significant weakness that year.  The Council’s position deteriorated in 2022/23, with significant risk being identified during that time.
• Regarding contracts and procurement, there was no view expressed in the report in terms of specific contract details or contractors appointed.  Reference was made to exemptions and the procedures associated with these.  It was indicated that inappropriate application of these had been a factor during 2021/22 and 2022/23, hence the association of risk during that period.
• Regarding the Middlesbrough Development Corporation, gaps had emerged since the formation of the company and therefore weakness was apparent across the period 2021/22 and 2022/23.  The recommendations in the Interim Report were the same as those in the statutory report.
• Regarding assets, particularly The Crown pub, the Committee heard that in terms of processes/ due diligence, there was evidence of weakness in 2022/23.
• Regarding Children’s Services, it was explained that the outcome of Ofsted inspections and other work carried out had demonstrated progress; the Council had delivered on the Children’s Services Improvement Plan.  The risk identified was based around service delivery.
• In the time since the period being reported on, the Council had made progress.  It was highlighted that the report was factually based and no comments were made concerning the adequacy of any progress achieved.
• Mention was made of preparatory work being undertaken around national reporting and associated procedures; reference was made to pages 35-36 of the Interim Report in this regard.
• Concerning inspection of the accounts, reference was made to page 37 of the Interim Report.  It was commented that the Council had not fully complied with this; many other Councils were the same.
• Reference was made to page 38 of the Interim Report and the pause of audit work.  Activities had taken place around debt provision, which was not linked to the Value for Money commentary.
• With regards to Objection 2022/23 statements, it was indicated that these had not been taken forward.

Following the Auditor’s presentation, the Chair invited any questions/ comments from the Committee.

A Member read out a statement, which referred to the following matters:

• An opinion of the contents of the audit report, including a failure to undertake statutory duties, and potential for the referral of matters to the Police for further investigation.
• Concerns around officer intervention levels.
• Concerns around assets, in particular The Crown pub, and possible further investigative action required.
• Concerns around compliance with finance and procurement rules.
• Concerns around the transparency of staff leaving packages and the Committees involved in assessing/ reviewing those arrangements.
• The action that would be taken to address the noted issues.

In response to the matters raised, the Chief Executive and Director of Finance made the following points:

·        The Chief Executive joined Middlesbrough Council on 23 March 2023, which was eight days prior to the period concerned.  The Chief Executive’s appointment followed as a result of audit concerns; a review had been undertaken by audit and a remedial action plan established.

·        Regarding irregularities around The Crown pub, the Chief Executive had requested that Veritau investigate this matter; a report had been provided previously to the Audit Committee.  There was no further comment to be made on this, other than to recommend referral back to the audit report for full details.

·        With regards to alleged criminality and the referral of matters to the Police for further investigation, the Chief Executive advised that any allegations would need to be fully evidenced/ supported.  Evidence would need to be readily available for a complaint to be made.  Any person(s) could make an independent report to the Police; the Chief Executive would not be privy to these.  The Chief Executive had fulfilled his role by commissioning audit to undertake an investigation and report on the outcome.

·        The Director of Finance joined the authority in April 2023 - after the contracts and procurement issues had emerged.  Since this time, an array of work had been undertaken, including compliance checking of purchase cards and other resources.  The aim was to achieve 100% compliance.  Rules and regulations around finance had been tightened up.

·        In terms of senior staff leaving packages, it was explained that appropriate legal advice had been sought in this regard.

·        The necessary action to split Audit and Governance into two separate entities had been undertaken.  Officers were working closely with partners to address the issues that had been identified.  Reference was made to a report submitted to Executive on 24 July 2024, which endorsed the Council’s direction of travel.  Work was taking place with the Department for Education and good progress achieved in terms of Children’s Services.  OFSTED was carrying-out a focus visit at present.

·        In response to EY’s recommendations around procurement practice, the Director of Finance explained that several measures had been taken in her capacity as the Council’s S151 Officer.  Reference was made to the number of contracts awarded with exemption to procedure rules.  It was explained that, as at March 2024, 121 of these contracts were live; 44 remained active at that point.  Two were currently in place that had been extended; 70 had ceased.  Five were currently in query status; further work would be undertaken by procurement to understand these in greater detail.  All contracts awarded that were subject to exemption had not exceeded the threshold.  The EY Auditor was not the current Auditor for work carried out since March 2023; new procedures had been established since this time.

·        Regarding responsibility for contracts, it was explained that procurement officers acquired goods and services based on such factors as best value; responsibility for contract management sat with Directors and Heads of Service.  The Mayor commented that governance was not only the responsibility of officers, noting that Audit Committee was an example of this.  The Council had a direction, and The Crown pub was not purchased on a whim.  Politicians set the direction and officers enacted decisions, therefore Councillors also needed to take ownership.  The Chief Executive advised that officers could procure up to a certain amount before matters would need to be referred to the Executive.

A discussion ensued in relation to reporting matters to the Police.  The Chair explained that it was not in the remit of the Committee to contact the Police, but any individual could raise a report should they have wished.  It was reiterated that evidence for any allegations would need to be provided.  It was also reiterated that neither the current Chief Executive nor the S151 Officer were in post at the time these issues occurred.  The Internal Auditor explained that the results of the audit were presented to the Audit Committee in March.  There was no evidence of criminality; had there been any evidence of criminality, the report would have been pulled and referred to officers to determine Police input.

NOTED