Contact: Ejner Knudsen, (01962) 84 7403; [email protected]

1 Introduction

1.1 The Annual Audit and Inspection letter for 2006 was recently issued by the Audit Commission and considered by the Cabinet at its meeting on 26 March 2007. Although the overall report is very positive, one of the actions recommended by the Commission relates to the Governance Committee and the need to demonstrate that it is satisfying the required role of an Audit Committee, as defined by the Chartered Institute of Public Finance and Accountancy ( CIPFA ) guidance originally published in October 2005.

1.2 As this issue is also expected to feature in the current CPA process relating to Internal Control a self assessment has been carried out for this purpose to provide evidence of the position as at 31 March 2007.

1 Recommendations

1.1 That the review of the Role of Audit Committees with the CIPFA guidance be noted.

1.2 That the Governance Committee's terms of reference be revised to clarify and reconcile all its existing functions with those required for audit, regularity, and accounts work, and proposals be brought to the next meeting prior to consideration by the Cabinet and Council pursuant to Part 1, chapter 15.2 (a) of the Constitution.

1.3 That the Audit Commission be consulted on the outcome of these reviews.

2 The CIPFA Practical Guidance for Audit Committees in Local Authorities

2.1 When first issued in October 2005 the guidance was intended to "help inform the debate about what constitutes a robust and effective audit committee ........which is an essential element of good governance". Audit Committees are mandatory in most of the public sector but local government is the exception, and therefore less than half of all local authorities had established audit committees at the time of publication. ( This was attributed mainly to the unique role of elected members within the governance framework for local government and the traditional democratic accountability it provides ).

2.2 Since 2005, successive inspections by the Audit Commission have included this guidance within its assessment process to the extent that is now regarded as a "standard" for the attainment of the highest score for part of the Internal Control arrangements within CPA. Any variation from the arrangements recommended in the guidance therefore need to be kept under review and the benefits for the County Council identified.

2.3 For 2007, an audit committee is "mandatory" (in CPA terms) for the attainment of a level 3 score within the Use of Resources assessment and its organisational independence from the Executive necessary to achieve level 4. this matter is discussed more fully in section 5 of this report in considering effectiveness of current arrangements.

3 The Role of the Audit Committee

3.1 In its Executive Summary the guidance stresses the importance of audit committees and their key role within an integrated corporate governance framework. The main purpose includes giving independent assurance to members and the public, and also providing challenge across the council.

3.2 In addition to internal and external audit, the functions overseen by an audit committee should include a number of control strategies such as risk management, the authority's governance and assurance statements, and anti-fraud and corruption arrangements. It is also recommended that a review of the authority's annual statement of accounts should be performed by the Audit Committee prior to the submission for statutory external audit.

3.3 The current terms of reference for the Governance Committee are attached at Appendix A1, together with the model terms taken from the guidance which relates specifically to an Audit Committee for a comparison. Although the broader scope of activity mentioned in paragraph 4.2 has in fact been regularly reported to the Governance Committee since its commencement in December 2004, the current terms of reference should be revised to specifically include these responsibilities and also the review of the statement of accounts.

4 Core Functions

A key part of this review is to consider how the County Council's current arrangements compare with the core functions as set out in the CIPFA guidance. The comments in italics are intended to demonstrate how each requirement is satisfied:

4.1 "Consider the effectiveness of the authority's risk management arrangements, the control environment and associated anti-fraud and anti-corruption arrangements."

The statement of internal control is prepared annually by the Monitoring Officer is intended to show this and also identifies the specific sources of evidence relied upon..

4.2 "Seek assurances that action is being taken on risk-related issues identified by auditors and inspectors."

Regular progress reports to the Governance Committee routinely follow up the implementation of previous audit recommendations and any other actions agreed.

4.3 Be satisfied that the authority's assurance statements, including the Statement on Internal Control, properly reflect the risk environment and any actions required to improve it."

The SIC identifies external as well as internal sources of evidence and the Committee also receive direct reports from the Audit Commission. Risk management is regularly and separately reported to the Committee enabling it to ensure any actions are properly included in the SIC improvement plans.

4.4 "Approve (but not direct) internal audit's strategy, plan and monitor its performance."

The internal audit strategy and plan are submitted in advance of the year for approval of the committee and in sufficient detail to demonstrate the audit risk assessment of priorities and the proposed deployment of resources.

4.5 "Review summary internal audit reports and the main issues arising, and seek assurance that action has been taken where necessary."

Regular internal audit progress reports to the Committee during the year include a summary of findings and recommendations, and also a follow up of previous significant issues.

4.6 "Receive the annual report of the head of internal audit."

Yes - a comprehensive report is provided to the Governance Committee together with an assurance statement and within the statutory reporting timetable i.e. 30 June following the financial year end.

4.7 "Consider the reports of external audit and inspection agencies."

Yes - both routine and special reports are usually presented by the Relationship and Audit manager on behalf of the Audit Commission and other statutory inspectorates, as they are issued.

4.6 "Ensure that there are effective relationships between external and internal audit, inspection agencies and other relevant bodies, and that the value of the audit process is actively promoted."

Yes - there is a specific reference within the internal audit strategy for regular liaison meetings, routine access to staff and information, and this is also evidenced by the external audit reliance quoted in the Annual Audit Letter.

4.7 "Review the financial statements, external auditor's opinion and reports to members, and monitor management action in response to the issues raised by external audit."

Yes - this role was taken over from the former Statement of Accounts Panel with effect from 2005/06. The Governance Committee undertaking the review in June 2006 was actually attended by the District Auditor.

5 Effectiveness

5.1 Section 4 demonstrates that, subject to an updating of the terms of reference, the current role of the Governance Committee meets the requirements of the guidance but a further consideration is the demonstration of its effectiveness.

5.2 The guidance has also provided a self assessment checklist to assist local authorities in the evaluation of effectiveness and a completed copy is attached at Appendix B for discussion.

5.3 The County Council's current arrangements appear to satisfy the checklist's model in all key respects except for the issues of independence from the Executive, and the need for separate private meetings between the Head of Internal Audit and the Chairman of the Committee.

5.4 Regarding the former issue, the constitution provides for Governance Committee representation to include the leaders of the three political parties in addition to the members appointed by the County Council. It is also chaired by the Leader. This is a significant variation from the arrangements recommended by the guidance where independence from the Executive (ie. Cabinet) is an important feature. However, the County Council's experience of Governance Committee operations since its establishment in December 2004 is that of major success in tackling significant issues identified by reports reviewing the internal control and corporate governance framework. These have included Business Continuity and IT service security, Social care and CRB policy, and more recently the Direct Payments service management and financial controls. It is doubtful whether the influence on Chief Officers (and their respective executive members) from a powerful Governance Committee could have been matched by any other more independent combination of members. Certainly the previous attempt to combine audit responsibilities with the Standards Committee which does enjoy complete separation from the executive resulted in very little progress being made on these issues. It does appear that in conducting its business in an open manner, and without political influence, the County Council has achieved a balance in favour of effectiveness, but at the expense of transparent independence. Informal discussions with the District Auditor have indicated that future assessments are likely to focus more on effectiveness than composition.

5.5 The second issue in paragraph 5.3 has recently been questioned by authorities on legality grounds and it is understood that CIPFA will be urgently reviewing its guidance. Another conflict has also arisen with some local authorities being recommended to appoint an independent member ( i.e. not elected ) to chair the audit committee. Although similar "best practice" developments for the operation of Standards Committees have already been published it would certainly create new problems of legality for an Audit Committee in the performance of its role to approve the Statement of Accounts. Hopefully these conflicts will soon be resolved with common sense and an emphasis more on the effectiveness of arrangements than compliance with any model structure.

6 Conclusion

6.1 Within Hampshire it is considered that the present Governance Committee in performance of its role as set out in section 4 can clearly be demonstrated as effective despite the two areas of non-compliance.

6.2 It is possible, however, that this balance of effectiveness and independence may be more difficult to sustain in the longer term and the need for a future constitutional change should be kept under review.

6.3 The outcome of these reviews should be shared with the Audit Commission to ensure their satisfaction with the process and conclusions.

Recommendations

7 that the review of the Role of Audit Committees with the CIPFA guidance be noted.

8 that the Governance Committee's terms of reference be revised to clarify and reconcile all its existing functions with those required for audit, regularity, and accounts work, and proposals be brought to the next meeting prior to consideration by the Cabinet and Council pursuant to Part 1, chapter 15.2 (a) of the Constitution.

9 that the Audit Commission be consulted on the outcome of these reviews.

Section 100 D - Local Government Act 1972 - background documents

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

NB the list excludes:

1. Published works.

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

(Quote list of documents here: either "none" if 1 or 2 above apply; or list the relevant letters, memos, etc and their location)

The Constitution: Part 1

Chapter 10 - The Governance Committee

10.1 The Governance Committee

The Council has set up a Governance Committee to monitor, review and report to the Cabinet the governance arrangements of the County Council.

10.2 Composition

The Governance Committee will be composed of 7 members.  The Leaders of the three political groups on the Council and two additional members appointed by the Council.

10.3 Role and Function

The Governance Committee will monitor the rules, processes and behavior that affect the way in that governance is exercised within the Council with regard to

a) The operation of the provisions relating to call-in and urgency set out in Part 3D paragraphs 1.15 and 1.16 and submitting an annual report to Cabinet if necessary.

b) Functions relating to elections as specified in Schedule 1 paragraph D1-17 of the Functions Regulations.

c) The adoption, review and amendment of Corporate Governance Framework for the County Council.

d) To receive and consider reports from the County Treasurer on internal Audit Strategy, planning and delivery.

e) To receive and consider reports from District Audit and such other national agencies that may report on County Council performance, inspection or audit.

f) To make recommendations to the Council for approval, the making or amending of standing orders relating to contracts and financial standing order or regulations related to the conduct of the Council's business."

g) To consider the recommendations of the report of the Independent Remuneration Panel and make recommendations to the Council for approval of the Members' Allowances Scheme.

h) To receive and consider reports from the Pension Fund Panel.

i) To approve the County Council's Statement of Accounts should it not prove possible to complete the statement for submission to the County Council within the government's required timescale

Suggested Audit Committee Terms of Reference

(source: Audit Committees, practical guidance for local authorities, CIPFA)

Self-assessment checklist - measuring the effectiveness of the Audit Committee

(Source: Audit Committees, practical guidance for local authorities, CIPFA)