Manchester City Council Report for Information. Subject: Internal Audit Annual Fraud Report 2010/11

Transcription

1 Manchester City Council Report for Information Report to: Audit Committee - 2 June 2011 Subject: Internal Audit Annual Fraud Report 2010/11 Report of: City Treasurer / Head of Internal Audit and Risk Management Summary Like any organisation of significant size and complexity Manchester City Council is inherently vulnerable to risks of fraud and corruption. In response to these risks the Council has a range of mitigating controls including the Fraud Investigation Group within Revenues and Benefits, enforcement officers in other services and dedicated anti-fraud and corruption resources within Internal Audit This report provides a summary on the outcome of proactive and reactive anti-fraud and investigation work during 2010/11, with a particular focus on the work delivered by Internal Audit. It outlines some of the areas of emerging fraud risk and the Council s strategic and operational arrangements for managing these risks. Recommendations Members are requested to consider the Internal Audit Annual Fraud Report for 2010/11. Wards Affected: None Contact Officers: Richard Paver City Treasurer richard.paver@manchester.gov.uk Tom Powell Head of Internal Audit and Risk Management t.powell@manchester.gov.uk Background documents (available for public inspection): Internal Audit Plan 2010/11 Internal Audit Plan 2011/12 165

2 1. Introduction 1.1. As a major employer, continually seeking to change and transform how it delivers services and that is engaged in a range of partnerships and activities the Council is inherently vulnerable to acts of fraud and corruption committed both from within and outside the Council. Nationally, fraud is recognised as a growing area of risk, particularly in the current economic climate, and the Council is not immune to these increased levels of risk This is our second Internal Audit annual fraud report. The purpose of the report is to provide a summary on the outcome of proactive and reactive work undertaken during 2010/11 to investigate referrals of fraud and other potential irregularities. It sets out the context for fraud risks in the Council and the response to these risks. It provides a summary of the work delivered by Internal Audit in the year and areas identified for further development during 2011/ Key issues and drivers 2.1. The Audit Commission report entitled Protecting the Public Purse published in October 2010 reflected the cost of fraud losses annually in the UK to be 30 billion, which means 620 is lost to fraud for each adult in the country. However, within local government, detected fraud losses were low compared with total council spending of 160 billion. Detected fraud cases for 2009/10 amounted to 119,000 cases worth 135 million The National Fraud Authority (NFA) reported that, nationally, too many frauds were not detected or being prevented and there was a gap between the level of reported frauds and those pursued through the criminal justice system The work of the Counter Fraud Strategy Forum set up by the NFA in 2010 is designed to help tackle fraud in central and local government. This is underpinned by a new strategy being developed to tackle fraud in local government under the heading of fighting fraud locally. This strategy is supported by the Audit Commission, CIPFA, CLG and other bodies previously engaged in providing support in the fight against fraud. As part of this strategy, a new ten point counter fraud blueprint was recently published by the Communities and Local Government Secretary, a copy of which is attached to this report (Appendix 1) Greater focus is now being placed on local government and Manchester has contributed to the development of this strategy through discussions at regional workshops and events to help understand the changing fraud landscape and identification of fraud risks In the current economic climate there is a perceived increased risk of fraud due to a tightening of available credit and borrowing. This is certainly true in local government, where budgetary pressures, large spending cuts and difficult decisions over priorities may weaken controls and increase the likelihood of fraud. 166

3 2.6. To safeguard public funds and ensure these funds are used for their intended purpose the Council has a zero tolerance approach supported by a strong policy statement and commitment to tackling fraud and corruption. This is backed up by various policies, procedures and codes linked to the Anti-Fraud and Corruption Strategy. This is to help ensure that the people of Manchester and stakeholders can have complete confidence that the affairs of the Council are conducted in accordance with the highest standards of probity and accountability and that Members and officers demonstrate the highest standards of honesty and integrity. 3. Structure and roles 3.1. Internal Audit acts on behalf of the City Treasurer in ensuring the Council has appropriate arrangements to deter, detect and investigate fraud. This role includes the following: Driving the continual development of a framework of anti-fraud policies and procedures. Raising awareness of fraud risks and developing mechanisms to maximise the opportunities for fraud risk reporting. Responding to whistleblowing allegations, referrals and other concerns including those received under the Council s Money Laundering Policy. Investigation of reports of financial or other irregularity. Liaising with Greater Manchester Police to support criminal prosecutions. Delivering a programme of proactive anti-fraud reviews. Providing advice and support to managers across the Council and within schools in their own investigation of irregularities. Providing advice and recommendations to managers on appropriate controls to help prevent and detect fraud and corruption. Monitoring anti-fraud activity across the Council In discharging this wide range of roles Internal Audit has a Lead Auditor for anti-fraud. This post was created in 2009/10 to support the Council in further developing its strategic and coordinated approach to combating fraud. This officer is supported by auditors and investigators within the Internal Audit Section and across the team there are three officers qualified in the CIPFA Certificate in Investigative Practice The Council s approach to fraud risk management extends beyond Internal Audit. These include the Fraud Investigation Group in the Revenues and Benefits Unit which deal with Housing Benefit and claimant fraud, the Blue Badge Enforcement Team, Trading Standards and officers in the HR/OD Service. All of these teams have a vital role to play in the deterrence, detection and investigation of fraud In 2010/11 Internal Audit budgeted for 435 days on proactive and reactive anti-fraud and corruption work compared to 340 days spent the previous year. The majority of this was spent on reactive investigation work. 167

4 4. Reactive fraud cases 4.1. During 2010/11 Internal Audit received formal notification of 56 reported cases of fraud theft or irregularity. Of these, 21 were whistleblowing referrals handled under the Council s whistleblowing procedures The nature, scale and complexity of the referrals have been varied and included suspicions of financial irregularity, financial abuse, mismanagement, identity fraud, staff behaviour and conduct issues, grant funding misuse and corruption. Some of these take a long time to investigate and often require various reports to be produced to management, Members, whistleblowers and the police. They also involve time spent in dealing with any subsequent disciplinary process or working with the police to pursue criminal action Internal Audit have both conducted and supported investigation work carried out in response to all these referrals It is important to acknowledge that investigations are conducted independently and without prejudice. This is reflected in the number of cases where investigations have resulted in the exoneration of individuals against whom allegations have been made. There are other cases where the investigation has resulted in disciplinary action or criminal action based on the evidence obtained, however in some cases and despite strong suspicion, a lack of evidence has meant we were unable to prove wrongdoing The Council remains focussed in its commitment to take all necessary action to investigate fraud and take appropriate disciplinary or legal action The key areas of focus and examples of cases investigated during the year included the following; Financial Abuse in Residential Care Homes 4.7. We have provided support in the investigation of five cases of suspected financial abuse of vulnerable service users in the indirect care of the Directorate for Adults. The cases involved allegations made against care staff employed by privately run service providers. The cases involved some Manchester funded residents and were handled by the respective safeguarding team under the safeguarding procedures and investigated by GMP. Four of the cases are still ongoing, whilst one found no evidence to substantiate allegations made We are working with management in the Directorate for Adults and Financial Management as well as other councils and GMP to investigate these allegations. Theft of Cash and Assets 168

5 4.9. During 2010/11 there have been a number of reported incidents involving thefts of cash and assets from Council buildings and schools. The value of claims made to the Council s insurance team in respect of theft was over 190,000. Thefts of assets mainly involved computer equipment or attractive portable items. A significant amount of computer equipment valued at 55,000 was taken from one secondary school in particular during three separate break-in s. These incidents were reported to GMP and a number of cases remain under investigation Internal Audit were informed of four Future Jobs Fund staff (FJF) working at a Council park to act as Leisure Attendants who were alleged to have stolen cash collected from car parking receipts. One of their roles was to issue tickets and take payment for car parking. A member of Council staff raised his suspicions with a manager that he suspected one or more of the staff were not issuing all tickets and were misappropriating income. The value of the theft was estimated at 2,000 and following an investigation conducted by Leisure Services all four of the staff were prevented from further work with the Council Other cases involving employees in the theft of cash, assets or other irregularity have been investigated by management with advice and support provided by Internal Audit. Appropriate disciplinary action has been taken against staff involved in these cases. Chequebooks There have again this year been several reported frauds involving the interception, alteration or use of counterfeit cheques from schools and Council establishments. The value of these is lower than in previous years and each would appear to have been perpetrated externally. Cheque fraud cases are generally investigated by the banks themselves and the Council are usually reimbursed for these losses. The Council s positive pay process and controls which cover the Council s main payment systems have helped to prevent several high value attempted frauds, but this does not extend to schools and some other establishments who operate cheque book imprest accounts. Procurement and payments Internal Audit were asked to assist in the recovery of misdirected payments of 168,000 made in error to the wrong vendor. The error was a result of an oversight during the payment process which culminated in payments being made to an organisation who shared a similar name to the one that was actually due the payment. Internal Audit recovered the full value of the overpayment, but in doing so, the investigation highlighted anomalies over the use of the funding and a potential conflict of interest. We reported our concerns to management and supported them in reviewing these arrangements The recovery of an overpayment of 68,000 in respect of a deceased service user is in progress. A substantial amount of the overpayment has been recovered following client visits undertaken by a District Manager and 169

6 arrangements to recover the balance of 33,000 are continuing through the Council s Legal Debt Recovery team An anonymous tip off and controls within the Council s payment process prevented an attempted fraud against the Council involving a bogus CHAPS payment of 42,000. Details were reported to GMP and the Serious Organised Crime Agency (SOCA) Internal Audit investigated a series of whistleblowing allegations from contractors raising concerns over aspects of unfairness in the Council s procurement process within a particular service area. We have investigated these, made a series of recommendations to management and are providing ongoing support to improve existing processes. Financial Irregularities We were involved in the conduct of several investigations into suspected financial irregularities at schools and external grant funded organisations linked with the Council. Our investigations highlighted serious issues of poor practice around the management of finances, lack of compliance with financial procedures, value for money and potential misuse of funds. These cases included the following An investigation into suspected theft of dinner money and misappropriation of financial records by a member of the finance staff at a school. The case against the individual was unproven and no disciplinary action was taken as Governors accepted a request for retirement. The individual was interviewed by the police, but it was decided it was not in the public interest to take the case forward We spent a significant amount of time investigating an allegation of gross financial management at a school relating to the procurement of works and the use of a sole contractor. The result of this was a report to Management Support to support them in the disciplinary process. The outcome of this resulted in two members of staff leaving the school on compromise agreements prior to a formal disciplinary investigation Allegations made against an external grant funded organisation raised specific concerns over the financial stability of the organisation and the potential misuse of grant funding. From the work undertaken, we were unable to provide assurance over the organisation s management of its finances, its capacity to deliver existing projects, or use of funding for its intended purpose. In conjunction with Corporate Procurement team we supported project managers in their continued monitoring role and work with the organisation to resolve the issues. The increasing number of allegations concerning voluntary sector groups has led to a broader review on issues arising from these investigations Another voluntary sector-based investigation involved groups in receipt of grant funding who worked closely with staff in Children s Services. This case highlighted concerns over the financial management arrangements including 170

7 issues over roles and responsibilities of staff working for partners and the Council and acting in contravention of Financial Regulations. After a long investigation involving detailed reviews of financial records we have aided management in their recovery of funds and the agreement of actions to prevent a reoccurrence. This is a good example of a case that on initial review appeared to be relatively straightforward but as investigations continued was found to be complex and time consuming to properly resolve The number of investigations into issues surrounding voluntary sector groups funded by the Council has grown significantly. Internal Audit investigated several allegations made against grant funded organisations, the nature of these being poor financial practices, financial losses and potential theft and misuse of funding and lack of management control over funding. Our investigation work did not prove fraud but found expenditure unaccounted for, poor financial management and governance arrangements and ineffective monitoring arrangements over grant funded expenditure. In response we briefed the appropriate Executive Members and management on the issues arising and are pleased that a wider plan of action is being progressed by the Third Sector team that should strengthen controls in these areas We investigated serious allegations of bullying, corruption and fraud made against individuals in one service area. Following detailed interviews with a large number of staff we were able to substantiate some of the allegations, but had insufficient evidence to prove others. Management have agreed a proposal for action in response to our report We investigated allegations of incorrect charging made against a debt collection company used by the Council. Our investigation confirmed that incorrect charging had taken place and we are working with management to agree a way forward We received sensitive allegations against an employee applying for voluntary early retirement, which cast doubt over their age and subsequent eligibility to retire. Our work with external agencies meant it was possible to exonerate the individual and for the application to retire to progress as planned We were involved in investigating allegations made against staff and managers in the Council as well as allegations against staff and Governors at a School. These related to the conduct of various officers in their handling of grievance matters. Intenal Audit supported the Head of Management Support in investigating the issues raised, but found no evidence to substantiate the claims. We notified the whistleblower about the outcome of our investigation and the Head of Management Support for Schools informed them that the other five matters should be taken up with the School s Governing Body. The whistleblower was not satisified with these outcomes and has escalated their concerns to the Council s external auditor Grant Thornton for their consideration who confimed that they concurred with our conclusions and decision on this case. 171

8 5. Proactive Anti-fraud work 5.1. Our plan this year was to build on the fraud prevention and detection work which we introduced last year. We have continued to develop the required skill sets amongst audit staff to assist in the development of data mining and data analysis routines designed to identify fraud and error and support audit assurance work. We invested a substantial amount of available audit resource into anti-fraud work, a significant proportion of which goes toward dealing with the reactive caseload which has impacted on the delivery of proactive work Our time spent on developing proactive work has produced some positive results and we will continue to look at further opportunities to develop our approach. Work conducted this year included the following Work led by Internal Audit designed to identify duplicate creditor payments to vendors found 144,607 of duplicate payments which required action to recover overpaid amounts. There is clearly a financial benefit in continuing to undertake these type of exercises and in our report we made a proposal to retain a proportion of the recovered funds to invest in similar exercises regularly in 2011/12. We will also work with colleagues across the Council to determine how controls can be developed to avoid duplicate payments as part of standard business processes We completed two proactive fraud detection exercises in the Directorate for Adults relating to cash handling on behalf of customers and use of individual budgets. Whilst our testing of customer payments in these areas did not identify fraud or theft, it does remain an inherently high risk area for potential fraud and this opinion is supported by the increase in the number of reported cases of suspected financial abuse and a previous high profile case in this area. We have worked with management to improve controls over cash handling and the introduction of other compliance checks designed to reduce the opportunity for fraud Another area of pro-active fraud review was the weekly fees payroll which was designed to process one-off payments to individuals who were not Council employees. Whilst we did not identify any fraudulent payments we were concerned over the effectiveness of existing controls and that the system provided an environment in which unnecessary and/or fraudulent payments could be made. Following our recommendations, transactions processed through the fees payroll process have been significantly reduced and work has continued with the Shared Service Centre to seek assurance over the ongoing payments made through this system We have considered the impact of the new Bribery Act which comes into force this year and provided a briefing note to the City Treasurer. There are a range of existing controls in this area and we will be working with Corporate Procurement, Finance, Capital Programmes and Legal Services over the next few months to consider how best to ensure that the Council can demonstrate it 172

9 has adequate procedures to detect and prevent Bribery in accordance with this new Act Council Tax single person discount (SPD) fraud is seen as a high risk area. Work carried out by the Council s Fraud Investigation Group and Revenues and Benefits staff to review SPD entitlement led to the cancellation of over 1,200 SPD claims with a value of over 190,000. Further work is underway to review other discounts and exemptions Work conducted during 2010/11 by officers responsible for the crack down on misuse of disabled parking permits reported 85 prosecutions with a total value of over 43,000. National Fraud Initiative 2009/ Internal Audit coordinates the Council s involvement in the National Fraud Initiative (NFI), which is the Audit Commission s biennial data matching exercise designed to pick up fraud and error across the public sector. This year we have completed our preparation work and commenced checks on the data match reports which were released in February We anticipate the results of this work will be available in late Developing an anti-fraud culture 6.1. The Council has a zero tolerance approach to dealing with fraud and corruption and this commitment is positively and publicly endorsed by Members and the Senior Management Team Internal Audit continues to promote the anti-fraud culture across the Council through our policy development work and proactive anti fraud programme. Our reactive investigation work and our commitment to take seriously any reported allegations of suspected wrongdoing positively seek to discourage potential fraudsters A dedicated anti-fraud and corruption page on the Council s intranet has brought together various Council policies, procedures and codes relating to anti-fraud. This has helped further clarify how to report concerns to Internal Audit 6.4. We have also introduced a new online whistleblowing webpage and reporting form to encourage individuals to report their suspicions of fraud, financial irregularity or wrongdoing. The whistleblowing contact details have also been included in the A-Z of Council Services for the firs time. These provide an improved method for reporting concerns and sit alongside existing fraud reporting channels such as the Council s Whistleblowing Hotline and address Other areas of activity which are still ongoing at the year end include the development of a fraud risk register which will sit along side existing risk 173

10 management processes and work to detect possible housing tenancy subletting using data matching techniques. 7. Key priorities 2011/ The need to respond quickly and comprehensively to allegations of fraud and corruption has impacted on the ability to deliver as much development and proactive anti-fraud work. We will work with managers to help improve capacity for investigating referrals particularly lower risk referrals. We have allocated 538 chargeable days for reactive and proactive fraud work in 2011/ Our proposed areas of coverage for anti fraud are contained in the 2011/12 Internal Audit plan. The plan includes new areas of fraud prevention and detection type work but also looks to consolidate what we consider to be the fundamental areas of any successful anti fraud strategy. This includes Raising awareness - Supporting the Council to improve levels of awareness of fraud risks amongst managers, staff and partners. Communication - improvements to the effective communication of Council policy, procedures and codes relating to anti-fraud. Fraud risk assessment - Finalisation of fraud risk assessments and a fraud risk register to focus resources on potential vulnerabilities. External liaison - Building on the strong links with the police over case handling and arrest. Proactive work - Continuation of a strong proactive anti-fraud programme to deter, prevent and detect potential fraudulent activity. The 2011/12 plan includes six specific reviews where work will be focused on the detection of potential fraud. Co-ordination - Working with colleagues, particular in personnel and the Fraud Investigation Group to share expertise and maximise the efficiency and effectiveness of anti-fraud activity across the Council. Fraud monitoring - Maintaining intelligence and oversight of fraud cases and outcomes to support decision making. 8. Conclusions 8.1. Members are asked to note the 2011/12 Internal Audit Annual Fraud Report. 174

11 Manchester City Council Appendix 1 Item 12 Appendix 1 Communities and Local Government Secretary Statement: Ten ways to tackle council fraud and recover 2bn a year (full text as reproduced from the Communities and Local Government website) A new ten point counter-fraud blueprint for tackling criminals and dishonest people who are costing the country billions of pounds in fraudulent local government claims was published today by Communities and Local Government Secretary Eric Pickles. According to the National Fraud Authority Annual Fraud Indicator, Local government could be saving taxpayers 2.1 billion a year by cracking down on fraud in housing tenancy; procurement; pay, pensions and recruitment; council tax; grant; and blue badge schemes. Money currently lost to fraud and error costs every household in England almost 100 a year. The ten point checklist was compiled, at the request of Mr Pickles, by experts in the National Fraud Authority. The recommendations include councils using credit rating agencies to stop tax evasion and benefit fraud; staff background checks to prevent fraudsters and organised criminals infiltrating key posts. The Government's Counter Fraud Task Force was launched last year to develop a new strategic approach to tackling fraud across the public sector with a focus on prevention. It will report in May. Many councils and housing associations are already tackling fraud and error in housing tenancy claims with the departments help. 19 million has been committed to 51 councils to help recover unlawfully occupied homes. Last year they recovered nearly 1,600 properties worth around 240 million. Eric Pickles said: "It's time to get tough and take on the fraud cons. At a time when we need to cut the national deficit and government waste, cleaning up fraud could save the taxpayer over 2 billion in recovered cash currently being fraudulently stolen or lost to tax cheats. "Better prevention, detection and recovery of fraud will help reduce the financial pressure on councils and help protect frontline services. Today I am publishing the top ten plays for cracking down on council finance fraud. "Councils should carry out better credit checks through credit rating agencies before giving over discounts or benefits. They should properly vet staff in key positions and put stricter controls on who can use the council credit card." Mike Haley, Director of Public Sector Fraud, National Fraud Authority said: "At a time when councils are attempting to protect front line services, fraud can no longer be tolerated. Substantial savings can be made, as demonstrated by the best 175

12 Manchester City Council Appendix 1 Item 12 local authorities, and reducing fraud can make a significant difference to local government finances. This ten-point plan, based on local authority best practice, is a starting point in helping councils get a grip on fraud." Top ten tips for tackling local authority fraud: 1. Measure exposure to fraud risk; 2. More aggressively pursue a preventative strategy; 3. Make better use of data analytics and credit reference agency checks to prevent fraud; 4. Adopt tried and tested methods for tackling fraud in risk areas - such as blue badge scheme misuse; 5. Follow best practice to drive down Housing Tenancy and Single Person Discount fraud; 6. Pay particular attention to high risk areas such as procurement and grant awards; 7. Work in partnership with service providers to tackle organised fraud across local services; 8. Maintain specialist fraud investigative teams; 9. Vet staff to a high standard to stop organised criminals infiltrating key departments; 10. Implement national counter fraud standards developed by the Chartered Institute of Public Finance and Accountancy. Estimates indicate that over 400,000 people could be wrongly claiming for single person discount at a cost of 100 million a year to councils in lost council tax. Birmingham City Council has identified 6.8 million worth of fraudulent and incorrect claims for single person council tax discounts. Some councils are already seeing the benefits of using credit rating agencies. Cheshire East Council found nearly 2000 people had wrongly claimed using Experian credit data. It cost 80,000 but will recover half a million pounds in new income. Kent County Council is pioneering a contract framework for credit rating agencies which all councils can buy into. This will keep costs down and tackle those that are wrongly claiming services. Mr Pickles believes other councils should take advantage of Kent's example and sign up to it. Local Government employs around 2 million permanent, temporary and agency staff. Ealing found that 6 per cent failed proper vetting checks but that the figure was higher for temporary staff at 13 per cent. One council found an agency worker put in charge of a large budget had set up a fictitious company and made false claims totalling 110,000. The person had used a false CV and was later sentenced to two years in prison. The insurance company refused to pay compensation. London councils have been targeted by a group of sophisticated and organised false identity fraudsters using fake passports to falsely claim 700,000 of services. Oxford Council hired a dedicated fraud officer last year and recovered 25 properties in the 176

13 Manchester City Council Appendix 1 Item 12 first six months. In 15 of these cases the unlawfully sub-letting tenant was still claiming housing benefit, the total cost of which was 1500 per week. The Department for Communities and Local Government has committed 19 million to helping 51 councils tackle social housing fraud. Published on CLG Website 11 May