by Diana Melville, Governance Advisor, CIPFA
Everyone knows it is good practice to have an audit committee to support an organisation’s audit arrangements, strong public financial management and good governance. But is there more to it than getting the tick in the box of good practice? I believe so. That’s why CIPFA continues to promote the development of audit committees and is bringing out a new edition of its Position Statement on Audit Committees in Local Authorities and Police.
There are huge pressures on all parts of the public sector. There have been several years of budget reductions, restructures and changes to the models of service delivery across many authorities. Those working in finance, internal audit, risk and governance roles have played an essential role in supporting and guiding their organisations through those changes, but at the same time they have seen their own resources reduced. Whilst the majority of authorities are performing effectively the risks remain high and there are some red and amber flags emerging.
Consider the following quotes from external auditors and internal auditors in their published reports:
2016/17 Annual Audit Letters for principal authorities
- Following allegations of impropriety in wholly owned subsidiary companies ‘We have concluded that, as the review identified that the principles and values of sound governance were not always in place for some decisions taken during 2016/17, a modification to our value for money opinion was required’
- ‘We concluded that there remain weaknesses in proper arrangements for understanding and using appropriate and reliable financial and performance information to support informed decision making and performance management, and for planning, organising and developing the workforce effectively to deliver strategic priorities’
- ‘The draft accounts published by the Authority on 17 July 2017 had not been adequately prepared or reviewed by an appropriate member of the Authority’s finance team…. Significant personnel changes have occurred across the Authority’s financial team with further changes anticipated.’
2016/17 Head of Internal Audit’s annual opinions
- ‘The lack of continuity of management has a detrimental impact upon the implementation of agreed audit recommendations. In many cases, at the time of the follow-up the auditor finds that the Manager who originally agreed to the recommendations is no longer in the Council’s employ and that they are now dealing with a replacement (often an interim).’
- ‘The report concludes that the Council’s internal control environment remains marginal, which means there are high risks requiring prompt action and that only limited assurance can be given.’
- ‘Due to the absence of a comprehensive risk management process, we were only able to provide a partial assurance opinion over the effectiveness of the Council’s risk management arrangements.’
- ‘Limited audit work has been undertaken regarding the organisation’s IT control framework in the year and no evidence of third party assurances could be provided by management. As a result of this limited evidence base the opinion does not extend to the Council’s IT control framework’
None of these organisations are classified as ‘failing’ yet they have risks and challenges which need attention and support. This is where the audit committee should be playing its part. It provides a forum for a focus on risks and internal controls. It can discuss the findings from internal audit reports and it can consider the strengths and weaknesses of the organisation’s governance. Yes this is ‘good practice’ but it is also vital work if an organisation is to successfully navigate the future. An effective audit committee can provide constructive challenge and help to ensure more rounded decision making, perhaps asking key questions such as:
- Are we satisfied that risks are fully understood?
- Are we monitoring the impacts of the changes we have made?
- Are there any warning signs we need to pick up on?
- Are we learning lessons from others who have tried this before?
- Are plans and programmes realistic and achievable?
- Do we have the right resources to monitor and oversee the changes?
- What support do you need to address these issues?
Whether questions such as these are asked in response to a review of the strategic risk register or in response to an internal audit report or when reviewing the Annual Governance Statement matters not. What is important is that the questions are being asked. And in response there should be a considered reply and action taken if necessary. The audit committee can’t magic risks away or conjure up extra resources but it can help make the organisation more successful at handling its lot.
So what difference does the CIPFA Position Statement and guidance publication, Audit Committees, Practical Guidance for Local Authorities and Police 2018 edition, make? It provides support for the role of the audit committee and sets out how the committee can have influence and add value. To achieve this a number of things are required:
- An effective structure
- Knowledgeable and objective members
- Focused agendas
- Recognition and support for the committee’s work
The publication provides the guidance on how to best achieve these conditions and CIPFA now recommends that an independent co-opted member is included on the committee. There are a number of reasons for this recommendation:
- Inclusion of independent members has been the direction of travel for a number of years now: local authorities in Wales and combined authorities in England are required to include a co-opted member. Police audit committees are solely made up of independents. In other sectors the audit committee benefits from non-executives.
- The benefits include the addition of knowledge and expertise, particularly useful for some agenda items on the committee.
- Their inclusion reinforces the non-political and objective nature of the committee.
- It can provide useful continuity when elections and political churn force significant change on the committee’s membership. This has become even more pressing with the bringing forward of the timetable for the closedown and publication of the accounts and annual governance statement.
The publication includes ‘practical guidance’ – as it says on the tin! It sets out the core functions of the committee and includes references and links to the key regulations and standards that shape the committees work. It sets out the elements needed to establish, support and maintain the committee and includes a section on troubleshooting problems. It contains a knowledge and skills framework for audit committee members and evaluation tools to help you assess your committee’s strengths and weaknesses.
When you review the Position Statement and guidance I hope you will use it to evaluate your own committee and then agree an action plan to consolidate or develop the committee. I also hope that you will use this as an opportunity to discuss the role and impact of the audit committee with the leadership team and all those charged with governance within the authority. For the committee to maximise its effectiveness there needs to be wide recognition, respect and understanding for its work.
Explore more
- Find out more with CIPFA's new publication 'Audit Committees: Practical Guidance for Local Authorities and Police (2018 Edition)
- For more support visit our Audit Committees resources page