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.
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.
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.
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
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
To achieve this, the work of the committee would include, but not be restricted to, considering and reviewing the risk management arrangements, reports and reviews on performance and review of the processes for preparing the Council’s statement of accounts, and ensuring internal and external audit recommendations are implemented appropriately. The committee would not be responsible for determining governance arrangements, but would provide comments and would give recommendations when it felt it appropriate.
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:
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.
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).
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.
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.
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.
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.
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.
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:
Update on internal audit reports issued and acceptance/implementation of recommendations
Details of any recent District Auditor reports and actions planned including Annual Audit Letter
June Consideration of statement of accounts
Consideration of Statement on Internal Control
November Annual report of Audit Manager, including plan variations/outturn for previous financial year
Report on risk management policy and risk reduction plans
January Update on internal audit reports issued and acceptance/ implementation of recommendations
Update on internal audit reports issued in previous financial year and acceptance of recommendations
Update on implementation of recommendations agreed in the financial year preceding the last
Consideration of internal and external audit plans
Update on internal audits issues since the last meeting of the Committee
Report on risk management policy and risk reduction plans.
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.
Background Papers (DoF)
There are no background papers (as defined by Section 100D(5) of the Local Government Act 1972) relating to this report.
Name: Mr M Hill Telephone: 01483 523240
Mr P Wenham Telephone: 01483 523238
To consider the head of internal audit’s annual report and opinion, and a summary of internal audit activity (actual and proposed) and the level of assurance it can give over the council’s corporate governance arrangements
To consider summaries of specific internal audit reports as requested
To consider reports dealing with the management and performance of the providers of internal audit services
To consider a report from internal audit on agreed recommendations not implemented within a reasonable timescale
To consider the external auditor’s annual audit letter, relevant reports, and the report to those charged with governance
To consider specific reports as agreed with the external auditor
To comment on the scope and depth of external audit work and to ensure it gives value for money
To liaise with the Audit Commission over the appointment of the council’s external auditor
To commission work from internal and external audit
To maintain an overview of the council’s constitution in respect of contract procedure rules, financial regulations and codes of conduct and behaviour
To review any issue referred to it by the head of paid service or a director, or any council body
To monitor the effective development and operation of risk management and corporate governance in the council
To monitor council policies on “Raising Concerns at Work” and the anti-fraud and anti-corruption strategy and the council’s complaints process
To oversee the production of the authority’s Statement on Internal Control and recommend its adoption
To consider the council’s arrangements for corporate governance and agreeing necessary actions to ensure compliance with best practice
To consider the council’s compliance with its own and other published standards and controls
To review the annual statement of accounts. Specifically, to consider whether appropriate accounting policies have been followed and whether there are concerns arising from the financial statements or from the audit that need to be brought to the attention of the council.
To consider the external auditor’s report to those charged with governance on issues arising from the audit of the accounts
Follows CIPFA guidance on the terms of reference, though experience shows that it is necessary to ensure the different roles and responsibilities need to be distinct and understood in order to avoid apparent overlaps with the Standards Committee.
4 meetings per year.
Political balance follows that for other Council committees.
No co-opted (non-elected) members, but should be independent from Executive and Scrutiny functions.
May 2006 agenda attached.
Terms of reference regarding audit very limited: “considering matters arising from internal audit and control reports; considering the Council’s corporate systems and controls, compliance with legislation and control procedures, considering the scope of internal audit activity; and considering such matters arising from external audit as may be referred to it by the external auditor”.
2 meetings a year, but being reviewed in light of external auditor’s comments
Political balance follows other committees
5 elected members and 2 co-opted members
Council’s Constitution does not preclude members of Executive or Scrutiny committees
Agenda February 2006 attached
Current terms of reference do not cover all aspects expected which was commented upon in Use of Resources assessment; proposal (currently not presented for decision) to revise to include whole of CIPFA’s model
6 elected members, 3 co-opted members (one of whom chairs), 1 parish representative
Scheduled to meet every 6 weeks if necessary
Agenda May 2006 attached
Terms of reference include most of CIPFA model but certain elements are reviewed by scrutiny function e.g. risk management, possibly also the statement on internal control and financial statements
5 elected members, 2 co-opted (one of whom chairs), 1 parish representative. No members of the Executive, but some are members of Overview and Scrutiny committee.
4/5 meetings per annum, one being often cancelled due to a lack of business. Internal audit items usually only taken to 3 meetings.
Terms of reference cover most of CIPFA model, but were not based upon it. Might report to Standards Committee if thought appropriate
11 members, political balance as with other committees
2 meetings to deal with audit issues a year plus others as and when required, but in practice there are audit-related issues on most agendas. Agenda for June attached.
Terms of reference appear to fulfil all of CIPFA model
5 members including 1 member of the Executive (who may not chair the committee)
It appears to be a new sub-committee and information as no information is available through the Council’s website
Spelthorne Borough Council Audit Committee Agenda May 2006
To receive any apologies for non-attendance.
To receive any disclosures of interest from Members in accordance with the Members’ Code of Conduct.
To consider the Minutes of the meeting held on 18 May 2006.
Henry Arthurs from Baker Tilly, the Council’s External Auditors will provide an overview on the relationship between External Audit and the Audit Committee and answer Members’ questions.
To consider the report of the Head of Financial Services on the production of the Statement on Internal Control (copy of statement attached). The Accounts and Audit Regulations 2003 require that the Council conducts a review at least once a year on the effectiveness of its system of internal control and produces a statement on its effectiveness as part of the Council’s Statement of Accounts. Internal control and risk management are key elements of good corporate governance. The Head of Financial Services will present the Statement of Internal Control for 2006/2007.
To receive a report from the Head of Audit Services (copy of report attached).
To consider the Audit and Inspection Plan for 2006/2007 prepared by the Council’s External Auditors Baker Tilly (copy of Plan attached). The Head of Financial Services together with Henry Arthurs from Baker Tilly will present the Plan and answer any questions raised by members of the Committee.
To receive a report from the Head of Audit Services (copy attached).
The Committee is requested to consider the updated work programme for 2006/2007.