Contact: Ejner Knudsen, 01962 847403, email: [email protected]

1 Introduction

1.1 The purpose of this report is to review delivery of the current Audit Strategy and highlight changes for approval by members of the Governance Committee.

2 Background

2.1 The Audit Strategy 2004 to 2007 was reviewed, updated and approved by Governance Committee in March 2005. This included a number of long term developments which are still in progress. The aim of this report is to review progress in delivery of the Strategy and ensure that it remains up to date. This enables internal audit resources to continue to be used effectively in providing an appropriate level of assurance.

2.2 The revisions to the audit strategy have already been considered by the Treasurer's Management Team, together with the summary audit plan for the three year period (copy attached at Appendix A). Chief Officers have also been consulted on their departmental plans.

2.3 To date, the audit strategy, which has been formally documented since October 1999, has been largely successful in achieving the aims of internal audit identified in the Accountancy Practices Board (APB) guidelines, the CIPFA Code of Practice for Internal Audit in Local Government in the United Kingdom, (the Code) and the CIPFA Local Government Audit Manual.

2.4 The definition of internal audit, as stated in the Code, is as `an assurance function that primarily provides an independent and objective opinion to the organisation on the control environment comprising risk management, control and governance by evaluating its effectiveness in achieving the organisation's objectives. It objectively examines, evaluates and reports on the adequacy of the control environment as a contribution to the proper, economic, efficient and effective use of resources.' The terms of reference for the internal audit service provided to Hampshire County Council were approved by Governance Committee in March 2005, but have since been updated at paragraph 25 to reflect the requirements of the Freedom of Information Act. Revised terms of reference are attached as Appendix B for approval by members, with the changes highlighted.

3 Review of current Audit Strategy

3.1 We have made good progress in working towards delivering the three year Audit Strategy agreed in 2004/05 and updated in 2005/06. The areas subject to ongoing development are highlighted below.

Corporate governance

3.2 The Audit Strategy for 2004/05 allowed for a full systems based review of corporate governance for each department over a three year cycle, supported by limited scope reviews on an interim basis, as well as an annual review of corporate arrangements.

3.3 The first cycle of reviews has now been completed - these have been high level reviews of corporate governance arrangements, providing a broadly based assurance. The findings of these reviews have been reported in our annual internal audit reports and have led to action by management to raise awareness of and compliance with the County Council's Code of Corporate Governance.

3.4 The scope of these reviews continues to expand each year to reflect developments in corporate governance. To accommodate this, we propose a change in approach whereby agreed elements of the programme are covered each year in every department over a five year cycle. This will ensure that the full programme is covered, whilst providing more robust assurance in each area.

Establishment audits

3.5 In line with our current strategy, there has been a gradual move away from the strict cycle of establishment visits, with a corresponding increase in departmental systems reviews. This enables us to review the adequacy of centrally prescribed controls and their application in a sample of establishments so that best practice can be disseminated across the department. The only exception to this is in Adult Services, where compliance with some controls in establishments had previously been found to be poor. This has improved over the last two years and as a result we propose to implement the current strategy in Adult Services from 2006/07.

3.6 The current strategy also introduced the idea of piloting a Control Risk Self Assessment questionnaire for completion by managers, particularly in schools, to be followed up by short notice visits in a sample of these to confirm compliance with controls. This was not pursued due to the DfES' published expectation that secondary schools should meet the Financial Management Standard in Schools by 31 March 2007, using a similar questionnaire based approach.

3.7 In the meantime, we intend to carry out short notice or unannounced visits in Adult's and Children's Services as part of our ongoing assurance and fraud detection work.

Fraud and irregularity

3.8 We are still working towards delivering the current strategy and a separate fraud and irregularity team has been set up and is receiving ongoing training and development. In addition, the Governance Committee also approved the Fraud Strategy and related policies during 2005/6.

3.9 However, in 2005/06 we have seen an increase in the incidence of reported cases and the resulting investigation work has delayed the full implementation of a proactive fraud detection programme. This will be addressed during 2006/07, with additional provision in the budget for the deployment of increased resources specifically to this area. In the meantime the results of the fraud investigation work have been used to inform our risk assessment process for the 2006/07 internal audit plan.

3.10 Since our 2005 Audit Strategy update, we have established closer liaison with the Police and so far it has not been necessary to pursue in-house prosecutions. The Police have been very responsive and are progressing cases on our behalf.

3.11 There is still concern over the level of awareness of the County Council's Fraud Strategy, Reporting Concerns and Work policy and other related policies and this has also been raised by the Audit Commission in their latest Annual Audit Letter. These will need to be re-launched to raise the awareness throughout the County Council, alongside other changes such as the thresholds in Financial Regulations.

3.12 In line with our Audit Strategy, we have carried out a cost benefit analysis for developing in-house computer forensics capability and as a result have made arrangements to buy these services as required from New Forest District Council. In addition, we continued to develop the skills of computer auditors in the handling of electronic evidence.

Value for money

3.13 As outlined in the 2005 Audit Strategy update, we have incorporated value for money into our corporate review of corporate governance, which is currently in progress. This work will be extended to the departments in 2006/07.

3.14 As previously stated, we will also report on specific value for money issues where these are highlighted through our internal audit reviews during 2006/07. The implementation of a new audit management system during 2006/07 will facilitate the reporting requirements for this.

Efficiency plan

3.15 Following liaison with the Audit Commission, no specific provision for reviewing arrangements for monitoring the delivery of the County Council's efficiency plan have been included in the internal audit plan as the Audit Commission will be undertaking this work.

4 Change issues

4.1 There are a number of change issues that will impact on the internal audit strategy for 2006/07, including:

Further organisational changes

4.2 The 2006/07 audit plan has been realigned to recognise the implementation of changes in Adult Services and Children's Services. We have also reflected the creation of a new Shared Service Centre, for payroll input, in both the Human Resources and County Treasurer's departmental plans. It is likely that the results of this work will contribute towards the annual audit opinions for both departments in future. We will review the impact of the merger of the Chief Executive's and Human Resources departments during the year but we do not anticipate major change to the internal audit provision in these areas.

The Financial Management Standard for Schools

4.3 The DfES has announced its expectation that all secondary schools should meet the Financial Management Standard for Schools by March 2007. The DfES are consulting on the details of the proposals, but based on our current understanding:

· the County Treasurer will be required to sign an annual statement to support the Section 52 outturn statement to confirm that arrangements are in place within the authority to ensure that all secondary schools meet the Standard or are subject to appropriate action to ensure that they will meet the Standard

· to gain this assurance, the County Treasurer proposes that schools should either have a three yearly external assessment or submit an annual self-assessment against the Standard. The results of these returns, as well as the outcomes of internal reviews and inspections carried out by Internal Audit, Education Financial Services, Governor Services etc. will be used to provide the assurance necessary for the County Treasurer to sign the annual statement

· external assessment can be carried out by internal audit or DfES nationally accredited firms. We will be offering this service as an addition to the County Treasurer's Service Level Agreement to schools

· a decision on the introduction of the Standard as mandatory in primary and special schools has yet to be announced, but the indications are that a phased introduction by 2010 is the DfES' current intention.

Local Public Service Agreements

4.4 During 2005/06, we carried out work to validate the data supporting the LPSA 1 funding, where targets were met. We propose to extend this work in future to review the LPSA 2 targets to ensure that monitoring and dataflow systems are in place to secure the funding.

Pay and Benefits Project

4.5 The 2006/07 audit plan will reflect the ongoing development of Pay and Benefits, focussing particularly on the implementation phase to ensure that adequate controls are in place to support the roll-out.

International Standards for Auditing

4.6 The introduction of the International Auditing Standards will result in a change to the external audit approach for the 2005/06 accounts. This requires the auditors to gain a good understanding of all of the systems underpinning the major balance sheet figures and review the controls in place to prevent fraud and irregularity. This will require external audit to repeat some of the internal audit testing, but we will continue to liaise with the Audit Commission to minimise this duplication.

5 Resource implications

Staff input

5.1 The overall objective of the audit strategy is to distribute internal audit resources to provide an appropriate level of assurance in each department and for the County Council as a whole.

5.2 There has been a great deal of pressure on resourcing the internal audit delivery over the last two years, both in terms of available days and the staff mix required. This is due to the impact of ongoing long term sickness, the increased incidence of reported fraud and irregularity cases as well as the impacts of agreed changes to the audit strategy.

5.3 The result of this is that resources have been redistributed to cover the higher risk areas. The 2006/07 plan has been prepared on the basis of assessed audit need and this confirms that we need to increase our staff mix and increase available audit days by 484 days compared to the original plan for 2005/06. Additional resources have been approved by members to address this and will enable us to further develop our approach to proactive fraud detection, governance issues and value for money

5.4 Our investment in audit management software during 2006/07 is expected to achieve some efficiencies in the audit process enabling us to deliver either a higher level of audit assurance or a reduction in audit days in some areas.

6 Recommendation:

6.1 That the Governance Committee approve the internal audit strategy for 2006/07.

6.2 That the Governance Committee approve the changes to the terms of reference for the internal audit service provided to Hampshire County Council (Appendix B).

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

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