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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 11/07/2006
Introduction of an Audit Committee or Equivalent



APPENDIX B.2
Waverley Borough Council

Constitution Special interest group - 7th july 2006

Title:
INTRODUCTION OF AN AUDIT COMMITTEE OR EQUIVALENT
[Wards Affected: All]
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Summary and purpose:

Councils in England and Wales are being encouraged to set up an audit committee, or to introduce arrangements that would ensure the roles and functions of an audit committee are fulfilled. The District Auditor, in his Annual Audit Letter, has made comment that Waverley’s internal control arrangements would be enhanced and brought up to date with the introduction of such a committee. Comprehensive Performance Assessment scores are improved by the existence and the sound working of such a committee.

A report was presented to the Executive on the 27th June. The Executive asked that the SIG consider the options and make its recommendations to its meeting on the 11th July. This might be the SIG’s proposed timetable and project plan, or if it feels adequately informed, its views on whether there should be an audit committee or whether the role of an audit committee should be performed by another, or a mixture of, committees of the Council.

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Environmental implications:

There are no direct environmental considerations arising from this report, but it should be noted that an audit committee would be charged with responding to any audit or inspection reports that had an implication for environmental policies and services.

Social / community implications:

There are no direct considerations arising from this report, but it should be noted that an audit committee would be charged with responding to any audit or inspection reports that had an implication for social/community policies and services. Additionally, the introduction of an audit committee would have beneficial consequences in that the public would be able to gain greater assurance that the Council is ensuring its policies and actions are appropriate and give value for money.

E-Government implications:

As with environmental considerations, whilst there are no direct implications, an audit committee would be charged with responding to any audit or inspection reports that had an implication for e-government policies and services

Resource and legal implications:

The direct resource implications would arise from potentially increased members’ expenses (responsibility allowances and mileage claims), but more significantly the indirect implications are the officer time spent in dealing with audit matters, administering the committee arrangements and implementing decisions of the committee. It is anticipated that staff costs will be met from existing budgets.

Introduction
1. Following a number of high profile frauds within the private sector, such as Enron, various reports have been issued in recent years concerning corporate governance arrangements and requirements. This has led commercial organisations to introduce audit committees to oversee governance arrangements. Voluntary and charitable organisations have followed suit.

2. Within the public sector, many organisations are required to have such a committee. Local government is almost alone in not being required to have them, but recently Comprehensive Performance Assessment (CPA) has raised the issue. One of the key lines of enquiry is internal control, and audit committees or equivalent are propounded as a core feature of a sound, modern system of corporate governance.

3. CPA involves consideration of an authority’s internal control arrangements. To obtain the maximum score, it must be demonstrated that the authority has a sound method of delivering the core functions of an audit committee. There are good reasons for introducing one at Waverley, quite apart from seeking to score well in CPA, which are outlined in this report.

4. CIPFA has recently published “Audit Committees: Practical Guidance for Local Authorities”, which is based upon research. It is, by definition, tailored to the needs and circumstances of local authorities, whereas other guidance that is available for commercial organisations is not wholly appropriate and would need to be modified. This report has been based on CIPFA’s guidance, and part of the deliberations at Waverley will be to decide whether an audit committee or equivalent should be given terms of reference that encompass the whole of CIPFA’s model terms of reference. The full guidance can be obtained upon request from the Audit Manager.

5. This report sets out the case for an audit committee at Waverley. The Executive has asked the Constitution SIG:

.to consider whether an Audit Committee is the best way of carrying out the functions of an audit committee or, as an alternative, whether some or all of the work could best be carried out, for example, by the Corporate Overview and Scrutiny Committee

to propose the terms of reference and make-up of the Audit Committee (and/or O&S acting as Audit Committee), basing the terms of reference on the CIPFA model and addressing whether and how the Audit Committee (or alternative) should access any additional specialist support

to consider a schedule for work programme and meetings, based around two scheduled meetings a year with additional ones if necessary


6. Throughout the report, where reference is made to an audit committee, this reference (unless clearly to the contrary) also encompasses the option of ensuring an audit committee’s functions are delivered by alternative means. Similarly, where reference is made to the District Auditor, this is intended to encompass any future change should Waverley’s appointed auditor ever be a commercial auditing company/partnership.

7. After the first round of CPA, it was reported that around 50% of local authorities had an audit committee. Your officers anticipate that this will increase as CPA results are considered and actions taken by authorities in response.

Purpose of an audit committee
8. An audit committee is regarded as a sound means of bringing independent, effective assurance into the Council’s corporate governance arrangements. This assurance would be in respect of:

Risk management framework
Control environment and arrangements
Financial performance
Non-financial performance (processes and controls)
Financial reporting


9. It would bring about greater awareness within the Council of the need for internal control and the implementation of both internal and external audit recommendations. Public confidence may also be bolstered, as internal check would be increased. The essential matter to consider is the independence of the committee, which has significant implications for its membership (see also the section in this report concerning membership of an audit committee).

10. In calling it an “audit committee”, one could be led into thinking it only deals with auditors. Whilst the Director of Finance, Audit Manager and the District Auditor would be key contacts, drivers of the committee’s business and sources of advice, it would also require contact with many other managers of the Council, including service managers. It would also have a role in challenging the work of both the Executive and the various committees, including overview and scrutiny.

Core functions (including current arrangements for their fulfilment)


11. The core functions of an audit committee, what they entail and how they are currently performed are set out in the following table:

Function/scopeDescriptionHow performed at present
Risk management arrangements, the control, environment and associated anti-fraud and anti-corruption arrangementsConsider the effectiveness of the authority’s arrangementsStrategic risks are discussed and agreed with the Executive and the Shadow Executive. Operational risks are defined and agreed at officer level, and reported to the Executive. The risk management policy is approved by the Executive, and is open to call-in by O&S and ratified by Council. Plans exist to present 2006 review of risk management to O&S beforehand.

Anti-fraud and anti-corruption policies are approved by the Executive and full Council. The Director of Finance reviews them, and a report is made to members if changes are recommended. Other codes of conduct relating to staff are similarly reviewed and issued by the Head of Personnel and Central Services in consultation with Management Team.

Action is taken on risk-related issuesSeek assurances from auditors and inspectors that action is being taken Internal audit recommendations are agreed with relevant managers, and an action plan prepared which is considered by Director of Finance and Managing Director.

Recommendations are followed up with managers either at next audit (where annual reviews occur) or approx. six months after final report issued. Two Local Performance Indicators are published: % recommendations agreed and % implemented.

External audit recommendations similarly agreed with relevant managers and Director of Finance. Annual Audit Letter, which does not contain detailed recommendations, presented to the Executive and published on the Council’s website.

Officers monitor actions to mitigate risks (likelihood and impact); changes reported to Executive (see above).

Assurance statementsReview to ensure these properly reflect the risk environment and action necessary to improve itStatement on Internal Control approved by the Executive and Council along with the Statement of Accounts.

Risk management as described above.

Annual Internal Audit report presented to the Executive.

Annual Audit Letter considered by Leader, relevant portfolio holder, Managing Director and Director of Finance prior to presenting to Executive.

Inspectorate reports discussed and agreed by service managers, and reports made to Executive, and O&S committees as appropriate.

Internal audit strategy, plan and performanceApprove (but not direct) strategy and plan; monitor performanceInternal Audit plan prepared in consultation with senior and chief officers; agreed between the Audit Manager and the Director of Finance.

Plan variations agreed between Audit Manager and Director of Finance and summary reported along with summary of performance within the Annual Internal Audit report.

Audit strategy approved by Executive; reviewed by Audit Manager and changes considered necessary recommended to Executive.

External audit planComment upon depth of workDetails discussed with District Auditor by the Director of Finance, who liaises with the portfolio holder. Reported to Executive.
Internal audit reportsReview summaries and seek assurances that action taken as necessaryAs outlined above.
Audit Manager’s annual reportReceive and considerCurrently presented to the Executive.
Reports of external audit and other inspection agenciesReceive and considerAs outlined above: details of external audit reports dealt with by officers and not presented to members except Annual Audit Letter. Reports on inspections taken to Executive, and O&S committees as appropriate.
Relationships between internal and external audit, inspection agencies and other relevant bodiesEnsure relationships are effective and audit process is actively promotedOfficer-level discussions take place between internal and external audit; external audit uses internal audit’s work in forming their opinion.

Inspection agencies tend to come to Waverley infrequently and tend to specify who they wish to see and what work they wish to do. Members (Executive/O&S) are advised of planned inspections, and inspectors meet key members as part of their planning and fact-finding.

Financial statements, external auditor opinion and management responseConsider financial statements and ensure suitable accounting policies and treatments are followed and any changes justified; provisions are justifiable; external auditor’s comments on significant adjustments and internal controlsStatement of Accounts presented to the Executive for approval by Council.

Detailed progress on actions is not reported to members other than in the Annual Audit Letter; otherwise these are monitored and implemented by the Director of Finance in conjunction with Managing Director/ Management Team.

The alternative to an audit committee

12. Both CPA and the CIPFA Code of practice for Internal Auditors in Local Government refer to an audit committee “or equivalent”. This acknowledges that some authorities might consider that such a committee might not be necessary and the roles could be fulfilled by alternative means. At the meeting of the Executive on 27th June, the District Auditor stated that his recommended approach would be to have an independent committee, but he also acknowledged that alternative arrangements could achieve the desired results provided careful consideration was given to all aspects of an audit committee’s role

13. One alternative would be to formalise and endorse the current arrangements, with appropriate modifications, such as requiring a report to be made to the Executive of any actions taken by officers. This, though, would still leave a situation where there is no member involvement in some of the functions.

14. Member involvement at Waverley involves the Executive in:

approval of the Internal Audit Charter and Strategy
receipt of and noting the Audit Manager’s annual report
receiving the District Auditor’s Annual Audit Letter and annual plan
approving the various assurance statements (such as the Statement on Internal Control after it has been considered by the Corporate Overview and Scrutiny Committee) and
approving the risk management policy. (There are plans to refer this to overview and scrutiny in order to improve the element of challenge.)

15. What is missing in some of these matters is that the opportunity to challenge; that could be addressed by widening the terms of reference of an overview and scrutiny such as the Corporate Overview and Scrutiny Committee, to encompass the financial statements, assurance statements etc.

16. The District Auditor, again in the Use of Resources assessment, made specific reference to the following functions of an audit committee that are not currently undertaken with any member involvement:

Approval of/comment upon the Internal Audit Plan
Monitoring of the Internal Audit Plan
Consideration of summary internal audit reports


17. Therefore it may be regarded as a reasonable alternative that with the opening up of overview and scrutiny business, and inclusion of the issues in the preceding paragraph in the Executive’s business (subject to review by overview and scrutiny) that Waverley could demonstrate that the functions of an audit committee would be fulfilled.

18. One authority has had an arrangement where the Executive had separate meetings at which it sat as an audit committee. Such a solution would appear to be contrary to best practice, as there would be no independence. It would also be open to criticism if applied at Waverley because the Executive is single-party. Other authorities have given their Standards Committee responsibility for audit; this is discussed further in the next section.

An audit committee at Waverley

19. With the introduction of an audit committee, audit and governance matters would become part of formal Council business, which (as outlined above) would provide backing to, and raise the profile of, such matters.

20. As stated, some other authorities have assimilated audit committee roles into their standards committee. This reduces the number of committees, and may be justified on the grounds that standards issues are allied to audit and governance issues. However, there are differences, which are outlined and illustrated in paragraphs 29 to 31 below. CIPFA guidance is clear in that it says that the audit committee should be able to review the work of any council committee, and this would include the Standards Committee. As the Standards Committee is responsible for ensuring there are high levels of good conduct and probity amongst members, it forms an integral part of the system of internal control. This is exactly what an audit committee is responsible for reviewing, and independence would arguably be compromised if the Standards Committee were also charged with audit responsibilities.

21. Analysis suggests that a separate committee would be the optimum solution. It would also provide the best form of compliance with CIPFA guidance. The key aim would be to have as many members as possible who are not also members of any of the existing committees, including the Executive, in order to avoid conflict of interest.

22. The SIG has been asked to recommend which of these functions a Waverley audit committee should undertake. CIPFA’s model set of terms of reference is attached at Annexe 1. In addition, some research has been undertaken by your officers as to the arrangements currently in place at some other local authorities within close proximity to Waverley, and the findings are summarised in Annexe 2. Requests for information were made by e-mail, given the need for quick responses, and consequently some respondents gave more detailed answers than others and there has not been the opportunity to follow-up any matters.

23. Members will see that in several of the authorities surveyed the Standards Committee has been given responsibility for audit. If this were considered for Waverley, there would be a consequent need to review the membership of the Standards Committee. This is because there are at least two nominations to the Committee from the Executive, which whilst it gives backing from the Executive to any decisions made by the Standards Committee would arguably compromise the independence of the Committee when dealing with audit matters. Such a decision would require further considerations of the Council's constitution. There would also be the need to consider whether the Council would wish independent members to deal with audit matters. Independent members whilst trained in and familiar with governance issues would be unlikely to have the breadth of knowledge needed to deal with audit matters which cover all aspects of the Council's business.

24. It is relevant to note that the District Auditor expressed a view when questioned at the Executive on the 27th June that a stand alone, fully independent audit committee represents the optimum solution. Runnymede Borough Council, as indicated in Annexe 2, is reconsidering its combined committee approach and may decide to split the two roles in future. As described below, there are some distinct differences between the roles of a standards committee and an audit committee.

Audit committee responsibilities and S.151 responsibilities

25. If an audit committee is established, its members must clearly understand the extent of their responsibilities. For example, whilst it would have a role in approving the Internal Audit Plan, the Director of Finance is the Council’s S.151 officer and it is part of his statutory duty to ensure that the Council has sound financial arrangements. This includes determining whether Internal Audit coverage is appropriate, and in order to fulfil his statutory duty the committee would need to understand that it is there to support the Director rather than direct his actions and decisions. Therefore it would not be appropriate, for example, for it to determine the precise level of resources to be applied to an audit review. There are also operational reasons for such decisions to rest with management, as flexibility is required as the Plan may have to be adjusted in the light of developments and unforeseen events. It would be appropriate for the committee to define priorities, which would guide amendments to the Plan that may need to be made by the Audit Manager (in consultation with the Director of Finance).

Other audit work not covered by the audit committee

26. There would be certain elements of both the Audit Manager’s and the District Auditor’s work that would not be reported to an audit committee. Both offer the service of support and advice, which is outside their statutory roles. Managers commission this work; for example, they may need an independent review or may have issues on which they require an audit view. In such circumstances the decision to report such work to the committee would rest with the relevant managers, as it is, strictly speaking, non-audit work.

Wider governance responsibilities

27. The plans and programmes of the District Auditor would be presented and discussed. Whilst the ultimate level of input will be restricted because of national requirements laid down by the Audit Commission, the committee could ask that certain matters be investigated. The committee would receive the District Auditor’s reports, and the committee would have access to the District Auditor to discuss the reports and receive explanations. It could therefore contribute to the response of the Council to the District Auditor’s Annual Audit and Inspection Letter, but giving the Council’s response would remain the responsibility of the Executive. An audit committee could also act as a co-ordinating body, seeking to resolve any differences in aims and intents between the District Auditor’s and internal audit’s work so as to increase efficiency and thus value for money.

28. Governance is considered to be encompass a broad range of activities including:
Risk management
Assurance framework e.g. Statement on Internal Control
Waverley’s codes of governance, standards and conduct
Arrangements for securing value for money
Anti fraud and corruption arrangements, “whistleblowing” policy etc.


29. The Standards Committee is required by law to deal with matters on member conduct, and already has responsibility for codes of conduct. Clearly there is a degree of synergy between the work of the Standards Committee and an audit committee, and the two would need to work in harmony.

30. The key difference would be that the Standards Committee is responsible for approving and recommending to Council appropriate standards and codes of conduct, and for dealing with appropriate incidents of alleged misconduct. An audit committee would be responsible for assessing the work of the Standards Committee in the context of the overall framework of corporate governance and making recommendations accordingly.

31. To illustrate, an audit committee would not undertake the review of codes and standards for behaviour, which would still be within the remit of the Standards Committee. An audit committee may take a view that, in the light of either a change in circumstances or an identified weakness in the corporate governance framework, a code or protocol should be reviewed. It would therefore make a recommendation that the code or protocol in question be reviewed by the Standards Committee.

32. In reviewing financial statements, such as before the Council approves the Statement of Accounts, a view can be given on appropriate accounting policies, treatments and provisions included in the accounts. It will also be able to comment on responses made to the District Auditor’s recommendations and concerns raised in previous years.

Membership of an audit committee

33. There are certain central issues that would need to be resolved, as it is important that an audit committee has access to adequate expertise and skills e.g. financial, inquisitive, ability to probe, independent attitude etc. CIPFA suggests that authorities could consider appointing co-opted members, however the audit committee works on Council-focussed business and officers believe co-opted members are not appropriate.

34. The work of an audit committee is not as concerned with personal conduct as the Standards Committee, which has co-opted members who are not closely acquainted with the elected members in order to avoid conflicts of interest. Whilst there may be a need to deal with allegations of financial or other misconduct from time to time, the normal work is concerned with management of the Council. Given this difference and the following comments about the personal qualities required, appointments to the Committee should be from within Waverley’s own elected members and that the Committee should then be permitted to call for specialist advice as it considers necessary.

35. Independence from the Executive and other committees of the Council is the best way to achieve independence. At present there is only one member who is not a member of any of the Council’s committees. This would pose difficulties, and officers therefore recommend that the members in the key decision-making roles only be excluded. This would not only exclude members who are either members of the Executive but it is suggested that the Chair or Vice-Chair of the overview and scrutiny committees, and members of the Licensing or Standards committees would also be excluded. At present, this would leave 25 members eligible for membership. Members are asked to consider this suggestion. Clearly, if the SIG were minded to recommend that an O&S committee be given the role of audit committee, this suggestion would not be relevant.

36. The audit committee would ideally consist of members who possess relevant personal qualities and knowledge. The personal qualities are those of being able to question, probe and obtain clarification on complex issues. Relevant knowledge includes an understanding of the requirements of legislation and local arrangements, risk management, internal control, the Council’s core activities, accounting issues and regulation and compliance. A strong chair is required, and discussions at meetings need to be free and open.

37. It would then be necessary to determine the number of members that should sit on an audit committee. CIPFA suggests that if there are too few members may mean that political balance might be difficult to achieve. HM Treasury guidance for central government suggests between three and five members. The quorum also needs to be defined. Three is perhaps too small, which leads to the suggestion that five would be most appropriate.

Suggested work programme

38. In its guidance, CIPFA recommends that an audit committee meets four times a year. Taking this as a starting position, it the committee’s work programme might be as follows:


39. However, if the SIG were to recommend at least two meetings supplemented as necessary by business arising, the two meetings would most likely be along the following lines:

Conclusion

40. The District Auditor regards the Council as not following best practice, and its CPA scores will be adversely affected should it continue to operate without an audit committee. A separate audit committee would best deliver the aims and benefits of having such a committee, although other authorities have successfully introduced arrangements where the duties of an audit committee are covered by one or more other committees.

41. Two meetings a year, timed appropriately, may prove to be sufficient to conduct the functions of an audit committee, provided that there was adequate flexibility to hold further meetings is there were pressing and urgent business.

42. There are matters to be considered concerning the membership of an audit committee, not only as to the personal qualities and knowledge of its members but also achieve the desired independence from the decision-making roles and executive functions.

Recommendation

The SIG considers the options regarding an audit committee at Waverley in accordance with the request of the Executive and provides officers with a direction as to the report to be submitted to the Executive’s meeting in July 2006.

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Background Papers (DoF)

There are no background papers (as defined by Section 100D(5) of the Local Government Act 1972) relating to this report.

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CONTACT OFFICER:

Name: Mr M Hill Telephone: 01483 523240

E-mail: mhill@waverley.gov.uk

Mr P Wenham Telephone: 01483 523238

E-mail: pwenham@waverley.gov.uk


Comms/executive/2006-07/101


Annexe 1

Annexe 2




Runnymede Borough Council Standards and Audit agenda February 2006-06-30





Guildford Borough Council Standards Committee agenda May 2006


Surrey Heath Policy and Resources Select Committee agenda June 2006 extract

4 External Auditor’s Joint Audit and Inspection plan 2006/07