Insufficient oversight and inadequate controls “allowed £2m fraud at joint venture”

Insufficient oversight by Barnet Council together with inadequate controls allowed a former member of staff to commit a £2m fraud at a joint venture, a report by auditors Grant Thornton has said.

The fraud related to transactions associated with compulsory purchase orders (CPOs) in the context of the council’s regeneration programmes.

The individual responsible initiated the transactions within Barnet’s joint venture with Capita, Regional Enterprise Limited (“Re”), for which he worked. Re has delivered development and regulatory services under a deal signed in August 2013.

These transactions were processed by Capita as an independent provider of the authority’s finance function via the Customer Support Group Finance (CSG Finance).

The individual responsible for the fraud was subsequently prosecuted and pleaded guilty to two separate charges of ‘fraud by abuse of position’ and received a custodial prison sentence last month. Capita has confirmed it had underwritten the loss from the fraud to the council.

Commissioned to carry out a review, which can be viewed here, Grant Thornton said it had developed an understanding of how the fraud was able to take place:

• The individual committed a fraud to the value of approximately £2m by fraudulently directing CPO payments to his personal bank accounts.
• The fraud was ultimately identified as a result of the individual’s bank querying an unusual transaction and not through the control processes of the council, Re and CSG Finance.
• The individual was a longstanding and trusted former employee of the council and CSG before taking up a position within Re, who had intimate knowledge of the financial processes and used this to perpetrate and conceal the fraud.

The auditors said its review of the controls put in place over the payments by Re and CSG Finance and the oversight provided by the council indicated that these were inadequate for the following key reasons:

• Lack of control over delegated financial authority in the areas reviewed within Re, managed by CSG and overseen by the council gave the individual access to cost centres on the ledger for illegitimate purposes.
• Lack of effective review controls in Re and CSG resulted in the individual being able to request 62 inappropriate payments to personal bank accounts.
• Lack of effective review of journal amendments by CSG requested by the individual enabled fraudulent costs to be concealed on the ledger.
• The overall financial control environment around the Regeneration Service within Re, supported by CSG, "was not sufficiently robust to ensure that financial control weaknesses were actively identified and mitigated as part of business as usual".
• In addition to inadequate controls put in place by Re and CSG, there was also insufficient oversight by the council to ensure that financial controls and budget management were sufficiently robust. “We note that the council was aware of deficiencies in the governance arrangements for overseeing Re and CSG. The council had initiated work to address this, however this was not completed in time to influence detection or prevention of the fraud, which was already underway.”

The report makes a series of recommendations “to improve the financial control environment and put in place arrangements to reduce the likelihood of similar failings in the future”. A detailed action plan is also being implemented.