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ITEM EX5

EXECUTIVE - 5 MARCH 2002

BEST VALUE COMMITTEE - 20 FEBRUARY 2002

AUDIT PROCEDURES

Report by Director for Business Support & County Treasurer
and Assistant Chief Executive

1. The District Auditor Annual Audit Letter for 2000/01 for the Council included a recommendation to consider establishing an appropriate forum for considering both internal and external (audit) reports and monitoring achievement of agreed plans. (Action Plan response R9). A copy of this letter was sent to all Members on 11 January 2002.
2. At their last meeting the Committee agreed to defer consideration of proposals to establish "an Audit Committee" to oversee Audit activities. Retiming should enable officers to report more fully to subsequent meetings (of this Committee and/or other parts of the Council’s political management) on the options for, and implications of, allocating responsibility for overseeing the Audit function, - either to a new committee or to an existing committee (such as Best Value), with a view to a recommendation being made to the Council in the context of the review of the Executive arrangements in Spring 2002.

The Audit Function

3. There is no legally distinct "Audit function". Audit embraces a range of activities carried out by officers of the County Council and the District Auditor in support of the County Council’s specific functions such as Education, Social Services etc. Consequently the legal provisions relating to the new political management arrangements do not separately identify Audit activities as either an Executive or non-Executive function.
4. Activities that go to make up the Audit function include:

• The annual external audit work carried out by the District Auditor which is summarised to the Council in the Annual Audit Letter. This work includes:-

• Reviewing aspects of performance management including the use of resources, performance information and Best Value Performance Plans.
• A review of the financial aspects of Corporate Governance including the legality of financial transactions, the financial standing of the Council, its systems of internal financial control and its standards of financial conduct and prevention and detection of fraud and corruption.
• Auditing of the Council’s Accounts and providing opinion and certification annually.

• Discharge of planned external and internal Audit Work Plans, which are monitored through periodic reports on the delivery of those plans and any key issues emerging from them.

• Specific or ad hoc reports on audit related issues arising during the year.

5. There are a number of arguments for considering the audit function as whole. These include:-

• The value of pulling together the various Audit related activities.

• The importance of involving members in Audit related activities.

• The importance of Audit related activities in ensuring the sound financial management of the Council, the avoidance of fraud and corruption, its contribution to the Best Value Agenda and maintenance of high ethical standards.

6. All County Councils were surveyed in January 2002 asking them five questions covering practice in dealing with their Audit activities. The results are set out at Annex 1. Practice is very mixed. In broad terms it would appear that eleven counties allocate the Audit activities to the Scrutiny Committees; seven have set up separate Audit Committees of the Council; six counties have no specific allocation of Audit activities. One county uses its Executive and two counties use a mixture of Scrutiny, Standards and their Executives.

A typical Terms of Reference for a County Council Member led Audit forum is shown at Annex 1.

Audit Commission Guidance

7. In 1996 the Audit Commission issued a management paper Called to Account - the role of Audit Committees in Local Government. A copy of the management paper has been placed in the Members’ Resource Room. The paper offers neither a prescriptive view that every local authority should establish an independent Audit Committee nor is it a blueprint for such a committee. The paper sought to stimulate discussion about whether an Audit Committee could bring benefits and if so how best to operate one. It was published, of course, well before the present political management arrangements were devised but concluded that there is a strong case in principle for establishing Audit Committees in local authorities. Updated commentary from the Audit Commission is given within To whom much is given (November 2001). A copy has been placed in the Members’ Resource Room. A relevant extract is shown at Annex 2.
8. Changing Gear - Best Value Annual Statement 2001 - published September 2001. This publication, which was reinforced by contents of launch conferences, set out some likely developments and consequent changes to the current Audit and Inspection arrangements for existing Best Value regimes. The Audit Commission (via District Audit in this Council) will be involved in assessing Council performance through the emerging comprehensive performance assessment framework. Further implications of this are still being developed but are likely to include modifying the review and reporting styles and cycles which have been used for previous audits of this Council’s Best Value Performance Plan and its supporting Review Programme.

A copy has been placed in the Members’ Resource Room.

9. In January 2002 a paper The Managed Audit 2002 update outlined features for a successful development of managed audit. It includes reference to an effective empowered Audit Committee. Annex 3 presents an extract covering the conditions and emphasises the Audit Commission’s Code of Practice elements. A copy of the paper has been placed in the Members’ Resource Room. A full copy can also be viewed at www.audit-commission.gov.uk/home.

Options to establish an ‘Audit Committee’

10. There are four broad options which appear to be available to the Council.

1. To set up a new committee of the Council. This has the advantage of focusing the audit activities in one place but involves the creation of another committee and separates Audit from related activities in Best Value, Standards, Scrutiny and the Executive. All of these member forums have a part to play in ensuring that there are high Audit standards.
2. To attach the Audit activities to an existing Council committee. There are two options:-

• The Best Value Committee. This has the potential advantage of bringing together Audit and Best Value related functions in one committee. However it could emphasise the Best Value aspect of Audit work and separate it from the Ethical, Scrutiny and Executive interests - which mainly derive from the external auditor’s code of practice work.
• The Standards Committee. This emphasises the regulatory and ethical aspects of Audit e.g. fraud and corruption, but separates it from the Best Value, Scrutiny and Executive interests.

1. To develop the Corporate Governance Scrutiny Committee as the member forum for dealing with all Audit activities, in so far as their current responsibilities under the constitution (page F1 paragraph 1(a)) includes "Audit and Financial Review". This has the advantage of building on existing responsibilities and follows the practice currently adopted by approximately one third of County Councils. However the Scrutiny Committee can make no decisions and would have to refer out specific issues to the Executive, a Council committee or an officer acting under delegated powers.
2. Allocate the Audit functions as an Executive responsibility because they are responsible for the discharge of the majority of the Council’s functions. There are a variety of ways in which the Executive could discharge this responsibility. These include:

11. "Audit" matters can fall into several Member forums already. Therefore, a key objective is to consolidate this fragmentation into a well focused Member led forum, to ensure that effective action is always being delivered, in respect of "Audit" matters. An effective "Audit Committee" would not normally act as a decision-making body. It would best be respected if its role was recognised as an independent member led review forum, which intervened in other processes only where they were not delivering results effectively.
12. Surveys of all other County Councils confirms that ‘Audit Committee’ practice is varied. In the absence of any prescriptive guidance this Council is able to establish a way forward which suits its own needs.

  RECOMMENDATIONS

13. The Committee is RECOMMENDED to:

1. endorse the principle of establishing a Member led forum to oversee the audit related activities within the Council.
2. consider the four options to establish a member led forum set out at paragraph 10 and identify a preferred option to recommend the Executive.

CHRIS GRAY
Director for Business Support & County Treasurer

CHRIS IMPEY
Assistant Chief Executive

Background papers: Nil

Contact Officer: John Barker, Assistant County Treasurer Tel: 815444

February 2002

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