The purpose and role of an audit committee

Neeta Major

Chief Internal Auditor

Areas to cover today

•Changing role of Economic Scrutiny

•Increasing focus on controls

•Purpose and functions of an audit committee

Terms of reference

• Economic Scrutiny - June 2003• Scope (Article 6, Constitution)

“Control, policy and finance, to discharge the functions of an Audit Committee including agreeing the External Audit Annual Service Plan, regeneration and economic development and customer services”

Why the change and the need for an audit committee?

Comprehensive Performance Assessment

• Standards of financial conduct and the prevention and detection of fraud

• “Inadequate” score if the authority does not have arrangements for discharging functions of an audit committee

• Real focus by Government

Focus on governance & controls

What has brought governance & internal controls to the forefront?

• Scandals

• Private sector & public sector

Scandals

Private Sector scandals

• Polly Peck

• BCCI

• Maxwell

• Enron

• Worldcom

Enron

• Vision - “BETTER, FASTER, SIMPLER”

• Focus on selling more, trading more, more profits

• Lack of core controls - scrutiny, accountability

• New business, better service delivery etc must go hand in hand with controls

Scandals (cont)

Public sector

• Lancaster

• Kingston upon Hull

• Lincolnshire

• Bromley school

• Canvey school

What did the Government do?

• Committees - Cadbury, Hampel, Turnbull, Nolan, Smith, Higgs, Sarbanes-Oxley

• Guidance - Combined Code, NHS Corporate Governance framework, CIPFA/SOLACE guidance on corporate governance

What is good governance?

Embraces 3 principles of openness, integrity & accountability in the following dimensions

• Community focus• Service delivery arrangements• Structure & processes• Risk management & internal controls• Standards of conduct

What are Internal Controls?

Systems an organisation has in order to :• conduct business in accordance with objectives• safeguard its assets• secure the accuracy, reliability and validity of its

records• adhere to internal policies/legislation• achieve value for money and avoid

waste/inefficiency

Examples of Internal Controls

• Organisational - provide framework under which system of controls can operate

• Financial - accuracy and adequacy of financial records and safeguard against

loss due to fraud or error

• Operational - efficiency and effectiveness of operations

• Compliance - compliance with legislation, best practice guidance and internal policies

Why are controls important?

Message is simple. Poor internal controls can lead to • loss of assets• increased waste• losses, errors or fraud• breaches of law• reputation of business & staff

Lack of controls reduces what can be done once a problem is highlighted

What are the features of a sound system of Internal Control?

• Owned by managers and staff

• Documented and well communicated

• Embedded in culture of organisation

• Responds to change

• Reviewed and continuously improved

How can an audit committee help?

To help ensure that an organisation’s resources are safeguarded and value for money secured by

• promoting internal control

• focusing audit resources

• monitoring audit performance

Promoting internal control

Promoting internal control

• systematic appraisal of internal controls

• develop an anti fraud - culture

• review financial procedures

Focusing audit resources

Focusing audit resources • agree audit plans• monitor audit delivery

Monitoring audit performance

Monitoring performance

• ensure auditor/officer collaboration within agreed timescales

• ensure timely preparation and response to audit reports

• monitor the finalisation of annual accounts

• ensure implementation of audit recommendations

Way Forward?

• Ensure all staff working in a proper controlled environment

• Famous last words“It will never happen to us”• Change culture so that don’t think of controls as

“another lot of work” but rather as something which is intrinsic to the job

• Balance between service delivery and control

THE END

MEMBERS, MANAGEMENT & STAFF WORKING TOGETHER TO ENSURE THE PROPER STEWARDSHIP OF PUBLIC FUNDS DEMONSTRATING COMMITMENT TO THE STANDARDS OF:

• OPENNESS• INTEGRITY• ACCOUNTABILITY