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 2006.

2.2 We intended to produce a new strategy for the period 2007 to 2010 to reflect the following current change issues:

· the revised Accounts and Audit Regulations 2006

· the revised CIPFA Code of Practice for internal audit 2006

· revisions to the CPA requirements, particularly relating to proactive fraud work and VFM

· the introduction of the Financial Management Standard in Schools (FMSiS)

· changes to the Local Area Agreement

· the results of annual benchmarking information for internal audit.

2.3 However, the impact of some of these changes is not yet clear and we therefore propose to defer a full refresh of the audit strategy until 2008/09. In addition, internal change factors, including the implementation of audit management software and major long-term sickness issues have impacted on our ability to plan for a major revision for 2007/08. We intend to begin preparation for a major revision of our strategy for 2008/09 in the Summer 2007.

2.4 In the meantime, the aim of this report is to review progress in delivery of the current 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.

2.5 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.

2.6 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.

2.7 The definition of internal audit, as stated in the Code, is `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 the Governance Committee in March 2006.

3 Review of current Audit Strategy

3.1 We have made good progress in working towards delivering the current Audit Strategy. The areas subject to ongoing development are highlighted below.

Value for money

3.2 During 2006/07 we included a specific statement in all audit reports, detailing whether or not any value for money opportunities were identified. In addition, our corporate governance work included a high level review of departmental interpretation and implementation of the new corporate VFM policy. Audit staff have also received training to help them to identify VFM opportunities during the conduct of their audit work.

3.3 During 2007/08, we propose to develop this further to help provide added value through a higher level/more thorough review of systems, with a view to being more proactive in identifying VFM opportunities for further investigation by the service department or the County Treasurer's consultancy team.

Partnerships

3.4 During 2006/07, much work has been carried out corporately to set up the partnerships `portal' and database of partnerships. We have not reviewed the portal or database because of the development of policies and procedures, but have been actively involved in advising during the development.

3.5 We propose to incorporate a review of the new partnerships arrangements into our corporate governance reviews for 2007/08 to assess management by departments. In addition, where significant partnerships exist, we propose to include specific audits in departmental audit plans to ensure that we provide enough audit coverage of the key risks relating to those partnerships.

Establishment audits

3.6 In line with the 2006/07 strategy update, we will continue to pilot a move away from cyclical reviews of establishments. As part of the pilot, we have been moving towards a risk based approach and propose to develop this further in 2007/08. In particular, we see a reduction in the number of establishment visits being replaced by:

· more focussed establishment visits - driven by intelligence from departments and by risk factors notified by external bodies such as the DfES

· increased reliance on other reviews, both external (eg DfES) and internal (eg Education Financial Services, and external assessments of the Financial Management Standard in Schools)

· encouraging departments to carry out their own internal reviews and agreeing respective roles

· increased number of `themed' audits and short notice visits, again using a risk based approach.

3.7 It is our intention to assess the impact of this change during 2007, to inform a major review of the audit strategy for establishment visits for 2008 to 2011. Schools will be consulted as part of this process.

Fraud and irregularity

3.8 We have been implementing the current strategy as resources permit and a separate fraud and irregularity team has been set up and is receiving appropriate specialist training and development.

3.9 During 2006/07 we have seen a reduction in the number of reported cases and this has allowed us to further develop and deliver the proactive counter fraud programme and document investigation procedures in consultation with the Monitoring Officer.

3.10 However, the level of long-term sickness on the audit team has continued to impact on our ability to drive development forward as quickly as planned and there is ongoing work planned for 2007/08:

· fully implement the investigation procedures

· raise awareness of members and senior officers with regard to promoting the anti fraud and corruption culture in Hampshire

· further develop the programme of proactive counter fraud work to test the strength of the anti fraud culture, using intelligence from departments gained as part of audit planning for 2007/08

· provide training for audit staff regarding the identification of fraud during normal audit work

· review our approach to computer forensic investigations.

Pay and Benefits Project

3.11 The audit arrangements for the pay and benefits project are now well established. During 2007/08, the focus of audit work will be on the implementation of the new pay and performance frameworks and the validation processes.

The Financial Management Standard in Schools (FMSiS)

3.12 The DfES required all secondary schools to comply with the FMSiS by 31 March 2007 and during 2006/07 we delivered 46 external assessments to schools. The DfES require all remaining schools to comply with the Standard by 31 March 2010 and a rollout programme was agreed with the Primary Heads Conference - Resources and Planning group in February 2007. Primary schools will also be offered an external assessment by Internal Audit as part of the Treasurers SLA. For the purposes of planning we have assumed that take up of the offer will be similar to the take up by Secondary schools, i.e. 60% of schools.

4 Change issues

4.1 There are a number of change issues that will impact on the internal audit strategy for 2007/08, including:

Local Area Agreements / Local Public Service Agreements

4.2 The 2006 update to the audit strategy said that we would extend our 2005/06 review of the LPSA1 data to review the monitoring and dataflow systems for LPSA2. However, discussions with the Chief Executive's department indicated that the timing was not right and this work was removed from the 2006/07 audit plan.

4.3 For 2007/08, we propose to reinstate LPSA in our corporate governance audit programme. We also plan to include a separate review of the Hampshire LAA. The LAA will be treated as a significant partnership and will be a key area for the Use of Resources element of the revised CPA. The Chief Internal Auditor and Accounting Officer will be required to sign an annual certificate and will therefore need evidence from partners and HCC departments to support the use of funding and performance indicators to identify achievements. We propose to include a review of the monitoring arrangements to ensure that adequate evidence is maintained.

Key financial systems

4.4 During 2006/07, we reviewed our approach to key financial systems audits. Whilst departmental key financial systems audits are planned, scoped and reported to their individual departments, an overall opinion on each key financial system is reported regularly to the Treasurer's Management Team to ensure that they are kept informed of key findings throughout the County Council.

4.5 The 2006/07 annual opinion for County Treasurer's will also be separated, with one opinion relating to all the County Treasurer's own departmental systems, and one covering all the key financial systems work (throughout the County Council as a whole). We propose to continue this approach in 2007/08.

Pension fund

4.6 In response to representations from the Audit Commission, the 2006/07 statement of control will need to include a reference to the corporate governance arrangements and control framework relating specifically to the pension fund. In order to evidence this opinion, we propose to review the timing and scope of our work programme in the pensions area, once details of the requirements are known.

Organisational change

4.7 As a result of the merger of the Chief Executive's and Human Resources departments, we propose to prepare a single plan and annual report to cover all aspects of the new department, with all routine reporting directed to the Head of Resources, Chief Executive's department.

5 Resource implications

Liaison with the Audit Commission

5.1 We have had regular liaison meetings with the Audit Commission throughout 2006/07 to discuss national and local audit issues, ensure that duplication is minimised and also that reporting to the Governance Committee is coordinated as far as possible. We propose to continue with this arrangement in 2007/08.

Staff input

5.2 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.

5.3 Once again, there has been a great deal of pressure on resourcing the internal audit delivery. This is due to the impact of ongoing long term sickness as well as the effects of agreed changes to the audit strategy. The result of this is that resources have been redistributed to ensure coverage of the higher risk areas during 2006/07.

5.4 Although the section continues to experience ongoing sickness issues, additional resources have been secured and resource planning indicates that delivery of the 2007/08 internal audit plan is achievable.

5.5 Our implementation of new audit management software during 2007/08 is expected to achieve some efficiencies in the audit process over time, enabling us to deliver either a higher level of audit assurance or a reduction in audit days in some areas. In financial terms we expect to meet a savings target of £40,000 within the Audit Services budget for 2007/08. The longer term impact of this change will be assessed as part of our major review of the audit strategy in the Summer 2007.

6 Recommendation:

6.1 That the Governance Committee approve the internal audit strategy for 2007/08.

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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