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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Internal Audit Car Loans

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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Internal Audit Car Loans

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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Internal Audit Car Loans

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

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

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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Internal Audit Car Loans

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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Internal Audit Car Loans

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

Officer
Responsible/
Timescale

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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Internal Audit Car Loans

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

Officer
Responsible/
Timescale

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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Internal Audit Car Loans

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

Officer
Responsible/
Timescale

The car loan in this case was approved by

the Director prior to the employees
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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Internal Audit Car Loans

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

Officer
Responsible/
Timescale

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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Internal Audit Car Loans

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
applicants 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

Officer
Responsible/
Timescale

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.

Payroll &
Pensions
Manager
N/A see
comments at
2

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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Internal Audit Car Loans

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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Internal Audit Car Loans

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
Directors name and directorate
not stated on car loan
application form.

Identify the authorising

Directors name and
directorate on the
authorisation form.

Risk
Car loan not authorised by the
correct director.

Management Response

Officer
Responsible/
Timescale

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.

Payroll &
Pensions
Manager
N/A see
comments at
2

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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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