Local Government and NHS Audit Committee Effectiveness

©2011 Grant Thornton UK LLP. All rights reserved.

CIPFA Audit Conference 2011Improving your audit committee effectiveness

Paul Hughes - 11 May 2011


Content

Introduction

Context - the public sector audit committeeThe current challenge

The importance of the AGS

Making a difference

What can go wrong - examples

Conclusion - top tips for effectiveness

Assurance gathering

Good practice examples


Introduction

The public sector is key market for Grant Thornton and we have the large pool of expertise and a proven track record.


Introduction

Assurance Director and public sector specialist17 years - Audit Commission and Grant ThorntonLead relationships with large LG and NHS clientsInterest in good governance

Audit and advisory reviews

Grant Thornton Governance InstituteNational report on LG Corporate Governance


Context - the public sector audit committee

specific factors for local government

principles of public audit

differing public sector models

similarities with the private sector “The purpose of an audit committee

is to provide independent assurance of the adequacy of the risk management framework and the associated control environment, independent scrutiny of

the authority’s financial and non-financial performance to the extent

that it affects the authority’s exposure to risk and weakens the control environment, and to oversee the

financial reporting process.”

(From a London Borough constitution)


Assurance and commissioning role re Internal and External

Audit

Approving accounting policies

Approving annual accounts

Considering External Audit report

Considering wider control issues

Monitoring action plan

The public sector audit committee - role

Role to provide independent assurance to the Board (or equivalent)

Risk management and internal control (including scrutiny of performance)

Financial reporting (i.e. the annual

accounts)

Recommending AGS adoption

Receiving risk management, Internal Audit, External Audit, regulatory and other reports throughout the year to gain reasonable assurance to recommend the AGS

over over

Discharged by: Discharged by:


Characteristics of assurance gathering

Financial reporting

Simple to scope boundaries of responsibility

Committee work loaded towards year end

Few reports and sources of evidence to consider

Risk management / internal control

Tougher to define boundaries of responsibility

For the two main areas of Audit Committee responsibility

Objective Subjective

Year round gathering of assurance

Lots of reports and sources of evidence to potentially consider


Unprecedented times making the audit committee agenda more challenging…

large funding reductions over SR period

demand for greater transparency

outsourcing and shared services

loss of capacity and capability

major organisational change

pressure on senior officer pay


What can go wrong - some examples

panic response - 24 items and 3 inch thick papers

party politics - 'wood for the trees'

agenda management - 'ground rush'

proportionality - meals on wheels example

gaps/duplication - unclear boundaries with executive/scrutiny / management


Obtaining assurance over financial reporting

Audit Committee responsibilities clearer, however:

progress updates on issues and resolution

early review of accounting policies

training on interpreting the accounts

financial expertise

follow up of ISA260 recommendations

challenging finance team resources


Obtaining assurance over risk management and internal control

More complicated…

audit committees have limited time

most efficient means of obtaining the required assurances

start with AGS and work back to design workplan

clarity over flows of assurance into the committee

"reasonable assurance"


Importance of the AGS

In LG, AGS are largely:

• still in the "compliance phase"

• not at the heart of governance processes

• weak in clearly articulating annual assurances

• unclear in reporting "significant weaknesses."To add real value we believe the AGS should:• have greater status as the key document that records the

planned and obtained assurances over achievement of the vision and strategic objectives

• be owned from the top, used to plan and monitor internal and external assurance gathering throughout the year

• be fundamentally reviewed each year so that it clearly includes what is significant and excludes what is not

• have only significant weaknesses recorded with SMART action planning

• provide a robust, transparent and honest assessment of the governance framework for the year.


Making a difference in challenging times

Some messages from our March 2011 workshop with Audit and Scrutiny Members:

Where joint arrangements or shared services are being introduced, audit committees can:

• seek a clear statement as to what outcomes are envisaged, to provide a benchmark against which performance can be judged

• ensure that appropriate internal controls are in place.

When major organisational change is being undertaken an audit committee can:

• ensure that a robust risk assessment has been carried out

• ensure that the internal audit plan covers the changes

• demand robust assurances over areas of concern.

Audit committees can increase their effectiveness by:

• ensuring that their members have access to appropriate training

• including lay members

• ensuring that they take the perspective of relevant stakeholders into account. "focus on what really matters"

"demonstrate impact from your work"


Audit Committee effectiveness - some examples

'cracking the whip' - implementing recommendations

strategic risk driving the agenda in social housing

'board secretary' keeping meetings on track

briefings, training and walking the floorfresh challenge on debt collection

flexing the agenda to reflect new risks - Iceland

"guess the party" - minimising the politics



Subjective

Establishing or reviewing the committee:

• appropriate, tailored, up to date terms of reference, reviewed alongside scrutiny

• membership - good chair supported by audit and financial expertise (including lay members and planning for future role)

• officer support - 'board secretary' role.

Planning for the year:

• focus on end point of assurance for AGS

• members to own the agenda and ensure that this reflects key risks facing the organisation

• workplan and meeting schedule to flow from this, as well as required training and briefings.



Year end:

• challenge the effectiveness of the AGS

• ensure explanations on the accounts are clear and satisfactory

• prepare a report on the effectiveness of the committee during the year

• feed improvements into next year's plan.

During the year:

• pre-meetings (including audit) to organise and prioritise agenda

• obsessive focus on assurance gathering for the AGS and speaking up / call officers in if not getting what is needed

• hard challenge on anything that threatens to soak up committee time that is not key to assurance gathering (interesting distractions / too much detail)

• awareness of tendency to drift into scrutiny/executive/management roles (policing role but assurance that it is being covered in the appropriate place)

• willingness to flex workplan / additional meeting / subgroup to deal with emerging important issues and risks.


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Documents

Local Government and NHS Audit Committee Effectiveness