Effective Structures for the Management of the Sponsor Relationship

Preliminary Lessons from the Northern Ireland Events Company

Appendix 1:

Minutes of Proceedings

Appendix 2:

Minutes of Evidence

Appendix 3:

Chairperson’s letter of 7 March 2008 to Mr Leo O’Reilly, Additional Accounting Officer,
Department of Finance and Personnel.

Correspondence of 21 March 2008 from Mr Leo O’Reilly, Additional Accounting Officer,
Department of Finance and Personnel.

Appendix 4:

List of Witnesses

List of
Abbreviations used in the Report

C&AG	Comptroller and Auditor General
DCAL	Department of Culture, Arts and Leisure
DFP	Department of Finance and Personnel
GB	Great Britain

 

Executive Summary

Introduction

1. There have been a series of high profile cases in which serious weaknesses of governance in arm’s length bodies have impacted on the delivery of public services and value for money. Against this background, the Committee examined the C&AG’s report on Good Governance – Effective Relationships between Departments and their Arm’s Length Bodies. As the C&AG’s report focused on developing good practice, the Committee considered it appropriate to examine the problems which have recently emerged in the Northern Ireland Events Company, an arm’s length body of the Department of Culture, Arts and Leisure (DCAL).

Effective Structures to Manage the Sponsor Relationship

2. Departments need to ensure that they have sound structures in place to promote good governance within their arm’s length bodies and effective management of the sponsor relationship. The need to promote and encourage good corporate governance within departments and their arm’s length bodies has been underscored by repeated failings which have been reported on previously by this Committee and it is expected that lessons will be learned this time.

3. However, it is not sufficient only to have appropriate structures of governance in place. Departments need to ensure that there is a strong culture of accountability with their arm’s length bodies and that good governance is delivered in practice.

4. There has been important progress in recent years in the provision of guidance on good governance. Much of this builds on the work being done in the private and public sectors in GB to drive up standards of governance, accountability and management of risk. There is a key role for the Department of Finance and Personnel (DFP) to ensure that relevant guidance is issued to departments and is being implemented. Good practice, as well as lessons from failures in governance, must be disseminated and adopted across the public sector.

5. The Committee welcomes that there has been recognition of the need to develop the skills of boards of arm’s length bodies, through the delivery of training and the appointment of independent non-executive members. The establishment of audit committees within arm’s length bodies and the appointment of independent members as chairs of these committees are also helping to improve standards of governance.

6. However, the Committee found that there is still much that needs to be done to ensure that the governance of arm’s length bodies is robust. For example, it is vital that the right people with the right skills are appointed to the boards of arm’s length bodies and the effectiveness of training for these members needs to be more clearly demonstrated. Furthermore, training needs to be provided to staff in sponsor departments who have responsibility for managing the sponsor relationship.

7. Departments should always be represented at audit committees of arm’s length bodies and should engage with their arm’s length bodies to formulate internal audit programmes based on assessment of risks. Risk management should be undertaken on a coordinated basis. Where a high risk is identified, sponsor departments should consider attendance at board meetings. The Review of Public Administration offers a particular opportunity for best practice to be established in new arm’s length bodies from the outset.

The Northern Ireland Events Company

8. The DCAL Accounting Officer gave his early assessment of the recent developments in the Northern Ireland Events Company. This again highlighted the substantial negative impact which governance failings can have on public confidence as well as the delivery of public services and value for money.

9. Although DCAL took prompt action once the problems in the Company were discovered, it is clear that all of the necessary governance structures had not been put in place. There were numerous warning signals which indicated that the Department’s sponsorship of the Events Company was inherently risky and therefore required a more robust and hands on degree of oversight.

10. It is also difficult to understand how the Events Company board, if it had full insight of its role and responsibilities, could have missed the exceptional nature of the spending commitments being entered into.

11. The Committee views this as one of the most serious failures of controls in an arm’s length body in recent years. The Committee intends to revisit it when the investigatory process is complete. It is clear that there will be lessons to be learned for the oversight of arm’s length bodies and how departments can identify such problems at a much earlier stage.

Summary of Recommendations

Effective Structures to Manage the Sponsor Relationship

1. The Committee recommends that a department should be represented at the audit committees of each of its arm’s length bodies.

2. It is essential that evidence provided to this Committee is accurate and complete. The Committee recommends that Accounting Officers and departmental staff should be reminded of their responsibility to provide this evidence.

3. The Committee recommends that DFP reviews its guidance on departmental attendance at the board meetings of arm’s length bodies and considers that departments should be given this option where, for example, the body has been identified as high risk or its governance record has been unsatisfactory.

4. The Committee recommends that more positive action is taken to promote high standards within the process for the appointment of board members to arm’s length bodies; to develop support and training for those who wish to become board members; and to attract a greater range of local people with the necessary skills to take up these appointments.

5. The Committee recommends that all board members are required to receive training on their roles and responsibilities. This should include the areas of probity, regularity and accountability within the public sector. Case studies analysing the causes of governance failures, such as has occurred in the Events Company, should be an integral part of training for boards. DFP should regularly evaluate the effectiveness of the training provided.

6. The Committee recommends that non-executive members of boards are made aware, on appointment, of their responsibility to challenge board processes where these are weak or do not follow best practice. Non-executive members should raise their concerns with the sponsor department if these are not adequately addressed by the arm’s length body in the first instance.

7. The Committee recommends that training for departmental staff in sponsor branches and staff in arm’s length bodies must be rolled out extensively. DFP needs to develop this training and consider whether it should be provided jointly for departmental staff and those working in arm’s length bodies to promote better understanding of the respective roles and responsibilities.

8. Accounting Officers in all departments must learn from DCAL’s experience and its action to implement a review of all of its arm’s length bodies. The Committee recommends that all departments should consider periodically undertaking similar independent reviews of the systems of control in their arm’s length bodies.

9. The Committee recommends that DFP examines the implementation of its recent guidance to ensure that this provides an effective approach for the periodic review of arm’s length bodies. DFP must also examine the lessons identified from recent reviews of arm’s length bodies and ensure that these are fully assimilated within the process for the Reform of Public Administration.

10. The Committee recommends that all departments take a coordinated approach to internal audit work across the sponsor department and its arm’s length bodies. Internal audit programmes should be formulated on the basis of assessments of risks in the department and arm’s length bodies. Departments should also assess the internal audit function in all their arm’s length bodies to ensure it complies with Government Internal Audit Standards.

11. The Committee welcomes DFP’s recognition that more can be done to disseminate good practice on risk management across departments. The Committee recommends that DFP reviews the arrangements for this and ensures that good practice is shared and implemented by departments.

The Northern Ireland Events Company

12. The Committee recommends that DFP works with DCAL to assimilate the specific lessons relating to the Chief Executive’s role and disseminates these lessons widely to ensure such a situation cannot arise again.

13. The Committee recommends that, after a sufficient period of operation has elapsed, the effectiveness of the Centre of Excellence should be formally evaluated and any lessons disseminated across the wider public sector. At this stage other departments should consider whether a central, specialist sponsorship structure of this nature should be established.

14. The Committee recommends that, in future, where the governance arrangements of any arm’s length body have been subject to a critical PAC hearing within the previous 5 years, and where undertakings have been given that there will be effective monitoring, it should be automatically flagged up as high risk, upgraded to the department’s risk register and be subject to periodic review by the department.

15. Where a department has established an arm’s length body under a limited company arrangement, it is inherently higher risk in nature, particularly where it is given an entrepreneurial remit. The Committee recommends that this should be taken into account in departmental risk registers and reflected in more robust scrutiny and oversight arrangements.

16. An internal audit function and an audit committee are basic components of the governance architecture and the Committee recommends that departments review all their arm’s length bodies to ensure that these are in place and working effectively in these bodies.

17. The Committee recommends that the performance of the board members in this case is specifically reviewed in the course of the various investigations. More generally, all departments should recognise the need to evaluate the performance of board members on a periodic basis.

Introduction

1. The Public Accounts Committee met on 6 March 2008 to consider the Comptroller and Auditor General’s (C&AG’s) report “Good Governance – Effective Relationships between Departments and their Arm’s Length Bodies”, and also to hear the preliminary findings from an investigation into the Northern Ireland Events Company, an arm’s length body of the Department of Culture, Arts and Leisure (DCAL).

2. The witnesses were:

• Mr Leo O’Reilly, Additional Accounting Officer, Department of Finance and Personnel;
• Mr Paul Sweeney, Accounting Officer, Department of Culture, Arts and Leisure;
• Mr David Thomson, Treasury Officer of Accounts; and
• Mr John Dowdall CB, Comptroller and Auditor General.

3. In recent years there has been a series of high profile cases in which serious governance failures in departments and their arm’s length bodies have impacted on public confidence as well as the delivery of public services and value for money. In recognition of this, the C&AG’s report had sought to consolidate existing guidance and the lessons learned from these failures in order to identify good practice principles for the governance of arm’s length bodies.

4. While improvements have been made, there is still much more that needs to be done by sponsor departments and the Department of Finance and Personnel (DFP) to ensure that good practice is fully embedded in the structures, processes and practices of the sponsor relationship. This is illustrated by the problems which have emerged in relation to the governance and activities of the Northern Ireland Events Company. This case has highlighted once again the substantial negative impact which governance failings can have on public confidence in standards of public life.

5. In taking evidence on the C&AG’s report, the Committee focused on two main issues. These were:

• the arrangements for managing the sponsorship relationship between departments and their arm’s length bodies; and
• the Northern Ireland Events Company.

Effective Structures for the Management
of the Sponsor Relationship

Departmental representation at arm’s length body audit committees and boards

6. Departments have a clear responsibility to ensure that good governance arrangements are in place within their arm’s length bodies. The establishment of effective and appropriate channels of communication with arm’s length bodies will enhance departmental oversight of the sponsor relationship.

7. DFP told the Committee that departments engage with these bodies at management and operational level in a number of ways. In almost all cases, departments are represented at the audit committees of their arm’s length bodies. Because audit committees focus on ensuring that proper procedures are being followed in respect of financial management, there are benefits to be gained by departmental attendance.

8. However DFP also told the Committee that, although attendance of departmental representatives at audit committees of arm’s length bodies is seen as good practice, it is not a requirement and there is variance in practice between departments on this issue. This is evidenced by DCAL, which has decided not to attend the audit committee meetings of any of its arm’s length bodies.

Recommendation 1

9. The Committee recommends that a department should be represented at the audit committees of each of its arm’s length bodies.

10. The Committee is concerned that, during the evidence session the two Accounting Officers gave conflicting and, in one case, inaccurate evidence as to how many departments had representatives on their arm’s length bodies’ audit committees. DFP had said that all but one department are represented but it became clear that there were at least two not represented. It is essential that accurate and complete information is provided to the Committee. This lack of clarity suggests that returns made by departments to DFP may not be accurate and consequently the true position on the operation of governance arrangements is not being reported.

Recommendation 2

11. It is essential that evidence provided to this Committee is accurate and complete. The Committee recommends that Accounting Officers and departmental staff should be reminded of their responsibility to provide this evidence.

12. In relation to departmental attendance at board meetings of arm’s length bodies, current guidance advises that departments should not be represented. In DFP’s view, representation at board meetings could distort the perception that the body is operating at arm’s length from the department and there could be potential for confusion over the roles and responsibilities of both the department and the arm’s length body.

13. However, in the Committee’s view, there is also the potential for significant benefits from departmental attendance at board meetings if this is appropriately managed and scoped. Attendance could improve information flows and could also enable departments to evaluate whether boards are exercising their management function effectively. The Committee is concerned that, because bodies are defined as being at arm’s length, those with responsibility within departments take the view that “it is not really their business to get involved with it.” This could have serious implications for accountability and the use of public money.

Recommendation 3

14. The Committee recommends that DFP reviews its guidance on departmental attendance at the board meetings of arm’s length bodies and considers that departments should be given this option where, for example, the body has been identified as high risk or its governance record has been unsatisfactory.

Appointment and training of independent non-executive board members

15. DFP told the Committee that it was not aware of any boards or audit committees of arm’s length bodies which did not have independent non-executive members. This is a welcome development and the Committee encourages DFP to continue to monitor this position to ensure that departments comply with this requirement.

16. DFP recognised, however, that it can be difficult, in some circumstances, for a non-executive director to “speak up” to provide an effective challenge to the way a board or the executive of an arm’s length body are operating. It acknowledged that it is, therefore, important that the right people with the right skills are recruited to these posts. Those appointed need to have knowledge of public sector governance and financial management and have experience of these activities. The Committee endorses this view.

17. The Committee welcomes the assurance that all appointments to boards of arm’s length bodies must be made according to procedures that have been approved by the Commissioner for Public Appointments. However, there are concerns that not enough is being done to attract and recruit more local people with the right skills to these boards. The Committee intends to make a range of recommendations to improve the public appointments process, in its forthcoming report on the Hospitality Association of Northern Ireland.

Recommendation 4

18. The Committee recommends that more positive action is taken to ensure high standards within the process for the appointment of board members to arm’s length bodies; to develop support and training for those who wish to become board members; and to attract a greater range of local people with the necessary skills to take up these appointments.

19. DFP told the Committee that training for non-executive members of boards was relatively new and that initial feedback indicated that the training was generally welcomed and useful. All departments and their arm’s length bodies are now required to ensure that non-executive members attend relevant training courses.

20. The ultimate test of the effectiveness of this training will be the extent to which the performance of board members is improved. It is not clear, however, that the training provided has yet been subject to appropriate evaluation to ensure that it is delivering improved performance. DFP told the Committee that the training courses which have been developed have not always addressed the right issues and it is aware of the need to keep training provision under review. The Committee considers that DFP needs to do more to evaluate the effectiveness of the training which board members receive and to further develop the range of training provided as necessary.

Recommendation 5

21. The Committee recommends that all board members are required to receive training on their roles and responsibilities. This should include the areas of probity, regularity and accountability within the public sector. Case studies analysing the causes of governance failures, such as has occurred in the Events Company, should be an integral part of training for boards. DFP should regularly evaluate the effectiveness of the training provided.

22. DFP highlighted that independent non-executive members of boards can be less than effective where substantial business is conducted outside of board meetings by executive members and where full business is not brought before the board. Where this occurs, there is a clear risk to the overall effectiveness and proper functioning of boards. The Committee would expect that in such circumstances non-executive members would raise these concerns with the board or, where necessary, with the sponsor department.

Recommendation 6

23. The Committee recommends that non-executive members of boards are made aware, on appointment, of their responsibility to challenge board processes where these are weak or do not follow best practice. Non-executive members should raise their concerns with the sponsor department if these are not adequately addressed by the arm’s length body in the first instance.

Training for departmental and arm’s length body staff

24. Lack of compliance with guidance and good practice often emerges “at lower levels” within organisations and where “staff operate with a degree of autonomy.” Therefore, training for these staff is fundamental to promoting a culture of accountability. For that reason, the Committee welcomes DFP’s introduction of a new training course for staff in sponsorship divisions.

25. However, the evidence given to the Committee was of only one recent training event having been delivered. Northern Ireland has a large number of arm’s length bodies and every department has a challenge to meet in ensuring improved governance. Sponsor departments and DFP need to do much more to ensure that all relevant staff, both in departments and in arm’s length bodies, receive the requisite training on handling what can be a demanding interface with each other.

Recommendation 7

26. The Committee recommends that training for departmental staff in sponsor branches and staff in arm’s length bodies must be rolled out extensively. DFP needs to develop this training and consider whether it should be provided jointly for departmental staff and those working in arm’s length bodies to promote better understanding of the respective roles and responsibilities.

Reforms of arm’s length bodies

27. Effective oversight requires departments to take a proactive role in ensuring that systems of internal control are sufficiently robust in their arm’s length bodies. Accounting Officers have the authority to commission reviews of the systems in their arm’s length bodies and their capacity to meet the operational and accountability requirements of the department.

28. The DCAL Accounting Officer told the Committee that, in the context of the emerging problems in the Events Company, he had commissioned a fundamental, independent review of all the arm’s length bodies sponsored by his Department. Given the serious cases of weaknesses in governance which have occurred across the public sector in recent years, the Committee is concerned that there is no evidence that reviews of this type have been commissioned previously by other departments. All departments must be more proactive in this area.

Recommendation 8

29. Accounting Officers in all departments must learn from DCAL’s experience and its action to implement a review of all of its arm’s length bodies. The Committee recommends that all departments should consider periodically undertaking similar independent reviews of the systems of control in their arm’s length bodies.

30. The Committee has been informed by DFP that new guidance was issued in October 2007 on the review of Non Departmental Public Bodies. The Committee is concerned that the requirement to carry out a 5 yearly review of each arm’s length body has fallen into abeyance. Despite several cases of serious failings in governance in recent years, there seems to have been a weakening of the requirement for departments to undertake reviews of their arm’s length bodies. It is also disappointing that DFP was unable to identify any lessons learnt from previous reviews and that these reviews lacked a common framework.

31. The Committee considers that the current Review of Public Administration offers an opportunity to ensure best practice governance arrangements are established from the outset in new or restructured arm’s length bodies. It will be important that assessments and conclusions that emerge from any ongoing reviews are fed in to that process and that any restructuring proposals take account of these lessons.

Recommendation 9

32. The Committee recommends that DFP examines the implementation of its recent guidance to ensure that this provides an effective approach for the periodic review of arm’s length bodies. DFP must also examine the lessons identified from recent reviews of arm’s length bodies and ensure that these are fully assimilated within the process for the Review of Public Administration.

Internal audit and risk management

33. The internal audit function can play an important role in ensuring high standards of accountability and providing assurance on risk management. This can be enhanced if the respective internal audit programmes of work are coordinated between the sponsor department and its arm’s length bodies. In the Committee’s view, it is also essential that internal audit work carried out in arm’s length bodies meets Government Internal Audit Standards

34. DCAL has indicated that, in light of the C&AG’s report, it will engage with each of its arm’s length bodies and seek to influence internal audit arrangements and the audit plan for each body, based on a risk assessment. The Committee is surprised that this coordinated and risk based approach is not being followed in all departments.

Recommendation 10

35. The Committee recommends that all departments take a coordinated approach to internal audit work across the sponsor department and its arm’s length bodies. Internal audit programmes should be formulated on the basis of assessments of risks in the department and arm’s length bodies. Departments should also assess the internal audit function in all their arm’s length bodies to ensure it complies with Government Internal Audit Standards.

36. The Committee noted that there were particular examples of good practice in relation to risk management. If standards are to be driven up, it will be critical that departments and arm’s length bodies exchange information continuously to ensure best practice is shared and risks are managed effectively. DFP has a key role in this process. It has accepted that there is scope to do more to disseminate examples of good practice in risk management.

37. The Committee welcomes DFP’s assurance that considerable attention is given to risk management in arm’s length bodies. However, the Committee considers it important that departments develop a coordinated approach with their arm’s length bodies. This should build on existing risk management processes to ensure that key risks, including joint risks, are being identified, risks are regularly and systematically reviewed and that where significant risks arise in arm’s length bodies that these are upgraded to departmental risk registers.

Recommendation 11

38. The Committee welcomes DFP’s recognition that more can be done to disseminate good practice on risk management across departments. The Committee recommends that DFP reviews the arrangements for this and ensures that good practice is shared and implemented by departments.

Preliminary Lessons from the Northern Ireland Events Company

Learning lessons from governance failures

39. The Northern Ireland Events Company represents another in a long list of governance failures between departments and their arm’s length bodies. This case has resulted in “serious financial consequences” to DCAL and potential harm to the public sector’s reputation to promote major international events in the future.

40. The Committee welcomes the Accounting Officer’s candour in outlining the basic facts of this case, the immediate actions taken to address it and the next steps in the process. His assessment of the preliminary issues emerging as a result of the various investigations which DCAL has initiated suggests that, even at this early stage, a number of high level lessons can be learned.

41. The Accounting Officer identified as a key weakness that the Events Company’s Chief Executive “operated well beyond the control framework specified” for the Company, breaching the delegated limits which she had been set; and, in a small number of cases, she treated funding in “the most cavalier fashion, with even the most elementary aspects of financial management set aside”. This has cost DCAL at least £1.2 million.

42. The Committee is extremely concerned that a situation arose where a single individual could so easily bypass the control framework and spend public funds in such a manner. DCAL has commissioned an investigation of how this situation arose within the Events Company and this is likely to be one of the key areas where lessons need to be learnt and disseminated.

Recommendation 12

43. The Committee recommends that DFP works with DCAL to assimilate the specific lessons relating to the Chief Executive’s role and disseminates these lessons widely to ensure such a situation cannot arise again.

44. Where governance failures are identified in arm’s length bodies, it is vital that the sponsor department takes prompt and decisive action. In this case, the Accounting Officer assured the Committee that he had done so. First, he shut down the operation of the Events Company and brought the matter to the attention of the Executive and the Assembly at the earliest opportunity. Second, he commissioned a fundamental review of all of DCAL’s other arm’s length bodies. In addition, he also initiated an independent investigation into the Events Company, giving the investigators unfettered access to all relevant information. For the future, the Accounting Officer indicated his willingness to “unashamedly reorganise” DCAL and to ensure that it has a Centre of Excellence around finance, governance and accountability to interface with its arm’s length bodies. It is also likely that there will be a degree of subsequent forensic audit work.

45. The Committee welcomes the prompt, decisive and transparent action reported by the Accounting Officer once the problems in the Events Company were discovered. It is essential that the lessons learnt from this case are made available as soon as possible to the wider public sector to avoid future governance failures of this nature. The proposed Centre of Excellence which DCAL aims to put in place is of particular interest. If it operates successfully, such an approach may prove beneficial to other departments which depend substantially on arm’s length bodies for service delivery.

Recommendation 13

46. The Committee recommends that, after a sufficient period of operation has elapsed, the effectiveness of the Centre of Excellence should be formally evaluated and any lessons disseminated across the wider public sector. At this stage other departments should consider whether a central, specialist sponsorship structure of this nature should be established.

Undertaking realistic, evidence based risk assessment

47. Departments must ensure that accountability and reporting mechanisms for sponsored bodies are commensurate with the level of risk associated with the sponsorship relationship. In this case, the Accounting Officer told the Committee that he had taken considerable assurance from the appearance that the Chief Executive seemed to be “fully seized of” and “meticulously adhered to”, the control frameworks in place. He considered that the Company had matured considerably and at no time did he find any risks of sufficient materiality that required upgrading to the departmental risk register. He also noted that, since 2000, the Events Company’s accounts had not been qualified by external auditors and there was therefore no cause for concern in this respect.

48. Despite these arguments, the Committee notes that there were numerous warning signals which indicated that DCAL’s sponsorship of the Events Company was inherently risky and therefore required a greater degree of oversight. Among these signals were the facts that:

• Governance concerns had been raised previously by the Public Accounts Committee around these types of activities – in 1997, about the Events Company’s predecessor body Positively Belfast; and again in 2002 about the Stormont Concerts, which were sponsored by the Events Company.
• The Company was in a transitional phase and expected to move from DCAL to the Northern Ireland Tourist Board under the Review of Public Administration.
• Several directors of the board had retired, which put a great deal of pressure on the remaining directors.
• Two Internal Audit reports had given only limited assurances to DCAL and a later report, in 2007, indicated that a number of shortcomings remained in the Company.
• A very serious complaint was made against the Events Company in its distribution and oversight of one particular grant.

49. Given these signals, the Committee considers that the attitude to risk was not what one would expect of a public body spending taxpayers’ money. The Company was given too much latitude in its operations and DCAL fell short of an obligation it had given to the previous PAC to keep the governance relationships under close review. DCAL’s monitoring arrangements failed to “reveal even the slightest hint of the increasing operational and financial risk.” DCAL was “insufficiently interrogative and insufficiently investigative” in its oversight of the company.

Recommendation 14

50. The Committee recommends that, in future, where the governance arrangements of any arm’s length body have been subject to a critical PAC hearing within the previous 5 years, and where undertakings have been given that there will be effective monitoring, it should be automatically flagged up as high risk, upgraded to the department’s risk register and be subject to periodic review by the department.

51. A further matter of concern was that the Events Company, like the Emerging Business Trust, was established as a form of limited company and therefore placed outside the annual scrutiny of the C&AG’s audit. The Committee was also told that, from the outset, the culture within this organisation was to be “entrepreneurial, fleet of foot and to have a degree of autonomy to enable it to operate in a dynamic, international marketplace”.

52. It is increasingly evident that it is the more entrepreneurial and autonomous arm’s length bodies that create the greatest risks to propriety and value for money. It is within these types of organisation that the scale of cultural change necessary to adhere to public sector standards is greatest. The Committee welcomes the fact that, in the near future, such bodies may be subject to audit by the C&AG. Nevertheless it is ultimately departments’ responsibility to assess the risks involved with these bodies and to exercise sufficient and appropriate oversight.

Recommendation 15

53. Where a department has established an arm’s length body under a limited company arrangement, it is inherently higher risk in nature, particularly where it is given an entrepreneurial remit. The Committee recommends that this should be taken into account in departmental risk registers and reflected in more robust scrutiny and oversight arrangements.

Establishing the fundamental architecture of governance

54. It was DCAL’s responsibility “to ensure that the fundamental architecture of governance was put in place” for the Events Company. The Accounting Officer told the Committee that he had a high level of confidence in the Company and took assurance from the fact that governance structures were in place. In this respect, he noted that the Events Company operated within a public accountability framework and the controls in place included a comprehensive management statement and financial memorandum and an obligation by the Chief Executive to produce an annual statement of internal control. This was supported, at operational level, by quarterly accountability meetings and regular communication between DCAL and the Company.

55. However, an internal audit function and an effective audit committee were not established in the company. These should have been integral components of the governance architecture and used to ensure high standards of accountability. Although there is no guarantee that they would have picked up the problems from day one, if these arrangements had been in place there is every reason to believe they would have picked up the warning signals much earlier. This proved a serious shortcoming which allowed malpractice to continue. It is disturbing that basic best practice was not adhered to and “did not seem to have percolated through to DCAL”.

Recommendation 16

56. An internal audit function and an audit committee are basic components of the governance architecture and the Committee recommends that departments review all their arm’s length bodies to ensure that these are in place and working effectively in these bodies.

Equipping Board members to provide effective challenge

57. Board members, particularly non-executives, are expected to play a key role in providing a challenge function to executive officers. The Accounting Officer indicated that the board members of the Events Company were “very capable and fully cognisant of corporate governance best practice”. However, the Committee notes that a great deal appeared to take place without any knowledge on the part of the board of the scale and significance of what was happening. The Committee was told that:

• The board was not provided with financial information of a sufficient quality and on a timely basis to identify issues as they arose.
• There was a serious lack of documentation of records, files and relevant correspondence about a small number of events.
• The board was largely unaware of what was happening with a small number of motocross events where the over commitments arose.
• The Company’s Chief Executive was entering into agreements without the board’s knowledge.
• There was a breakdown of controls within the Company and it moved away from making grants of capped expenditure to a situation in which people acting on behalf of the Events Company were running events.

58. It is difficult to understand how an effective board, with full insight of its roles and responsibilities, could have missed the exceptional nature of the spending commitments being entered into or allowed itself to receive insufficient, poor quality and untimely financial information. Yet this is exactly what did happen.

Recommendation 17

59. The Committee recommends that the performance of the board members in this case is specifically reviewed in the course of the various investigations. More generally, all departments should recognise the need to evaluate the performance of board members on a periodic basis.

Appendix 1

Minutes of Proceedings
of the Committee Relating
to the Report

Thursday, 6 March 2008
Senate Chamber, Parliament Buildings

Present:Mr John O’Dowd (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Thomas Burns
Mr John Dallat
Mr Simon Hamilton
Mr Ian McCrea
Mr Mitchel McLaughlin
Ms Dawn Purvis

In Attendance:Mr Jim Beatty (Assembly Clerk)
Mrs Gillian Lewis (Assistant Assembly Clerk)
Mrs Nicola Shephard (Clerical Supervisor)
Mr Ricky Shek (Clerical Officer)

Apologies: Mr Jonathan Craig
Mr David Hilditch
Mr Ian McCrea

The meeting opened at 2.00pm in public session.

1. The Chairperson welcomed Mr Thomas Burns as a member of the Committee. Mr Burns confirmed that his interests were as listed in the Register of Members’ Interests.

3. The Chairperson welcomed Mr John Dowdall CB, Comptroller & Auditor General (C&AG) to the meeting.

4. Evidence on the NIAO Report ‘Good Governance – Effective Relationships between Departments and their Arm’s Length Bodies’.

Mr Beggs declared an interest in that his father is Chairperson of an Education and Library Board, and Mr Beggs is a member of the Drainage Council.

The Committee took oral evidence on the NIAO report ‘Good Governance – Effective Relationships between Departments and their Arm’s Length Bodies’, and some oral evidence on issues arising from the Northern Ireland Events Company, from Mr Leo O’Reilly, Additional Accounting Officer, Department of Finance and Personnel (DFP), Mr Paul Sweeney, Accounting Officer, Department of Culture, Arts and Leisure, and Mr David Thomson, Head of Supply, DFP.

The witnesses answered a number of questions put by the Committee.

3.45pm Mr Beggs left the meeting.

Members requested that the witnesses should provide additional information to the Clerk on some issues raised during the evidence session.

4.07pm The evidence session finished.

[EXTRACT]

Thursday, 24 April 2008
Room 144, Parliament Buildings

Present: Mr John O’Dowd (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Jonathan Craig
Mr Simon Hamilton
Mr Trevor Lunn
Mr Ian McCrea
Mr Mitchel McLaughlin
Ms Dawn Purvis

In Attendance: Mr Jim Beatty (Assembly Clerk)
Mrs Nicola Shepherd (Clerical Supervisor)
Mr John Lunny (Clerical Supervisor)

Apologies: Mr Thomas Burns
Mr John Dallat
Mr David Hilditch

The meeting opened at 2.01pm in public session.

2.04pm Mr Lunn joined the meeting.

2.04pm Ms Purvis joined the meeting.

2.06pm Mr Hamilton joined the meeting.

2.23pm The meeting went into closed session.

3.05pm Mr McLaughlin left the meeting.

3.11pm Mr Hamilton left the meeting.

9. Consideration of the Committee’s Draft Report on Good Governance – Effective Relationships between Departments and their Arm’s Length Bodies.

Members considered the draft report paragraph by paragraph. The witnesses attending were Mr John Dowdall CB, C&AG, Mr Eddie Bradley, Director of Value for Money, Mr David Murdie, Audit Manager, and Mr Joe Campbell, Audit Manager, NIAO.

The Committee considered the main body of the report.

3.25pm Mr Craig left the meeting.

Paragraphs 1 – 9 read and agreed.

Paragraph 10 read, amended and agreed.

3.29pm Mr Craig rejoined the meeting.

3.29pm Mr McCrea left the meeting.

3.30pm Mr Hamilton rejoined the meeting.

Paragraphs 11 – 16 read and agreed.

Paragraph 17 read, amended and agreed.

Paragraphs 18 – 20 read and agreed.

Paragraph 21 read, amended and agreed.

Paragraphs 22 – 27 read and agreed.

3.41pm Mr McCrea rejoined the meeting.

Paragraph 28 read, amended and agreed.

Paragraphs 29 and 30 read and agreed.

Paragraphs 31 and 32 read, amended and agreed.

Paragraph 33 read and agreed.

Paragraph 34 read, amended and agreed.

Paragraphs 35 and 36 read and agreed.

Paragraph 37 read, amended and agreed.

Paragraphs 38 – 41 read and agreed.

Paragraph 42 read, amended and agreed.

Paragraph 43 read and agreed.

3.52pm Mr Lunn left the meeting.

Paragraphs 44 and 45 read, amended and agreed.

Paragraph 46 read and agreed.

Paragraphs 47 and 48 read, amended and agreed.

Paragraph 49 read and agreed.

Paragraph 50 read, amended and agreed.

Paragraphs 51 – 54 read and agreed.

Paragraph 55 read, amended and agreed.

Paragraphs 56 and 57 read and agreed.

Paragraph 58 read, amended and agreed.

Paragraph 59 read and agreed.

The Committee considered the Executive Summary of the report.

Paragraphs 1 – 6 read and agreed.

Paragraph 7 read, amended and agreed.

Paragraphs 8 – 11 read and agreed.

Agreed: Members ordered the report to be printed.

Agreed: Members agreed that the Chairperson’s letter requesting additional information and the response from the Accounting Officer, Department of Finance and Personnel, would be included in the Committee’s report.

Agreed: Members agreed to embargo the report until 00.01am on 15 May 2008, when the report would be officially released.

Agreed: Members agreed that they would not hold a press conference.

[EXTRACT]

Appendix 2

Minutes of Evidence

6 March 2008

Members present for all or part of the proceedings:
Mr John O’Dowd (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Thomas Burns
Mr John Dallat
Mr Simon Hamilton
Mr Mitchel McLaughlin
Ms Dawn Purvis

Witnesses:

Mr Leo O’Reilly Mr David Thomson		Department of Finance and Personnel
Mr Paul Sweeney		Department of Culture, Arts and Leisure
Mr John Dowdall CB		Comptroller and Auditor General

1. The Chairperson (Mr O’Dowd): I ask all visitors, members of the public and Committee members to ensure that their mobile phones are switched off, as they can interfere with the recording equipment even when they are turned to silent. The transcript of today’s meeting is vital to the production of our report.

2. Members, today’s evidence session is on the report by the Audit Office entitled ‘Good Governance — Effective Relationships between Departments and their Arm’s Length Bodies’. I welcome Mr Leo O’Reilly, additional accounting officer of the Department of Finance and Personnel (DFP), Mr Paul Sweeney, the accounting officer of the Department of Culture, Arts and Leisure (DCAL) and Mr David Thomson, head of supply in the Department of Finance and Personnel. You are all welcome to our meeting. Some of you have been here before, so you will be familiar with how the Committee operates.

3. I will start the questions, and the other members will then ask questions. We will concentrate, first, on the Audit Office report, and after that we will ask questions on the ongoing inquiries into the Events Company. As members are aware, at last week’s meeting, we agreed to hold those questions until the end of the session. I ask members to respect that agreement.

4. My first question is for Mr O’Reilly. In the introductory remarks, paragraph 5 of the Audit Office report sets out the context of the report. It says that there have been a series of high-profile cases in which serious weaknesses of governance have impacted on the delivery of public services and value for money. What assurances can you give the Committee that everything possible is being done to prevent those types of failings from occurring again in bodies that are sponsored by Government Departments?

5. Mr Leo O’Reilly (Department of Finance and Personnel): In recent years, particularly since the start of the decade, there has been a much greater focus on the issue of the relationship between Departments and their arm’s-length bodies. In large measure, that was prompted by the reports and investigation by the Public Accounts Committee in the first mandate of the Assembly and the Westminster Public Accounts Committee and by earlier concerns. We can identify a number of actions that have been taken.

6. First, following each of the investigations and reports that were conducted by the Public Accounts Committees, the Department of Finance and Personnel produced guidance for Departments in order to ensure that they were aware of the concerns that had been raised.

7. Secondly, DFP has not only issued guidance to Departments, but it has sought to ensure that that guidance was disseminated to their non-departmental public bodies (NDPBs). In addition to that, we have also instigated a programme of awareness training that is directed at the board members in arm’s-length bodies, the staff of the arm’s-length bodies and to the Departments. A series of training programmes has been introduced that involve, in some cases, partnerships with outside organisations such as the Chartered Institute of Public Finance and Accountability (CIPFA). In other cases, there are partnerships with, for example, the National School of Government to highlight training issues.

8. Finally, we have raised awareness of the issues and concerns, and we have sought to ensure that our guidance provides the Departments with a clear framework within which to manage their relationships with their arm’s-length bodies.

9. The Chairperson: Paragraph 1.31 of the report refers to departmental representation at arm’s-length body board meetings. What is the DFP view on that, and are there advantages in Departments’ attendance at arm’s-length body board meetings in an observer or advisory capacity?

10. Mr O’Reilly: I am sure that the Committee knows that in February 2005 the Department of Finance and Personnel issued guidance to Departments on departmental representation on the boards of NDPBs and other sponsored bodies. It is a challenging issue. At a superficial level it might seem obvious that it would be beneficial for a Department to be represented on a board of an arm’s-length body. It could be argued that such representation would ensure that the Department was aware of what the body was doing, and it would ensure that the body was aware of departmental views on issues. One might go further and say that it might mean that the Department could intervene and caution the body if it thought that the body was acting improperly or incorrectly.

11. There are, however, a number of fundamental weaknesses in that approach, which we have highlighted in our guidance. First, it is important to understand that we are talking about an arm’s-length body. The reasons for the creation of an arm’s-length body are many and diverse, and the Committee may want to come back on that. Fundamentally, they are created to operate at some distance from a central Government Department. If there is representation — perhaps at senior level — from that Department on the board, it can distort the perception of whether the body is operating at arm’s length from the Department.

12. Secondly, that approach can create a difficulty for the body. If the person who is representing the Department does not comment during the body’s meetings, for instance, it could be taken for granted that the body is operating within the rules as set. There is the potential for confusion of roles.

13. Thirdly, it is important that Departments are aware of what arm’s-length bodies are doing, but there are other ways that that can be done. I can provide examples if the Committee so wishes.

14. What was the second part of your question, Chairperson?

15. The Chairperson: It related to the attendance of a departmental representative in an observer or advisory capacity, but you have covered that.

16. Paragraph 1.31 of the Audit Office’s report states:

“The most common examples of departments’ involvement in the management structures of ALBs is in relation to attendance at their Audit Committee meetings on an ex-officio basis. This happens in half of the bodies reviewed”.

17. I am not sure how many bodies were reviewed, but in half of the cases examined, the Departments thought that it was a good idea to send someone, on an ex-officio basis, to the audit committee. Why did all Departments not think that it was good practice, because the audit committee is a key area of good governance in any public body?

18. Mr O’Reilly: I should draw a distinction between attendance at the board of an arm’s-length body and participation and attendance at meetings of the audit committees of arm’s-length bodies. From the research that we carried out in advance of this hearing, we found that the majority of the Departments that we contacted attend the audit committee meetings of arm’s-length bodies, and in some instances, the members — particularly the chairs of audit committees — are also represented on the departmental audit committees.

19. One might ask why they attend the audit committee meetings and not the full board meetings. There is an advantage in attending an audit committee, because it, by definition, focuses on ensuring that proper procedures are being followed in respect of financial management and other issues. That is an area in which there is greater relevance and potential for benefit to be had from a cross-fertilisation between the Departments and the arm’s-length bodies.

20. The Chairperson: Is there a requirement to attend the audit committee, and, if not, should there be? Is it merely seen as good practice to attend?

21. Mr David Thomson (Department of Finance and Personnel): It is seen as good practice; it is not a mandatory requirement. However, since the Audit Office completed its field work on this report and from our information from Departments, it is now common in all Departments, bar one, to have membership of audit committees.

22. The Chairperson: That is something that the Committee might return to in its deliberations.

23. Paragraph 3.8 of the Audit Office’s report highlights the important role of independent, non-executive members of the boards of arm’s-length bodies. Given the number of high-profile failures over the years, are you content than the non-executive board members are fulfilling their roles effectively? What feedback do you receive on that issue?

24. Mr O’Reilly: Your question has highlighted the fact that there must have been some instances in which non-executive directors were not effective in preventing difficulties. There are a number of potential reasons for that. The first is that the non-executive members have not been properly apprised of their roles and responsibilities. To address that issue, all Departments and their arm’s-length bodies are now required to ensure that non-executive members attend training courses. Therefore, an awareness of roles is one area of weakness that we need to address.

25. The second potential area of weakness is simply the way that a board operates. It can be challenging for a non-executive director — particularly if he or she is in the minority on a board — to speak up and challenge accepted wisdom amongst colleagues. Therefore, it is important that the right type of individuals are recruited and appointed to non-executive positions in arm’s-length bodies, or, indeed, to main departmental boards. The type of people that are required are those who have knowledge of public-sector governance and areas of financial management, and they should also have substantial experience in that type of activity.

26. The third reason that non-executive directors can be less effective — which has been illustrated in previous reports and through investigations by this and other Committees — is simply that sometimes full business is not brought before the full board of the particular arm’s-length body; sometimes substantial business is conducted by the executive members of the board outside of the actual board. Therefore, non-executive members can be ineffective simply because of the way that a board is managed and organised.

27. The Chairperson: Surely non-executive board members are ineffective by allowing that process to take place. If non-executive board members are of the view or realise that the executive committee is dealing with business, surely they have a responsibility to say that they do not accept that process.

28. Mr O’Reilly: Yes. It is important that non-executive board members have access, when necessary, to the Department as well as to their own boards to enable them to raise such concerns.

29. Mr Thomson: To link back to your previous question, we also found that when civil servants from the Department sat on boards, sometimes the non-executive director was inclined to sit back and think that the civil servant was there to deal with the issues. That is another reason why we are nervous about civil servants sitting on boards — it seems to take away from the directors’ perceived responsibilities.

30. The Chairperson: Or it could be seen as deniability by the Department.

31. Mr Thomson: Possibly.

32. The Chairperson: Perhaps I will return to that matter later.

33. Mr Burns: My question is for Mr Sweeney. Paragraphs 2.17 to 2.21 of the report make it clear that Departments’ internal auditors can play a role in providing assurances to accounting officers. They can do so, for example, by undertaking audit activities or agreeing with the audit programme of arm’s-length bodies. In what way do you use your internal audit function to obtain assurances about your Department’s arm’s-length bodies?

34. Mr Paul Sweeney (Department of Culture, Arts and Leisure): We do that on a number of fronts. Internal audit would primarily be deployed as the key control mechanism for assessments of the Department’s and arm’s-length bodies’ risk management arrangements. For example, internal audit is currently conducting a review of the Department’s specific sponsorship of the Northern Ireland Events Company to ascertain what lessons can be learned from that. We also rely heavily on the internal audit arrangements that are in place in the arm’s-length bodies.

35. Mr McLaughlin: I want to address the section of the report from paragraphs 1.21 to 1.27. Mr Sweeney, the role of accounting officer brings, with its responsibilities, a certain amount of authority and power. Paragraph 1.21 states:

“Accounting Officers have the authority to commission reviews of the system in their ALBs and their capability to meet the operational and accountability requirements of the department.”

36. Paragraph 1.24 makes it clear:

“The Chief Executive, where designated as Accounting Officer, is held to account for any shortfall in performance, financial management or corporate governance standards.”

37. Power comes with the position of conducting periodic reviews of the systems in the arm’s-length bodies. Have you ever authorised or commissioned such a review?

38. Mr Sweeney: I have recently, in the context of what happened in the Northern Ireland Events Company.

39. Mr McLaughlin: Was that very recent?

40. Mr Sweeney: Yes. In the light of what happened in the Northern Ireland Events Company, in December 2007 I commissioned an exercise for a fundamental review of all arm’s-length bodies, sponsored by the Department. Prior to that, I had not commissioned such a review.

41. Mr McLaughlin: Is that because you had not deemed it necessary, or did you not understand that you had the power to do so?

42. Mr Sweeney: I took assurances from several internal auditing arrangements in my Department and the arm’s-length bodies. Therefore, I honestly felt that the need did not arise. However, in the light of what unfolded in the Northern Ireland Events Company, I needed to get assurances urgently about the robustness of the arrangements in all the Department’s arm’s-length bodies. As may be discussed later, and all things being equal, I had no indication that there was anything other than full compliance with the control framework in the Northern Ireland Events Company. When that proved not to be the case, I urgently required assurances from throughout the Department about all its arm’s-length bodies, and that exercise is under way.

43. Mr McLaughlin: As we will be discussing the Northern Ireland Events Company, I will not stray into that territory, other than to make the observation that the systems clearly let you down. I appreciate that the reviews of all the arm’s-length bodies are ongoing, but have they given you any cause for concern yet?

44. Mr Sweeney: They have not yet given rise to any catastrophic concerns. I have received at least limited assurances from any of the exercises in which I have been involved in the Department to date. I have not received any reports to cause me to undertake a “more fundamental review”.

45. Mr McLaughlin: Paragraph 1.23 states:

“in some cases departments are clearly involved in the annual formulation of the ALB internal audit programmes.”

46. Do you accept that as best practice, and have you adopted it as such or do you intend to do so?

47. Mr Sweeney: There is considerable merit in a Department’s engaging with the arm’s-length body in preparation for an annual audit plan, in order that together they can map out the audit plan for the year, based on a risk assessment. In the past, DCAL has not done that, but in the light of the NIAO report, it is an excellent idea. Therefore, the Department will engage with the internal audit arrangements of its arm’s-length bodies, and it will seek to influence the audit plan for each body, based on a risk assessment.

48. Mr McLaughlin: The assurances on which you relied would have been to some extent, and perhaps to a considerable extent, dependent on the health check that the audit process provided for arm’s-length bodies. Do the terms of reference of the review that you have set up include an assessment of whether there is consistency and whether the audit processes are sufficiently rigorous to provide future assurance?

49. Mr Sweeney: Yes, it is comprehensive and is being undertaken by the Chartered Institute for Professional Finance and Accountability, including its head, David Nicholl. It involves both all of the arm’s-length bodies and the Department’s sponsorship arrangements.

50. Mr McLaughlin: Does that include their internal-auditing procedures?

51. Mr Sweeney: Yes.

52. Mr McLaughlin: Finally, oversight exercise by the Departments is discussed in paragraphs 1.21 to 1.27. In your earlier comments, Mr O’Reilly, you mentioned that some Departments have put appropriate oversight arrangements in place. The question arises as to why all Departments have not done so. What support is provided, particularly with regard to training, to ensure that there is consistent understanding of the sponsorship function that exists between a Department and an arm’s-length body?

53. Mr O’Reilly: If you are agreeable, Chairman, I will ask my colleague David Thomson to respond on training, on which he had done a great deal of work.

54. The first part of the question relates to how Departments have put in place monitoring and governance arrangements, why they differ between Departments and seem to be more intensive in some Departments than in others. The research that the Department has carried out in advance of this meeting has found that variation exists across Departments. Some Departments have close monitoring arrangements — for example, they go as far as to receive quarterly assurance reports from chief executives; they agree the audit programme for the year with the arm’s-length body at the start of the year; and they receive copies of all audit reports that have been prepared by the arm’s-length body’s auditors. Therefore, at one end of the spectrum, there is intensive monitoring and oversight of what the body is doing, without the Department’s involvement in the body’s day-to-day business, which is appropriate.

55. At the other end of the spectrum are Departments that have arrangements in place whereby the Minister and perhaps the accounting officer will meet the chairman and the chief executive of the arm’s-length body once or twice a year. There will be ad hoc meetings with senior members of the particular body. In some cases, there will be structured arrangements for ad hoc meetings with the entire board.

56. From the Department’s review of research that it has undertaken for the meeting, its sense is that there is scope for more Departments to move towards the end of the spectrum that I described first — where there are clear arrangements in place by which, for example, every Department receives copies of all audit reports that are prepared in the arm’s-length body as a matter of course; and that, where there are already arrangements in place, to, at least, review the arm’s-length body’s audit programme at the beginning of the year and have a readout at the end of the year of what has occurred. Indeed, in some cases, where there is a particularly important relationship, it could go further — in one case, a quarterly assurance report is received.

57. To answer the member’s question on why those differences have happened, I believe that, in simple terms, they have happened because in some cases, the arm’s-length body carries out a substantial part of the Department’s duties — where, in fact, it conducts a large part of the work for which the Department is responsible — whereas, in some cases, the arm’s-length body carries out a relatively small portion of the Department’s overall responsibilities. Perhaps, in those latter cases, there may be less focus — possibly less than there should be — on ensuring that there is routine standard practice. It has emerged from the Department’s research across the entire area that if strong, routine systems are in place and are adhered to completely, there is much better quality of oversight.

58. I shall hand over to my colleague —

59. Mr McLaughlin: David, would you mind if I come back separately to the question of training? Leo, the heart of the matter is that, with recent events in mind, public perception and confidence depends on whether there is value for money and robust systems of accountability, and that that almost ad hoc or voluntary approach would, at least — if the situation were evaluated — seem to open the possibility of mistakes going undetected. Of course, whether those mistakes are large or small, they get the full treatment when they hit the media.

60. The process of government is particularly vulnerable to media headlines that describe carelessness, arrogance and a lack of both accountability and transparency.

61. In answer to an earlier question, Paul said that he had ordered a review of all the arm’s-length bodies that are in his purview. Given that DFP’s role is to have an overview of expenditure, has it ordered a review of all systems to ensure that the auditing process in particular is as rigorous as it should be? Individual Departments must set a standard for those bodies, regardless of their size. That said, I do not know whether it is an option for Departments to take an ad hoc approach to sitting in on audit committee meetings.

62. Mr O’Reilly: The simple answer is that we have not ordered such a review to date, although I am subject to my colleagues’ correcting me. The programme of work to date has been focusing on implementing arrangements and guidance and following up on the guidance that has been issued in GB to ensure that it is introduced here. Prior to this meeting, we asked Departments exactly what they do in practice, and in the light of that research and of experience, it may be that some variations have emerged, as you have suggested. There are some examples of very good practice, and there are some examples of where Departments seem to accept what is perhaps a slightly more ad hoc relationship, as you described it. In some cases, there is perhaps a less systematic engagement with the Departments. However, that deserves qualification: in a sense, the departmental accounting officer has to judge the best way to manage his or her relationship with the arm’s-length bodies, depending on the circumstances and on the nature of the work that they undertake for the Department.

63. Mr Thomson: The term “ad hoc” has been used. Some basic requirements should apply to every situation that concerns every arm’s-length body. For example, a dear accounting officer letter requires that Departments satisfy themselves with the internal audit arrangements in the arm’s-length body.

64. There are also reporting requirements. The resource accounts of every Department must include a commentary on the governance and oversight of the arm’s-length bodies. Furthermore, the accounts of an arm’s-length body must include a statement of internal control that the accounting officer signs. Some fundamentals apply across the piece, meaning that the arrangements are not truly ad hoc. However, a risk-based balance must always be struck between the degree of arm’s length and close control.

65. Mr McLaughlin: What about training?

66. Mr Thomson: We have done a fair bit of training, much of which has been done with the Northern Ireland Audit Office. People have become a bit bored with the two of us — the Northern Ireland Audit Office and the Department of Finance and Personnel — joining up together, but a great deal of such work has been done. Recently, we have done a fair bit with the Chief Executives’ Forum for chief executives, chairpersons and those who support accounting officers in the arm’s-length bodies. More recently, we saw a gap for Departments, and we have been considering the financial management training that we give to departmental staff. We have run a course for sponsor divisions in Departments, which discusses and reminds them of their responsibilities and what they should be doing. That was done jointly with the National School of Government and the Audit Office, and we will be running similar courses during the year.

67. Mr McLaughlin: This is an observation as much as a question, but if I link two studies that the Committee has carried out, including an inquiry into internal fraud in the Ordnance Survey, it seems that problems emerge at lower levels. We have not come across instances of malpractice or maladministration at managerial or principal officer level. It seems that problems can emerge when departmental staff operate with a degree of autonomy. It might, therefore, be worth reading the report on the Ordnance Survey while working on this inquiry.

68. To a certain extent, the description of an arm’s-length body has disarmed people. They think that because a body is at arm’s-length, it is not really their business to get involved with it. Ultimately, however, public money is involved.

69. Ms Purvis: Paragraph 1.14 of the Audit Office report suggests that there was a lack of coherence and strategic management in those Departments that have several arm’s-length bodies. What have you done to ensure a corporate strategic approach to your Department’s arm’s-length bodies, which could be relevant to the group as a whole? I am thinking of issues such as performance management, financial control or the identification of good practice.

70. Mr Sweeney: I will give two good examples; first, what has happened; and secondly, what is about to happen. I joined the Department of Culture, Arts and Leisure in April 2006, and I was keen to discuss the issue of corporate governance and accountability. In September 2006, I called a meeting of the chief executives and finance directors of all the Department’s arm’s-length bodies, and we used the fraud investigation at the Ordnance Survey as a case study. We talked through all the governance and accountability issues and examined vulnerabilities. A good effort was made at that point to achieve a more corporate approach to the management of the arm’s-length bodies.

71. We encourage those bodies to share good practice. Although it has not happened often enough, there are some examples of where it has worked well. The Department has a non-executive director called Stephanie Lowry, who is the chairperson of the Department’s audit and risk management committee. She has invited all the chairpersons of the audit committees of our arm’s-length bodies to attend a workshop in April to discuss a range of governance and accountability issues, including the lessons that are to be learnt from what happened with the Northern Ireland Events Company.

72. Ms Purvis: Has the Department adopted a corporate approach to risk management? How is risk managed in the Department and its arm’s-length bodies in an integrated and co-ordinated way?

73. Mr Sweeney: Each arm’s-length body is obligated to formulate its own risk register. The Department has quarterly accountability meetings with each of its arm’s-length bodies, and there is a two-page checklist of all the issues. One of the most fundamental tasks is to review risk-assessment arrangements. We review the risk register of each arm’s-length body, and if there are any red-light issues that raise serious concerns or highlight significant deficiencies, they will be elevated in the departmental risk register. The matter would be included in the sponsor branch’s risk register, and, if necessary, it would be put on to the departmental board’s risk register. However, aside from the Northern Ireland Events Company, I must say that, since I joined the Department, I know of no instance when that has happened.

74. Ms Purvis: Mr O’Reilly, paragraph 2.23 suggests that Departments are not generally identifying joint risks that arise from sponsorship or determining how they should be managed. What is DFP doing to encourage Departments and their arm’s-length bodies to work together to identify such risks and develop appropriate management approaches?

75. Mr O’Reilly: If I continue the theme of previous answers, we have ensured that the relevant guidance on risk management has been circulated, and we have also sought to include risk management in our training programmes. Beyond that, our day-to-day engagement with Departments — particularly through David’s supply side, which manages the relationship with individual Departments — often involves our meeting with departmental representatives when a difficulty arises or a risk has materialised. In those circumstances, we can — and do — address with the Department whether the issue of concern, whatever it might be, was on either its risk register, or, if it is relevant, on the risk register of its arm’s-length body.

76. Sometimes an arm’s-length body and a Department have compiled a risk register. In all the cases that we reviewed ahead of this meeting, we found that every Department and every arm’s-length body had a risk register. However, there are two dangers with that: first, the risks become “stale”, as the saying is, and are not reviewed dynamically; and secondly, bodies do not monitor and escalate the risks to a higher level where appropriate, for example to their sponsoring Department or — as I have experienced in some extreme cases — to the departmental board.

77. The first key weakness would be to not have a risk register, but that is not what we have found. We have discovered that there is a need to have really systematic arrangements in place to ensure that the risks are systematically reviewed. The best practice that we have seen in many Departments has been where risk registers have been systematically reviewed at each quarterly audit and risk committee meeting. By definition, those are departmental meetings that focus on departmental risks. However, people on the audit and risk committees will be aware of what is happening in arm’s-length bodies, and they should be able to alert the board to risks, even if they have not formally appeared. The emphasis is on creating a process of constant dynamic management and review of risks.

78. Ms Purvis: Is it down to the quarterly accountability meetings to identify those risks from the review of the risk registers?

79. Mr O’Reilly: On top of the basic, fundamental arrangements, there is the matter of ensuring that the risks be systematically and rigorously reviewed at the departmental audit and risk committee meetings. We should ensure that the Departments make sure that their arm’s-length bodies also carry out a quarterly review of the risks to ascertain their condition and whether they have become more or less acute.

80. Mr Thomson: Paragraph 2.3 of the Comptroller and Auditor General’s report states:

“there is evidence of considerable attention being devoted to risk management in Departments and ALBs.”

81. I wish it to be recorded that a fair degree of risk management is taking place in those organisations.

82. Ms Purvis: I just wanted to clarify the process. Thank you.

83. Mr Beggs: Mr O’Reilly, paragraph 3.9 of the report refers to an obligation for non-executives to undertake training for their duties and for the requirements of public-sector probity in finance. Are you content that that training is effective in equipping board members with the relevant skills, and have you evaluated that effectiveness?

84. Mr O’Reilly: I will ask my colleague to come in on that, but I will answer the question first. The training courses are relatively new, and we have been getting preliminary feedback that they are, generally, welcomed and that people have found them to be useful. However, the ultimate litmus test is whether it influences people’s behaviour for the better. We will need to continue to monitor training, particularly that which is delivered to board members.

85. My colleague David Thomson referred earlier to a further training programme that we have initiated, which is primarily for departmental staff who work with arm’s-length bodies. Having attended one of those courses recently to see what happens, my sense was that there is significant scope for a further systematic training programme that is directed not only at departmental staff, but at staff in arm’s-length bodies. There could be a case for having joint training for departmental staff and for those who work in arm’s-length bodies. With the Chairperson’s agreement, I will ask my colleague to discuss evaluation.

86. Mr Thomson: Some of the training is provided by CIPFA. It runs a course called On Board, which was developed in Northern Ireland and is being rolled out across the rest of the UK, and the Republic. That is an effective course for board members, to whom it is particularly aimed.

87. Having said that, we are not complacent: we introduced the new course for sponsor Departments because feedback told us that we had not been hitting all the right marks. Therefore, training must be kept under review.

88. Mr Beggs: Mr Sweeney, paragraphs 3.8 and 3.14 quote Treasury guidance on board and audit committee membership. Can you tell us whether your Department has appointed independent, non-executive members to each arm’s-length body’s board and audit committee?

89. Mr Sweeney: Do you mean appointments over and above those to each of the arm’s-length bodies’ board of directors?

90. Mr Beggs: In order to ensure that all appointees are not civil servants, have independent, non-executive members been appointed to each board and audit committee?

91. Mr Sweeney: Except for the Northern Ireland Events company, the details of which I will discuss later, each arm’s-length body has an audit committee that includes a subcommittee comprising non-executive directors. In a small number of instances, such as in the case of the Arts Council, arm’s-length bodies have asked one or two external candidates to join their audit committees. However, that is the exception rather than the rule. For the most part, arm’s-length body audit committees comprise non-executive director, subcommittee members.

92. Mr Beggs: Are all arm’s-length-body audit committees chaired by independent, non-executive members? Does guidance stipulate who a chairperson should be?

93. Mr Sweeney: Invariably, the chairperson is a non-executive board member of his or her arm’s-length body, but not the chairperson of that arm’s-length body. Deliberate efforts are made to protect an audit committee chairperson’s independence from that of the chairperson of an arm’s-length body.

94. Mr Beggs: Paragraphs 3.8 and 3.14 deal with a similar matter, so given that Northern Ireland is a relatively small place and has a large number of arm’s-length bodies, have independent, non-executive members been appointed to all arm’s-length body boards and audit committees? If not, what is the timescale for that to take place?

95. Mr Thomson: I am not aware of any situation in which independent members do not serve on a board or an audit committee.

96. Mr Beggs: Mr Sweeney, paragraph 3.16 recommends that Departments should have access to its arm’s-length bodies’ audit committee records. Will you please tell us about the relationship, and co-ordination, between your Department and the audit committees of arm’s-length bodies? What information is shared between those committees and the Department?

97. Mr Sweeney: After audit committees have ratified the minutes of meetings, we routinely receive those minutes.

98. Mr Beggs: I accept that minutes must be approved; however, how frequent are audit committee meetings? Are they annual, for example? How old is the information that you receive?

99. Mr Sweeney: Typically, the audit committees meet three or four times a year, and there is invariably a gap of several weeks between a meeting and our receipt of their approved minutes.

100. Mr Beggs: Further to the Chairperson’s earlier question to Mr O’Reilly, to which he replied that all but one Department is represented on the arm’s-length bodies’ audit committees. Which Department is not represented?

101. Mr Sweeney: DCAL does not have a representative on any arm’s-length body audit committee.

102. Mr Beggs: Mr O’Reilly, can you confirm whether DCAL is the one Department that is not represented on — or even attends — any audit committee?

103. Mr O’Reilly: The Department for Social Development is not represented on the audit committees of the Northern Ireland Housing Executive or the Ilex Urban Regeneration Company. However, in the majority of cases, Departments attend or are members of arm’s-length bodies’ audit committees. That is the information that I have.

104. Mr Beggs: It would be helpful if DCAL clarified whether it is represented on any such committees.

105. Mr O’Reilly: DCAL is not on the list that I have.

106. Mr Beggs: I am not necessarily asking whether DCAL has members on the committee, but does it have representation at arm’s-length bodies’ audit committees?

107. Mr Sweeney: No.

108. Mr Beggs: If that is the case, the Department needs to check its information.

109. The Chairperson: Mr Sweeney, in your original answer to Mr Beggs’s question, you said it is not the practice for DCAL to have representation on arm’s-length bodies’ audit committees. Why is that?

110. Mr Sweeney: The Department of Culture, Arts and Leisure is responsible for 16 bodies. We made a conscious decision to place a great deal of emphasis on the quarterly accountability meetings between the sponsor branch and the arm’s-length bodies. Our work on the case study into Sport Northern Ireland has been cited as good practice. We also rely on receiving the minutes of the meetings of arm’s-length bodies.

111. Aside from the North/South bodies and the Fisheries Conservancy Board (FCB), the Northern Ireland Audit Office has observer status on the audit committees of all the 16 arm’s-length bodies for which the Department is responsible. We took the decision not to send departmental representatives to the audit committees of our arm’s-length bodies.

112. The Chairperson: OK. Perhaps that is an issue that we can return to later.

113. Mr Dallat: Arm’s-length bodies have caused problems for several years. During your presentation, you said that you expected the best people to serve on them, regardless of their executive status. I would be the first to accept that there was a sort of social circle during direct rule that resulted in the type of people who made tea for the Secretary of State’s wife getting appointed to those bodies. Has that practice ended?

114. Furthermore, why are so many people adding to the carbon footprint by flying in from other regions to serve on arm’s-length bodies? Does that mean that not enough is being done to attract local people?

115. Mr O’Reilly: Certain arrangements have been reinforced over recent years. For example, there is a requirement that all appointments to such bodies and to third-party organisations must be made according to the procedures that have been endorsed and approved by the Commissioner for Public Appointments. As I said, that is a relatively recent development; therefore, inevitably it may take a little time for that to feed through into the full composition of the committees.

116. On the question of individuals from outside Northern Ireland being members of boards, and, indeed, sometimes of committees, to some extent a balance needs to be struck between drawing on local talent and from elsewhere, regardless of where that may be. Northern Ireland is a small country with a large number of bodies, and sometimes it is good to draw on outside experience. My own Department has one non-executive director from Northern Ireland and one from across the water. That combination works well for us.

117. Mr Dallat: The thought has occurred to me that given that we now we have our own Assembly, there should be opportunities for people outside it to participate. Without doubt, there is an over-dependence on people coming from Britain and other places to sit on those boards.

118. I thought that that was an appropriate question to ask.

119. Mr Thomson: The Commissioner for Public Appointments is working with the Belfast Metropolitan College to help those who wish to become board members prepare for the application process. Indeed, a member of my staff helps the commissioner with that training.

120. Mr Dallat: That is important, because in the past some arm’s-length bodies had a bad reputation, with the result that people are almost reluctant to express an interest in them, especially considering the issues that emerged about Local Enterprise Development Unit’s relationship with the Emerging Business Trust, the Tourist Board, and so on. Therefore, a fundamental issue exists. Following the Audit Office’s report on the establishment and oversight of the Emerging Business Trust loan and venture funds, some good measures were suggested. How many of those measures have been implemented and are still in operation?

121. Mr Thomson: In order to be precise, I would have to provide you with that information in writing. We issued guidance to Departments following publication of that report, and I attended a meeting of the permanent secretary group to discuss the issues that arose. Many of the lessons that have been learnt from those sorts of cases have been incorporated into a new comprehensive public body guide that DFP issued in October last year. I will provide you with the information on those specific recommendations in writing.

122. Mr Dallat: Perhaps I should have pointed out that I am referring specifically to case illustration 16 of the report, which contains six recommendations.

123. Mr O’Reilly: One of the key recommendations was that the Emerging Business Trust focused on questions of conflict of interest. Therefore, a requirement was introduced to ensure that the code of the Commissioner for Public Appointments was used in the appointment of members to third-party organisations. The Department introduced the requirement that board members of third-party organisations should come within the ambit of the code of the Commissioner for Public Appointments. We implemented a second follow-up recommendation, which is the basic requirement that the permanent secretary of the sponsoring Department must approve the creation of any new third-party organisation that is in or attached to an arm’s-length body.

124. Mr Dallat: The report concludes at paragraph 3·31, with an interesting observation on the need for top management to promote a “positive culture of accountability”. How are you setting standards and expectations in order to promote such a culture in your Department and in arm’s-length bodies?

125. Mr Sweeney: We are setting standards in several ways. When I joined the Department, ironically, I made Government accountability my early theme, hence the meeting in autumn 2006 where I involved people from various arm’s-length bodies. To bring that up to date, CIPFA is undertaking a fundamental review of the governance and accountability arrangements in all our arm’s-length bodies. The outcome of that report will be important. We are trying to implement a model toolkit — to use a phrase that CIPFA used — that would detail the respective roles of the sponsoring Department, its sponsoring branches and the arm’s-length bodies. Therefore, the whole theme of governance and accountability has underpinned the way in which the Department has sought to deliver its functions. There is no room for complacency, and we will be talking later about the experience of the Northern Ireland Events Company.

126. Mr Dallat: Finally, the Emerging Business Trust was a particularly horrible example of an organisation that was out of control. How successful have you been at assuring the wider community that the problems that relate to some arm’s-length bodies have been addressed? The public perception is that the Department has not addressed those problems.

127. Mr Sweeney: Is that question being addressed to me specifically?

128. Mr Dallat: I do not mind who answers the questions as long as I get the answers.

129. Mr O’Reilly: You identified rightly that the fundamental issue relates to actual or perceived conflicts of interest between activities undertaken by individuals in various roles.

130. We have put arrangements in place — David can provide the detail — as part of those of the Office of the Commissioner for Public Appointments for a more refined register that shows the different bodies in which individuals are participating That means that there will at least be a baseline of information available, so if someone is being considered for appointment, it will be immediately apparent if he or she is represented on any other bodies, as will other activities that he or she already undertakes. That is the action that we have taken.

131. Going back to your last question on paragraphs 3.30 and 3.31 in section 3 of the report, the culture of organisations is fundamental. People create the culture or tone — as the Public Service Commission refers to — of accountability and of a concern to ensure adherence to standards and proper procedures. That must be set at the top of Departments and arm’s-length bodies, which is fundamentally important to ensure that, not only are the rules in place, but are adhered to both in letter and in spirit.

132. Mr Dallat: Those are key points, and I am glad that they have been tossed out. That is an issue that the Committee will want to return to soon. I am pleased with the assurance that the social circle is disappearing because the new Assembly must be matched by local people serving on bodies and contributing to the success that I hope we will achieve.

133. Mr Hamilton: I have a series of questions for Mr O’Reilly. Leo, paragraph 1.2 states that arm’s-length bodies are normally subject to a five-yearly review, which is an opportunity to revisit and amend framework documents in the light of evolving and changing circumstances. It is important that those reviews are meaningful and not a rubber-stamping exercise. Do you have any specific examples of major changes in the governance arrangements of arm’s-length bodies as a result of the five-yearly reviews?

134. Mr O’Reilly: I cannot think of an example off the top of my head. That is partly because of the recent work as part of the review of public administration, which has led to a significant number of arm’s-length bodies being subjected to a series of potential changes. I am not sure if any of my colleagues can quote a specific example of a five-yearly review producing a change.

135. Mr Thomson: I know that Departments review their governance arrangements with arm’s-length bodies, because one of the requirements is that the management frameworks and financial statements must be approved by DFP, which still happens. However, like Mr O’Reilly, I cannot think of any examples. The review of public administration has clouded the situation, because many Departments were waiting to see what was going to come from that.

136. Mr O’Reilly: The model management statement and financial memorandum contains the requirement that it should be reviewed at least every five years, or sooner if appropriate. As the report notes, arm’s-length bodies are normally subject to five-yearly reviews. However, there can be some variation around that in individual circumstances at present.

137. Mr Hamilton: Is the model of management statement that is outlined in the report used by all arm’s-length bodies? If so, how effective has it been?

138. Mr O’Reilly: From the feedback that we have received, the model has been received well, because it provides a clear framework of the areas that a good management statement and a good financial memorandum should cover. The majority of arm’s-length bodies have MSFMs, or an equivalent, in place. For example, in the Department of Agriculture and Rural Development, some non-executive NDPBs operate under contracts of employment. In the Department for Employment and Learning, further education colleges operate under a financial management and audit code. In the Department of Health, Social Services and Public Safety, specific requirements exist for the governance of health and social services. In the Department for Regional Development, the new company, Northern Ireland Water, operates under specific governance arrangements relating to its status as a Government-owned company.

139. DFP is satisfied that, in those instances where a management statement and financial memorandum has not been formally adopted, there are suitable and adequate alternative arrangements in place.

140. Mr Hamilton: Therefore, every arm’s-length body has either the model or an equivalent in place, and you are satisfied with the arrangements.

141. Mr O’Reilly: Yes.

142. Mr Hamilton: Has DFP specified what the five-yearly reviews should entail? When complete, how are any lessons that have been learned from the process shared with all Departments and from there to all the arm’s-length bodies?

143. Mr Thomson: We have not specified to Departments what the five-yearly review should entail. The model management statement and financial memorandum is so comprehensive that it covers virtually everything. We told Departments that they should examine how the MSFM operates.

144. Earlier in today’s meeting, we talked about how, in some cases, the arm between the Department and the public body is short, the two have a close relationship and much information is passed between them. In other cases, the arm is fairly long. I envisage that the Department will need to examine the risks and assess whether the arm is the correct length. The Department must consider whether it is too close to the public body and should grant it greater autonomy because the risks are under control. Conversely, the Department should also consider whether tighter controls are required. The review should centre on the length of the arm, rather than on the operational considerations.

145. Mr O’Reilly: To supplement that, in October 2007, DFP issued a new version of ‘Public Bodies: A Guide for NI Departments’, which is based on a parallel Houses of Parliament publication. The local Northern Ireland version was compiled by DFP and the Public Service Improvement Unit and is a comprehensive guide to all aspects of public bodies. It includes the arrangements for the review of public bodies.

146. I suspect that a question is sometimes asked about whether bodies are allowed to remain in place simply because they have always existed. The suspicion is that there are no rigorous and fundamental reviews of the need for their existence. In other devolved Administrations, reviews have taken place a year or so after devolution, and the RPA is under way here.

147. Mr Hamilton: Chairman, you will be glad to know that I will not go into the detail of the RPA.

148. On page 22 of the report, two case illustrations identify the way in which the Department for Social Development and the Department for Employment and Learning manage risk. How are the risk-management initiatives in some Departments, which may be perceived to have benefits for other Departments, identified and shared right across the board?

149. Mr O’Reilly: As I mentioned, we circulate the relevant guidance on risk management. However, you raised a good question: when the general guidance has been circulated, should we disseminate examples of good practice more widely? There is scope to do that more than has happened heretofore. To date, the work on risk management has focused mainly on creating risk registers for each Department. There is more scope to disseminate good practice, such as that detailed in the two case illustrations.

150. The Chairperson: Before moving to the next section of the meeting, members want to make a couple of further points.

151. Mr Burns: Paragraphs 2.1 to 2.21 make points about how internal audits can provide assurance on risk management. Does that apply to the internal-audit function in arm’s-length bodies? Have you issued guidance that requires them to comply with the Government’s internal audit standards, or are assessments made of their performances?

152. Mr O’Reilly: In 2002, we issued guidance on internal arrangements between sponsoring bodies or Departments and their NDPBs. That suggested that Departments would wish to scrutinise their forward audit plans. Similarly, the MSFM template also advises that the audit strategy and audit plan from the arm’s-length body should be forwarded to the sponsoring team. We encourage the linkage of the internal audit programmes between the arm’s-length bodies and the sponsoring Department as an important part of that framework. In addition, the relevant dear accounting officer (DAO) letter advises that Departments should have access to NDPB final audit reports, as we discussed earlier in the meeting.

153. Mr McLaughlin: As the discussion on the impact of the RPA process emerged, I found a number of references interesting. Perhaps some of those references clouded the issue, or clouded judgement. When seeking best practice, will the ongoing reviews be fed back through the RPA process so that any restructuring proposals can take account of any lessons that emerge?

154. Mr O’Reilly: As the seminal report on the Teesside Development Corporation illustrated, when an organisation comes towards the end of its life, for whatever reason, additional risks are created for auditing control. The NIAO report highlights good practice in respect of the Laganside Corporation, where that specific risk was acknowledged and managed.

155. The creation of new bodies — for example, the education and skills authority — offers a major new opportunity to get relationships right and to address weaknesses and problems from the past. One key role that DFP will play, along with, for example, the Department of Education, is to seek to ensure that the new management frameworks and financial memoranda that will be put in place for organisations such as the education and skills authority will address all the best-practice points that have emerged in recent years. RPA offers an opportunity in that sense.

156. Mr McLaughlin: Will any assessments or conclusions that emerge from the reviews that are ongoing be fed into the RPA process, or will those be fed into the new structures that emerge after the RPA process? Will the reviews be used to inform the RPA process?

157. Mr O’Reilly: I am not aware that the specific issue of good governance has been highlighted in any of the RPA reviews, although I stand to be corrected on that point. The key point is that the reviews provide an important opportunity to ensure that the new arrangements that will be put in place for the new organisations comply with very best practice.

158. Mr McLaughlin: Presumably, that could also apply to existing arrangements. Given that mistakes were made, we can assume that a more rigorous approach will be taken, based on the lessons that have been learned. Will that be fed into the RPA process, or will we wait for the outcome of the RPA process before applying the reports?

159. Mr Thomson: In some ways, the lessons from the reports will be fed in. For example, the governance arrangements were fundamental to decisions when considering the structure of the new water organisation. When Ministers eventually decided to go down the company route, much thought was given to the governance arrangements and how those would work. That is an example of how those sorts of issues have an impact on the final decision.

160. I will stray into Paul’s territory slightly: discussions are ongoing in the Assembly about the new libraries body. As a part of that, consideration is being given as to how best the board should be set up, and how the governance arrangements should work. That is feeding into the RPA process; but, on the other hand, many of those structures are political, and Ministers and others must make decisions on them. Civil servants who are given those political directions and structures have to make sure that they work.

161. Mr O’Reilly: I take it from the point raised that, as well as ensuring that there are proper systems in place, we need to take account of the detailed design of the structures — for example, the nature of the arm’s-length body, if there is to be a new one created. We need to take account of that in considering future structures under RPA. As you have probably gathered from our reaction, we could benefit from reflecting on this point further after the meeting.

162. The Chairperson: Before we finish this section, Mr Sweeney, you touched on the role of the Sports Council in relation to DCAL. In paragraph 1.10, case illustration 2 refers to regular meetings between the Sports Council and DCAL to review finance, governance and accountability issues. That appears to be a good model. Are similar meetings held for all arm’s-length bodies, or is this a pilot scheme? What is the status of that arrangement, and why have you chosen that model for the Sports Council?

163. Mr Sweeney: We have that model in place for all the Department’s arm’s-length bodies. I was intrigued to hear mention of the emerging business trust. As a result of that, one of the key action-points which the permanent secretary took was to require the accounting officer in each of his arm’s-length bodies to produce a quarterly statement of internal control. That is an interesting mechanism. However, DCAL had put in place a structure whereby we would meet quarterly with the arm’s-length bodies and go through a two-page checklist of all the key governance and accountability issues.

164. The Chairperson: How long has that practice been in place?

165. Mr Sweeney: It varies from body to body, but at least from 2005, and in some instances even earlier than that.

166. The Chairperson: We have just one other matter before we move on. In response to Mr Hamilton’s question on the five-yearly review, I understand that you cannot provide an example off the top of your head. Can you forward in writing the most up-to-date examples of bodies that have been through the five-yearly review?

167. We move now to questions on the Events Company. We stated at the last meeting that we are conscious that the Departments represented here are conducting an investigation into the Events Company. This is merely the Committee’s preliminary investigation. On this occasion, members must understand the constraints under which the accounting officers before us today must operate. However, we expect answers to be as full and frank as possible, and in return, members will respect the boundaries within which the officers must operate.

168. I refer members to the agreed questions on this issue. Each member will ask one question: I will cover two, because a member is absent.

169. Mr Sweeney, this is a very serious issue of governance failure, which has had extremely serious financial consequences for the Department. It has done potential harm to the North’s reputation to hold major international events. As I have stated, we must await the conclusions of the various investigations into how it was allowed to happen. However, by now it is safe to assume that you have reached some high-level opinions on how it occurred. Therefore, I think it fair for the Committee to ask for your initial assessment as to where the balance of blame rests for the corporate failure. Is it with the company, with the Department, or is the blame to be shared?

170. Mr Sweeney: I will be candid with the Committee; I have a duty of candour to it. However, falling short of saying something that might be prejudicial to any future proceedings, and respecting natural justice for those involved, I will not be specific about names.

171. There is an issue of roles and responsibilities because the company is still in existence. It is a company limited by guarantee rather than a statutory non-departmental public body. For all intents and purposes, however, we were treating it as a non-departmental public body. From the outset, the culture within the organisation was to try to be entrepreneurial, fleet of foot and to have a degree of autonomy to enable it to operate in a dynamic, international marketplace. We had to respect the spirit of that culture. Nevertheless, the organisation still had to operate within a public-accountability framework. It would be wrong of me not to say that a great deal of success has been achieved within that function.

172. The Department sought to ensure that several fundamental controls were in place. The key thing was the management statement and financial memorandum. As colleagues have said, there is a new and comprehensive version that we brokered with the Events Company between August and December 2006. It was, therefore, fully implemented at the Events Company by December 2006. Before that, the organisation still had a comprehensive financial memorandum. However, it has now in place a best practice financial memorandum and management statement.

173. I appointed the accounting officer and my predecessor appointed the accounting officer for the company. There was an obligation on the accounting officer to produce an annual statement of internal control. I believe that we appointed a very capable board. I have to say on record that the Department had a high level of confidence in the capability of the board and the performance of the chief executive as accounting officer. We held quarterly accountability meetings with the company since 2005. The first meeting was in June 2005 and they have since been held quarterly. There was also regular communication between the Department and the company.

174. I have no doubt that the board was fully aware and seized of its responsibilities under the Companies Act 2006 because it operated as a company limited by guarantee. Each of the company’s annual reports and accounts since 2000 spelt out specifically its role: to put in place appropriate accounting policies; to keep proper accounting records; to ensure that the financial affairs of the company proceeded on a going-concern basis; to set the strategic direction for the company; and to provide a constructive challenge to the accounting officer in the Northern Ireland Events Company.

175. The accounting officer was personally responsible under the financial memorandum for keeping proper records, prudent and economic administration, and the efficient and effective use of all resources in her charge. Her job was also to provide appropriate advice to the board on a regular and timely basis.

176. The Department — and this is important — specified in the financial memorandum a tolerance of plus or minus 5% so that if at any time the accounting officer in that company looked as if she was going to exceed the agreed approved estimates between the Department and the company, there was a clear, written obligation on her that she had a tolerance up to plus or minus 5%.

177. There was also an obligation on the accounting officer to bring to the attention of the board as soon as possible information about any significant loses or special payments. Indeed, it is the case — as it is the case with all accounting officers in the arm’s-length bodies for which I am responsible in respect of the new financial memorandum and management statement — that if the chief executive of that company were still in place today, she would be sitting beside me here, reporting to the Committee because that would be a clear and specified role of the accounting officer of an arm’s-length body.

178. With hindsight, however, the failure to establish in that company a properly-functioning audit committee and the failure to put in place appropriate internal audit arrangements — all of which were clearly specified in the management statement and financial memorandum as core requirements — were very serious shortcomings. There was a context — and I mention this not as an excuse — whereby the company was in transition and expected to move from our Department to the Northern Ireland Tourist Board under the RPA. Several directors had retired and that put a great deal of pressure on the remaining directors. With hindsight, there clearly was an over-reliance placed on the compliance and adherence of the accounting officer to the responsibilities and proper controls specified in the management statement.

179. KPMG has been commissioned to carry out an independent review of all of the circumstances that gave rise to the debacle in the Events Company. The Minister has committed to report to the House at the earliest opportunity, and that report should be ready around St Patrick’s weekend. After solicitors have had a look at that report, the Minister will make a statement in the House and make the report available in the Assembly Library.

180. What is emerging as a result of the debacle is that in a small number of events, all relating to motocross, but significantly so from 2005 onwards, the accounting officer operated well beyond the control framework that had been specified for the company, and well beyond the delegated limits that had been set, and entered into a number of contractual obligations with a very small number of people that gave rise to serious financial consequences. I have formed the view that a great deal of that took place without the full knowledge or, perhaps, without any knowledge on the part of the board, of the scale and significance of what was happening. However, that will be subject to independent review. That small number of events continued from 2005 up to 2007. Lamentably, the 2007 event, and some of the contractual arrangements entered into in 2007, will have contingent liabilities into the future that have yet to be determined.

181. To quantify that, the Department’s assessment is that decisions were taken, outside the control framework and the authority that was delegated to the accounting officer, on a sum between £1 million and £1·5 million — probably £1·2 million. In reality, on 31 March 2008 the company will probably yield a trading deficit of around £700,000. For that reason, the Department went to the Executive to seek cover, so that there would be an arrangement whereby the company could be wound down in a solvent state, although that has yet to be determined.

182. The financial manifestation of the situation does not really reveal itself in the 2005-06 accounts, because the external auditors prepared those accounts and those accounts were unqualified. The significance of the situation only began to manifest itself when the external auditors went in to do the fieldwork for the 2006-07 accounts. That fieldwork began in July 2007. In November last year, I asked the external auditors to succinctly set out for me what their preliminary assessment was of what had happened.

183. The external auditors said:

“Those overspends were primarily a result of a breakdown of controls within the company. The then chief executive suffered ill health and a number of key personnel had left the company. That led to payments being made without proper procedures being followed and a lack of knowledge in relation to the excessive expenditure on the events described above”.

184. Those are a small handful of events, and I can be more specific about that shortly.

“The board of directors were not provided with financial information of a sufficient quality and on a timely basis to identify any issues as they arose.”

185. The finance officer in the company in July 2006 — and I am quoting from the minutes — said:

“Projections are slightly over budget”.

186. Before she left the company in April 2007, the accounting officer said:

“We are just slightly over budget”.

187. We now know that the trading deficit then was about £1·2 million.

188. The board had insufficient financial information to appreciate fully the actual operations of the company, in my opinion. Certainly, from 2005 onwards, it was not fully aware of the situation. The operational controls lie very clearly with the Northern Ireland Events Company directors and the accounting officer of the company. The Department was very heavily reliant on both the accounting officer and the directors discharging their responsibilities effectively. The Department’s role was to ensure that the fundamental architecture of governance was put in place.

189. Judgement calls were made about the capability of both the board and the accounting officer. With hindsight, the Department could have been more assertive in ensuring that the company established a fully functioning audit committee and appropriate internal audit arrangements. Judging by the spirit of the report, I conclude that both the board and the Department were not sufficiently interrogative and investigative of the performance of the company.

190. The Chairperson: Out of respect for the boundaries that the Public Accounts Committee has set, it will not delve any further into that, but, undoubtedly, will examine your opening statement at a later date.

191. Mr McLaughlin: Mr Sweeney’s candid opening statement has dealt with some issues that I wanted to examine. In paragraph 2·21 of the report, there are several references to Treasury guidance on risk management and the role that the internal audit process plays in support of risk management strategies.

192. Although Mr Sweeney indicated that the Events Company’s problems began emerging in 2005, in 2002, the Department assured the PAC that it would keep its governing relationship with the Events Company under close review and that, in future, internal audit would scrutinise areas of potential concern. Paragraph 2·21 describes in explicit detail how that internal audit process can be of assistance to good governance. Therefore, why did the Department’s promised monitoring arrangements not reveal even the slightest hint of the increasing operational and financial risk, let alone the financial and reputational disaster that has recently come to light? The monitoring arrangements let everyone down, including the Department.

193. Mr Sweeney: The 2002 report was important. In preparation for today, I examined sequentially the Department’s actions from 2002 onwards, and much action was taken. The 2002 report focused on real or perceived abuse of hospitality at that time, and in February 2003, the Department drew up the management statement and financial memorandum and specified a section on hospitality and cost benefit and ratio for hospitality. Also in 2003, two internal audit reports were completed; one examined the accountability audit and considered independently the governance arrangements in the company; the other examined grant payment procedures. Many other reviews were conducted over the years, mainly to investigate the strategic direction that the Events Company was taking.

194. With hindsight, a great deal of reliance was placed on the board and the accounting officer discharging their responsibilities. Undoubtedly, not absolutely insisting on a fully functioning audit committee and proper internal audit procedures proved a serious shortcoming. In reality, reliance was placed on external auditors, and although the accounts had not been qualified from 2000 onwards, there was always a delay by the time the external auditors came in. In this instance, by the time the accounts for 2006-07 were audited, a great deal of money had been discharged outside the normal control framework.

195. Mr McLaughlin: The external audit was able to post facto expose that deficiency. The internal audit process, including, or in addition to the explicit commitments on monitoring and developing more effective governance, fell by the wayside.

196. Mr Sweeney: No independent internal audit arrangements were in place. The boards met approximately eight times a year, and were getting financial statements from the accounting officer on a monthly basis. The Department was reviewing the performance of the company on a quarterly basis, but the reality is that, with hindsight, the fact that independent, internal audit arrangements were not in place was a serious shortcoming. Even if those arrangements had been in place, there is no guarantee that they would have picked up everything from day one, but there is every reason to believe that proper internal audit arrangements would have picked up the problem much earlier.

197. Mr McLaughlin: That is the key point, and it is not new science. Treasury guidelines indicate that those arrangements should be in place in order to ensure good governance; therefore, a serious criticism is being made. Lessons — not necessarily derived from our experience here, but from wider experience — brought about a situation where very definitive guidelines were established, which pointed towards how best practice and best management are developed and sustained. However, in this case, that does not seem to have percolated through to the Department.

198. Mr Sweeney: No, and efforts were made to ensure that a properly functioning audit committee would be put in place, and the Department ensured that all the proper guidance was provided to the company, specifically to the accounting officer. We also suggested how she, at that time, might go about putting appropriate internal audit arrangements in place. One such suggestion was that she could share internal audit arrangements with some of the other arm’s-length bodies, because there are good examples of such economies of scale, whereby two of our arm’s-length bodies share those arrangements.

199. Therefore, the Department was making those suggestions during the quarterly accountability meetings. In reality, although some efforts were made to explore arrangements, I must say — speaking candidly — that those independent internal audit arrangements were not implemented.

200. Ms Purvis: I am concerned that since 2000, the company submitted unqualified accounts from external auditors. To me, that suggests that the Department should have scrutinised the company more closely. I accept what Mr Sweeney said about the quarterly meetings, in that the Department offered guidance, etc. and tried to insist on good internal audit arrangements, and I think that Mr Sweeney said that the Department started to receive internal audit reports in 2003. Did any of those reports flag up warning signs? Internal audit reports are a good mechanism for enabling Departments to flag up what is happening in arm’s-length bodies. Perhaps Mr Sweeney could say more about the reports that the Department received and why they did not flag up any warning signs.

201. Mr Sweeney: In 2003, there were two internal audit reports — one considered the company’s audit arrangements, and the other focused on its grant distribution. Those reports gave limited assurances to the Department. What I mean is that the reports said that in response to criticism in the 2002 Northern Ireland Audit Office report, arrangements were being developed by the Northern Ireland Events Company, and the company was, therefore, going in the right direction and taking the right steps. The Department could take assurances from the fact that it had got limited assurances.

202. In 2007, the Department invited its internal audit unit to factor in an audit review of the systems in the Northern Ireland Events Company. The fieldwork for that began in June 2007, and the unit reported in August 2007. However, the magnitude of the report unfolded in September 2007. The 2007 internal audit report said that although the fundamentals were in place — such as the management statement and the financial memorandum — a number of shortcomings remained in the company.

203. As accounting officer, with responsibility for 16 arm’s-length bodies, one is often obliged to make judgement calls. Therefore, I want to make one very material point this afternoon. In 2006, in an exceptional circumstance, the Department invited the company to oversee a grant of approximately £800,000 to Rally Ireland. To cut a long story short, when supervising those two tranches of grants, the company was so meticulous in its adherence to the proper procedures and processes that to a certain extent — to strike the right balance — I was concerned that, perhaps, the funding was not flowing enough to the project promoters of Rally Ireland.

204. In January 2006, and again from July to November 2006, an independent firm, BDO Stoy Hayward, was brought in to assess how the Northern Ireland Events Company was overseeing and supervising the grant to Rally Ireland. I took considerable assurance from that process because, over both those periods, BDO Stoy Hayward reported the Northern Ireland Events Company’s accounting officer’s meticulous adherence to the correct systems and procedures and stated clearly its belief that the Events Company simply would not pay a grant to a third party, unless that organisation also adhered meticulously to the relevant conditions. Although it may seem perverse, I took a great deal of assurance from that.

205. There is a great deal of contrast on this subject. On the one hand, I — not unreasonably — concluded that the accounting officer was fully seized of and aware of the systems, procedures and control frameworks. I had real empirical evidence about how those were being meticulously adhered to, perhaps even excessively so. On the other hand, however, there are a small number of examples of funding being treated in the most cavalier fashion, with even the most basic elementary aspects of financial management set aside.

206. Mr Beggs: Paragraph 2·16 points out that

“Departments need to ensure that accountability and reporting arrangements for sponsored bodies are commensurate with the level of risk associated with that sponsorship relationship.”

207. Given the governance concerns raised previously by the Public Accounts Committee — initially, in 1997, about the Events Company’s predecessor body, Positively Belfast, and again in 2002, about the Stormont concerts, which were sponsored by the Events Company — what was the Department’s assessment of the Events Company’s risk profile? Where did the company appear on the Department’s risk register and what evidence was used to make that assessment?

208. Mr Sweeney: My perception of the Northern Ireland Events Company was that it had matured considerably since its baptism of fire. It did adhere to the compilation of a risk register, as it was obligated to do. At no stage during our supervision of the Northern Ireland Events Company’s risk register did we find anything of sufficient materiality that required elevation to the departmental risk register, apart from our growing concerns that the company had not put in place internal audit arrangements. Therefore, in its 2006-07 risk register, we insisted that the company flagged up the lack of internal audit arrangements as being a serious weakness, and we asked the company to identify mitigating steps that it would take in lieu of those internal audit arrangements.

209. The Northern Ireland Events Company undertook to put its entire staff through Chartered Institute for Public Finance and Accounting (CIPFA) training. It established a fraud register, and, very specifically, examined the BDO Stoy Hayward reports from January 2006 and the summer of 2006, and factored in the lessons to be learnt from those. That is evidence of the Department attempting to implement mitigating steps and make the company accept that not having internal audit arrangements in place is a serious shortcoming. To conclude, I drew assurances from the fact that none of the externally prepared accounts were qualified.

210. A situation existed whereby a very serious complaint was made against the Northern Ireland Events Company in its distribution and oversight of one particular grant. Such was the seriousness of that complaint that I invited a retired civil servant to examine and track the life cycle of that grant. I took considerable assurance from that.

211. My deputy secretary in the Department attended a board meeting of the Northern Ireland Events Company approximately every six months, and I attended its strategic away day in the autumn of 2006. I took a great deal of assurance from the level of professionalism with which the directors and the accounting officer were discharging their responsibilities. There were also quarterly accountability meetings between the Department and the Events Company. Due to the nature of our relationship, we requested that the company took responsibility for the community festival fund from 2005-06 onwards.

212. Communication between the Events Company and the Department took place often; almost on a daily basis. We took assurances from a whole range of proxies, and in the context in which we were operating, I made a judgment call. Hindsight is a wonderful gift, but there is no doubt that the failure to have systematically applied internal audit arrangements in place was a serious shortcoming.

213. Mr Beggs: Should the absence of satisfactory audit arrangements not have warranted placing the Events Company on the Department’s risk register?

214. Mr Sweeney: The reality is that the Events Company was not placed on that register. It is not as though the Department was not taking cognisance of those issues. The Department discussed with the company its failure to have internal audit arrangements in place, asked it what efforts it was making to rectify that, and insisted that it factor that failure into its risk register. In 2006, we instructed the accounting officer to carry out an audit needs assessment. I do not mean to offer a limp excuse, but the context in which those circumstances occurred was a one-off. There was some uncertainty regarding the company’s future circumstances, although that in itself is not an excuse. However, there was nothing of materiality on the company’s risk register that required it to be elevated to the departmental risk register.

215. Mr Dallat: I thank Mr Sweeney for being open and candid, but it strikes me as rather strange that the Department did not know anything about what was going on in the Events Company, when even the dogs in the street knew about it. Certainly, I made it known to people who were in a position to at least examine the issue. Is the report that is due to be published on St Patrick’s Day —let us hope that it banishes the financial snakes from Ireland — likely to get to the bottom of the issues? Could Mr Sweeney indicate the extent to which former Secretaries of State may have been involved in pressurising people in the Events Company to enter into commitments?

216. Mr Sweeney: I cannot anticipate the exact content of the KPMG report, but, as members might imagine, my colleagues in the Department and I have been working hand in glove with KPMG to ensure that it has unfettered access to all the relevant information. The reason that that organisation has been appointed is that its track record shows that it is a leader in the field of audit and advisory services. I have no doubt that the report will be very professional and thorough. It may well be that the report will encapsulate a great deal of what I have said this afternoon. I anticipate that it may identify a small number of areas in which considerable forensic audit might be required. I do not think that this will be a report that ends the need for reports. I anticipate that it will take us to a certain stage, but there may then be cause to pause and to reflect on what other appropriate steps might have to be taken.

217. Mr Dallat: To return to a point made earlier by Dawn — to have qualified accounts for five years, and not to have put in place the most stringent mechanisms, or to have adopted the most exact principles, suggests that a situation continued to exist in which it was Christmas every day, and Santa gave away all the money.

218. Mr Sweeney: I apologise; if I used the term “qualified accounts”, I would like to retract that.

219. From 2000, accounts were not qualified by the external auditors, and there was no cause for concern. Right up to 2005-06, the accounts were not qualified by the external auditors.

220. I shall deal with the issue raised about the Secretary of State. I must be assertive and say this: as accounting officer in the Department, I take my post very seriously, and that is true of all my colleagues. There is no circumstance in which any politician would distort the judgement of an accounting officer. The accounting officer is accountable to the Assembly and to this Committee. I can think of no circumstances where an elected representative — regardless of his or her position — would bring any undue influence on my supervision of an arm’s-length body. I cannot conceive of such a situation. I say to the Committee categorically that that did not occur.

221. Mr Dallat: Given the experience that Mr Sweeney has had, what principles will be adopted to ensure that such an embarrassment never recurs?

222. Mr Sweeney: One has to work on the assumption that there is absolutely no guarantee —

223. Mr Dallat: A lot of money was involved: £1∙2 million.

224. Mr Sweeney: I would like to think that the manner in which I discharge my responsibilities, and my approach this afternoon, convinces the Committee that I do not consider this to be a trivial matter. I do not wish to give the impression that I consider it to be so. I do not see this as trivial in any way.

225. It might sound self-serving, but one of the first things that the Department did was to act decisively and shut down the operation of the company. It brought the matter to the attention of the Executive at the earliest opportunity. No attempt was made to be anything other than transparent. The Minister took the earliest opportunity to make a statement in the House, and undertook to initiate an independent review of the circumstances that gave rise to this occurrence.

226. As accounting officer, I asked myself what I was presiding over. I had accepted many assurances about the manner in which the Events Company operated. I have said that on several occasions.

227. This is where we started. I commissioned an independent body, CIPFA, to perform a fundamental review of all our arm’s-length bodies, and to interview my colleagues in the Department who were responsible for the sponsorship arrangements. Ultimately, I am responsible, but I wanted those who were managing the sponsorship arrangements to be interviewed. That review is well under way. The report will not be completed until April, but, this week, I have sought an interim report from David Nicholl. I am happy to report, and he is happy to be quoted on this, that I can take considerable assurance from the performance of the other arm’s-length bodies. All the fundamentals — the basic architecture of governance and accountability — are adhered to. That is based on him meeting and spending the equivalent of two days with each of the arm’s-length bodies for which I am responsible. I have to say, however, that that excludes the North/South bodies and the education and library boards.

228. Ms Purvis: Let me clarify that when I spoke, I did not say “unqualified accounts”. I was concerned about the many accounting years that, although qualified by the external auditor, did not flag up anything.

229. Mr Hamilton: I thank Mr Sweeney for his candour today. He has approached the subject with the appropriate attitude.

230. In the Audit Office report ‘Good Governance: Effective Relationships between Departments and their Arm’s Length Bodies’, paragraph 2.27 notes that Departments have a low tolerance of risk in sponsored bodies. The attitude to risk adopted by the Northern Ireland Events Company is more like what Northern Rock was up to, rather than what one would expect of a public body that is spending public money. Why did the Department adopt such a low tolerance to risk, and although we all want to encourage entrepreneurial spirit, why was the company given such latitude?

231. Mr Sweeney: I am not sure whether the Events Company’s attitude to risk was of Northern Rock proportions, but that is not to trivialise the situation. Arm’s-length bodies run those types of organisations because, otherwise, they would be run by boring bureaucrats. [Laughter]

232. The idea of arm’s-length bodies is that they are fleet-of-foot and entrepreneurial. The Events Company’s corporate plan and business plan for 2007-10 told the Department that it was dealing in a dynamic international marketplace and that it needed to move fast. It compared the fact that Scotland has put £8 million a year into similar resources and mentioned what had been done in Yorkshire, so autonomy was needed. As my colleague David Thomson said, a judgement call must be made on whether that should be a long, thin bridge or a short, fat bridge.

233. The memorandum of understanding and articles of association tasked the Events Company to enter into partnerships, and it could provide guarantees as long as everything was done within a legal framework. In the early part of its existence, the company was involved mainly in making grants of capped expenditure to organisations. A picture has emerged that, from 2005 onwards, a radical departure took place in the Events Company’s attitude to risk. Even the most common sense observance of the elementary rules of financial management was set aside.

234. That is illustrated specifically by a series of motocross events. Without naming any individuals or third parties, I will cite one or two examples. It is documented that the board approved capped expenditure up to a maximum of £50,000 for a motocross event in Desertmartin in September 2005. The KPMG report will probably reveal that there was an overspend of £369,000 on that one event. Although the accounting officer entered into legal obligations with the promoters of the event, the board took the view that it had agreed capped expenditure of £50,000. The board was largely unaware of what was happening.

235. In 2006, another motocross event was held. The Department of Culture, Arts and Leisure has reviewed the quality of the papers that went to the board, which did not know that the accounting officer had entered into a legal obligation with an international governing body on the event. A third-party company was brought in to run the event. For whatever reason, the Northern Ireland Events Company stepped in to de facto run the event. That was a move away from a capped-expenditure approach to a situation in which people acting on behalf of the Events Company were running the event. The net cost of the event ran to several hundreds of thousands of pounds. In August 2007, the Events Company de facto ran another motocross event. It incurred expenditure of several hundreds of thousands of pounds and may even have incurred contingent liabilities that will run into the future.

236. Although there was a degree of acceptance that the Events Company should have the opportunity to be market-orientated, fleet-of-foot and entrepreneurial, I am convinced by what I have read that its board was largely unaware of what was happening with a small number of events. The company’s accounting officer was entering into agreements without the board’s knowledge. There was a serious lack of documentation of records, files and relevant correspondence about a small number of events. The board lacked any precision of detail about those events.

237. I always like to consider such matters from the other person’s point of view, so the accounting officer might have felt that she had the implicit approval of the board at the time, because she enjoyed the confidence of the board. I also had a high regard for her.

238. At the time, she may have felt that, because she enjoyed the board’s confidence, she had its implicit approval and endorsement. I also held her in high regard.

239. Having reviewed all the written records and documents, undocumented commitments involving a small number of events and individuals were clearly entered into. As a consequence of running that small number of events the company landed what might have been perceived to be a success story — the 2008 and 2012 Motocross of Nations, which is globally significant, and a commitment for motocross grand prix in 2009, 2010 and 2011. To give a balanced view, the accounting officer would say that she made the investment because, by demonstrating capabilities, there was a big prize to be had. However, there is no other way to say this: the company was operating without any control framework in place between it and the Department.

240. Mr Burns: Mr Sweeney, it is clear from paragraph 3.8 that boards should include independent non-executives and that those members have a key role to play in providing a challenge function. Can you tell us whether the Events Company had such non-executives on its board and, if so, how were they chosen and what training was provided in order to ensure that they could fulfil that challenge role? In addition, what would you do differently now?

241. Mr Sweeney: The bulk of the current Northern Ireland Events Company board membership was appointed on merit, following a proper public competition in June 2002. First and foremost, those applicants were obliged to demonstrate a range of capabilities in areas such as governance and accountability. I want to be hugely respectful of those board members this afternoon. They were unpaid but very experienced, having all served on other significant boards.

242. My colleagues mentioned training. Recent governance and accountability issues are undoubtebly, largely, the result of private-sector debacles. In the public sector, for several years, guidance about, and training in, governance and accountability has evolved. Therefore, even if someone has been trained, from time to time there should be refresher training.

243. In July 2004, the Department proposed that the board members undertake the CIPFA corporate governance training. At that time, the directors, rightly, said that, having undergone corporate governance training in various other areas of public life, they were familiar with it. Therefore, they did not attend CIPFA’s customised course; however, in October 2004, at their annual strategic awayday, they spent a great deal of time collectively bringing themselves up to date with corporate governance best practice. I stand by the statement that the board, on all the evidence available to me, was very capable and fully cognisant of corporate governance best practice.

244. Mr Burns: What would you do differently now?

245. Mr Sweeney: When you are in a crisis, the important thing is what you do. On one level, you would not wish such a situation on your worst enemy; on another level, it is the nature of the task. The appointment letter of the accounting officer is a very significant document that places very specific responsibilities on both the Department’s principal accounting-officer — in this case, me — and, more particularly, on the accounting officer in the arm’s length body, who is personally responsible and accountable to this Committee.

246. In that crisis, I did two things: I tried to act decisively and bring the issue to the body politic — the Executive and the Assembly — at the earliest opportunity; and I asked CIPFA to carry out a comprehensive review of all my other arm’s-length bodies. We will certainly take on board any lessons that have been learned, to the extent that — and this is the fundamental learning curve for me — the senior management team in the Department has spent two days, one in January and one in February, looking at the nature of our Department. We deliver 83% of our budget through those 16 arm’s-length bodies. That is a big span of exposure.

247. The executive team will now await the KPMG report and whatever the outworkings of that might be. We will also wait for the CIPFA report in April. In the meantime, however, we will unashamedly reorganise the Department and have a centre of excellence around finance, governance and accountability. We are more seized than ever before of the fact that 83% of our budget is being delivered by a family of relationships with 16 arm’s-length bodies, some of which have budgets close to £20 million a year and others with budgets of £250,000 a year. There has, therefore, to be proportionality about how you relate to each of those bodies as well as about the nature of that relationship. However, we are taking very seriously the lessons from this. Frankly, it will run for some considerable time to come. There are lessons here for the Department and for the entire public sector.

248. The Chairperson: In different circumstances the Public Accounts Committee could sit here all evening thrashing out the issues around the Events Company. In future, we will no doubt take a significant portion of time to examine those issues. However, we have to respect that there is an investigation going on and that the Department of Culture, Arts and Leisure’s Committee has a role to play in the matter, and we will present our findings in due course.

249. As for the broader good governance report and the inquiry that we have had today: often when accounting officers come before the Committee, they tell us that there is guidance and protocols. Today we have heard about risk management and risk registers and suchlike. The last thing that the Public Accounts Committee wants to do is to produce recommendations that are then added to the good guidance.

250. Without pre-empting the Committee’s report and findings on this matter, I have to say that, to me, the fundamental weakness in good governance is the individuals who are being appointed to the boards of these arm’s-length bodies. I am not convinced, and I will review the evidence, that in certain circumstances those who are appointed to the boards — and I do not intend to be stereotypical — realise the importance of the task that they are taking on. I do not say that to scare anyone off from sitting on those boards because they should be representative of a cross-section of society and the communities out there. Membership should not be exclusively for the great and the good — John Dallat referred earlier to those who served tea to the wives of Secretaries of State. At times it appears that some people on those boards are in everything but the crib.

251. If, as in this example, 83% of the Department of Culture, Arts and Leisure’s budget is being managed by arm’s-length bodies, we have to get it right. I remain to be convinced whether it is a good idea not to have a departmental person on those boards because that can be the end of deniability.

252. I thank the witnesses for the fullness of their answers, especially in relation to the Events Company. You provided a fuller report than we expected, and we appreciate that. It will give us food for thought. As for the issue of good governance, we do not want just to produce recommendations that then become another good guidance for distribution. We have to examine how board members are trained and appointed. We shall produce a report in the fullness of time. As you know, there is a memorandum of response from the Department. Thank you very much.

Appendix 3

Correspondence

Chairperson’s letter of 7 March 2008

Public Accounts Committee
Parliament Buildings
Room 371
Stormont Estate
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
Email: jim.beattie@niassembly.gov.uk

Date: 7 March 2008

Mr Leo O’Reilly
Additional Accounting Officer
Department of Finance and Personnel
Rathgael House
Balloo road
Bangor
BT19 7NA

Dear Leo

Re: Public Accounts Committee Evidence Session 6 March 2008

Further to the evidence session at the Public Accounts Committee yesterday, which you attended, please provide the following additional information which members requested at the meeting:

1. In response to the Public Accounts Committee report on the Emerging Business Trust, DETI put in place a number of good practices. How many of these practices have been implemented and how many are still in operation?

2. Please provide recent examples of when 5 year reviews have been carried out and what changes have been made as a result of the reviews.

I should be grateful for a response by 21 March 2008.

Yours sincerely

John O’Dowd
Chairperson
Public Accounts Committee

Correspondence of 21 March 2008
from Mr Leo O’Reilly

From The 2nd Permanent Secretary
Leo O’Reilly

Rathgael House
Balloo Road
Bangor, BT19 7NA
Tel No: 028 91277601
Fax No: 028 9185 8184
E-mail: leo.o’reilly@dfpni.gov.uk

John O’Dowd
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
Stormont, BELFAST
BT4 3XX

21 March 2008

Dear John

Effective Relationships with Arms Length Bodies
Public Accounts Committee Evidence Session 6 March 2008

Thank you for your letter of 7 March 2008 in which you sought further information on the follow up to the Westminster PAC report on the Emerging Business Trust and also on five yearly reviews of public bodies.

Emerging Business Trust

DETI has implemented a number of good government practices as a result of the investigation into Emerging Business Trust. A number of these were put in place in response to recommendations contained in the PAC report. However, others had been put in place prior to the PAC hearing and had been referred to in the C&AG’s report (paragraph 17 of that report is a particularly relevant reference). I attach an annex which provides detailed information on these improvements and on the actions taken in response to both the NIAO and PAC reports.

Quinquennial Reviews

You also asked for some information on the five yearly reviews. These had been common practice from the time when Next Steps Agencies were introduced, but following the Agency Policy Review report published in 2002 by the Cabinet Office, it was decided that the central programme of quinquennial or financial, management and policy reviews of executive agencies and NDPBs would be no longer required by the Cabinet Office and the Treasury. In Whitehall, these reviews were replaced with business reviews of the end-to-end processes involved in achieving the outcomes specified in departmental Public Service Agreements. NDPBs with a lead responsibility for, or a key role in, delivering a PSA target would feature in these business reviews.

In December 2002, the then Direct Rule administration decided, in line with practice in Whitehall, that the quinquennial review process for agencies and NDPBs should no longer be obligatory in Northern Ireland.

In October 2007, DFP issued a new Public Bodies Guide for NI Departments and this stresses the need for quality and continuous improvement and, as part of that, the importance of regularly reviewing whether individual NDPBs continue to be the best way to deliver the services for which they are responsible, and if they are how delivery of these services can be improved. The guidance introduces a framework of landscape/end-to-end reviews of the in depth processes for NDPBs with a lead responsibility in delivering PSA targets, and light touch reviews for smaller NDPBs to look at whether the function the body carries out is still required and, if so, whether the NDPB model is the most effective way of carrying out that function.

DFP does not hold any central records of reviews carried out under the new guidance. However, we are aware, from work associated with the Review of Public Administration, of the significant reviewing and restructuring of organisations in areas such as health and education.

I hope this meets your information requirements.

Yours sincerely

Leo O’Reilly

Annex

Emerging Business Trust: Good Practice Actions

Pre Public Accounts Committee Report

No	Reference	Actions Taken	Notes
1	NIAO Report Para 17	The engagement of forensic accountants to conduct the EBT investigation.
2	NIAO Report Para 17	The establishment of a steering group comprising senior managers to oversee the handling of the [EBT] investigation and the issues arising.
3	NIAO Report Para 17	The interim findings of the investigations were sent to the Chairman of EBT in July 2003 with a further list of issues being sent in November 2003.
4	NIAO Report Para 17	The taking of legal advice at various stages throughout the investigation process.
5	NIAO Report Para 17	A meeting, in December 2003, between the Chairman of Invest NI and an Invest NI Board member connected to EBT at which the board member was asked, in the light of legal advice, to absent herself from future meetings of the Invest NI Board. She did not attend any further meetings of the Board, and her term of appointment came to an end in March 2004.
6	NIAO Report Para 17	Invest NI held fourteen recorded meetings with representatives of the Board of EBT to discuss aspects of the investigation and proposed action to be taken.
7	NIAO Report Para 17	All relevant loan and venture capital funds were reviewed in light of the issues identified in the EBT case.
8	NIAO Report Para 17	Relevant staff throughout the Department were briefed on the issues arising from the review of Third Party Organisations (TPOs).	Further guidance is to be provided to relevant staff in light of the findings of the TPO inspection programme.
9	NIAO Report Para 17	Guidance has been produced and promulgated on the engagement and monitoring of TPOs.	The guidance has since been recirculated and will be superseded by the updated guidance referred to at 8 above.
10	NIAO Report Para 17	Guidance on staff acting as directors of limited liability companies has been disseminated. This guidance reflects current companies and insolvency legislation and case law.	The guidance was recirculated in November 2006.
11	NIAO Report Para 17	The Department and its NDPBs reviewed, on a case by case basis, the necessity for staff to act as directors. The review confirmed that, in each case, it was necessary for staff to act in this capacity.
12	NIAO Report Para 17	Claims totalling £700,000 have been lodged with the Liquidator of EBT. The Department estimates that, if all claims are admitted by the Liquidator, between £170,000 and £250,000 will be recovered.	The liquidator had admitted £200,000 of Invest NI’s claim but had rejected the other £500,000. The liquidator had also rejected IFI’s claim. Both Invest NI and IFI have appealed the decision to the Court. The case is still continuing.
13	NIAO Report Para 17	The Department asked DFP to circulate the NIAO report to other government departments.
14	NIAO Report Para 17	A branch was established, in 2002, which specialises in corporate governance and accountability issues.
15	NIAO Report Para 17	Risk management procedures have been strengthened, with Risk Registers prepared in the Department and its NDPBs.	Continuing Action
16	NIAO Report Para 17	NIAO representatives attend the Audit Committees of the Department, Invest Northern Ireland and the Northern Ireland Tourist Board.	Continuing Action
17	NIAO Report Para 17	Departmental representatives sit on the Audit Committees of Invest Northern Ireland, the Northern Ireland Tourist Board, the Health and Safety Executive for Northern Ireland and the Consumer Council.	Continuing Action
18	NIAO Report Para 17	Guidance has been issued on responding to NIAO reports and management letters. This involves Audit Committee follow up where appropriate.	Continuing Action
19	NIAO Report Para 17	For 2006-2007, Statements of Internal Control have been required on a quarterly rather than annual basis from NDPB chief executives and from senior officers in the Department.	Continuing Action
20	NIAO Report Para 17	The Department reviews annually the relationship between the Internal Audit programme and the Risk Registers in the Department and its NDPBs.	Continuing Action
21	Permanent Secretary memo 17 May 2006	The Permanent Secretary’s personal approval is required before a new TPO can be established.	Staff were reminded of this requirement in November 2006. Further reference is made in the draft guidance referred to at 8 above.

Post Public Accounts Committee Report

No	Reference	Actions Taken	Notes
22	PAC Report Conclusion 4	Public Accounts Committee reports relevant to the Department are circulated within the Department and its NDPBs.	Continuing Action
23	PAC Report Conclusion 5	The Committee’s report was circulated to Heads of Division and to NDPB Chief Executives in July 2006.
24	PAC Report Conclusion 6	The OCPANI Code of Practice is applied, as far as is practicable (and with due regard to proportionality), to all public appointments in DETI and its NDPBs.	Continuing Action
25	PAC Report Conclusion 7	DETI is complying with the requirements of DAO (DFP) 08/07 issued on 6 July 2007. This requires public appointments files to be retained for a period of seven years after the end of the last appointment.	Continuing Action
26	PAC Report Conclusion 8	The performance of NDPB Board Members is assessed annually. The Department is currently giving further consideration to the composition of its audit committee and the assessment of performance of audit committee members. The Department is cogniscent with DAO (DFP) 8/07 which contains guidance on the sharing of information on board appointments.	Continuing Action
27	PAC Report Conclusion 9	Compliance with the OCPANI Code of Practice is now a condition of future offers of funding to Third Party Organisations, subject to considerations of practicality and proportionality.	Continuing Action
28	PAC Report Conclusion 10	All future legal agreements establishing venture capital funds to which DETI and its NDPBs contribute funding will contain an express prohibition on the fund manager, or any staff employed by the fund manager, holding shares in private investee companies. It will also be forbidden for a fund manager to charge fees for services provided to investee companies beyond those set out in the tender which resulted in the award of the contract to manage the fund.	Continuing Action
29	PAC Report Conclusion 11	Corporate governance training is mandatory for Board members of NDPBs within six months of appointment. Officials in DETI and its NDPBs that use TPOs constituted with boards of directors (or equivalents), have been asked to bring the Cabinet Office Code of Best Practice for Board Members to their attention with a request that they draw up Codes of Practice based on the Cabinet Office model.	Continuing Action
30	PAC Report Conclusion 12	A risk based inspection programme of TPOs sponsored by DETI HQ and NITB has been completed. The review also covered the control and monitoring arrangements that the organisation sponsoring the TPO had in place. The review extended to the Invest NI TPOs that were covered in the earlier, Invest NI led, inspection programme. The Department is currently obtaining assurance that each TPO meets a specific and continuing need and that there is no wasteful duplication of effort.	Monitoring of TPOs and their sponsor control arrangements will be a continuous process, to which the Audit Committees of DETI and its NDPBs will pay particular attention.
31	PAC Report Conclusion 15	Guidance issued by DFP in relation to the use of rolling contracts has been disseminated.	Application of the guidance is a continuing action.
32	PAC Report Conclusion 17	The attention of the EBT liquidator was drawn to the Arcom loan and the payment of fees to MTF for managing loans which had already been written off.
33	PAC Report Conclusion 18	The Committee was provided, in July 2006, with a note of disciplinary action taken.
34	PAC Report Conclusion 19	The Westminster Committee was provided with a progress report on the ongoing investigations in November 2006. A further update was provided to the Assembly PAC in March 2008. The Committee’s comments were drawn to the attention of the EBT liquidator, the police and the Director of the Insolvency Service.	Further reports will be provided to the Committee on the outcomes of the investigations as they are completed.

Appendix 4

List of Witnesses Who
Gave Oral Evidence
to the Committee

List of Witnesses Who Gave
Oral Evidence to the Committee

1. Mr Leo O’Reilly, Additional Accounting Officer, Department of Finance and Personnel.

2. Mr David Thomson, Head of Supply, Department of Finance and Personnel.

3. Mr Paul Sweeney, Accounting Officer, Department of Culture, Arts and Leisure.

4. Mr John Dowdall CB, Comptroller and Auditor General, Northern Ireland Audit Office.