60 Car Loans Audit Report FINAL

Final Internal Audit Report 2009/2010 Car Loans

Final Report Issued: 02 March 2010

Audit Reference

Internal Audit – Car Loans

Contents Background

page 2

Scope

page 2

Audit Opinion

page 3

Detailed Findings & Action Plan

page 5

Auditor(s): Benjamin Bruce Distribution: Angie Ridgwell – Interim Chief finance Officer (Interim s151 Officer) Rob Walsh - Executive Director Business Services (Monitoring Officer) Joanne Robinson – Head of Transactional Services Dawn Buckle – Chief Payroll Officer Audit working group Audit Commission Malcolm Towle – Insurance and Risk Manager

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1 Background 1.1

North East Lincolnshire Council provides an assisted car loan scheme to permanent staff for the purchase of vehicles.

1.2

Historically the scheme has been administered as part of the Debtors function, but administering this system will now be performed by the Payroll and Pensions’ team.

1.3

The total outstanding car loans balance at October 2009 was £280,793; this includes 6 loans for former employees totalling £39,487.49, and 36 loans to current employees totalling £241,306. The average car loan per employee is approximately £6,702 per staff member.

2 Scope 2.1

During November 2009 to January 2010, Internal Audit carried out a review of the Car Loans system, as part of the 2009/2010 Audit Plan. The audit was performed later in the year than anticipated, due to a revised policy still being developed at the time of the audit.

2.2

The approach used was system based auditing, which included evaluating the existing framework and determining whether there are sufficient controls in place to manage risks.

2.3

The overall objective of this audit was to provide management with assurance about the effectiveness of key controls that are operated by the team and the exposure to risk any control weaknesses may cause. The audit was intended to provide an independent assurance in the following areas: • • • • •

To review of the revised policy and procedure for the granting of car loans; To conduct a framework walkthrough of the current system and identify the controls in place; To measure the effectiveness of the control framework by performing sample testing of the old, new and existing car loans; To test compliance with the new policy and procedures and identify whether car loan applications are supported by required supporting documentation. To test the accuracy of the car loan balances on the payroll system and compare them to the balances on the car plan system.

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3 Audit Opinion 3.1

Overall, our findings indicate partial assurance of the Car Loans system; new controls are not yet embedded and substantial risk exposure still exists from reputational risk. There are 10 findings in all, broken down into 4 substantial, 5 limited and 1 minimal residual risk exposure.

3.2

Since the change in responsibility for this system in August 2008, a review of the system has been performed by management. The system has been flow charted and the procedures are being reviewed to tighten up the controls in the system.

3.3

Although the car loans system is being updated, the controls are not yet fully embedded, resulting in both financial and reputational risk from inappropriate loans being awarded. This has resulted in some weak points that are currently being addressed, which include: • • • • •

Incomplete file documentation, such as proof of purchase, independent inspection, proof of registration, and insurance documentation not being on file; Granting of new loans to people who still have existing loans for previous vehicles which have been sold or used as trade in on new vehicles. In one instance the total loan granted exceeded the value of the new vehicle purchased; No credit scoring/ consideration of employee salary when awarding loans. Monthly reconciliations between the car plan and payroll systems have only been completed up to October 2009.

3.4 Furthermore, our review of the 6 outstanding loans handed over to recovery has raised additional concern in the manner in which loans were granted, these include: • A loan previously granted to an employee at the time when they were subject to disciplinary procedures, who subsequently left the authority and then defaulted on the loan, could not be recovered resulting in the loan of £9,368 being put forward for write off; • A loan granted to a casual employee, being repaid on instalment. (A control has subsequently been implemented to restrict loans to permanent employees only); • A loan agreement not signed, resulting in the full loan of £8,926 being proposed for write off after the Recovery Team had made numerous attempts to recover the loan and the circumstances had been checked with enforcement. • A loan being granted to a debtor with a history of bad debt, this loan will be recovered at £26 per month for the next 21 years.

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3.5 We have confirmed with legal services that car loans cannot be secured on vehicles purchased under the scheme; nor can they be attached should the debtor default on their car loan payments. Legal services have informed us that the reason for requesting registration and insurance documentation is purely to establish that the vehicle has been purchased. 3.6 Given the reputational risk associated with defaults, the hidden costs associated with the car loans scheme (such as the time administering and recovering the loans) and there being no statutory obligation to maintain the scheme, the Council should regularly review the costs and benefits of continuing the car loans scheme. Key to Control Effectiveness (As referred to in paragraph 3.1) High assurance Significant Assurance Partial Assurance

Strong controls support achievement of the business objectives. Controls support the business objectives, but some improvements should be made. Controls provide some support for business Î objectives, but improvements are essential. Controls do not support the achievement of No assurance business objectives.

Key to Residual Risk Exposure (As referred to in paragraph 3.4 and colour coded in the detailed findings) Minimal Limited Î

Substantial Critical

Low level of exposure. Exposure to the Council exists but with some mitigating factors. Significant exposure or area of importance or concern to the Council. Very significant exposure or area of critical importance or concern to the Council.

4 Detailed Findings & Action Plan 4.1

Areas for improvement are ranked below according to the impact they represent to the service or process on which we are reporting. The findings have been discussed with the responsible officer and their response included. Timescales for implementation of agreed recommendations have also been completed in consultation with the responsible officer.

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Ref

Findings & Risk

1 Substantial

Findings No target date has been set for completion of the revised car loan policy, procedure and forms.

Recommendation

Agreed/ Not Agreed

Management Response

Officer Responsible/ Timescale

Set a target date for the Partially The revised policy was to be released 1st completion of revised Agree January 2010; however the release date policies and procedures and any further work on the revised ‘draft’ for administration of car policy was suspended until the outcome of loans. the audit report was available. The delay was to ensure any agreed The new car loans procedure Link car loan policy into recommendations were implemented. does not link the car loans policy the aims of the Council. into the aims of the Council. This policy does not link into the aims of the Council. The old car loans policy and Remove old car loans procedures are still being used policy and procedures The current car loans policy and to grant car loans, pending the from the staff intranet procedures are still being used and Payroll revised policy being completed. and update with revised will continue to do so until the new policy is car loan policy when it implemented. Once implemented the old is completed. policy will be removed from the Intranet. Also see comments at 2.

Payroll & Pensions Manager N/A – see comments at 2

Risk Car loans policy would be out of date and not linked to Council goals or objectives.

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Ref

Findings & Risk

Recommendation

Agreed/ Not Agreed

2 Substantial

Findings There is no statutory or Council Review the need for Agreed requirement to provide car loans continuing the car loans assistance to Council scheme. employees. There are hidden costs associated with the scheme; these include the use of limited capacity within the payroll and recovery teams; cost of administering and collecting outstanding loans from previous employees and write off of unrecoverable loans.

Perform a cost benefit analysis every 3 years to consider whether the scheme should still be used.

Management Response


No statutory or Council requirement to provide a car loan exists, therefore due to the level of administration work, monthly and yearly reconciliations and mainly the concern over the collection of outstanding balances when employees leave (see comments at 3); I propose the scheme to be cancelled as of 31st March 2010 and all scheme details removed from the Intranet at that time.

Head of Transactional Services March 2010

The current car loans (approximately 39) and any new car loans approved up to 31st March 2010 should be honoured until the loan has been paid in full.

Risks Car loans scheme not aligned with objectives of the Council aims.

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3 Substantial

Ref

Findings & Risk

Recommendation

Findings Current car loan files were found to be incomplete. A checklist has been introduced to monitor file documentation.

Ensure file checklist is regularly checked to ensure missing file documentation is properly followed up and complete prior to employee leaving the Council.

The Recovery/Enforcement team have not been consulted on required documentation that would assist them in recovering outstanding car loans.

Consult with Recovery section to identify required documentation needed to recovery outstanding car loans.

Car loans are treated as a Consider payment plan sundry debtor and invoiced out prior to staff leaving the per the sundry debtor procedure Council. without informing the Recovery team. Risk Unrecoverable car loans due to inadequate or incomplete loan documentation. Significant reputational risk to the Council.

Agreed/ Not Agreed Agreed

Management Response


The car loan files (complete or incomplete) Payroll & were passed from Payments to Payroll 1st Pensions Manager August 2008 when responsibility of the scheme was transferred. At that time priority was given to the Travel & Subsistence scheme, which was also transferred to Payroll. Recently a checklist has been introduced and included in each current file. This has highlighted the missing documents. All employees concerned will be contacted to April 2010 ensure the file is updated. If an employee leaves an invoice is raised and Recovery is informed. As with all other overpayments, if the invoice is not paid back up papers are requested by Recovery and are provided. However, with immediate effect Recovery will be provided all documentation they require as soon as February the invoice is raised. 2010 HR will be contacted to consider the payment plan, as they are aware of an employee leaving before Payroll.

March 2010

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Ref

Findings & Risk

4 Substantial

Findings In 2007 a car loan was granted to a member of staff who was on sick/disciplinary leave. The debtor subsequently sold the vehicle and moved to New Zealand. Neither the car loan nor the money from the sale of the vehicle could be recovered.

Risks Unrecoverable debts, resulting in write off of debt Debts not secure by vehicle, resulting in write off of debt. Significant reputational risk to the Council.

Recommendation

Agreed/ Not Agreed

Restrict car loans to Agreed staff that do not have any circumstances affecting their long term employment. Perform a risk assessment before approving car loan (credit check, bankruptcy check, cash flow etc.).

Management Response


The car loan in this case was approved by the Director prior to the employee’s commencement of long term sickness absence. As sickness absence is notified to Payroll in arrears when this loan was prepared the absence was not recorded.

Head of Transactional Services/ Payroll & Pensions Manager/ All Directors

For any Director approving a loan the length of sickness absence is unknown and in most cases employees receive full pay which covers the monthly deduction.

N/A – see comments at 2

Directors must decide, based on known circumstances, if the loan is approved. If an employee leaves an invoice is raised and Recovery is informed. Procedures are then followed to attempt to recover the debt. If the scheme is to continue financial checks prior to loan approval will be required.

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5 Limited

Ref

Findings & Risk

Recommendation

Agreed/ Not Agreed

Ensure that the monthly Findings Monthly reconciliations between reconciliations are Agreed the Car Plan system (which is brought up to date. used to calculate the principle and interest monthly payments over the life of the loan) and the Payroll system have been performed up to end October 2009. These are incomplete, and are not up to date. There is no breakdown of what the existing balance brought forward at the beginning of the year.

Risks Errors may go undetected Incorrect payments may be deducted

The existing balance at the beginning of the year needs to be broken down into what it is for.

Management Response


Due to lack of resources the balancing has not been kept up to date. The correct level of resources is now in place; therefore the monthly reconciliation is currently being brought up to date.

Payroll & Pensions Manager February 2010

The monthly reconciliation task is included on the 'Payroll Controls - Assessment Form' and requires that this reconciliation is carried out each month by no later than 5 working days following the end of the month. A breakdown of the balances is currently available and with immediate effect will be included as part of the reconciliation process.

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6 Limited

Ref

Findings & Risk Findings Car loans are granted up to a maximum of £15000 and 100% of the value of the vehicle, with no deposit paid by the debtor. It is common practice for other local authorities providing similar schemes to restrict the loan amount to a fixed percentage of the vehicle value. No consideration of the applicant’s salary or personal circumstances.

Recommendation

Agreed/ Not Agreed

Consider reducing the Agreed percentage loan size and requesting a larger deposit, to ensure the resale value of the vehicle covers the loan. Ensure that Executive Directors consider the salary of the applicant and their ability to repay the car loan.

Management Response


If the scheme is to continue consideration will be made to the % of loan granted and deposit, however a more robust administration process and the requirement to carry out financial checks prior to loan approval will be required to reduce the risk of non-payment.


The declaration signed by the Executive Director can include an additional statement to ensure the required checks have been carried out.

Risk Applicant could default on loan. Car loan could exceed the value of the vehicle.

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7 Limited

Ref

Findings & Risk Findings Sample testing of the application files found that vehicle inspection reports were performed by the salesmen selling the vehicles; this would present a conflict of interest in assessing the value or condition of vehicles.

Recommendation

Agreed/ Not Agreed

Management Response

Require independent Agreed The current procedure is based on a inspection of vehicle by previous decision made sometime ago AA/RAC or independent when the garage facilities at Doughty garage to determine Road ceased inspecting cars. condition and life of vehicle. If the scheme is to continue the recommendation will be implemented.

Officer Responsible/ Timescale Payroll & Pensions Manager N/A – see comments at 2

8 Limited

Risks Car loan vehicle values or condition potentially misstated. Findings New loans are approved, despite old loans not being fully repaid. Risk Car loans are not repaid Car loans do not reflect cost of new vehicle

Revised policies should be updated to require Agreed old loans be repaid in full before granting new loans.

Occasionally employees request a new Payroll & loan when a balance from a previous loan Pensions is outstanding. If the scheme is to continue Manager the recommendation will be implemented. N/A – see comments at 2

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10 Minimal

9 Limited

Ref

Findings & Risk

Recommendation

Agreed/ Not Agreed

Findings No pre-employment check is performed to identify whether a new employee has an outstanding loan with the Council. Risk Outstanding loans not recovered from employees.

Consider revising the Agreed starter checklist to check outstanding loans with the Council before appointment.

Findings Director’s name and directorate not stated on car loan application form.

Identify the authorising Director’s name and directorate on the authorisation form.

Risk Car loan not authorised by the correct director.

Management Response


HR is aware prior to Payroll of commencement dates and if the new employee has previously worked for NELC via application forms.

HR Manager/ Payroll & Pensions Manager

If the scheme continues the starter N/A – see checklist, for HR use section only, on the comments at New Starter form (P150) should include an 2 extra check to contact Recovery to confirm if any previous debts are outstanding. If so an instalment plan can be agreed.

Agreed

If the scheme continues the ‘draft’ revised policy requests this information, therefore will eradicate this risk as long as the details are completed in full.


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The agreed actions may be subject to a follow up audit to establish whether they have been implemented. Any queries regarding this report should be directed to Chris Green (Audit Manager). Internal Audit would like to thank the Management and Staff for their assistance during this audit.

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60 Car Loans Audit Report FINAL

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