Following the Public Pound - March 2004
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Following the Public Pound Controller of Audit’s report and Accounts Commission’s findings March 2004
The Accounts Commission
The Accounts Commission is a statutory, independent body which,
through the audit process, assists local authorities in Scotland to achieve
the highest standards of financial stewardship and the economic,
efficient and effective use of their resources. The Commission has five
main responsibilities:
• securing the external audit
• following up issues of concern identified through the audit, to ensure
satisfactory resolutions
• reviewing the management arrangements which audited bodies have
in place to achieve value for money
• carrying out national value for money studies to improve economy,
efficiency and effectiveness in local government
• issuing an annual direction to local authorities which sets out the
range of performance information which they are required to publish.
The Commission secures the audit of 32 councils and 34 joint boards
(including police and fire services). Local authorities spend over
£9 billion of public funds a year.
Audit Scotland is a statutory body set up in April 2000
under the Public Finance and Accountability (Scotland) Act
2000. It provides services to the Auditor General for
Scotland and the Accounts Commission. Together they
ensure that the Scottish Executive and public sector bodies
in Scotland are held to account for the proper, efficient and
effective use of public funds.
Contents 1 Contents Accounts Commission’s findings Page 2 Controller of Audit’s report Summary Page 4 Part 1. Introduction Background The purpose of this report Page 6 Part 2. Funding arrangements and governance Funding arrangements Page 7 Governance Page 9 Audit Page 10 Part 3. Applying the ‘Following the Public Pound’ Code in practice The Code The Audit Scotland survey Page 12 Appendix 1 Accounts Commission/ Convention of Scottish Local Authorities Code Page 20 Appendix 2 The City of Edinburgh Council: Case Study Page 22
2 Accounts Commission’s findings On the basis of this initial review the Commission has concerns about councils’ funding of arm’s length bodies.
Accounts Commission’s findings 3 On the basis of this initial review the the amounts going to the large Commission has concerns about number of organisations which councils’ funding of arm’s length receive relatively small individual bodies, and particularly about the lack grants, and the ways in which of reliable information on the councils are dealing with both position. categories. These issues will grow in significance We will make a further public report as councils become increasingly when that work has been completed. involved in partnership working and In the meantime we are asking innovative ways of delivering auditors to follow up the initial results services and we have therefore with individual councils. asked Audit Scotland to carry out further work as a matter of priority to establish: • the action taken by councils to apply the Code to funding relationships already in place • the steps being taken by councils to apply it to new funding relationships • the extent of implementation of improvements being made by councils in management information systems and controls • the amounts going to companies and trusts which receive high value funding from councils and
4
Controller of Audit’s report
Summary contains information drawn from an private sectors. My local authority
Audit Scotland survey of councils’ overview reports have highlighted
Introduction involvement in funding agreements. this area and the need for councils to
1. Scottish councils provided funding continue to review their governance
of around £200 million to 12,000 4. Although the report focuses on arrangements so that they are
companies, trusts and other the role of councils in funding meeting best practice standards.
organisations in 2001/02, for external organisations, similar types The main tenet of ‘following the
purposes related to council services of funding arrangements exist in public pound’ is that the principles of
and functions. This covers a range of other parts of the Scottish public good governance apply in decisions
funding arrangements, from relatively sector. It is likely, therefore, that the concerning public money irrespective
small grants to voluntary issues raised in this report will have of whether those funds are spent
organisations to payments to trusts wider application, in sectors other directly or are transferred to arms-
set up by councils to manage all of than local government. length organisations such as
their leisure facilities. The overall companies, trusts and voluntary
amount involved is significant, Funding arrangements and organisations.
representing over 2% of the governance
£9 billion spent annually on 5. Councils fund external 8. Robust systems for identifying and
council services. organisations for a number of evaluating all the significant risks
reasons, for example to provide associated with planning and
2. Where councils fund such arms- important services to the public or to delivering services is an important
length entities it is important to provide social benefits such as aspect of good governance and
maintain control and accountability creating employment opportunities. applies where councils are
over public funds. This requires the They may also consider that an considering new and existing funding
ability to ‘follow the public pound’ external organisation can provide a agreements. In addition to normal
across organisational boundaries – better range or quality of service, or business risks such as financial loss
from the point at which money services that would otherwise not be and service failure, there is the risk of
leaves the council to the point at provided. External bodies may be damage to reputation through
which it is ultimately spent by the able to attract funding from sources association with an external
receiving organisation. The not so readily accessible to the organisation if financial or service
Convention of Scottish Local council, such as the private or the delivery problems emerge.
Authorities / Accounts Commission voluntary sectors. Councils also
‘Code of Guidance on Funding establish arms-length organisations 9. Effective governance also requires
External Bodies and Following the to deliver services where this may councils to ensure that funds and
Public Pound’ sets out the principles provide economic advantages as resources provided to arms-length
of best practice when councils compared with direct service organisations are used for the
establish funding relationships of delivery arrangements. purpose intended. Best Value
this type. requires efficiency, effectiveness,
6. These types of arrangements are economy, equal opportunities and
3. This is a public interest report to not new. But Best Value encourages the achievement of sustainable
the Accounts Commission under councils to review the way in which development; these concepts are
s102 (1) of Local Government services are provided and to equally relevant in funding
(Scotland) Act 1973. Its main purpose undertake option appraisals of arrangements. Effective monitoring
is to highlight the importance of the alternative methods of service that is commensurate with the value
principles involved in following the delivery. This, in time, may lead of the funds and assessed risks is
public pound at a time when councils councils to develop and expand the therefore essential.
may be reviewing existing use of funding arrangements of the
approaches and considering options type covered by the ‘Following the 10. The involvement of council
for new ways of delivering services Public Pound’ Code. members or officers on the boards or
in response to their statutory duties, management committees of funded
powers and freedoms under the 7. Since the publication of the Code bodies does not, in itself, represent a
Local Government in Scotland Act in 1996 there have been significant robust monitoring mechanism which
2003, including Best Value and developments in governance and risk enables the council to discharge its
Community Planning. The report also management in both the public and stewardship responsibilities. EffectiveController of Audit’s report 5
control requires systematic and Some councils had difficulty in weakness where councils should
regular monitoring of service and supplying the information requested review current practice.
financial performance with formal but the figures provided suggest that
monitoring reports presented to the the total amount involved was of the 19. In overall terms, the Audit
council, or an appropriate committee, order of £200 million in 2001/02. In Scotland survey indicates a high level
irrespective of council representation addition to this, councils also provide of non-compliance with the Code’s
on the governing bodies of non-financial support in terms of requirements, both among councils
organisations receiving council administrative resources, premises and within individual councils. Non-
funding. and staff. compliance is evident in all services
where arms-length funding is used
11. Auditors recognise the increasing 15. Councils were unable in all cases and in most councils to some
number and complexity of funding to identify the purpose of the funding degree. Current practice should
arrangements and can assess provided and the statutory authority therefore be reviewed with the aim
councils’ exercise of control with under which the expenditure was of achieving closer compliance with
reference to the existing guidance incurred. This is critical in determining the Code.
and the new Best Value duties and the nature of the financial relationship
other responsibilities set out in the and the monitoring arrangements Conclusion
2003 Act. required. 20. This report indicates that there is
significant scope for councils to
12. In addition, the audit of Best 16. The Audit Scotland survey also strengthen and improve their
Value and Community Planning will shows that there is scope for arrangements for following the public
cover partnership arrangements and councils to review and improve the pound with reference to the good
may include a review of the council’s way they monitor and verify the practice and to the weaknesses
performance, with specific focus on financial and service performance highlighted from the Audit Scotland
that part of the partnership aspects of funding agreements. Few survey. Existing and new funding
arrangement that the council can councils adopt a corporate approach agreements should be reviewed in
influence and for which it is to funding arrangements. the light of the Code, recent
accountable. Barriers to the guidance on corporate governance
achievement of Best Value including 17. Elected members and council and emerging guidance on Best
those that are outwith the council’s officers often participate in the Value and Community Planning. This
direct control may be highlighted in governing bodies of funded is necessary in view of the need to
the public audit report produced at the organisations, but the survey reveals ensure the most effective use of and
conclusion of the Best Value audit. that often there appears to be no control over the substantial public
obvious link between council funds currently involved, and the
Applying the ‘Following the Public membership and the significance of potential for these to increase with
Pound’ Code in practice the funds provided. Councils also the exercise of the new duties,
13. To assess the effectiveness of need to establish clear limits to the powers and freedoms vested in
existing governance arrangements, amount of funding that will be councils in the Local Government in
Audit Scotland surveyed councils’ provided in each case and to Scotland Act.
involvement in funding external predetermine criteria that would
organisations. This provides useful trigger a review of the funding
contextual information about funding relationship.
arrangements and identifies
strengths and areas where action is 18. There is evidence of good
required to achieve closer practice at a number of councils and
compliance with the Code. examples of this are cited in this
report. It is also clear that the R Hinds
14. The survey confirms that councils process of completing the Audit Controller of Audit
provide a significant amount of public Scotland questionnaire has prompted 5 November 2003
money to arms-length organisations some councils to review their
to help deliver a range of services, arrangements for managing funding
particularly relating to social work, relationships. However, the survey
leisure and economic development. also served to highlight areas of6
Part 1. Introduction
This part of the report covers: and other organisations other than on main purpose is to highlight this
a straightforward contractual basis. important area of activity at a time
• background Since then, there have been further when councils may be reviewing
changes in the pattern of council existing arrangements and options
• the purpose of this report. spending with innovative approaches for new ways of delivering services
to service delivery often involving in response to their statutory duties,
Background new and diverse arms-length funding powers and freedoms under the
1.1 Scottish councils provided relationships. In practice these can Local Government in Scotland Act
funding of around £200 million to range from relatively small grants to 2003, including Best Value and
12,000 arms-length organisations in voluntary organisations to payments Community Planning. The report also
2001/02, for a range of purposes to trusts set up by councils to contains information drawn from an
related to council services and manage all of their leisure facilities. Audit Scotland survey of councils’
functions. This is a significant amount involvement in funding agreements.
of public money and represents over 1.4 Recent changes to the local The survey produced information
2% of the £9 billion spent annually government legislative framework, which enabled the extent of existing
on council services. including the new duties relating to funding arrangements to be
Best Value and Community Planning, quantified and considered aspects of
1.2 These funding arrangements are should lead councils to consider the associated monitoring and
often more complex than standard options for service delivery which accountability arrangements which
purchase contracts for goods or may result in further and more have been established. This provides
services and are usually designed to widespread use of external agencies useful contextual information and
deliver wider public benefits. They to achieve service objectives. helps identify areas where
involve the transfer of public funds improvements are required.
from the direct control of a council to 1.5 My annual overview reports on
the control of an arms-length local authority audits in recent years 1.7 Part 2 of the report considers the
organisation such as a company or a have reflected external auditors’ ‘following the public pound’ concept,
voluntary organisation. To ensure that concerns about the arrangements including the reasons why councils
public funds are used properly and to that councils establish to maintain enter into arms-length funding
maintain accountability, it must be control and accountability over the arrangements and the prospect of
possible to trace the funds from the public funds that they provide to these becoming more common. This
point at which they leave the council arms-length organisations. More is then considered in the context of
to the point at which they are specifically, my statutory report on the development of corporate
ultimately spent by the receiving Fife Council’s involvement with the governance in the local authority
organisation. In other words, where Third Age Group illustrated the sector. Part 3 provides details of the
councils fund arms-length entities it problems that can arise when there existing Code and the information
is important to be able to ‘follow the are weaknesses in these obtained from councils through the
public pound’ across organisational arrangements. Concern about Audit Scotland survey about the
boundaries. councils’ financial involvement in nature and extent of council funding
arms-length organisations is also one and compliance with the guidance in
1.3 In response to concerns about of the most frequently recurring the Code. This part of the report
councils’ increasing use of arms- issues raised by the public in contains some examples of good
length organisations and the need to correspondence to auditors. practice identified from the survey.
maintain control and accountability
over public funds, COSLA The purpose of this report 1.8 Although the report focuses on
(Convention of Scottish Local 1.6 In view of the concerns over the role of councils in funding
Authorities) and the Accounts existing funding relationships external organisations, similar types
Commission jointly published the reported by auditors and the of funding arrangements exist in
‘Code of Guidance on Funding likelihood of further and possibly other parts of the Scottish public
External Bodies and Following the more complex funding relationships, I sector. It is likely, therefore, that the
Public Pound’ in 1996. This set out have decided to make this public issues raised in this report will have
the principles of best practice when interest report to the Accounts wider application, in sectors other
councils establish significant funding Commission under s102 (1) of Local than local government.
relationships with companies, trusts Government (Scotland) Act 1973. ItsPart 2. Funding arrangements and governance 7
Part 2. Funding arrangements and
governance
This part of the report covers: than a contract for the purchase of 2.4 Councils may perceive, for
services. These can range from one- example, that an arms-length
• funding arrangements off grants to voluntary organisations company may be more effective at
to large-scale regular contributions to engaging with the private sector to
• governance the operating costs of organisations promote economic development.
created by councils to provide Voluntary organisations can engage
• audit. services previously provided by them with socially excluded groups, such
directly. Exhibit 1 overleaf contains as drug users and the homeless who
Funding arrangements examples of cases where councils may be reluctant to contact statutory
fund external organisations. agencies to access services. In
‘Following the public pound’ addition to providing services, funded
2.1 The ‘following the public pound’ Council involvement bodies can bring wider benefits to
concept applies when councils decide 2.3 Councils fund external local communities by, for example,
to fund external organisations which organisations to provide important helping people to develop skills and
deliver services that might otherwise services to the public, or to provide encouraging community
be delivered by the councils social benefits, such as creating involvement.
themselves. In these arrangements, employment opportunities. They may
councils agree to provide funds and consider that an external organisation 2.5 The common purpose in
other resources to companies and can provide a better range or quality councils’ involvement in these
other organisations such as trusts or of service, or can provide services arrangements is usually to provide a
grant aided voluntary organisations. that would otherwise not be wider range of services, often in
‘Following the public pound’ means provided. External bodies may also conjunction with other public
ensuring that there is proper be able to attract funding from organisations to provide ‘seamless’
accountability for public funds used in sources not so readily accessible to services. Councils also envisage
delivering services, irrespective of the council, such as the private greater choice for service users and
the means of service delivery. sector or from charitable trusts. general improvements in the quality
Councils also establish arms-length and cost of service delivery.
2.2 The ‘Following the Public Pound’ bodies to deliver services where this
Code applies when councils’ financial may provide economic advantages 2.6 These types of arrangements are
relationships with external as compared with direct service not new. However, in recent years
organisations are on a basis other delivery arrangements. councils have been considering8 Bye now, pay later follow-up Exhibit 1 Examples of cases where councils fund external organisations Councils provide funding to a range of organisations mainly in connection with social work, leisure and economic development. The following examples from councils’ accounts highlight the range of activities funded by councils. Aberdeen City Council has a majority shareholding in a company set up to provide buildings for exhibitions, conferences and other events. In 2001/02 the Council provided a funding grant of £650,000. Edinburgh Leisure Limited is a non-profit-distributing company limited by guarantee and registered as a charity. It was incorporated to manage sport and leisure facilities on behalf of the City of Edinburgh Council. In 2001/02, the Council provided revenue funding of £7.4 million to Edinburgh Leisure Limited. Fife Council’s annual accounts disclose that the Council provides funding to a number of organisations that provide the Council with a degree of influence over their operations. In addition to funding for leisure and environmental related services, the Council provided funding totalling £2.8 million to 35 organisations for social work activities in 2001/02. Glasgow City Council is represented on the Greater Glasgow and Clyde Valley Tourist Board. During 2001/02 the Council contributed £2.1 million to the Tourist Board. The Time Capsule (Monklands) Trust Ltd was formed to manage a leisure facility. North Lanarkshire Council provides financial support and in 2001/02 provided £1.5 million as a contribution to operating costs. Orkney Islands Council owns Orkney Ferries Limited. During the year the Council provided subsidy payments totalling £4 million to the company in support of ferry services. Renfrewshire Council’s accounts disclose payments to voluntary organisations in excess of £60,000. These include payments to organisations providing services relating to regeneration, mental health, alcohol counselling and support for carers. Source: Councils’ audited accounts 2001/02
Part 2. Funding arrangements and governance 9
innovative approaches to service consider innovative approaches to 2.13 My overview report on the
delivery and this has led to an service delivery. These could include 2001/02 local authority audits noted
increase both in the number of such new arms-length agencies and closer that while they are making progress
arrangements and range of activities partnership working between in this area, councils need to
to which they apply, with associated councils and other organisations, as continue to review their governance
changes in the scope of they respond to the needs of the arrangements to ensure that they are
responsibilities. communities they serve. This, in meeting best practice standards of
time, may lead councils to develop governance – to check that these
Best Value and Community Planning and expand the use of funding arrangements are sound and are
2.7 The Local Government in arrangements of the type covered by seen to be sound.
Scotland Act 2003 (the Act) the ‘Following the Public Pound’ Code.
establishes new statutory duties on Governance and ‘following the
councils to make arrangements that Governance public pound’
secure Best Value, defined as 2.14 The main tenet of ‘following the
continuous improvement in the The governance agenda public pound’ is that the principles of
performance of their functions. 2.10 The term ‘corporate good governance apply in decisions
Councils are also required to maintain governance’ came into common use concerning public money irrespective
a Community Planning process for following the publication of the of whether those funds are spent
consultation and cooperation in the Cadbury Report in 1992. Cadbury directly or are transferred to arms-
provision of public services in their defined corporate governance as ‘the length organisations such as
area. Among other provisions, the system by which organisations are companies, trusts and voluntary
Act also gives councils a new power directed and controlled’. Since then organisations.
to promote or improve the well-being there have been significant
of their area and persons within developments in governance and risk 2.15 The ‘Following the Public
their area. management in both the private and Pound’ Code supports these
the public sectors. principles. The approach is also
2.8 Scottish Ministers have issued reflected in other guidance. For
statutory guidance that sets out what 2.11 In recognition of the need to example in its publication ‘A
councils are expected to draw together the principles Statement on the Role of the
demonstrate in fulfilling their new identified by Cadbury and others, Finance Director in Local
statutory duties. This highlights the including the Committee on Government’, CIPFA recognises that
need for sound governance at a Standards in Public Life, into a single ‘the statutory role of the finance
strategic, financial and operational framework of corporate governance director does not stop at the
level. The guidance also states that a for use in councils, CIPFA (Chartered boundaries of the local authority but
council that secures Best Value will Institute of Public Finance and extends into its partnerships,
also be able to demonstrate the use Accountancy) and SOLACE (Society devolved arrangements, joint
of review and options appraisal. In of Local Authority Chief Executives) ventures and companies in which the
considering opportunities for produced ‘Corporate Governance in authority has an interest’.
improvements in services, councils Local Government – A Keystone for
are expected to take a fair and open Community Governance’. This 2.16 In considering whether to enter
approach in evaluating alternative considers corporate governance in into a funding arrangement or to
forms of service delivery irrespective the local government context and continue funding under an ongoing
of whether the service providers are identifies the underlying principles as agreement, governance
from the private or public sectors. openness and inclusivity; integrity; arrangements within the funded
Councils are also required to have and accountability. organisation should be assessed. The
regard to any recognised, published aim should be to ensure that these
code such as the current 2.12 The CIPFA/SOLACE paper is meet the standards that councils
COSLA/Accounts Commission designed to assist councils in expect in agreeing resources for
‘Following the Public Pound’ Code. developing and improving their services provided directly. Where a
corporate governance arrangements. new company or trust is being
2.9 The new wide ranging powers Service delivery arrangements, risk established, the council can influence
and duties are designed to management and standards of the form of the management
encourage councils to review their conduct are highlighted among the arrangements from the start.
approach to providing services and areas which should be reviewed.10 Bye now, pay later follow-up
Exhibit 2
Membership of governing bodies – guidance for councillors
If you become a director of a company as a nominee of the Council you will assume personal responsibilities under the
Companies Acts. It is possible that a conflict of interest may arise for you as between the company and the Council. In
such cases it is your responsibility to take advice on your responsibilities to the Council and to the company. This will include
questions of declarations of interest.
………..In relation to service on the boards and management committees of limited liability companies, public bodies,
societies and other organisations, you must decide, in the particular circumstances surrounding any matter, whether to
declare a non-financial interest. Only if you believe that, in the particular circumstances, the nature of the interest is irrelevant
or without significance, should it not be declared. You must always remember that the public interest points towards
transparency and, in particular, a possible divergence of interest between the Council and another body.
Source: The Councillor’s Code of Conduct
2.17 Corporate governance event of financial problems within the bodies does not, in itself, represent a
arrangements should reflect the external organisation. This implies the robust monitoring mechanism to
requirement to develop and maintain need to set out clear limitations at enable the council to discharge its
robust systems for identifying and the start of the agreement and stewardship responsibilities. Effective
evaluating all the significant risks identify ‘exit strategies’ or other control requires systematic and
associated with planning and courses of action which will be taken regular monitoring of service and
delivering services. This applies in if problems arise. financial performance with formal
cases where councils are considering monitoring reports presented to the
new ‘following the public pound’ 2.19 Effective governance requires council, or an appropriate committee,
financial relationships and where they councils to ensure that funds and irrespective of council representation
are continuing with existing resources provided to arms-length on the governing bodies of funded
arrangements. In addition to normal organisations are used for the organisations.
business risks such as financial loss purpose intended. Councils will also
and service failure, councils need to wish to ensure that the public money 2.21 The Councillor’s Code of
consider the risk of damage to used in the provision of services is Conduct, issued by Scottish
reputation through association with subject to the same requirements Ministers under the Ethical Standards
an external organisation if financial or that apply to them under Best Value in Public Life etc. (Scotland) Act
service delivery problems emerge. in relation to efficiency, effectiveness, 2000, recognises the potential for
economy, equal opportunities and conflicts of interest when elected
2.18 Financial risks in ongoing the achievement of sustainable members sit on the governing bodies
‘following the public pound’ development. In order to achieve this of external organisations (Exhibit 2).
arrangements can often be complex. and meet their accountability
Where, for example, a council’s obligations, councils need to establish Audit
relationship with an external robust monitoring arrangements that
organisation involved significant are commensurate with the value of 2.22 External auditors review
investment in the form of start-up the funds and other resources councils’ arrangements for following
capital or the delivery of a key provided to the arms-length the public pound. Although there has
service, the council may be exposed organisation and with assessed risks. been limited reporting on this topic,
to greater than normal business risk. in recent years auditors have
In this and other situations, the 2.20 The involvement of council highlighted cases where councils
council may find itself in a position of members or officers on the boards or have been faced with unanticipated
being the ‘funder of last resort’ in the management committees of funded liabilities arising from theirPart 2. Funding arrangements and governance 11
involvement in external organisations audit. Where the partner organisation
and where there are weaknesses in has a Best Value duty subject to audit
monitoring arrangements. These under the Scottish public audit
findings have been included in my process, these issues may be
annual overview reports on local referred to the auditors of the partner
authority audits. organisation for consideration as part
of their audit.
2.23 As indicated previously, in
establishing funding relationships
with external organisations councils
should stipulate how they intend to
monitor the relationship. As part of
that process councils should ensure
that their external auditors have the
right of access to information that
they may require in connection with
the audit of the council, including
access, through the council, to the
external auditors of the organisation.
In the event that audit access is
needed and cannot be arranged in
any other way, the external auditor
may rely upon statutory rights of
access.
2.24 Auditors recognise the
increasing number and complexity
of ‘following the public pound’
arrangements and can assess the
arrangements in place at councils
with reference to the existing
guidance in the Code and the new
Best Value duties and other
responsibilities set out in the
2003 Act.
2.25 In addition, the approach to the
audit of Best Value and Community
Planning will cover partnership
arrangements and may include a
review of the council’s performance
with a specific focus on that part of
the partnership arrangement that the
council can influence and for which it
is accountable. The council will
include its views on the partnership
arrangement as part of its self-
assessment submission under the
Best Value audit. Barriers to the
achievement of Best Value including
those that are outwith the council’s
direct control may be highlighted in
the public audit report produced at
the conclusion of the Best Value12
Part 3. Applying the ‘Following the
Public Pound’ Code in practice
This part of the report covers: reproduced in full in Appendix 1. awarded. Information was also
The Code was supplemented by requested on how funding
• the Code operational guidance issued by arrangements are monitored and
COSLA in 1998. controlled to ensure that funds are
• the Audit Scotland survey. used properly and to achieve the
3.2 The remainder of this part of the intended outcomes. (It should be
The Code report considers the findings from noted that while councils act as the
3.1 In 1996 the Accounts the Audit Scotland survey as they accounting bodies for amounts
Commission and COSLA jointly relate to the requirements of the awarded to local Social Inclusion
published the ‘Code of Guidance on Code. Partnerships, overall accountability for
Funding External Bodies and these funds lies with the Scottish
Following the Public Pound’ (the The Audit Scotland survey Executive and for this reason these
Code). The Code sets out the arrangements were outwith the
principles of best practice when Survey approach scope of this survey).
councils establish significant funding 3.3 Audit Scotland undertook a
relationships with companies, trusts survey of all Scottish councils to 3.5 Council staff completed the
and other bodies other than on a establish the nature and extent of questionnaires and external auditors
straightforward contractual basis. The their financial involvement with reviewed the information.
Code was published in response to external bodies and how councils Questionnaires were returned for all
concerns about councils’ increasing respond to the guidance on 32 councils, although the quality of
use of arms-length organisations and management provided in the Code. information varied; the auditors of
the need to maintain control and several councils identified
accountability over public funds. It 3.4 Questionnaires were issued to all shortcomings in the information
reflects the self-regulatory approach 32 Scottish councils requesting provided, either because not all the
adopted in Scotland and has recently information about their financial information requested was provided
been given more formal status under relationships with external bodies. or because there was a lack of
the Local Government in Scotland The questionnaires sought to evidence to support councils’
Act 2003 which requires councils to establish the total funding awarded responses.
have regard to generally recognised, by councils in the financial year
published codes in pursuing Best 2001/02, the types of bodies 3.6 The survey did not seek to
Value. Exhibit 3 opposite provides a receiving funding and the statutory provide an overview on all the points
brief overview of the Code; it is powers under which funding was councils should take into account inPart 3. Applying the ‘Following the Public Pound’ Code in practice 13
Exhibit 3
A brief overview of the Code
The ‘Following the Public Pound’ Code highlights that the principles of openness, integrity and accountability which apply to
councils in their decisions on spending public money apply equally to funds or other resources which are transferred by
councils to arms-length bodies. The guidance is intended to ensure proper accountability for public funds and that the
principles of regularity and probity are not circumvented.
The Code seeks to ensure that:
• councils are clear about the reasons for their involvement in any arms-length funding arrangement
• the extent of the financial commitment and the nature of the financial relationship are clearly specified
• appropriate financial and performance monitoring and reporting arrangements are in place from the start
• provisions are made for the council and its external auditors to have access to the records of the funded body
• councils carefully consider the question of their representation in the arms-length body
• councils establish limitations in the funding relationship and an ‘exit’ strategy.
Source: COSLA/Accounts Commission ‘Following the Public Pound’ Code (1996)
applying the Code but identified the are subject to tightly specified service £2.1 million to Greater Glasgow and
most commonly occurring issues level agreements. Clyde Valley Tourist Board).
faced by councils. In so doing,
examples of good practice were 3.9 Of the £200 million identified as 3.12 The Audit Scotland survey
identified and are included in the awarded to external bodies in asked councils to provide a
report. A more comprehensive case 2001/02, the amount awarded by breakdown of funding to external
study referring to the City of individual councils ranged from bodies by value of funding awarded.
Edinburgh Council’s approach is set £42 million (Glasgow City Council) to About a quarter of councils had
out in Appendix 2. £0.6 million (South Ayrshire Council). difficulty in providing this information.
Funding for external bodies An analysis of the information which
3.7 There was evidence that the expressed as a percentage of service was provided shows that 44% of
process of completing the expenditure by each council varied the total funding awarded goes to
questionnaire had prompted some between over 5% to less than 1%. 97 external organisations, each
councils to re-consider their receiving in excess of £250,000. In
arrangements for monitoring 3.10 Exhibit 4 overleaf shows that contrast, approximately 9,000
funded bodies. councils funded arms-length external organisations received
organisations across a range of policy awards of less than £50,000,
Council spending on external funding areas with the highest proportion representing 25% of total funding
3.8 The Audit Scotland survey sought (38%) relating to social work. Culture awarded (Exhibit 5 overleaf).
to identify the total amount of and leisure provision and economic
funding provided by councils to arms- development attracted 20% and 3.13 The true cost of funding may
length organisations. The survey 16% of funding respectively. exceed the value of the funds
revealed that some councils transferred to the arms-length
experience difficulties in determining 3.11 Councils provide funding to organisation. In responding to the
the types of arrangements to which many different types of Audit Scotland survey, some councils
the Code applies. The figures organisations, from small-scale identified cases where staff were
provided by councils may, therefore, voluntary bodies to large companies. seconded to funded bodies
include some arrangements that are Among the highest individual funded (particularly during the start-up phase)
essentially service purchase bodies were leisure trusts (City of or premises were leased at nominal
contracts. Against this, it is probable Edinburgh Council awarded £7.4 million rents. Some councils also provide
that some councils may have to Edinburgh Leisure) and tourist finance and accounting services to
excluded funding agreements that boards (Glasgow City Council awarded arms-length organisations.14
Exhibit 4
Analysis of expenditure on external bodies by policy area
Education Housing
7% 7%
Other
Corporate 4%
8%
Economic
development
16%
Social work
38%
Culture and leisure
20%
Source: Audit Scotland
Exhibit 5
Funding by amount of award
Funding awards
of under £10,000
7% of total funding
–7734 bodies
Funding awards of
£1 million or more
21% of total funding
Funding awards of –15 bodies
between £10,000
and £50,000
18% of total funding
–1216 bodies
Funding awards of
between £50,000 Funding awards of
and £100,000 between £250,000
14% of total funding and £1 million
–309 bodies 23% of total funding
–82 bodies
Funding awards of
between £100,000
and £250,000
17% of total funding
–191 bodies
Source: Audit ScotlandPart 3. Applying the ‘Following the Public Pound’ Code in practice 15
Exhibit 6
Establishing the legal and financial framework
Renfrewshire Council maintains a central data base, which includes checklist screens to ensure that the following
documents have been obtained from funded bodies:
• Constitution
• Deeds of Trust
• Last audited accounts
• Memorandum and Articles of Association
• Bank statements
• Signed undertakings from members of management committees.
Source: Renfrewshire Council’s response to Audit Scotland survey
Management arrangements imply that the payments were illegal, in identifying the legal and financial
3.14 The Code emphasises that in it does point to the need for framework (Exhibit 6).
transferring funds to an external improvements in the way council
organisation councils should be clear funding decisions are documented. 3.19 Funding agreements should
about the reasons for doing so and incorporate provisions to enable the
the objectives they are trying to 3.17 The legal framework within council to monitor the way its funds
achieve. It recommends that councils which an organisation operates are being used by external bodies.
should set out the purpose for the determines the financial regime These provisions may include
funding at the time the funding which will apply as well as the role monitoring reports to the council on
decision is made and that this should that council officers and elected financial matters, achievement of
be included in any documentation members may adopt and where targets and future plans.
relating to the funding agreement. liability lies in the event of financial
mismanagement or non-compliance 3.20 In response to the Audit
3.15 The Audit Scotland survey with the terms of funding Scotland survey about two thirds of
asked councils to state the purpose agreements. Responses to the Audit councils indicated that their funding
of funding for specific bodies. In Scotland survey showed that several agreements included standard
response some councils cited the councils had difficulty in providing conditions reflecting the guidance on
statutory powers relied on for making information on the legal form of monitoring arrangements set out in
the payment, or gave a general organisations to which they provided the Code.
response such as ‘social inclusion’ financial support. Of the 32 councils,
without identifying a specific council only about one half provided an 3.21 Results from the survey show
policy objective that the funding was analysis of funding by the type of that in many cases councils rely
intended to meet. body funded. This may point to heavily on audited accounts and
weaknesses in information systems annual reports submitted by arms-
3.16 Returns from several councils or may be indicative of a lack of length organisations as the main
did not specify the statutory powers awareness about the legal form of monitoring mechanism. These
under which significant amounts of the arms-length organisation provide assurance on the financial
funding were awarded to individual receiving funding. position and provide a useful
bodies. This suggests that officers indicator of the organisation’s view of
may be unclear about the legal basis 3.18 The Audit Scotland survey its performance, but are of limited
of expenditure. While this does not identified examples of good practice use in monitoring the overall16
performance of funded organisations. 3.24 In some cases measures of arrangements and that others are
Other councils recognise the need to effectiveness are monitored to reviewing arrangements. An example
request more detailed financial ensure that the broader purposes of is included in Exhibit 11 overleaf.
information in addition to reviewing funding are met. This may involve
the annual accounts of funded longer-term impact studies, as 3.29 Written guidance which is
bodies. Most commonly, councils shown in Exhibit 9. available to all officers responsible for
requested reports showing actual monitoring procedures will help
expenditure against budget. 3.25 When asked to indicate how ensure clarity in roles and
monitoring information was verified, responsibilities. Guidance issued at a
3.22 The involvement of council councils appear to be less clear about corporate level also promotes a
officers with suitable financial how to check the information consistency of approach in
qualifications or expertise in provided by funded organisations. monitoring and financial control
reviewing financial information will Some councils appeared to make procedures. Just over half of
help ensure that technical aspects of little or no attempt to verify the councils indicated that they had
the information are properly information provided. Others stated written guidance and specified
interpreted. However, few councils this was achieved by attendance at procedures for monitoring funding
indicated that financial information board or committee meetings, or that arrangements, either at corporate
was passed to the council’s finance the reports themselves provided level or for all departments awarding
department, or was reviewed by verification. Exhibit 10 overleaf funding. Survey responses suggest,
officers with a financial background contains an example of good practice however, that in some councils
(Exhibit 7). drawn from the survey. written procedures are available to
only some of the departments
3.23 Non-financial measures are 3.26 The process of verifying awarding funding.
necessary to ensure that specified information provided by funded
results are being achieved and that organisations will be assisted by 3.30 Evidence from the Audit
the level and quality of service is in including a condition in the funding Scotland survey shows that council
line with the funding agreement. In agreement giving the council a right officers and members regularly sit on
responding to the Audit Scotland of access to records held by the the governing bodies (boards or
survey about two thirds of councils body. The Audit Scotland survey management committees) of funded
indicated that they have standard indicated that about two-thirds of bodies. Councils identified
conditions in funding agreements councils included this as a standard membership of governing bodies as
specifying defined outcomes from condition in funding agreements. contributing to their monitoring and
funding. However, when asked to control arrangements. However, the
identify the measures in place, 3.27 There was evidence from the survey results also suggest that, in
responses tended to focus on survey that some internal audit some councils, council members and
measures not directly related to departments had recently undertaken officers are as likely to sit on the
service outcomes. For example, an a review of councils’ general governing bodies of organisations
arms-length organisation offering arrangements for funding external which receive small amounts of
welfare rights advice recorded a high bodies. Councils reported that annual funding as on those where
number of clients but this does not internal audit departments were also the council has a more significant,
provide assurance that the clients involved in investigating organisations long term financial relationship. In
received good advice – this could be when problems had come to light. other words, there is often no
measured by client satisfaction obvious link between council
surveys or by the amount of 3.28 The survey showed that only membership on governing bodies
additional welfare benefits secured five councils exercised central control and the significance of the funding
as a result of the advice. There is, of funding arrangements with the awarded.
however, some evidence from the majority of councils delegating this to
Audit Scotland survey that councils departments. A central database 3.31 The Code emphasises that clear
recognise the need to improve provides a key control mechanism, limits should be laid down at the
aspects of their non-financial particularly where more than one outset of funding arrangements on
monitoring, as demonstrated in council department may award the extent to which the council will
Exhibit 8. funding. The survey indicated that a become involved financially with the
small number of councils maintain a arms-length organisation and its
central database of funding affairs. The council should alsoPart 3. Applying the ‘Following the Public Pound’ Code in practice 17 Exhibit 7 Involving the finance department Aberdeenshire Council has written procedures for the financial vetting of externally funded bodies that require an accountant within the finance department to be designated for each body. The accountant is responsible for financial checks on the body, recognising the need for financial expertise in conducting the monitoring function. The Council has a system of annual and triennial financial checks on funded organisations. The Council takes a graduated approach depending on the level of funding. Source: Aberdeenshire Council’s response to Audit Scotland survey Exhibit 8 Improving performance monitoring The survey indicated that councils recognise the need to improve performance measures. The following references are taken from the survey returns. [Organisations]… ‘are not formally set specific performance indicators. They are monitored through regular meetings and dialogue….However ..[the] Council has approved a decision to pilot Service Level Agreements....to introduce new measurable performance indicators to assist with monitoring in the future’. ‘A formal Service Level Agreement is being developed which will formalise monitoring arrangements’. ‘Annual business plan targets and objectives have been introduced from 2002/03’. Source: Responses to Audit Scotland survey Exhibit 9 Taking the broader view West Lothian Council awarded £263,000 to a project providing supported accommodation for young people. Quarterly financial returns and annual accounts are submitted to the Council and are used to monitor actual expenditure against budget, identifying significant variances. The services are subject to a service level agreement and local quality inspections are carried out. Monthly occupancy rates are monitored and year on year comparisons are made. A detailed Best Value review in 2000 assessed the organisation in terms of its fit with Council and community priorities, as well as the organisation’s effectiveness and efficiency. The Best Value review process involved a detailed self-assessment, Council officer assessment and external independent assessment. The project’s services are linked to the Council’s objectives to maximise the potential for children and young people to lead full lives and to address unemployment and economic and social exclusion. Source: West Lothian Council’s response to Audit Scotland survey
18 Bye now, pay later follow-up Exhibit 10 Verifying information Dundee City Council awarded funding of £154,000 to a community education project run by a charitable company. The funding was related to the Council’s corporate objectives of: • providing learning and cultural development • building an informed, involved and active citizenship; and • making efficient and effective use of resources. The Council has no representation on the company’s board but two officers and a councillor have the right to attend board meetings as observers. Financial monitoring reports comparing budget with actual income and expenditure are produced for board meetings. Monitoring statements are supported by reports from the company’s financial system. The Council has access to the organisation’s financial system and records. The Council undertakes annual system analysis visits, reviewing the systems and procedures in operation and testing information on a sample basis. The service level agreement requires details of service delivery including work targets. The company’s annual report details usage figures and other performance information and includes an action plan for the next year. Advice and guidance is available to the organisation from dedicated Council officers, including an assistant finance officer. Source: Dundee City Council’s response to Audit Scotland survey. Exhibit 11 Central control Within North Lanarkshire Council six different departments managed grants to voluntary bodies, each with different internal controls. The Council’s Internal Audit department conducted a value for money study in 2001/02 and recommended that the current system should be replaced with a corporate system, together with appropriate guidelines and monitoring arrangements applicable throughout the authority. In response to the report, the Council’s Chief Executive established a working group to address the issues and recommendations that were identified. Source: North Lanarkshire Council’s response to Audit Scotland survey.
Part 3. Applying the ‘Following the Public Pound’ Code in practice 19
establish ‘exit strategies’ setting out that there is scope for councils to
circumstances that would trigger a improve the way they monitor and
review of the agreement and verify the financial and service
specific events that could lead to performance aspects of funding
the termination of the agreement and agreements. The survey also
protection of the council’s financial highlights that few councils adopt a
interest. corporate approach to funding
arrangements.
3.32 The survey results show that
funding agreements are generally 3.36 The survey reveals that elected
time limited, usually covering a members and council officers often
period matching the council’s budget participate in the governing boards or
cycle. However, other examples managing committees of funded
were identified, often involving the bodies, but often there appears to be
council in ‘deficit funding’ no obvious link between council
agreements, where the council is membership and the significance of
committed to cover any losses in the the funds provided.
arms-length organisation. This
effectively represents an unlimited 3.37 The survey also indicates that
liability to be met from public funds. councils need to set clear limits to
the amount of funding that will be
Concluding comments on the survey provided in each case and to
3.33 The Audit Scotland survey predetermine criteria that would
confirms that councils provide a trigger a review of the funding
significant amount of public money relationship.
to organisations outside their direct
control to deliver a range of services, 3.38 There is evidence of good
particularly relating to social work, practice at a number of councils and
leisure and economic development. examples of these are cited in this
While some councils had difficulty in report. It is also clear that the
supplying the information requested, process of completing the Audit
the survey suggests that the total Scotland questionnaire has prompted
amount involved is of the order of some councils to review their
£200 million in 2001/02. In addition to arrangements for managing funding
this direct funding, councils provide relationships. However, the survey
other non-financial support in terms also served to highlight areas of
of administrative resources, premises weakness where councils should
and staff. review current practice.
3.34 The survey indicates that 3.39 In overall terms, the Audit
councils were unable in all cases to Scotland survey indicates a high level
identify the purpose of the funding of non-compliance with the Code’s
provided and the statutory authority requirements, both among councils
under which the expenditure was and within individual councils. Non-
incurred. This is critical in determining compliance is evident in all services
the nature of the financial relationship where arms-length funding is used
and the monitoring arrangements and in most councils to some
required. degree. Current practice should
therefore be reviewed with the aim
3.35 Appropriate mechanisms are of achieving closer compliance with
required to maintain control and the Code.
accountability over public money
provided under funding agreements.
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