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A storm brewing? The need for ‘safeguarding the public purse’ specialists

26-06-2018

by Les Dobie, Counter Fraud Centre Training Manager
and Alan Doig, Counter Fraud and Anti-corruption Specialist and CIPFA Associate

Introduction

As the responsibility for counter fraud rests firmly with councils, the question arises of how far current staff arrangements are really geared up to addressing this risk. 

Few councils have fully-fledged fraud units and, even if they do, their focus tends to be on the investigation of fraud and the recovery of losses. The fact that a fraud has occurred means that procedural and other weaknesses still pertain. Despite the role of internal audit and audit committees, there is often an absence of ongoing ownership to identify, devise and take forward the organisational, cultural and procedural reviews and reforms that may be necessary and which do not, at present, have a council focus.

This article argues for a re-think of the role of counter fraud teams in councils and suggests that councils should be looking to an individual at senior level with the knowledge and expertise to take an overview of all governance issues, including fraud, and bring solutions that improve the resilience of the entire organisation.

It’s all about governance

Among local authorities there can be a number of ways that governance weaknesses may be revealed, for example: service failure, legal challenge, fraud, financial failure. 

The following examples provide some recent demonstrations.

In her 2016 report on Winchester Council, Claer Lloyd-Jones warned of the perfect storm that she believed the council faced over variations to a development agreement which were successfully challenged in a judicial review by a councillor. In her assessment of how the council ended up in court, despite litigation risk and other assessment processes, she noted that there was:

  • an absence of internal challenge and debate among both members and officers
  • a reliance on cross-party support, which meant that there was no challenge from an opposition party
  • no challenge from overview and scrutiny (with officers feeling obliged to take the position that they had to see the process through to delivery in order to fulfil the council’s original intentions).

In 2018, Max Caller undertook a Best Value Inspection of Northamptonshire County Council. The report found that:

  • councillors took steps toward a particular structure for delivering functions and services that appeared to abandon strong and effective budget-setting scrutiny, and did not involve informed discussion by the full council
  • the council lacked appropriate advice in setting and managing budgets, as well as the necessary control mechanisms to ensure compliance with the law and good practice, and lacked determined intervention from both members and officers.

Compliance with and awareness of legal and good practice approaches appear integral to both situations, and it is interesting that in comparing the recommendations from the Winchester review and the questions the secretary of state wanted answering by the Best Value Inspection, we see the same issues – scrutiny, risk management, provision of information, engaged debate and an effective organisational culture that would make up appropriate governance arrangements for any council.

Indeed, together they provide a useful set of questions as to why the proposed new post – a senior level individual with an overview of all governance issues, including fraud - is an appropriate answer:

  • Are the right culture, governance and processes in place to make robust decisions?
  • Is clear, useful and sufficiently detailed information provided to councillors to inform their decision making?
  • Does the council’s finance department have strong processes in place to manage services within the budget constraints and within service areas?
  • Is the council organised and structured appropriately to safeguard it against fraud?
  • Will the overview and scrutiny function be supported in the future by dedicated staff and specialist training?
  • Are there appropriate control and assurance mechanisms in place?

Preparing for the storm

No one is saying that both councils were entirely in the wrong – and not everyone in the council is necessarily happy with the inquiries’ findings – but the reports underline problems any local authority may face in the absence of robust governance (the potential for the storm). Indeed, as examples as disparate as Derby, Dundee and the Greater Cambridge Greater Peterborough Local Enterprise Partnership underline, it is this absence that may require an innovative response to the safeguarding of the public purse.

In the Derby case, the external auditors issued a public interest report in 2016 which noted that systems of governance were flawed in some respects, officers did not report risks sufficiently promptly, members involved themselves inappropriately in operational matters and the council had to understand that a more robust approach to governance was ‘essential’.

In the Dundee example, Audit Scotland reported in 2018 that a £1m fraud was perpetrated over seven years as the result of failures in fundamental controls within the council’s financial systems. These failures had not been picked up by a number of external audit reviews which were intended to assess the suitability and effectiveness of the council's corporate governance arrangements, and identify any weaknesses in the council's overall arrangements for the prevention and detection of fraud.

Finally, it is worth noting the Public Accounts Committee’s (PAC) report on the Greater Cambridge Greater Peterborough Local Enterprise Partnership, which emphasised that when expending public funds, such bodies are required to demonstrate certain standards in public life, particularly in terms of accountability and transparency, through appropriate governance arrangements.

This perspective is generally applicable, but in the case of providing assurance to the public about councils’ governance arrangements and their stewardship of public funds, particularly in the case of counter fraud activity, it is worth noting Greg Marks and Diana Melville (CIPFA Better Governance Forum) who observed in 2012 that:

"All-embracing governance contributions for risk management, internal audit, information governance, ethical standards and corporate governance… are all elements towards the creation and maintenance of an anti-fraud culture."

(Marks G and Melville D (2012) The Evolution of Fraud and Anti-Fraud Activity in Local Authorities in C Morales, and F Boardman (Eds), Public Service Reform in the UK: Revolutionary or Evolutionary? London: PMPA)

Councils are primarily responsible for their own governance arrangements, but in a climate of continuing cuts and councils searching for innovative and streamlined ways of delivering functions and services, the risk of a storm, whether in relation to inappropriate decision making, unaccountable expenditure, financial loss or possible fraud, is inherent in a failure to ensure the appropriate governance arrangements and the marriage of robust procedures within what is termed the softer characteristics of leadership and standards.

Preventing the storm: who should safeguard the public purse?

The Fighting Fraud and Corruption Locally 2016–2019 Strategy asks elected members, chief executives, finance directors and all those charged with governance to ensure the strategy is adopted and implemented in their local authorities. 

The strategy recognises that it isn’t sufficient for authorities to focus only on investigations. Successful analytics and investigation of low value, high volume fraud are important but so are financial risk management and more complex investigatory work such as high value low volume fraud or areas of emerging risk. The successful implementation of the strategy means much more effective working by – and between – internal auditors and external auditors, counter-fraud specialists, risk and audit committees and senior management teams.

In turn this will also require a shift from a technical response that focuses on compliance and investigation to one that embraces areas such as governance, probity and working with private and voluntary sector partners, the outcomes of which are reviewed and monitored as part of an effective strategic response. 

This is where the new breed of counter fraud or financial loss specialist comes in – someone who needs to know about fraud risk management and investigations, has a grounding in how finance works, and understands what governance arrangements should be in place and how these can be demonstrated to be working effectively in practice.

The PAC warned that making people properly accountable is as much about culture and actual implementation as it is about guidance. Derby Council has accepted the need to strengthen and enhance its governance framework, which would be subject to a number of checks and balances to ensure continuous improvement. Dundee Council had established a Corporate Integrity Group to address risk, communication, monitoring organisational vulnerability and sustainable preventative measures.

For any of this to be successful, however, the levels of expertise and knowledge will require not only a new approach to the safeguarding of public funds but also a new type of public official. In what the PAC described as the increasingly complex governance structure in England, such as elected mayors, LEPs and combined authorities, such a new ‘safeguarding the public purse specialist’ may be required with the requisite knowledge, experience and skills to weld governance arrangements into an effective stewardship of public funds.

Find out more about CIPFA’s counter fraud training.