Professional Documents
Culture Documents
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:
Tom Powell Head of Internal Audit and Risk Management 234 5273
t.powell@manchester.gov.uk
165
Manchester City Council Item 12
Audit Committee 2 June 2011
1. Introduction
1.2. 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
2011/12.
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.
2.2. 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.
2.3. 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).
2.4. 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.
2.5. 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
Manchester City Council Item 12
Audit Committee 2 June 2011
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.
3.1. 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:
3.2. 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.
3.3. 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.
3.4. 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
Manchester City Council Item 12
Audit Committee 2 June 2011
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.
4.2. 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.
4.3. Internal Audit have both conducted and supported investigation work carried
out in response to all these referrals.
4.5. The Council remains focussed in its commitment to take all necessary action
to investigate fraud and take appropriate disciplinary or legal action.
4.6. The key areas of focus and examples of cases investigated during the year
included the following;
4.8. We are working with management in the Directorate for Adults and Financial
Management as well as other councils and GMP to investigate these
allegations.
168
Manchester City Council Item 12
Audit Committee 2 June 2011
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.
4.10. 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.
4.11. 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
4.12. 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.
4.13. 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.
169
Manchester City Council Item 12
Audit Committee 2 June 2011
Financial Irregularities
4.20. 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.
170
Manchester City Council Item 12
Audit Committee 2 June 2011
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.
4.22. 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.
171
Manchester City Council Item 12
Audit Committee 2 June 2011
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.
5.2. 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.
5.3. 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.
5.4. 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.
5.5. 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.
5.6. 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
Manchester City Council Item 12
Audit Committee 2 June 2011
5.7. 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.
5.8. 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.
5.9. 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 2011. We anticipate the
results of this work will be available in late 2011.
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.
6.2. 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.
6.3. 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 e-mail
address.
6.5. 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
Manchester City Council Item 12
Audit Committee 2 June 2011
7.1. 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
2011/12.
7.2. 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
8. Conclusions
8.1. Members are asked to note the 2011/12 Internal Audit Annual Fraud Report.
174
Manchester City Council Appendix 1 – Item 12
Audit Committee 2 June 2011
Appendix 1
(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.
"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
Manchester City Council Appendix 1 – Item 12
Audit Committee 2 June 2011
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."
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
Manchester City Council Appendix 1 – Item 12
Audit Committee 2 June 2011
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.
177