LOCAL GOVERNMENT AUDIT SERVICE. Statutory Audit Report. to the. Members of Cork City Council. for the

Transcription

1 LOCAL GOVERNMENT AUDIT SERVICE Statutory Audit Report to the Members of Cork City Council for the Year Ended 31 December

2 Contents Paragraph Introduction 1 Main Issues 2 Financial Performance 3 Financial Standing 4 Capital Account 5 Main Revenue Collections 6 Specific Matters 7

3 AUDITOR S REPORT TO THE MEMBERS OF CORK CITY COUNCIL 1 Introduction 1.1 I have completed the statutory audit of the accounts of Cork City Council for the year ended 31 December My audit opinion on the Annual Financial Statement (AFS) of the Council, which is unqualified, is stated at page 3 to the AFS. 1.2 This report is issued in accordance with section 120 of the Local Government Act, Main Issues Attention is drawn to the following main issues in this report: No progress has been made in reducing the level of indebtedness on either land loans or affordable housing loans (paragraph 4.4) Significant deficit balances continue to be carried on unfunded capital schemes (paragraph 5.3) Increase in arrears in some revenue collection categories (paragraph 6) Judgments delivered in the civil and criminal cases concerning the theft of parking discs and domestic refuse tags (paragraph 7.1) The park-by-phone service continues to operate without a formal contract (paragraph 7.2). 3. Financial Performance 3.1 The Income and Expenditure Account with comparative figures for the previous year may be summarised as follows: 2012 m 2011 m Expenditure (158.6) (179.0) Income Surplus /(Deficit) for Year before Transfers Transfers from / (to) Reserves (2.7) (5.0) Overall Surplus /(Deficit) for Year Opening Balance at 1 st January Closing Balance at 31 st December Financial Standing 4.1 Balance Sheet The balance sheet shows net assets of 3,396m at 31 December 2012, consisting of the following: 1

4 2012 m 2011 m Fixed Assets 3, ,278.0 Work In Progress (WIP) and Preliminary Expenses Long Term Debtors Net Current Assets Long Term Creditors (182.9) (188.1) Net Assets 3, ,363.5 Represented by: Capitalisation Account 3, ,278.0 Income WIP Specific Revenue Balance General Revenue Balance Other Balances (85.4) (87.2) 3, , Fixed Assets incomplete land and property register I highlighted at the previous audit that the land and property register was both incomplete and was also not reconciled to the related financial data in the schedule of fixed assets. While I still have concerns over the incompleteness of the underlying records I note that work is currently being progressed towards implementing a property register that should accurately record all appropriate assets. It is important that the resources currently available are maintained to ensure that the register is completed without further delay, particularly in view of the expected transfer of assets to the new public body, Irish Water. 4.3 Work In Progress The accumulated expenditure on the work in progress (WIP) and preliminary expenses account at the 31 December 2012 was 180m ( m). Transfers to fixed assets amounted to 50m in 2012 and referred, in the main, to the costs incurred on the Ballincollig Green Route Road scheme which accounted for 48m of the total amount transferred. Schemes remaining in the WIP account at the year-end included the costs associated with the Marina Park Development ( 16m - paragraph 5.4). The year-end balance also included accumulated expenditure of approximately 12m in respect of the costs of the broadband network. I have requested the Manager to seek clarification on what ownership rights are vested with the Council in respect of the related cable system to ensure that the asset is appropriately disclosed in the AFS. 4.4 Loans Payable At 31 December 2012, the Council owed 176m ( m) in medium to long-term loans (note 8 to the AFS refers). 2

5 The year-end figure included 37m that was owed to the Housing Finance Agency (HFA) in respect of loans taken out in recent years to purchase seven separate parcels of land for housing development. Until recently all of the related nine loans had terms of seven years with interest being rolled up annually and capitalised to the principal amount. The loans have now been converted to annuity with repayments of both principal and interest commencing in The Council is currently required to fund the monthly instalments (estimated at approximately 2m in a full year) from its own resources. In addition, the Council owed the HFA a further 37m on affordable housing loans at the end of These loans were originally obtained to fund the acquisition of housing units for sale under the affordable housing scheme. There were 113 of these properties unsold at the year-end, of which 85 were transferred under temporary letting schemes at that date. The funding shortfall in respect of the unsold affordable housing units was calculated at over 27m as at June The current obligations to fund both the land and affordable housing loan repayments will continue to put significant pressure on the Council s financial position unless additional sources of funding are identified. Discussions are on-going with the Housing and Sustainable Communities Limited (HSC) in relation to land holdings, acquired for housing purposes that may transfer to the Land Aggregation Scheme. This scheme is under review at present and no transfers have occurred to date. Department of the Environment, Community and Local Government s (the Department) circular letter 26/2012 converting the associated loans to 25 year annuity loans as they matured and requiring local authorities to bear the cost of any interest/capital payments that arise before the transfer of the lands will place significant burden of approximately 2m per annum on Cork City Council. The City Council has outstanding loans of 37m in respect of affordable housing schemes and 113 unsold properties most of which have been temporarily transferred to social leasing, to the Rental Accommodation Scheme or to temporary convenience lettings. Efforts are continuing to resolve the funding shortfall. 5. Capital Account 5.1 The capital account records income and expenditure in respect of the acquisition and provision of assets related to services provided by the Council. It has been de-aggregated with the various accounts included under relevant account headings in the balance sheet. 5.2 A summary of the transactions on the capital account, with comparative figures for 2011 is as follows: 3

6 2012 m 2011 m Expenditure (including transfers) (71) (67) Income (including transfers) Outturn for the year 1 53 Opening Balance Favourable / (Adverse) 13 (40) Closing Balance Favourable / (Adverse) Adverse Balances - individual capital schemes There was a favourable balance of 14m on the capital account at 31 December However, there were significant deficits, totalling 56m, being carried on a number of schemes at that date that were classified as unfunded. The schemes with the largest unfunded deficits remain Docklands Bridge ( 5.1m) and Marina Park Development ( 4.6m). The main concentration of unfunded balances remains within the housing directorate where there were accumulated deficits of 42m covering a large number of housing schemes. I have been advised that there is little expectation of any additional external funding to finance the majority of these debit balances. As there has been no significant movement on these deficit balances over the past two to three years, management needs to devise a strategy that would reduce and eventually eliminate the shortfalls. Balances on the capital account are reviewed regularly with particular emphasis on funding sources. Expenditure on housing construction (approximately 42m deficit) was incurred on the understanding that it would for the main part be recouped from Central Government. The housing directorate continue to engage with the Department and the matter will be kept under review. 5.4 Marina Park Development The land and buildings that make up the Cork Showgrounds and other lands located nearby were acquired by the Council in 2009 for approximately 16m. It was originally intended to fund part of the acquisition costs from development contributions arising from the development of the Cork docklands. I have been advised that there is unlikely to be any significant development of the docklands in the short to medium term. There is currently a deficit of 4.6m on this scheme. The balance on the Marina Park Development remains to be funded from future development levies. 4

7 5.5 Cork Main Drainage This scheme continues to record a deficit of over 19m and remains classified in the AFS as funded. While all of the relevant grant applications have now been submitted to the Department, no confirmation has yet been received as to whether there will be any additional funding for this project. The position on the Cork Main Drainage is being pursued vigorously with the Department and should become clearer during the current year, particularly in light of the proposed establishment of Irish Water. 5.6 Atkins Hall Social Housing Scheme The Council entered into a contract, in 2007, with a development company to acquire 96 housing units at Atkins Hall, Lee Road for a total purchase price of 25m. The Council has incurred costs of 3.4m to date on the payment of deposits for the housing units. The development company is currently in voluntary receivership and I note that none of the housing units have been transferred to the Council. While grants of 25m were received from the Department, no further payments were made to the company. As no progress had been made in securing any of the units from the company, the Department gave approval, in 2011, to transfer 11m of the total grant approved for this scheme to fund deficits arising on other housing projects. The balance of the grant received from the Department has been placed on deposit. 5.7 Three year Capital programme report The annual report covering the period was submitted to the Council in December 2012 by the Manager in accordance with section 135 of the Local Government Act A capital investment of 189m, depending on funding availability, is anticipated over the three years. 6. Summary of Major Revenue Collections 6.1 The arrears and percentage yields from the main revenue collection accounts were as follows: m % m % Commercial Rates Housing Rents & Annuities Commercial Water Housing Loans

8 6.2 Commercial Rates The collection levels further declined in 2012 with arrears increasing to 18.5m at the year end. A provision for bad debts of 10.7m has been made representing almost 58% of the total book debt as at 31 December Housing Rents There was a further reduction in collection levels in this category during 2012 with arrears at the end of the year increasing to 2.7m. A provision for bad debts of 1.3m has been made representing almost 50% of the total book debt as at 31 December Commercial Water The collection levels for 2012 recorded an increase of 3% on the levels achieved in 2011 with arrears reducing to 1.4m as at 31 December The improved collection levels are attributable to the issuing of invoices on a more timely basis as well as more regular reviews of arrears cases. I note that the charges raised in respect of December 2012 have not been included in the AFS as the relevant amounts were included in invoices that did not issue until In line with accounting protocol all income earned in the year should be recorded in that year s AFS. Procedures should be put in place to ensure that the AFS for 2013 includes all relevant income earned to the end of the year. 6.5 Housing Loans Housing loans collections deteriorated by 6% in the year when compared to the returns achieved in 2011 with arrears at 31 December 2012 amounting to 936k, an increase in the year of over 200k. At the year-end date there were 161 accounts with accumulated balances of 731k that were more than six months in arrears. The collection of income is increasingly difficult in the present economic climate and every effort is made to secure the Council s income. Initiatives continue to be undertaken to strengthen debt collection measures and processes. A Mortgage Arrears Resolution Process has been implemented to assist borrowers in difficulty with their housing loans. 7. Specific Matters 7.1 Theft of parking discs and domestic refuse tags As previously reported, the civil case instigated by the Council against the distributor of parking discs and domestic refuse tags concluded in The Council was successful in obtaining judgment in the High Court in the sum of 924,757. A criminal investigation was also instigated and this concluded in 2013 with a custodial sentence being imposed on the distributor. Prior to the 6

9 judgment being delivered, the Council received a payment of 25,000 from the defendant. The High Court ruling was referred to the Cork County Sheriff for seizure of goods but was returned in January 2012 marked nulla bona. The Council accordingly instituted enforcement proceedings for payment of the judgment debt by instalments in the District Court. In September 2012, an instalment order in the sum of 100 per month was granted but I note that no payments have yet been received by the Council. As the judgment allows the Council to seek a variation of the order and to retest the debtor, I have recommended that this would be regularly examined. At the time of the original investigation the Council commissioned independent legal and financial advisors to examine the circumstances of the theft. The subsequent reports that issued referred to significant deficiencies in the manner in which the contract for the distribution of the parking discs was managed by the Council. I note that no contract was ever executed in respect of the distribution of domestic refuse tags. The Council is no longer in the domestic refuse business and the distribution of parking discs is now administered internally. During the audit, I reviewed the adequacy of the internal controls applied in respect of the parking discs area and I am satisfied that it is now being managed effectively. 7.2 Parking Income Park-by-phone The park-by-phone service is currently outsourced to a private company without a formal contract with the Council being in place. A contract was drafted in 2008 between the Council and the company (the purpose of which was to engage the company to collect cash generated from the park-by-phone service on the Council s behalf) to last for three years ending December I note, however, that the document was never signed. I reviewed this area again during the current audit and have again identified internal control deficiencies particularly in respect of the verification of cash collections. The Council continues to rely on this service provider to produce financial data on the income generated without subjecting these underlying records to any independent scrutiny. The arrangement with the company provides for the cash collections to be transmitted to the Council monthly in arrears. I note that a significant portion of the amounts collected ( 201k) by the company in respect of the six month period from January to June 2012 was not paid over to the Council until The payments were made in piecemeal amounts and only finally paid in full in September The amount that was due to the Council at the 2012 year end, totalling 165k, has not been included in the AFS. As stated at paragraph 6.4 above, all income earned in the year should be recorded in that year s AFS. The Council is currently pursuing the formal re-tender of the service. The matters highlighted during audit need to be addressed as a matter of urgency to ensure that all amounts due to the Council are properly and accurately recorded in the accounts, receipted on a timely basis and are 7

10 authenticated by reference to contracts that were approved following the application of proper tendering procedures. The Park by phone service is provided by a private company which was engaged in December 2008 following a tender process. The tender envisaged the service being retendered at five yearly intervals. In response to the control weaknesses identified, the Council engaged a private firm in July 2012 to assist in the setting up and procurement of a new service. The tenders for the new service provider were published in May 2013 and a number of tenders have been received. The assessment of tenders is being completed with a view to contracting and rolling out a new service in the coming months. Transitional arrangements have also been set out and agreed with the current service provider. Park by phone currently accounts for approximately 5% of parking related income. It is anticipated that this will increase further in the years ahead Parking Income controls There have been a number of reports issued in recent years by both external and internal audit and also by a firm of accountants (who were retained by the Council to report on internal controls in some income areas including parking) all of which have highlighted internal control weaknesses across various parking income streams. I am satisfied that progress has now been made in implementing the recommendations made, particularly in improving the internal controls over parking fines and the sale and distribution of parking discs although some areas have yet to be resolved. These include issues with the operating licence for the park and ride facility and while progress has been made in implementing recommendations in relation to the management of the city car parks, some internal control weaknesses still need to be addressed. Progress is being made in the implementation of recommended improvements in controls. Most of the improvements identified for car parks have been implemented or are being followed up. The Council installed a new server and new information system in It also implemented changes in response to recommendations regarding the sign off of reconciliations, standard checklists, record keeping, codes and keys, staff access etc. The draft procedural manual and agreement on reporting suite will be closed out by year end. There are outstanding issues relating to the Park and Ride and these will be addressed in Procurement - compliance with national and EU procurement and tendering regulations At the previous audit, I highlighted a number of instances of non-compliance with tendering procedures and regulations. Some sections of the Council have made good progress in improving compliance levels since the issue of the 2011 report. 8

11 I note that the significant annual expenditure incurred on the hiring of trucks and vans has now been put on a more formal basis and a long term strategy has also been put in place. A number of measures were also implemented by the housing directorate that has resulted in improved tendering compliance levels. However, there remain some areas of non-compliance that should be attended to without further delay. This could be achieved in the context of an improved financial reporting environment, as recommended during the audit, particularly by the main spending directorates that could provide for the regular reporting of procurement compliance levels to the senior management team. It is essential that procedures continue to be developed to ensure that the Council is fully compliant with all relevant national and EU procurement regulations and guidelines. 7.4 Development Contributions The total amount shown as outstanding at 31 December 2012 was 11.2m ( m) and is classified in the Balance Sheet as follows; Current Debt (Note 5 to the AFS) Long Term Debt (Note 3) 11.0m ( m) 0.2m ( m) The Council has included a provision for bad debts on the total amounts outstanding of 6.6m ( m). I have requested that a review be carried out to determine the accuracy of the element of the full debt being classified as current as some of the balances included in the current debt category might be more appropriately classified as long term. 7.5 Governance Corporate governance comprises the systems and procedures by which enterprises are directed and controlled. The Manager, his management team and the elected members all have a role in ensuring that there are sound systems of financial management and internal control in place Risk Management An effective risk management framework provides the executive management and the Council members with assurances that major organisational risks are identified and appropriately managed. I reviewed a sample of registers during the audit which highlighted that some of the documented risks were limited in both detail and completeness. To ensure that the process is embedded successfully throughout the organisation it needs to be both wide-ranging and comprehensive. I have advised the Manager that he and his senior management team should review the current status of the risk management process as rolled out across the Council and to take immediate corrective action in the areas where it has not been appropriately implemented. It is the senior management team s responsibility to ensure that adequate risk management and internal control systems are maintained throughout the organisation. 9

12 Internal Audit The unit issued a number of reports in 2012 and I have taken account of this work in carrying out my statutory audit. There continues to be delays encountered by the unit in issuing reports which, in some cases, were finalised without management responses to the matters raised. Management needs to continue to implement its procedures to ensure that responses to the findings and recommendations contained in the reports are attended to more expediently Business process improvement unit The Council s business process improvement unit continues to examine and identify areas where cost savings and efficiencies may be achieved. Management should continue to ensure that recommendations contained in reports are implemented so as to ensure that the benefits accrue to the Council at the earliest opportunity Audit Committee The Council s audit committee met on four occasions during 2012 and issued its annual report for that year in February Interest in Subsidiary Companies The Council currently has interests in a number of companies and these are detailed at Appendix 8 to the AFS Cork Opera House plc. The company oversees the day-to-day management of the theatre. A firm of auditors was appointed to audit the books and records and to report thereon. I have received the company s audited accounts for the year ended 31 March The company recorded an operating profit for the year of 260,645 reducing the accumulated losses to 3m. During the audit I met with members of the company s senior management team who advised me of the measures taken to return the company to profitability. The Council continues to provide a guarantee to the company s bankers to cover the loan of 1.5m drawn down in The Council also issued a loan of 1.25m to the company in 2011 with repayments, as per the agreement, commencing in Disclosure of financial results The financial results of the subsidiary companies have not been consolidated into the accounts of the Council. 10

13 8. Acknowledgement I wish to record my appreciation for the courtesy and co-operation extended to audit by the management and staff of the Council. Eamonn Daly Local Government Auditor 11 November