Agenda item

[Report of the Assistant Director for Corporate Governance. To be introduced by the Cabinet Member for Corporate Resources.]

Cabinet will be asked to approve the award of the contract for the provision of internal audit services.

The Cabinet Member for Corporate Resources introduced the report which recommended entering into a contract with Croydon Council, by means of their Audit Services Framework Agreement, from 1 April 2018 for six years to provide audit resources to deliver the Internal Audit service for Haringey Council at a total cost of £1.5m over the duration of the contract.

RESOLVED

1. That the Council enter into contract with Croydon Council, by means of their Audit Services Framework Agreement, from 1 April 2018 for six years to provide audit resources to deliver the Internal Audit service for Haringey Council at a total cost of £1.5m over the duration of the contract; and

2. That if the Croydon Council framework contract is extended in compliance with the EU regulations (up to a maximum of two years), and satisfactory contract performance is maintained, agreed that the Council extends its contract with Croydon Council and associated framework agreement up to a maximum of two years, subject to compliance with Haringey Council’s Constitution. The total value of the contract for the 8-year period would be £2m.

Reasons for decision

The current internal audit contract commenced on 1 April 2012 and is due to expire on 31 March 2018. Internal audit is a statutory function which Haringey Council is required to maintain. It is therefore necessary to ensure that an appropriate internal audit service is in place from 1 April 2018, to ensure ongoing compliance with statutory requirements.

Alternative options considered

Five options have been considered and these are set out below.

It should be noted that experience has proved that it is highly unlikely that an in-house resource could be recruited and retained to deliver the Council’s internal audit service in its entirety. All London boroughs have outsourced their internal audit service to some extent and none are looking to bring this service fully back in-house due to the ongoing costs of recruitment, retention and specialist audit training required.

Option 1 – OJEU Open Tender

The potential contract values involved for this length of contract would require a full re-tender following European procurement legislation, commonly known as the OJEU rules, unless an acceptable alternative procurement route is used e.g. an appropriate framework agreement. The full open tender approach by Haringey alone is not recommended as taking an independent procurement route in this way would be resource-intensive and unlikely to achieve better results in terms of value for money than the other options available.

Option 2 – Crown Commercial Services (CCS)

This is a framework agreement established by central government for the provision of internal audit services under their Management Consultancy Framework. Although geared towards provision within Central Government, local authorities are included in the list of organisations eligible to use the framework. The framework includes the provision of services from all the main providers of Local Government internal audit, namely: BDO LLP, Deloitte LLP, Ernst & Young LLP, Grant Thornton LLP, KPMG LLP, Mazars LLP, PWC LLP, and RSM Tax and Accounting PLC.

To utilise the framework, it would be necessary to conduct a ‘mini-competition’ between the contractors. While this option would ensure that the market is tested, it is considered that, as with the full tender (option 1 above), it is unlikely that the relatively small number of audit days Haringey would require would attract better rates than those available under the Croydon Council Framework. The current indicative standard daily rates quoted by each of the contractors within the overall government framework are higher than those currently paid by the Council under the Croydon Council Framework.

Option 3 – Shared Service with another local authority

A number of London boroughs have entered into shared service arrangements to deliver their statutory internal audit service in recent years. Some of these arrangements form part of large shared arrangements covering a range of different Council services, while others only cover internal audit arrangements.

In the longer term, it might be beneficial for the Council to consider shared service arrangements if issues with the existing and contractual delivery of internal audit services are identified. In such circumstances, shared service arrangements might provide:

·       Improved resilience – less reliance on the external audit delivery partner to provide audit resources to the Council;

·       Access to specialist internal auditors – most Councils would not have sufficient work to justify employing these to work solely at one authority;

·       Contract options – explore alternative arrangements, including other frameworks, shared services etc.;

·       Career opportunities – developing and retaining in-house audit staff to avoid reliance on external contractors; offering experience and training across one or more Councils may attract higher calibre candidates;

·       Savings opportunities – ongoing financial constraints mean Councils look to review how services are delivered; exploring alternative arrangements may reduce overall costs across authorities.

A small number of the shared service arrangements have since reverted back to stand-alone internal audit services for their respective authorities; this has been for various reasons including: a recognition that the Head of the Shared Internal Audit Service had less capacity to be involved in corporate projects than in the past; service delivery arrangements had not met expectations; and strategic arrangements had changed.

At a time when Haringey Council is undergoing significant organisational and service changes, the level of risk exposure is increased and therefore it is critical that an adequate level of internal audit work maintained to ensure new working systems and processes are implemented effectively across the organisation and relevant assurance is provided; and that sufficient senior level audit resources are available to support officers and members.

Option 4 – Alternative Framework contract

There is another framework agreement established by a London authority in 2014/15 for the provision of internal audit services and other local authorities are included in the list of organisations eligible to use the framework. The framework is delivered by another private sector contractor, but the daily rates quoted are substantially higher than those paid by the Council under the London Borough of Croydon framework contract. This alternative framework is due to end in 2018/19 and no information is available at present on what arrangements will be in place following the end of its current term. For these reasons, use of this framework has not been considered as part of this evaluation.

Option 5 – Croydon Council Framework Agreement

This option involves the Council using the framework agreement procured by Croydon Council. Croydon Council tendered for a single supplier framework agreement to take effect from 1 April 2018. The tender process was run as an OJEU open procedure (ref: 279176-2017); Croydon Council has confirmed that the framework agreement has been tendered in compliance with EU Procurement Regulations. Croydon Council’s framework agreement is delivered by a single supplier, Mazars Public Sector Audit Limited (Mazars), Haringey’s current supplier. Haringey Council’s Legal Services and Corporate Procurement Services have reviewed the OJEU notice to confirm that Haringey Council would be able to participate in the Croydon Council framework agreement.

This is a shared services model, whereby Croydon Council is the contracting authority (and therefore the service provider) and will call off a contract on behalf of the authorities which participate in the framework agreement. The framework agreement is structured to provide cheaper daily rates for audit services as more authorities join the framework. The contract is structured as a call-off and, as such, offers Haringey Council maximum flexibility in terms of the number of days purchased in any year, with no requirement to purchase a minimum number of days.

The framework agreement rates are based on different daily rates for the various audit areas such as IT; Contract; and General audit (including Schools). This is in line with the Council’s current contract. The daily rate costs in the new framework are higher than the current costs: general audit by 11.7% and ICT audit days by 3.8%. It should be noted that the existing framework rates have remained largely unchanged over its 10-year duration and general audit day rates are only 0.8% higher than they were at the start. The proposed daily rates still represent good value for money for the Council.

The framework agreement rates will be subject to review and a Retail Prices Index-linked increase in April each year. Over the six-year period, the contract value is expected to be £1.5m for Haringey Council. The internal audit service for Homes for Haringey is provided via the current framework contract and Homes for Haringey have confirmed that they wish to retain the current arrangements for the new framework contract. Additional audit days delivered to Homes for Haringey will be subject to a formal Service Level Agreement; these days will be in addition to those provided to the Council.

There are clear administrative benefits in retaining the services of our existing supplier as they are fully conversant with the Council’s operational arrangements, systems and processes as well as the standard of work the Council expects and will therefore provide staff with the requisite skills.

As stated at 5.7.2 above, the contract for the internal audit service would be between Haringey Council and Croydon Council; it is being recommended that Haringey Council enter into a contract for a six-year period from 1 April 2018, with the option to extend for a further two years’ subject to compliance with EU regulations and satisfactory contract performance.

The framework agreement, whilst in theory being ‘managed’ by Croydon Council, is delivered through Mazars, the Council’s current provider. It is considered highly likely, although not guaranteed, that the current provider would continue to utilise staff working on the existing Haringey contract, thus retaining their accumulated knowledge about the Council.

Contract payment and monitoring arrangements. Croydon Council will invoice Haringey Council for the audit work completed in accordance with the framework agreement’s daily rates and Haringey Council will undertake regular contract monitoring and review meetings with Croydon Council. Regular group meetings of the existing framework users already take place and it is envisaged that these will continue under the new framework agreement to ensure service developments and operational arrangements are satisfactory. Monthly contract monitoring review meetings take place under the current contract to ensure compliance with terms and conditions of the contract, including performance and output standards; and locally agreed performance and reporting arrangements. These meetings will continue under the proposed new contract.

The following outlines the contractual arrangements which would be in place if the Council were to use the Croydon Council framework agreement:

a) Croydon Council and Mazars

This is the framework agreement onto which Croydon Council appointed Mazars following a full tender process for the provision of internal audit and anti-fraud services. This framework agreement is due to commence on 1 April 2018 and run for six years, with an option to extend for a further two years.

b) Contract between Haringey and Croydon Council

A contract will be established between Haringey and Croydon Councils, whereby Croydon would undertake to provide Haringey with a number of audit days as per its requirement/ specification. Croydon Council would be responsible for delivering the services by calling-off a sub-contract from their framework agreement with Mazars. Croydon Council would charge Haringey at the same contract day rates for any work they undertake in managing and monitoring this contract (the number of days would be agreed in advance each year).

c) Letter of engagement between Haringey Council and Mazars

This agreement is necessary to ensure that the process remains as streamlined as possible at the operational level and allows existing working practices to continue as far as is required. This agreement would enable Mazars to issue all audit reports direct to Haringey Council, rather than via Croydon Council.