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Establishing an Audit Committee for Sheffield City Council
Report of the Director of Corporate Resources
Cabinet Report 24th May 2006
Establishing an Audit Committee for Sheffield City Council
Purpose of the Report
The purpose of the report is to seek approval for the establishment of an Audit Committee for the City Council.
Introduction
This report outlines the reasons for seeking approval to establish an Audit Committee for the Council and describes the purpose of an Audit Committee.
It will propose that the current Scrutiny Board for Strategic Resources and Performance meets as an Audit Committee with independent advisors. The arrangements will be subject to review in a year’s time. The report also provides the draft terms of reference for approval.
Background
In recent years a significant amount of guidance and regulation has been available on governance arrangements for both private and public sector bodies and a common feature of the governance arrangements for significant sized organisations is the existence of an Audit Committee. In some sectors such as the Health Service, Audit Committees are a statutory requirement.
There is no statutory requirement placed on local authorities to establish an Audit Committee but they are becoming increasingly common and the Audit Commission promote Audit Committees as a feature of good governance practice. This is illustrated in the recent Comprehensive Performance Assessment (CPA) Key Lines of Enquiry (KLOE’s) where the establishment of an independent Audit Committee is an explicit feature required of any authority aspiring to achieve an “excellent” status for the Use of Resources element of the CPA process.
The Chartered Institute of Public Finance and Accountancy (CIPFA) regards Audit Committees as being a key component of corporate governance and emphasises the importance of Audit Committees being established. Many of the issues raised in this paper are drawn from CIPFA’s recently published guidance for local authorities on this subject.
Purpose of an Audit Committee
The CIPFA guidance suggests that the purpose of an Audit Committee is to provide independent assurance of the adequacy of the risk management framework and the associated control environment. It should also provide independent scrutiny of the authority’s financial and non-financial performance and oversee the financial reporting process.
In addition, an Audit Committee provides a forum to review the Statement of Internal Control and any significant issues arising from any external or internal audit work.
An Audit Committee should:
- consider the effectiveness of the authority’s risk management arrangements, the control environment and associated anti-fraud and anti-corruption arrangements.
- seek assurances that action is being taken on risk-related issues identified by auditors and inspectors
- be satisfied that the authority’s assurance statements, including the Statement of Internal Control, properly reflect the risk environment and any actions required to improve it
- review summary internal audit reports and the main issues arising, and seek assurance that action has been taken where necessary
- receive the annual report of the Chief Internal Auditor
- consider the reports of external audit and inspection agencies
- review and scrutinise the financial statements, external auditor’s opinion and reports to members, and monitor management action in response to the issues raised by external audit
An Audit Committee should not look at an Authority’s Code of Conduct or conduct any individual investigations in relation to it. Neither will it receive the external auditors annual management letter.
It is also important to note here that the responsibility of identifying and managing risk lies with the Executive. The role of the Audit Committee is to review the effectiveness of these arrangements.
Key Areas of Work for an Audit Committee
Internal Audit
The Audit Committee should have a clear role in relation to the authority’s internal audit function. This should involve:
- formally approving (but not direct) the overall strategy to ensure that it meets the council’s overall strategic direction
- approving the annual programme of audits
- monitoring progress against the plan and assessing whether adequate skills and resources are available to provide an effective audit function
- consideration of summaries of work done, key findings, issues of concern and action in hand as a result of audit work.
- judge the effectiveness of internal audit by receiving feedback on the work carried out including responses to internal audit recommendations.
A key part of the role is receiving, reviewing and approving the annual report from the Chief Internal Auditor in order to reach an overall opinion on the internal control environment and the quality of internal audit coverage.
External Audit and Inspections
The Audit Committee’s role should include receiving and considering the work of the external auditor.
The programme of audits should follow a nationally agreed path to some extent but, where local flavour from the auditor’s risk assessment can be added, the committee should be given the chance to comment on the inclusion of any audit work and should receive reports following the completion of such work in order to monitor action to be taken.
The Audit Committee should contribute to the council’s response to the Audit Commission’s annual audit and inspection letter, reports and opinion. It should also consider and express and opinion on the selection and rotation of the external auditor.
Financial Statements
The Accounts and Audit Regulations 2003 require local authorities to have in place sound systems of internal control including approval of the Statement of Accounts. These Regulations have also gradually brought forward the deadline for having the Statement of Accounts approved to a point where the deadline for the approval of the financial statements for 2005/6, and future years will be the 30 June. This will prove to be very difficult under the current approval arrangements.
The Audit Committee should scrutinise, review, challenge, where necessary, and approve the financial statements in accordance with the Accounts and Audit Regulations 2003 paying particular attention to:
· critical accounting policies and practices and any change in them
· decisions requiring a major element of judgement
· the extent to which the financial statements are affected by any unusual transactions in the year and how they are disclosed
· the clarity of disclosures
· significant adjustments resulting from the external audit
· compliance with the Statement of Recommended Practice (SORP)
· compliance with other legal and regulatory requirements and the reasons for any deviation from those requirements
The Audit Committee will receive the external auditors report on the Accounts, currently known as the SAS 610 letter, which will report in September of each year and take the appropriate action in respect of this report.
Control Strategies
The council has a number of processes and structures in place to regulate its activities and control the actions of its employees, elected members and contractors. The Audit Committee should take a view on whether these arrangements have been properly formulated, and remain effective. Internal audit arrangements and the function of the Audit Committee will be only one part of the internal control arrangements required. There will be a need to balance the function for review of financial matters with that for ethics and standards. Those functions of promoting and maintaining high ethical standards will continue to be exercised through the Standards Committee and the monitoring officer . The proposed terms of reference reflect this.
Regular reports to the committee on action taken and annual statements of the continued appropriateness of the strategies will be necessary if the Audit Committee is to perform this role.
The strategies to be overseen by the Audit Committee should include:
- risk management
- the assurance framework, including the production of the Statement on Internal Control (SIC)
- local codes of corporate governance, standards and behaviour
- arrangements for delivering value for money
- anti-fraud arrangements
- anti-corruption arrangements including the authority’s whistle-blowing guidelines
- anti money laundering arrangements
Skills and Experience
To be effective, members of the Audit Committee will require certain financial / governance skills and it would be of benefit if they had experience in some of the key areas to be considered by the committee.
Whilst financial awareness is essential, the Audit Committee would be greatly enhanced by the use of independent advisors who have an accounting background or qualification with some experience of corporate governance.
Audit Committee members should be expected to become familiar with:
· governance – understanding of the requirements of legislation and of local arrangements including the councils objectives, organisation, structure and culture
· risk management – recognising the requirements of CPA
· internal control assurance
· accounting issues
· regulation and compliance
A training programme would be devised for all members to develop and enhance all the necessary skills.
Proposed Model/ Terms of Reference
The preferred model would be an Audit Committee consisting of elected Members with at least one independent advisor to advise the chair where necessary.
Draft terms of reference have been drawn up for this Committee, based on the CIPFA guidance, which are included in Appendix A for information. They will be reviewed and developed as the Audit Committee establishes itself. It is implicit in the terms as drafted that these will not effect the roles and responsibilities of Cabinet, Council and other committees. However, they may seek to influence, through making recommendations, to improve the effectiveness of existing arrangements and that would be a legitimate function of the Committee.
Constitutional Issues
On the basis of the Council’s existing constitution, which is based on the Local Government Act 2000, the Audit Committee could be set up through the Scrutiny Function. As there is already a Scrutiny Board for Strategic Resources and Performance which has amongst other things within its remit financial processes and management of internal resources it is recommended that initially this Scrutiny Board meets as an Audit Committee and that this is subject to review in a years time. The members of the Audit Committee will be supported by at least one independent advisor.
However, within the scrutiny framework the Audit Committee can only have an advisory, not a decision making role, which will mean it will not be able to give final approval to the Statement of Accounts, although it will be able to consider the reports in detail and receive the external auditors report. Final approval of the accounts will as now be through Council. At present, the Council cannot delegate its responsibilities in relation to the Statement of Accounts to a subordinate body. It is possible that, as Audit Committees become more common practice within Local Authorities that this changes.
Meeting Arrangements
The first meeting will be on the 26th June to scrutinise, discuss and recommend to the Full Council meeting on the 5th July that the Accounts are approved.
The Audit Committee will then meet at least quarterly, with a meeting in September to receive the external auditors report on the Accounts. As well as the existing members of the Scrutiny Board for Strategic Resources and Performance and the independent advisor(s), Officers of the Authority, the Leader or Deputy Leader of the Council, the Cabinet Member for Finance and the Chief Executive may also be required to attend to answer questions. Currently, the Deputy Leader is the Cabinet Member for Finance so this elected Member would attend under both remits if necessary.
Finance and Resource Implications
The training cost associated with setting up the Audit Committee will be contained within existing member training budgets and the cost of proposal, including independent advice, will be covered within existing budgets within Chief Executives Directorate.
Recommendations
That the Scrutiny Board for Strategic Resources and Performance meets as an Audit Committee, subject to review when appropriate, with the first meeting being on the 26th June to comply with the Accounts and Audit Regulations 2003.
That the second meeting of the Scrutiny Board as an Audit Committee will be in September to receive the external auditors report on the Statement of Accounts.
That the Director of Resources and Chief Executive be delegated to identify / recruit at least one suitable advisor with relevant experience / qualifications to advise the Audit Committee.
That a further report will be produced when appropriate to update on how the Audit Committee is functioning and recommend any changes if necessary, including any constitutional amendments surrounding the decision making function.
Suggested Audit Committee Terms of Reference Appendix 1
Below are the suggested Terms of Reference for the Audit Committee. It should be noted that these terms of reference will be revised further to ensure congruence with other statutory and established bodies as necessary.
Audit Activity
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 internal audit service.
To consider a report from internal audit on agreed recommendations not implemented within a reasonable timescale.
To consider the external auditor’s annual letter, relevant reports, and the report to those charged with governance.
To receive any detailed responses to the external auditors annual letter.
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.
Regulatory Framework/Risk Management
To maintain an overview of the council’s constitution in respect of contract procedure rules, financial regulations and codes of conduct and behaviour.
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 of Internal control and to 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.
Accounts
To review and approve the annual statement of accounts in line with the statutory requirements including those relating to the publishing deadlines. 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 e 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.
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