Annual Audit Letter

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Annual Audit Letter

West Mercia Probation Trust

Audit 2009/10

   

          The Audit Commission is an independent watchdog, driving economy, efficiency and effectiveness in local public services to deliver better outcomes for everyone.   Our work across local government, health, housing, community safety and fire and rescue services means that we have a unique perspective. We promote value for money for taxpayers, auditing the £200 billion spent by 11,000 local public bodies.   As a force for improvement, we work in partnership to assess local public services and make practical recommendations for promoting a better quality of life for local people.  

 

 

Contents

Key messages .................................................................................................... 2   Overview....................................................................................................... 2   Financial statements..................................................................................... 3   Value for money............................................................................................ 3   Actions .......................................................................................................... 3   Value for money and governance..................................................................... 4   VFM conclusion ............................................................................................ 4   Future VFM conclusion requirements ........................................................... 5   Reform agenda and governance .................................................................. 5   Financial statements and statement on internal control................................ 7   Audit opinion ................................................................................................. 7   Financial statements..................................................................................... 7   Control environment ..................................................................................... 8   Accounting practice and financial reporting .................................................. 9   Closing remarks ............................................................................................... 10   Independence ............................................................................................. 10   Audit fees.................................................................................................... 10   Future of the Audit Commission ................................................................. 10   Reporting .................................................................................................... 11   Appendix 1 Value for money conclusion key findings ................................ 12   Managing finances...................................................................................... 12   Governing the business .............................................................................. 14   Managing resources ................................................................................... 15    

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  Key messages

This report summarises the findings from our 2009/10 audit. It includes messages arising from the audit of your financial statements and the results of the work I have undertaken to assess your arrangements to secure value for money. Overview 1 During this financial year West Mercia Probation Trust (the Trust) has faced a number of challenges. Most importantly the Trust secured second wave Trust status in the autumn. This was the culmination of a significant amount of work by officers and members of the Trust and now provides the Trust with greater confidence over its future. 2 The Trust faced financial challenges in the year. Mid-year the Trust was forecasting an overspend of £490,000. This position was improved with a further allocation from National Offender Management Service (NOMs) of over £200,000 plus permission to overspend by £150,000. The Trust ended the year with an overspend which was within the tolerances agreed by NOMs. 3 With a change in government, and the autumn spending review on the horizon, the financial resilience of public bodies remains uncertain. While the Trust has set a balanced budget for 2010/11 it is forecasting a cumulative deficit of over £1 million by 2012/13. Clearly robust financial planning and scrutiny of the ongoing financial position by members will be critical in the coming months and years. 4 In the face of these challenges, the Trust is taking innovative steps to work with partners and the 'third sector' to develop probation services, maximising funding from other sources and minimising the costs to the Trust. The preferred partner arrangement was entered into in April. The next step for the Trust and its partner is to receive and approve a business case for the first area of service to be captured within this arrangement. We will watch with interest as these arrangements develop.

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Financial statements 5 The financial statements were prepared in line with statutory deadlines. Working papers to support the accounts were satisfactory and officers were supportive of the audit. I did not identify any material errors within the accounts. The accounts were prepared in accordance with the requirements of the International Financial Reporting Standards (IFRS) for the first time this year. No material issues were referred to within the Annual Governance report that I presented to the Board and I issued an unqualified opinion on 23 June 2010 which was prior to the national deadline. Value for money 6 I have undertaken my audit in accordance with the Code of Audit Practice and having regard to the criteria for probation trusts specified by the Audit Commission and published in January 2009. I am satisfied that, in all significant respects, West Mercia Probation Trust made proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2010. Actions 7 Recommendations are shown within the body of this report and have been agreed with the Trust.    

Audit Commission    

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  Value for money and governance

I assessed whether the Trust put in place adequate corporate arrangements for securing economy, efficiency and effectiveness in its use of resources. This is known as the value for money (VFM) conclusion.

VFM conclusion 8 The Audit Commission specifies the relevant criteria for the VFM conclusion for each type of body each year. Those relevant for 2009/10, and my assessment of the Trust's performance against them, are summarised in the table below.

Table 1: VFM conclusion criteria  

KLOE Criteria Met 1.1 Does the organisation plan its finances effectively to Yes deliver its strategic priorities and secure sound financial health? 1.2 Does the organisation have a sound understanding of Yes its costs and performance and achieve efficiencies in its activities? 1.3 Is the organisations financial reporting timely, reliable Yes and does it meet the needs of internal users, stakeholders and local people? 2.4 Does the organisation manage it's risks and maintain a Yes sound system of internal control? 3.3 Does the organisation plan, organise and develop its Yes workforce effectively to support the achievement of its corporate priorities?

  9 The summary findings and conclusions on each of the areas are set out in Appendix 1 but as a result of the work I was able to issue an unqualified value for money conclusion stating that the Trust had adequate arrangements to secure economy, efficiency and effectiveness in its use of resources.

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Future VFM conclusion requirements 10 Following a decision by the new government the Audit Commission announced on 28 May 2010 that work on Comprehensive Area Assessment (CAA), including the use of resources assessment, was stopping immediately. Whilst the Trust was not directly impacted by this announcement the Commission has been reviewing the arrangements for auditors work on value for money (VFM) relating to the 2010/11 accounts and future years. 11 I still have a continuing statutory responsibility, as set out in the Code of Audit Practice 2010, to give a conclusion on whether the Trust has made proper arrangements for securing VFM. The Audit Commission's aim is to ensure the focus of this work remains on my core responsibilities and on local audit issues whilst recognising the scale of the financial pressures for public bodies in the current economic climate. 12 The most significant changes are likely to be seen at single tier, country and district council levels. Arrangements for probation Trusts are expected to be similar to arrangements in 2009/10. Current guidance will be updated and reissued in due course and I will ensure there is an ongoing dialogue with the Trust as the framework is finalised. Reform agenda and governance 13 The coalition government has indicated that it wishes to: ■  introduce a rehabilitation revolution that will pay independent providers   to reduce reoffending, paid for by the savings this new approach will generate within the criminal justice system, and ■  conduct a full review of sentencing policy to ensure that it is effective in deterring crime, protecting the public, punishing offenders and cutting reoffending. 14 These have been incorporated into the Ministry of Justice's Structural Reform Plan published in July 2010. The detail has yet to be worked upon but there are potentially far reaching effects for the probation service. 15 In the face of these challenges, the Trust is taking innovative steps to work with partners and the 'third sector' to develop probation services, maximising funding from other sources and minimising the costs to the Trust. The Preferred Partner Arrangement with Youth Support Services (YSS) was entered into in April. 16 I have looked at the procurement process for the Arrangement and I am satisfied that it was open and transparent. This is a potentially innovative arrangement which has already generated interest from other probation trusts. The key risks, such as failure of the partner to deliver the expected outcomes, are mitigated by the requirement for approved business cases and the short termination provision provided for in the contract.

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  17 The next step for the Trust and its partner is to receive and approve a business case for the first area of service to be captured within this arrangement. The first year is not expected to deliver a large number of projects but as the numbers, and potentially income, increase in future years the Trust will need to ensure that the governance and reporting arrangements are kept under review to ensure they remain appropriate. 18 The monitoring of actual performance against budgeted assumptions both in the partnership arrangement and the Trust's core functions will be key to ensuring the continuing financial health of the Trust. The Trust faced financial challenges in the 2009/10 financial year. Mid-year the Trust was forecasting an overspend of £490,000. This position was improved with a further allocation from National Offender Management Service (NOMs) of over £200,000 plus permission to overspend by £150,000. The Trust ended the year with an overspend which was within the tolerances agreed by NOMs. 19 With a change in government, and the autumn spending review on the horizon, the financial resilience of public bodies remains uncertain. Whilst the Trust has set a balanced budget for 2010/11 it is forecasting a cumulative deficit of over £1 million by 2012/13. Achieving a balance between identifying savings for the current service whilst awaiting decisions on whether the probation service will be expected to take on new responsibilities under the reform agenda will be difficult. Robust financial planning and scrutiny of the ongoing financial position by members will be critical in the coming months and years. 20 In respect of this, the Trust's overall governance arrangements will be changing as a result of the decision that Justices of the Peace should no longer have voting rights on the Board and the retirement of the current Treasurer. The Chair will be considering the options available and bringing forward proposals. It will be important to ensure that any new arrangements comply with the regulatory framework whilst also reflecting the strategic and operational direction of the Trust.   Recommendation R1 The Trust should ensure that its governance and reporting framework are appropriate for the new preferred partner arrangements and, where changes are being considered, that they comply with the regulatory framework whilst also reflecting the strategic and o erational direction of the Trust.

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  Financial statements and statement on internal control

The Trust's financial statements and statement on internal control are an important means by which the Trust accounts for its stewardship of public funds. Audit opinion 21 I issued an unqualified opinion on 23 June 2010 which was prior to the national deadline. In my opinion: ■  the financial statements give a true and fair view, in accordance with the accounting policies directed by the Secretary of State under the Offender Management Act 2007, of the state of the Trusts affairs as at 31 March 2010 and of its net operating costs and cash flows for the year then ended; ■  the financial statements, and the part of the Remuneration Report to be audited, have been properly prepared in accordance with the accounting policies directed by the Offender Management Act 2007 and directions made there under by the Secretary of State; ■  in all material respects the expenditure and income have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them; and ■  information within the Financial Review included in the Annual Report, is consistent with the financial statements. 22 I issued a letter of assurance to the National Audit Office by their 30 June deadline. Financial statements 23 The accounts were presented for audit and the opinion issued within the timetable outlined by NOMs. My Annual Governance Report, that was presented to the Board in June, and summarised the findings from my opinion audit, did not highlight any issues of particular significance.

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  24 First time implementation of the International Financial reporting standards was undertaken well. The accounts were completed in a tight timescale in order to meet the deadlines set by NOMs. Staff were very supportive of the audit and working papers were available to support most aspects. These were supplemented by further requests for information, as is normal in the audit process, and these requests were responded to quickly and adequately. We discussed with staff where there would be scope for improvements and we agreed cross referencing could be improved to provide a better audit trail next year. We also discussed improvements in the bank reconciliation such that the reconciliation should combine all bank account balances (including imprest accounts) to be reconciled back to the general ledger. 25 2009/10 was the first year that the accounts were prepared under international financial reporting standards. The main areas of the accounts that were impacted by these changes were: ■  holiday pay - a new requirement was that the Trust had to make an estimate of the value of untaken leave and accrue for this in the accounts. We identified some minor weaknesses in some of the underlying records to support these figures; however these were corrected in the final version of the accounts; and ■  accounting for leases - under the standards, some arrangements that previously were not regarded as leases could be classified and accounted for as leases. We identified some arrangements around the treatment of mini buses that we felt could be incorrectly classified. We made the judgement that these were unlikely to be material to the accounts. In our AGR we recommended that the Trust should have regard for finance leases when entering into any new arrangements in the future.   Recommendation R2 The Trust could better evidence its lease arrangements by: ■  ensuring the accounting implications of any new arrangements entered into that could contain a lease under IFRS. ■  supporting spreadsheets should be provided to better evidence classification of operating and finance leases. Control environment 26 We assessed the Trust's overall control environment to be adequate. However, we had planned to place reliance on the work of internal audit for the creditors system but the evidence on the files to support their conclusions was inadequate in this area. Documentation was weak for both the creditors system and also the debtors system.

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  27 The Trust did challenge the quality of the internal audit work this year and in discussions with the internal audit manager has taken steps to ensure that the specific problems do not occur next year. The Trust should satisfy itself as to the adequacy of internal audit work going forward, as internal audit is key to providing management with confidence around the operation of internal controls.   Recommendation R3 The Trust should work with internal audit so that the quality and coverage of their work is adequate to provide management with sufficient assurance about the adequacy of internal controls; and ■  In areas where external audit has agreed that reliance will be placed on the work of internal audit on financial systems, then adequate working papers to support internal audit work and conclusions should be provided in a timely manner. Accounting practice and financial reporting 28 The Trust provided the annual report in line with the timetable for production and audit of the accounts. This enabled us to be able to review the content for consistency prior to the opinion being issued and this represents good practice. 29 In local authority accounts, the accounts themselves contain an explanatory forward and introduction where the chief financial officer can provide an overview of the financial year. As the Trust's accounts are prepared in a proforma provided by NOMs in a very restricted form there is little capacity to provide that type of overview in the statutory accounts. 30 Whilst we are satisfied that the annual report contains the key elements, a possible improvement area to aid transparency to the readers of the accounts and annual report would be an enhanced commentary within the financial overview. This process would also be aided by the accounts and annual report being published promptly on the Trust's website.   Recommendation R4 The Trust should consider providing a more detailed overview of the financial statements to aid the readers of the annual report and financial statements and to support transparency.  

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