Agenda item

Report of the Director of Finance and Resources

The interim Chief Internal Auditor introduced a report and gave a presentation on the CIPFA Practical Guidance for Local Authorities and Police 2018.  This updated guidance that was issued in 2013.  The publication was long awaited as several publications and legislation had come into being during this intervening period.  A copy of the document would be shared with the Committee.

In introducing this item the interim Chief Internal Auditor reminded Members of the benefits of an Audit Committee: promoting good governance and its application to decision making; raising awareness of effective control environment; supporting effective risk management arrangements; advising on robustness of the assurance framework; reinforcing effectiveness of internal audit and external audit; aiding achievement of objectives via effective assurance arrangements; supporting the development of robust value for money arrangements; helping implement ethical governance values, and countering fraud and corruption and promoting transparency, accountability and effective public reporting.  The interim Chief Internal Auditor also reiterated that the Audit Committee was a key component of the authority’s government arrangements.

The position statement set out the main scope of the Audit Committee and then other chapters of the guidance detailed the core and wider functions and a self- assessment checklist that had been completed by the Internal Audit team in March 2018.  The key changes were highlighted and referenced against the pages in the guidance document.  The Interim Chief Internal Auditor then went on to explain what the key changes were.

The Audit Committee should be independent of Executive and Scrutiny functions.  The Guidance went a step further and the latest publication states that the Committee should also include an independent member. 

Secondly, there is reference to audit committees considering the robustness of risk management and consider not only partnerships but also collaborations.  As the Guidance also included the Police, this reference referred to the emergency services.  The Chairman stated that this also included commercial collaborations.

The Guidance went on to suggest that in monitoring the effectiveness of the control environment, supporting standards and ethics should be included.

In regard to the purpose of Audit Committees, previously Audit Committees were seen to add value in relation to developing an effectiveness of the control environment. Now, in addition, there was a need to raise awareness of the need for sound internal controls within the organisation.

In relation to supporting the quality of the internal audit controls, the Guidance suggested reinforcement of the objectivity, importance and independence of internal and external audit functions.

In terms of the core functions of the audit committee, the high-level core functions remained unchanged.  However, there were some changes within the detail.  The detail had been updated to include the new deadlines for the review of the AGS and financial statements and with reference to internal audit, reference was made to the PSIAS (Public Sector Internal Audit Standards) including the mission of internal audit, the Code of Ethics, definition of internal audit and the core principles of an effective internal audit team.

In terms of the Audit Committee’s role in overseeing the independence, objectivity and importance of internal audit, there was some finer detail in terms the Audit Committee confirming the organisational independence of internal audit and around the safeguards in place to limit impairments of the Head of Audit and Financial Services.  Both details are included in the Annual Outturn Report.  Changes had taken place within the internal audit team so that the interim Chief Internal Auditor’s role was now solely around audit and the interim Head of Internal Audit and Financial Services had retained the risk management responsibilities.  There was further detail in the Guidance around receiving communications on performance relative to the internal audit plan and other matters. The Committee receives an update on recommendations; delivery against the plan; the annual outturn report and the limited assurance reports in the plan. There was also a section on approving any significant additional consulting services (not included in the Audit Plan) – there were none of these.  In terms of value for money, where external audit has issued a qualified conclusion on the Council’s value for money the Committee should ensure there is a robust plan to address the issues. Further guidance was given on this to the Committee in the report.  With reference to Counter Fraud and Corruption, reference was made to the revised counter fraud standards referring to the Fighting Fraud Locally Checklist and managing fraud and corruption. An update to this was given as part of the annual outturn report.  An update on the Fighting Fraud Locally Checklist was scheduled for discussion at a future meeting of the Committee.  In terms of external audit and how the Audit and Standards Committee gives oversight to the work of external audit and promotes its independence. In the latest guidance, the role of the Committee in terms of the appointment of external audit by a Panel or PSAA (Staffordshire County Council has gone down the PSAA route) and monitoring the external audit process was recognised.  It states within the guidance that external audit should disclose to the Committee a statement regarding its independence. This was stated in the audit plan presented to the Committee in March, in the external auditor’s plan presented in July and in the ISO 260 report. There is a new section on potential threats to independence within the Guidance.

Quoting recent national examples, Members asked how the Committee could be assured of the integrity of the external auditors appointed, given the small market place that there is for external auditors.  The interim Head of Audit and Financial Services stated that the Financial Reporting Council were reviewing the issue regarding the monopoly that the four main audit companies have, and guidance is awaited.  PSAA do their own annual review of the external auditor and the interim Chief Internal Auditor agreed to share the scope of this review with the Committee.

Turning to the core functions, the deadline for review of the annual governance statement had been revised to 31 July from 30 September. In relation to partnerships governance, reference was made to the emergency services collaborations and recognition was given to the complexity of gaining audit assurance in partnerships and collaborations.  In terms of the possible wider functions, there were no changes to the detail in this section.  This was around the Audit Committee considering requests to consider issues referred from other Committees within the authority, working with different committees to consider ethics, working with other committees to review matters such as the treasury management function and commenting on other public reports from time to time.

Regarding the independence and accountability of the Audit and Standards Committee, 85 per cent of Councils had Audit Committees reporting to full Council.  The number of standalone committees had declined from 58 per cent to 47 per cent.  The Chairman reassured Members of the independence of the Audit and Standards Committee.  The Guidance also states that the Head of Internal Audit should have free and unfettered access to the Chief Executive and Chair of the Audit Committee.  This was the case in Staffordshire. Finally, the Committee were regarded as most effective when discussing governance, risk and control issues with responsible managers directly. 

The interim Chief Internal Auditor confirmed that the Committee was displaying all the attributes of what an audit committee should be.  In terms of membership and effectiveness there is no change in terms of the five attributes that an Audit Committee should have but more detail is given e.g. the right mix of apolitical expertise and in relation to the Chair there are additional attributes such as promoting open discussion; encouraging a candid approach from all participants and being interested in several disciplines.    Any register of interests should be maintained in the event that independent members are appointed to the Committee. 

Members asked why the Committee did not have any independent Members.

The Chairman agreed that consideration of this should take place.

The latest Guidance identified the top three difficulties for Audit Committees as limited knowledge and experience of members; the Committee not being seen as a priority by other members and risks regarding the intrusion of political interests.  A new risk had also been identified within the Guidance relating to the risk of a breakdown in the relationship between committee members and the Executive, Police and Crime Commissioner or Chief Constable or with senior management.

The above guidance suggests that changes to the Terms of Reference should also include a review of the governance and assurance arrangements for significant partnerships or collaborations and that the Committee consider any impairments to independence or objectivity arising from additional roles or responsibilities outside of internal auditing of the Head of Internal Audit.  This is given in the annual audit report but should be reflected in the Terms of Reference.  Currently explicit reference is not given to audit having free or unfettered access to the Chairman of the Audit and Standards or being able to have a private meeting with the Committee if required. This will be taken into consideration in updating the Terms of Reference. In terms of external audit, consideration should be given to how the Committee fulfils the role of supporting external audit independence. A review of any issues raised by the PSAA would allow for consideration of this area.  Under accountability arrangements, consideration should be given as to whether the Committee wished to produce an annual report.  The interim Chief Internal Auditor suggested that consideration be given to revising the Terms of Reference and they be brought back to the next meeting of the Committee and then if approved that this go to full Council for inclusion of the revised terms of reference within the Council’s Constitution.

There were no changes in respect of the skills required of Audit and Standards Committee members.  Finally, there is a section on self-assessment and this suggests that the Committee review their Terms of Reference to ensure that it supports the ethical framework; that consideration be given to the appointment of independent members and in relation to the effectiveness of the Committee there are four additional points that should be considered, and these will be added to the self-assessment Checklist.

Members considered that the Audit and Standards Committee should have a higher profile within the Council.  The Chairman suggested that this be considered as part of the Terms of Reference and that this be brought back to the next meeting.  He agreed that it might be helpful to have a Report back to full Council on the work of the Committee and consideration should be given to the frequency of this report.

RESOLVED: a) A link to the Changes to the Practical Guidance for Local Authorities and Police 2018 Edition be shared with the Committee b) That the scope of the PSAA review of the external auditor be shared with the Committee c) the Terms of Reference will be reviewed and brought back to the December meeting.