Internal Audit of Fixed Assets

HERTFORDSHIRE COUNTY COUNCIL

AUDIT COMMITTEE

25 MARCH 2010 AT 2.00 PM

INTERNAL AUDIT OF FIXED ASSETS

Report of the Chief Internal Auditor

[Author: Susan Groom, Group Auditor

Tel: 01992 555320]

1.Background

The Council's Accounts for 2008/09 were qualified by the external auditor for a second year, because the accuracy and completeness of the fixed assets register (FAR), as reflected in the financial ledger, could not be relied upon. The Corporate Property Database (CPD) was also found to be deficient. The Council agreed to ensure that, by 23 December 2009, the CPD was accurate and complete, and that, by 10 January 2010, the FAR was agreed to the CPD. The Valuation and Asset Accounting (VAA) project was established to achieve this.

The first part of the VAA project has been to validate the opening balance as at 1 April 2009 by examining original records, cross-checking details against the Terrier and property deeds, ensuring there were accurate plans to record ownership and ensuring there was clarity as to whether or not the asset was in operational use. Work was then undertaken to establish what was on each asset record, and that it had a relevant valuation. The information was then loaded on to the new system, with a cross-reference against the old asset register as a final check.

The second piece of work was to ensure that movements in-year (for example acquisition or construction of new assets, sales, changes in use, amalgamations, etc) were properly recorded. It was intended that by the end of December 2009, the opening balance at 1 April would be correct, and that by mid-January all of the in-year transactions to September would have been captured on the system. Post-September transactions would be entered using the ongoing, properly documented process for capturing changes.

It was agreed with the Director of Resources and Performance and with the Audit Commission that Internal Audit would undertake a programme of tests, including substantive testing of assets selected by the Commission’s auditors. The programme of testing would continue through until the end of April 2010. Internal Audit would also undertake tests through 2010/11 on the key controls over the new database. The results of this testing would be reported to the Audit Committee, including a progress report to the March 2010 Committee.

2.Purpose of Report

To provide the Audit Committee with an overview of the results so far of the in-depth testing which has been undertaken by Internal Audit of the systems relating to asset management and capital accounting, including substantive testing on the Corporate Property Database and the Fixed Assets Register.

3.Summary

The audit objective has been to evaluate the adequacy and effectiveness of the VAA project verification processes, ensuring that the risk of errors occurring and remaining undetected is minimal. The project has involved significant officer input from Property and Finance, although delays in its completion resulted in later than expected sample selection. A copy of the control spreadsheet, used by Property officers to compile all the data needing to be uploaded into the CPD, was made available to the Audit Commission auditors on 21 January, and the Commission provided Internal Audit with the sample on 25 January (two weeks later than originally planned).

Internal Audit’s subsequent detailed testing of the sample has confirmed the extensiveness of the checking undertaken by the relevant professionals on all selected records within the CPD. 185 assets were selected by the Commission for detailed internal audit checking, out of a total of 2248 assets. All 185 of the sample properties have been physically visited by internal auditors, and checked against the key asset records. While a number of discrepancies have been identified by Internal Audit from its physical verification work, none of these will have a material effect on the accounts. The types of discrepancies are set out in the remainder of this report.

The reconciliation processes undertaken by Finance between the CPD data and the FAR have taken longer than expected, as the CPD valuations were not finalised on schedule, but the reconciliation has now been completed by Finance. Internal Audit continues to work through the agreed test programme, and will report and make recommendations to the Director of Resources and Performance following completion of its findings.

1. Internal Audit testing of assets

All 185 properties selected for physical verification were visited by Internal Audit, and were all agreed with the Terrier, which is the system for holding working copies of all records relating to the purchase or disposal of each parcel of land. The other associated asset records were also largely found to be correct – there were 13 differences requiring updating of the records, as reflected in paragraph 4.1 below.

As agreed with the Audit Commission, Internal Audit has undertaken, and will be completing, the following tests (test numbers shown in parenthesis are those on the agreed testing schedule).

4.1Validation of Property Terrier to Deeds to Corporate Property Database (CPD) and Fixed Asset Register (FAR)

This testing was designed to ensure that the project team have created an accurate cleansed asset dataset (Tests 1 and 2). Our findings are summarised in the following table, which shows the results of comparing the physical evidence of all 185 properties in the sample with the key Property records. We found all records to be correct, except for a total of 13 sites with relatively minor differences; these comprised minor encroachments by adjacent properties or other discrepancies compared with plans (Test C: 9 properties), fire or other damage (Test F: 3 properties), or misclassification as operational (Test H: 1 roadway misclassified).

4.2‘No asset’ records to check

Whilst none of the 27 tested assets deemed to be “No Asset” for VAA purposes were found actually to be HCC assets, their inclusion in the CPD does raise concerns that previous valuation processes had not removed 2 sold properties, 2 duplicated assets and 2 merged assets. If a link to the deeds reference could be made on the CPD, the occurrence of these ‘no assets’ records should be minimised.

Extensive matching of assets has been undertaken within Finance, and Internal Audit has raised issues with both Property and Finance during the verification process to ensure that as many of the minor discrepancies and non-consequential errors as possible were rectified before the final upload to the new CPD.

4.3Completeness check

An independent match by Internal Audit between the many hundreds of known service delivery assets (as evidenced by the Council’s intranet and other sources) and the CPD has been completed, and all assets satisfactorily matched to the CPD.

4.4Testing of capability and operation of the data cleansing and validation process (Test 3)

The VAA Control Spreadsheet was not intended to be an event logging document but evolved into one, so not every stage within the VAA project process was logged. Because of this, some evidence of checks within the process being undertaken was circumstantial rather than evidenced on the control spreadsheet; key processes had to be completed before the subsequent ones could be started. Internal Audit were unable to use this as a control document to confirm that all processes in the VAA project process document were completed. However, managers of the VAA Project advised us that completion and review by appropriate staff of all significant stages is evidenced by each asset being signed off on the control spreadsheet at the final CAD stage, as this could not have been reached without such completion and review of all key stages.

It was noted that checking to deeds was not undertaken as part of the VAA project, and there is no link on the asset records to the deed packet numbers. A non-material land swop found during physical verification, and not correctly reflected in the terrier and online asset plan, would have been found if checks had been made to the deeds. This had no effect on the accounts, as the valuers have confirmed that there is no value difference between the asset as recorded on the plans in the terrier and those in the deeds. This agreed with what was visible during Internal Audit’s inspection of the asset site.

4.5Testing the upload of the cleansed data (Test 4)

Internal Audit are still awaiting confirmation of successful upload of reconciled assets and a frozen download from the new CPD for checking. Reconciliation of the data for the CPD and the FAR was achieved by Finance on 16 March, thus clearing the way for the data to be uploaded to the CPD.

4.6Testing of capability and operation of the valuation process (Test 5)

IA are testing the valuation processes for 20 assets within the 185 assets subject to physical ownership tests. The expected 31 January completion of CPD and FAR verification was not achieved; at that time Internal Audit were advised that drawings would require two weeks checking, and since then other delays have occurred.

The timescale was very tight to complete the work on the opening balances by the end of December. Extra resources were diverted to the Property team and officers have been diverted from other activities.

Even so, the data was not completed on opening balances until early March; we understand that there are now no outstanding material discrepancies between the CPD and the FAR.

4.7Testing the processes operated in respect of items coded as capital expenditure (Tests 6 & 7)

Internal Audit will also be checking that there is clarity around revenue and capital expenditure (in particular, where there is an annual capital provision), and the definition of what has been charged to an annual provision and what has been charged to revenue. Various accounting issues have been identified in consultations with the Audit Commission auditors, and are being targeted with relevant officers, and training has been provided to Finance and Property staff to ensure that they all have a clear understanding of the coding structure to be used.

4.8Documenting, reviewing and testing the new Corporate Property Database system (Test 8)

This involves testing the new system in its widest sense, including controls and processes operated within departments, and identifying the controls in operation to control fixed assets, capital expenditure and the ongoing maintenance of the fixed asset data and the CPD system.

Internal Audit are still awaiting completion of the process maps, process documentation and quality control standards documentation, which have been revised as the processes have been designed, and refined during testing.

The new CPD system is an established one, which is widely in use. Although it is not bespoke, Property and Finance have checked that the specification meets their requirements.

Internal Audit have still to check the controls of the new system as part of their continuing work on the VAA project: as agreed, this will be undertaken early in 2010/11. Testing will include ensuring that the interface with SAP allows for the data to be accurately transferred into the accounts. A check will be made to establish if the system has an available field in which to record the deed packet number, to provide an audit trail to the prime ownership documents.

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