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PROPOSED INTERNAL AUDIT SHARED SERVICE FOR

PLYMOUTH CITY, DEVON COUNTY AND TORBAY COUNCILS

Background Plymouth City (PCC), Torbay (TC) and Devon County (DCC) Councils have been finding that the current size and specialist nature of internal audit work undertaken in each authority does not allow efficiencies of scale to be obtained, for example with regard to audit management systems, training and development, etc. In addition, the Councils, like many others, have struggled at times to deliver their Internal Audit functions because of difficulties in recruiting suitably qualified and experienced staff. Coincidentally, the Government’s White Paper, Strong and Prosperous Communities, outlined proposals for improvements in the operation of Local Government which explicitly proposed improved collaborative working by authorities. This aim is supported by Plymouth, Devon and Torbay and there is a shared commitment to delivering better and more cost-effective public services to meet the priorities of local communities, and provide improved value for money. Effective partnership working is also a key theme against which all local authorities are judged in their CPA value for money assessment, and there will be even greater emphasis on partnerships under the new CAA regime. Against this background the Heads of the respective internal audit sections, on behalf of their S151 Officers, have been working together to consider shared working. The Group has explored the various options for service delivery within the geographic area of Devon, including shared services with both the public and private sector partners, and produced an Outline Business Case (OBC) recommending a preferred option for taking the initiative forward. The OBC has recently been reviewed and challenged by senior officers and directors from each authority at a workshop facilitated by consultants from 4ps. The workshop confirmed the validity of the rationale contained within the OBC, but recommended strengthening the overall vision, and governance arrangements for the project. This report now summarises the OBC (as amended), and recommends that a formal shared service model in the form of a consortium to deliver Internal Audit services for Devon, Plymouth and Torbay be approved, in principle, with a target date for implementation of April 2009 (timeline summary to follow). This joint report has been agreed by the S151 Officers from all three authorities, and approval to take the project forward is now being sought through the appropriate decision making process at each respective Authority.

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Outline Business Case The main features outlined in the OBC (as amended) were as follows:- Strategic Vision and Purpose It was agreed that the overall vision for entering into a shared Internal Audit service comprises several elements, but could be summarised as:- “To provide high quality, cost effective internal audit services that add value, and support the corporate objectives of each client authority and also support the career and development aspirations of audit staff.” Current State Assessment The Heads of Audit group undertook a current state assessment of Internal Audit provision at the partner councils, which established that, in general, they deliver a service which meets the needs of clients and the external auditors. Opportunities for improvement were identified as:

• reducing the cost of provision at higher cost authorities;

• improving productivity and performance management;

• improving the ability of the service to deliver the audit plan and react to ad hoc work;

• providing greater potential for specialist audit skills;

• providing audit coverage for a wide geographical area in an effective manner. Service Improvement Objectives On the basis of the strategic context and current state assessment, the group set a list of service improvement objectives. An extract of these objectives includes:

• to improve / or maintain cost effectiveness to be at least the average of CIPFA benchmarked costs;

• to provide adequate and suitable training, audit qualifications, continued professional development (CPD) and general updating of skills;

• to be responsive to customer needs i.e. tailored service, customer focussed;

• to continue to provide a quality audit service that is sustainable, achieving continuous improvement, in an arrangement that is at least cost-neutral to each authority;

• to standardise audit procedures;

• to share Best Practice;

• to retain a “local” presence that will meet customer expectations; and

• to be responsive to changes in the market place e.g. outsourcing / partnership working by local authorities.

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Options appraisal During the process, five distinct service delivery arrangements were identified. By using a detailed scoring against the service improvement objectives, three of these options (outsourcing to the private sector; partnership working with the private sector; joining another local authority partnership) were discounted at an early stage because they did not meet the objectives for the project and / or did not address SWOT issues that had been identified. Two options (create a consortium arrangement or create an arms length company) were taken forward for more detailed consideration. Recommended option The three Heads of Audit evaluated these two options for delivering a shared service, and recommended that a full shared service model in the form of a consortium, delivering Internal Audit for Devon, Plymouth and Torbay, would be the preferred way forward for internal audit. The recommendation was based on assessing the two potential delivery models against 7 criteria such as timescale to deliver, practicability in establishing / operating the partnership, legal issues etc. Benefits The preferred option is expected to deliver a number of benefits and efficiencies including:

• a staff resource that can be deployed more flexibly, with better ability to cope with vacancies and / or ad hoc work;

• enabling the risk of vacancies to be better managed;

• the opportunity to share operational knowledge to assist in the reduction of average costs per audit day;

• increasing the sharing of best practice and access to a larger pool of specialist knowledge;

• economies of scale e.g. training, resourcing specialist skills such as IT and contract audit;

• keeping unproductive time and travel costs to a minimum;

• providing for flexible deployment if and when necessary, and allowing staff to build up specialist knowledge of the council(s) they are working within;

• providing better opportunities for staff to further careers within the internal audit function;

• applying common technology and methodology across all teams. Financial assessment The OBC contained a financial assessment which included details of the costs of providing an Internal Audit service at Devon, Plymouth and Torbay Councils. Comparative, benchmarking data was also included which demonstrated that the

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combined average cost per productive day for the 3 authorities compared very favourably with other benchmarking authorities. There is scope, however, for further cost efficiencies to be made by entering into a shared service arrangement. For example, the resulting larger employee base, would allow the overall management structure to be revised, resulting in overall cost savings with improved service levels. It is anticipated that there would be a reduction from three to one “head of internal audit,” although part of these savings would need to be used to revise the management and other structures at a lower level to adequately cover the reduction in staff resources. To take the project forward, detailed work will need to be undertaken in 2008. This will involve the heads of the three sections, who will also require specific project support, the cost of which will be split between the partners. It is also anticipated that a shared, integrated IT audit management system may be required. Purchase costs for such a system would need to be determined, but this will require detailed investigation, as it may be practical to share use of existing systems. The OBC summarised the estimated costs and cashable savings arising in the early years of the partnership agreement and concluded that approximately 10% annual cost savings against baseline costs could be anticipated. At the start of the partnership, it is anticipated that operating budgets would be the combination of those set for each internal audit team by its Authority for the 2009/10 financial year. It would be preferable for the three authorities to agree on future funding arrangements for a specific minimum term of agreement to enable the new partnership to consolidate its revised working arrangements and achieve its full potential. Risk Assessment A risk register will need to be completed, identifying the risks to the project and also to the new partnership arrangement. Some early thinking in this area has identified the following risks that will need to be considered and mitigated:- Project risks

• Change in strategic direction by authority;

• Change in pricing / charging structure – tie in to current contracts (e.g. schools);

• Loss of goodwill between authorities leading to reduced commitment to consortium;

• Staff resistant to change;

• Failure to identify a “host.” Partnership arrangement risks

• Competition from other service providers;

• Authorities not satisfied with quality of service provided;

• Loss of key staff and inability to recruit suitable staff;

• Authorities reduce budget contribution;

• ICT integration concerns.

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The project plan has identified the above as some of the risks that could impact on the success of the overall project. The plan also will include the mitigating actions that are being taken to reduce the risks such as regular meetings both between and within the councils to enable the actions of the individual councils to be reported and assessment be made of the impact on the project. As part of the reporting process, the risk register and consequential actions to mitigate these risks will be brought to Members.

Governance Arrangements Provided that the preferred delivery model is supported by each partner authority, the first key decision is the identification of a willing and suitable host authority. The host must be able to meet the needs of the internal audit function, and be willing to accept the risks that will come with being the platform for a wider audit service. Devon County Council has already expressed a willingness to act as the host authority. Although the three Heads of Internal Audit have progressed the project to date, which has been agreed in principle by the three S151 Officers, there is now a need to put in place more formal governance arrangements to enable the project to move forward and allow key decisions to be made in the lead up to implementation. It is proposed that a Project Board is set up which will comprise the S151 Officers from each partner authority ie Adam Broome (PCC), Mary Davis (DCC) and Richard Thorpe (TC), with Adam Broome designated as Project Owner and Chair. The Project Board would be advised by Malcolm Coe, Head of Finance (Governance & Planning, PCC) who has agreed to act in the capacity of Project Director; and Richard Parsons, consultant Project Manager. A number of working project groups will consider various aspects of the partnership arrangements eg working practices, HR implications, etc. The proposed project schematic is attached at Appendix 1. Following implementation of the project it is envisaged that the corporate governance arrangements will be accommodated through a Joint Committee of all three authorities, alongside a management board comprising S151 Officers, or their nominated representatives.

The Next Steps There are a number of key issues that still need to be addressed during the transitional phase of the project. Specific working groups have already been established to consider audit operational convergence requirements eg working practices. Timeframe – the target date for a shared service arrangement is that it should become operational in April 2009. A project plan is currently being prepared in order to determine the feasibility of this target and identify dependencies etc. A summary of this timeline and key milestones will be provided as soon as possible.

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Staffing - throughout the project to date a continual process of dialogue has been undertaken with Internal Audit staff. This has been through debriefings at team meetings which have been held at each of the partner offices. However, before the project goes ahead, formal consultation with staff and trade unions will be required. If the recommended option is agreed, it is currently envisaged that staff will transfer from current employers to the “host” authority under TUPE arrangements, but this will need to be confirmed. Stakeholder Management and Communication – Apart from communication with staff and trade unions, it is important that other stakeholders are involved with the project as soon as possible (eg audit clients, audit committees, external auditors etc). Revised Internal Audit structure – existing structures would need to be reviewed, with the likelihood that only one Head of Audit would be required under the revised arrangements. Resultant costs savings, however, may be partly offset by changes required lower down in the new structure. Operational systems - there will be a need to determine how audit work will be delivered, and whether a single operating system (for example audit working papers, audit reports etc) will be best placed to deliver objectives. Contracts - service level contracts will need to be developed between the partnership and each authority, which should guarantee business for a specific period of time to enable the partnership to be established in a sound and stable environment.

Recommendations To enable the Internal Audit Shared Services Project to proceed, the three Corporate Management Teams and the Cabinet/Executive Bodies of Plymouth City, Devon County and Torbay Councils are asked to approve the following recommendations:-

• To agree in principle that a consortium be formed between the three authorities for the provision of internal audit services with a target implementation date of 1st April 2009

• To agree that Devon County Council should act as the host authority for the partnership.

• To agree to the formation of an Internal Audit Shared Services Project Board (as outlined in Appendix 1), which would oversee transitional planning and project implementation.

• To agree to the composition of the Internal Audit Shared Services Project Board as: Adam Broome (Project Owner and Chair), Director of Corporate Resources, PCC John Mills, Director of Finance, IT & Trading, DCC Richard Thorpe, Executive Head of Governance, TC

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Adam Broome Director of Corporate Resources, Plymouth City Council Richard Thorpe Executive Head of Governance, Torbay Council Mary Davis Acting Director of Finance, IT & Trading, Devon County Council