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AUDIT COMMITTEE
20 JUNE 2012
M I N U T E S
ATTENDANCE
MEMBERS OF THE COMMITTEE
N K Brook, D B Lloyd,J K Maddern (for S Markiewicz), C A Mitchell, S Quilty (Chairman), A M R Searing, R G Tindall (for P V Goggins), M A Watkin (for M Cowan),
A D Williams, A S M Witherick
Other Members in Attendance:
T W Hone, Deputy Executive Member for Transformation, Performance & Waste Management
Upon consideration of the agenda for the Audit Committee meeting on 20 June 2012as circulated, copy annexed, decisions were reached and are recorded below:
Note: No declarations of interest were made by any member of the Committee in relation to the matters considered at this meeting.
PART 1
ACTION1. /
APPOINTMENT OF CHAIRMAN AND VICE-CHAIRMAN
1.1 /It wasnoted that County Council on 15 May 2012 had appointed
S Quilty and A D Williams as Chairman and Vice-Chairman of the Committee for the ensuing year.
2. /MINUTES
2.1 / The minutes of the meeting of the Committee held on 30 March 2012were confirmed as a correct record.3. / RISK MANAGEMENT UPDATE
3.1 / The Committee received the Risk Management Update, covering risk management activity since the last meeting. The report included a summary of the Corporate Risk Register; information on follow-up actions taken since the last meeting; a view of the Corporate Risk Register over the last four quarters; and the revised and updated Risk Management Policy. The Committee heard that following work with the system developers, the risk movement report is now able to be drawn directly from the Risk Management Information System, enabling more timely reporting and ease of use by programme managers.
3.2 / It was noted that there had againbeen very little movement against risk scoresover the last quarter: however, greater movement was expected over the forthcoming quarter, both as a result of service planning processesbeing undertaken by departments, and fundamental risk review workbeing carried out in some areas (e.g. Community Protection). The Performance & Risk Manager reported that following comments from the Committee at the last meeting about lack of movement against risk scores, further work had been done to investigate possible reasons for this. It had been noted that the nature of the risks included within the Corporate Risk Register – being longstanding and with longstanding controls in place - reduces the potential for movement; additionally, instances had been identified where movement of a risk score within the quarter had been offset by a counter movement, resulting in a net position of nil. The Committee also heard that a major reason for lack of movement was that a significant number of risks have now been ‘managed down’ to their target level, with mitigating actions having been taken to reduce these risks to a level which is judged acceptable by the organisation. For these risks, further movements would not be expected. A report showing risk movements over the last four quarters had been provided to the Committee to enable Members to track movement across a longer timeframe, and this additional information was welcomed.
3.3 / The Committee heard that following discussion at the last meeting, risk PROP0002 had been further reviewed: as a result, the wording of the risk had been amended to more fully reflect the nature of the risk; the current risk score has been maintained pending further work; and the target score has been revised up to a rating of ‘significant’ (24). Consequently the current risk score and target score are now much closer. However, it was noted that this remains a long-term risk, so that movement in the short- to medium- term will be minimal.
3.4 / In relation to those risks where the risk rating remains above target and where there has been little or no movement over the year, it was noted that the Committee had received ‘risk focus’ reports on the majority of these over the year: additionally, it was noted that risks operate over different timeframes (with some being long-term and others short- to medium-). The Committee heard that target scores in some areas (e.g. Community Protection) would be re-assessed as part of forthcoming planned risk review work.
3.5 / In debate it washighlighted that there are a number of risks with considerable variance between risk score and target, and it was questioned whether some targets are too ‘aspirational’; whether the target setting process is too much a ‘paper-based’ exercise which does not fully take account of intangible factors; and whether for some risks the target scores may not be realistic or achievable. It was suggested that risk targets could be made more realistic over the short- to medium-term; that timescales for achieving target scores or interim target scores could be included in the Corporate Risk Register; and that greater information onaction plans in place to reduce risk could be incorporated. In response it was noted that difficulties could arise in relation to implementation of some of these suggestions due to the differing nature of risks and controls (with some risks being more inherently long-term, and some mitigating actions being more fully within the authority’s control than others), and additionally that the existence of risk is fundamental to all authorities, with theoverall effectiveness of the risk assessment and management process, rather than performance against specific timed targets, being key. The Performance & Risk Manager undertook to give further consideration to the suggestions raised: it was also recommended that a seminar on risk scoringand targetsettingwould be useful for Members. The Committee noted National Audit Office guidance that in addition to considering the ‘visible’ risks, it was important for the Committee to continue to challenge those risks which may be very rare, but which could have a significant impact. / Performance & Risk Manager
Decision:
The Committee RESOLVED that:
3.6 / the Risk Management Update be noted;
3.7 / a seminar, open to all Members, on risk scoring and target setting, be arranged at a suitable time; / Performance & Risk Manager
3.8 / risk CSCE0010 (risk of failing to meet the 25% carbon reduction target) be the subject of the risk focus report for the September 2012 meeting. / Performance & Risk Manager
4. / RISKS ON THE COUNTY COUNCIL’S RISK REGISTER: FRAUD RISK
4.1 / The Committee received a report which detailed the risks and controls recorded on the risk register in relation to risk AUDIT0001 (‘as a result of the current economic conditions there is an increased risk that the Council experiences significant fraud’). The report also included information on developments in the national anti-fraud agenda, and information on the outcome of a recent review of the Council’s fraud arrangements undertaken by PWC together with proposed actions arising from its recommendations. It is anticipated that implementation of these will enable movement of the risk towards its target score of 4 (currently 12).
4.2 / It was noted that PWC had assessed that there was ‘substantial assurance’ over the robustness of the Council’s anti-fraud and anti-corruption arrangements: recommendations arising from the review had centred around ensuring that policies are up-to-date and consistent; ensuring there is a focus on areas of key risk; and identifying areas of key risk appropriately, so that targeted training and awareness-raising can take place.
4.3 / In response to Member questions it was clarified that PWC had been approached to conduct the review in order to avoid a potential conflict of interest, and to obtain an independent perspective: existing business model arrangements with PWC, as a partner of the SIAS, mean that the work was carried out within PWC’s allocation of work days for the SIAS.
4.4 / In response to Member questions the Head of Assurance Services undertook to check the timescale for expected implementation of the updated Whistleblowing Policy, and to confirm the most up-to-date figure for duplicate payments (page 8 of the report). The Committee heard that it was considered that the PWC review had been very helpful, and that the recommendations were all agreed: the exercise had also been useful in identifying areas where work should be focussed – for example, introducing a formal assessment for referrals in order to ensure that resources are not expended on investigating cases of fraud which are unable to be proved. In relation to fraud investigations it was stressed that work should focus on ensuring that possibilities for repeat occurrences are removed / reduced. / Head of Assurance Services
Decision:
The Committee RESOLVED that:
4.5 / the information within the report be noted.
5. / ANNUAL GOVERNANCE STATEMENT 2011/12
5.1 / The Committee received the draft Annual Governance Statement 2011/12, setting out the Council’s governance arrangements, including the system of internal control. The Committee was invited to approve the Statement prior to sign-off by the Leader of the Council and the Chief Executive, following which it would be incorporated within the final Statement of Accounts.
5.2 / It was noted that two significant governance issues had been identified (shown in section 5 of the Statement) related to the Council’s medium-term financial strategy and security of data handling activity. Additionally, it was noted that the Statement includes a new section detailing further areas for governance improvement, which, whilst not of sufficient severity to be deemed ‘Significant Governance Issues’, are areas where improvements in governance and internal control could be made (section 6). The Committee heard about the comprehensive process which had been undertaken to produce the Statement: this hadincluded seeking assurances from all senior management staff (including Assistant Directors) in relation to governance arrangements and controls, together with notification of areas whereany improvements were needed.
Decision:
The Committee RESOLVED that:
5.3 / the Annual Governance Statement 2011/12 be approved.
6. / CODE OF CORPORATE GOVERNANCE
6.1 / The Committee received a revised and updated Code of Corporate Governance, following recent review by the Chief Legal Officer. Members heard that a simplified format for the Code had been adopted as part of the review process: the updated Code sets out the Corporate Governance Framework and the six core principles to ensure high standards of good governance (which are consistent with the principles of CIPFA / SOLACE good practice), together with the ways in which theseprinciples are delivered by the Council. It was noted that the new document includes links to supporting policies and documents which underpin the governance framework, which will be active once the Code has been published online.
Decision:
The Committee RESOLVED that:
6.2 / the Code of Corporate Governance be approved.
7. / ANNUAL ASSURANCE STATEMENT AND INTERNAL AUDIT ANNUAL REPORT 2011/12
7.1 / The Committee received the Annual Assurance Statement and Internal Audit Annual Report for 2011/12. The Head of Assurance Services reported that an opinion of ‘substantial assurance’ had been reached in respect of the overall adequacy of the Council’s control environment, with the assurance opinion in relation to financial systems being ‘moderate’, and in relation to non-financial systems being ‘substantial’.
7.2 / The report included information on all audit activity within the year, together with the audit opinions reached (where an audit opinion was given). The performance of Internal Audit against the SIAS performance indicators was also noted: however, the Committee heard that the year had involved significant transition for Internal Audit following establishment of the SIAS - it was therefore difficult to draw conclusions as to whether the performance recorded was typical. It was considered that performance over the forthcoming year would improve, following settlement of the new arrangements.
7.3 / The Committee also heard that an independent review of the effectiveness of Internal Audit had been undertaken by Veritau (a local authority-owned audit company based in North Yorkshire) within the year: positive conclusions had been reported, together with helpful recommendations for improvements going forward (shown in section 4 of the report). It was further noted that the report included a summary of the Internal Audit Fraud Register for 2011/12, as had been recommended by PWC within its review of the Council’s fraud arrangements.
7.4 / In relation to the ‘moderate’ assurance opinion on financial systems, it was noted that this was the first year for which a separate opinion on financial systems had been given. Members heard that the opinion indicates that control is essentially sound but there is scope for improvement: the opinion had been reached based on the outcome of audit work during the year (it was noted the opinion on treasury management had subsequently been revised up to ‘substantial’ from ‘moderate’ as shown in the report). The Head of Assurance Services reported that a positive response had been received from officers in relation to the recommendations made on financial systems audits.
7.5 / The Head of Assurance Services provided further clarification in relation to various aspects of the report, in response to Member questions.
Decision:
The Committee RESOLVED that:
7.6 / The Annual Assurance Statement and Internal Audit Annual Report 2011/12 be noted.
8. / SHARED INTERNAL AUDIT SERVICE ANNUAL REPORT 2011/12
8.1 / The Committee received the Annual Report of the Shared Internal Audit Service for 2011/12. It was noted that the service had been established on 1 July 2011: the report presented to the Committee therefore comprised its first annual report. Members heard that production of an annual report detailing performance within the year formed a requirement of the SIAS governance arrangements: the report had been considered by the SIAS Board on 30 May, and it was to be considered by partner Audit Committees in order to fulfil accountability to Members on service performance.
8.2 / It was noted that the report includes a general overview of the service’s first year of operation; performance information; the outcome of the Veritau peer review; and plans for the forthcoming year.
8.3 / Members noted that one conclusion of the Veritau review had been that ‘the service is a good example that can be used for other areas looking to share services’. In response to a Member question as to how this could be progressed, the Head of Assurance Services undertook to consider this further. In response to questions as to the reasons for moving to a trading account basis from 2012/13, Members heard that it is hoped this will enable improved monitoring of the delivery of planned work days, and will also ensure parity of treatment between HCC andpartners in terms of billing arrangements. It will also ensure that the service is better placed to expand and develop going forward; although it was noted that the aim is to consolidate the current service prior to expansion. In relation to the cost of the service, Members heard that it is expected that the cost of Internal Audit services to the County Council will reduce as a result of the anticipated development of the SIAS: both through the increased efficiencies achievable to a larger service and improved productivity.
8.4 / In relation to plans for future development, Members heard that there exists an aim to expand and develop the service; althoughit is considered that caution needs to be exercised to ensure that this does not happen at too rapid a pace, and to ensure that the service is appropriately configured prior to expansion. The Committee heard that the current priority is to ensure the ability to fully deliver the audit plans of those partner organisations which have committed to the service. In response to a Member question it was confirmed that the Council’s scrutiny function does not fall within the SIAS.
Decision:
The Committee RESOLVED that:
8.5 / the Shared Internal Audit Service Annual Report 2011/12 be noted.
9. / INTERNAL AUDIT PROGRESS REPORT Q1 2012/13
9.1 / The Committee received the Internal Audit Progress Report for the first quarter of 2012/13. It was noted that the report is now presented in the SIAS format and includes improved information on progress against the Audit Plan, together with information on the work which has been completed since the last meeting; the opinions reached; and the numbers and categories of recommendations. It was noted that under the new format, progress on implementation of high priority recommendations is to be included as an appendix to the report, and it is hoped that this will assist Members in monitoringthe management action taken in response to high priority audit recommendations. It was noted that a significant number of high priority recommendations is currently being made, and that work isto be done to ensure that there is consistency around what constitutes ‘high priority’ and that these are being classified appropriately. In the event of large numbers of high priority recommendations being made, these would be reviewed to ensure that only progress against strategic high priority recommendations is reported to the Committee, to enable appropriate focus on these areas.
9.2 / It was noted that, in relation to the Waste Treatment Procurement Process, the recommendation that ‘actions be taken to address a potential conflict of interest relating to Members who made procurement decisions and who also sit on the Development Control Committee’ is shown as ‘completed’. However, whilst dual role Members have been identified and replacements nominated, some Members advised that they have not yet received the training requiredto enable their appointment to the Development Control Committee. It was clarified that the ‘completed’ status referred to management acknowledgement and acceptance of the recommendation and establishment of arrangements to deal with this matter; officers confirmed that the progress of training arrangements would be checked,but that robust arrangements were in place to ensure that no un-trained Member would be permitted to serve on the Committee. / Legal & Member Services
Decision:
The Committee RESOLVED that:
9.3 / the Internal Audit Progress Report for the first quarter of 2012/13 be noted;
9.4 / the proposed approach to the continued reporting of high priority recommendations be agreed.
10. / ANNUAL REPORT ON THE TREASURY MANAGEMENT SERVICE AND PRUDENTIAL INDICATORS 2011/12
10.1 / The Committee received the annual report on the Treasury Management Service and Prudential Indicators 2011/12. The report covered prudential indicators; the treasury management context; lending strategy; borrowing strategy; and estimated and actual treasury position and prudential indicators for the period.
10.2 / It was noted that the Council has complied with the treasury management prudential indicators throughout the year. The capital expenditure and capital financing requirement were lower than anticipated when the original indicators were set, as a result of the application of alternative forms of funding and slippage against the revised capital programme. With the reduced need to borrow, and higher than forecast cash balances, the net costs of borrowing and lending were lower than anticipated (no new borrowing was undertaken within the year to support capital expenditure).
10.3 / In relation to the economic situation, it was noted that the context within which treasury management activities were undertaken during the year had been dominated by the eurozone debt crisis: in relation to the UK economic position it was noted that the economy had fallen into recession over the last 6 months of the financial year, and the Committee heard about the pressures which had affected the economy, and the policies which had been implemented to try to mitigate the effects of the difficult economic climate (section 7 of the report).
10.4 / In relation to lending activity it was noted that the majority of investments continue to be held in Money Market Funds (from which funds can bequickly be withdrawn), reflecting concerns about the banking sector. Yields for the year were above benchmark on MMF investments. The Committee heard that following the favourable decision in the Icelandic Supreme Court to award preferred creditor status, distributions were being received from the two Icelandic-domiciled banks Landsbanki and Glitnir: the projected total expected return from the Icelandic Bank investments is 94.6% of the original £28m investment, with over 50% of this having been received to date.
10.5 / In relation to borrowing, no new long term borrowing was undertaken within the year, although some short term borrowing was taken to cover temporary cash flow needs.
10.6 / In response to a question as to whether the strength of the pound against the euro could result in gains in relation to the contract for the Waste Procurement Programme with Veolia (which is partly denominated in euros), it was noted that the planning approval process is ongoing, and that any potential gains would only be crystallised if or when planning permission is received (and the exchange rate situation may be different at that time). It was noted that consideration had been given to hedging; however, given the extreme uncertainty in relation to timescales for completion of the planning process, it was considered that this would have resulted in an unacceptable level of cost.
Decision:
The Committee RESOLVED that:
10.7 / the Annual Report on the Treasury Management Service and Prudential Indicators be approved.
11. / FUTURE WORK PROGRAMME
11.1 / The Committee agreed its future rolling work programme, as follows:
13 September 2012 at 10.00am /
- Annual Governance Reports 2011/12 – County Council and Pension Fund
- Response to Annual Governance Reports 2011/12 – County Council and Pension Fund
- Final Statement of Accounts 2011/12
- Risk Management Update
- Risk Focus Report
- Internal Audit Progress Report
22 November 2012 at 10.00am /
- Annual Audit Letter 2011/12
- Annual Governance Report 2011/12 Action Plan Update
- Annual Fee Letters 2012/13 – County Council and Pension Fund
- Mid-Year Report on the Treasury Management Service and Prudential Indicators 2012/13
- Risk Management Update
- Risk Focus Report
- Internal Audit Progress Report
28 March 2013 at 10.00am /
- Annual Governance Report 2011/12 Action Plan Update
- Audit Plans 2012/13 – County Council and Pension Fund
- Letters of Representation on Management Assurance and Processes
- SIAS Terms of Reference 2013/14
- Internal Audit Progress Report
- Internal Audit Plan 2013/14
- Risk Management Annual Report 2012/13
- Risk Focus Report
Kathryn Pettitt