Stockton-on-Tees Borough Council

Big plans, bright future

Audit Committee (ceased to operate 21/05/2019) Minutes

Monday, 24th June, 2013
4.00 p.m.
Conference Room 2, Second Floor, Municipal Buildings, Church Road, Stockton on Tees, TS18 1LD
Please note: all Minutes are subject to approval at the next Meeting

Attendance Details

Cllr Ross Patterson (In the Chair); Cllr Terry Laing, Cllr Mick Moore, Cllr David Wilburn and Cllr Barry Woodhouse.
P Johnson, P McCann, M Skipsey, D MacDonald, A Barber (R); D E Bond, P K Bell (LD).
In Attendance:
M Barnes, M Kirkham (Mazars LLP).
Apologies for absence:
Cllr Derrick Brown, Cllr Phillip Dennis, Cllr Alan Lewis and Cllr Kathryn Nelson.
Item Description Decision
There were no interests declared.
The minutes of the meeeting held on 25th February 2013 were signed by the Chair as correct record.
RESOLVED that the External Audit Progress Report be noted.
RESOLVED that the improvements set out in appendix 2 of the report be implemented to the agreed timescales and reported to Audit Committee as part of the quarterly progress reports.

1. The opinion on the Council’s control environment be noted.

2. The performance of the Internal Audit Section be noted.

1. The report be noted.

2. The proposed continuing course of action contained in the Health and Safety Unit Service Plan 2013 - 2014 be accepted.
RESOLVED that the Annual Governance Statement for 2012/13 be noted.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RESOLVED that the report be noted.

1. The review report and proposed recommendations be noted.

2. The Committee’s views be submitted to Cabinet, prior to Cabinet making its recommendations to Council regarding the review.
RESOLVED that the Diary of Meetings and Work Programme for the Audit Committee for 2013/14 be noted.
4.00 pm - 6.00 pm


Consideration was given to a report that updated Members on Mazars LLP progress in meeting their responsibilities as the Council external auditor. Also included in the report were key emerging national issues and developments.

There had been a change to the audit team since their last report, Martin Barnes had replaced Rochelle Tribe as the Senior Manager of the audit team. Handover processes were undertaken in April 2013, prior to Rochelle taking up a secondment with the Department of Health. Martin had significant experience of audit and accountancy in the private and public sectors, and had previously managed the external audits of several public sector bodies in the Teesside area. He had no potential conflicts of interest with the Council, it’s Members and Officers.

Good progress had been made to date on the 2012/13 audit: the Audit Strategy Memorandum was presented to Members in February, setting out the risks that had been identified for the audit for both the opinion on the financial statements and the value for money conclusion, and the approach to the audit.

Mazars LLP had completed work to confirm their understanding of the Council's key financial systems including reviewing documentation on the design and operation of controls and walking through transactions to test their understanding in practice. Mazars LLP work to date had not identified any significant weaknesses in internal control however should Mazars LLP identify any issues during the remainder of their work they would report these to officers.

Mazars LLP had also reviewed general ICT controls and were undertaking early substantive testing of bank accounts, income and expenditure cut-off and pensions transactions, to help reduce the testing required at the final audit visit. Mazars LLP had issued the notice of audit, to ensure respective responsibilities in this regard were fulfilled, and set a date of 29th July 2013 for the public to exercise their rights of inspection etc.
Consideration was given to a report that provided details of the review of the Internal Audit Service for 2012/13.

The Accounts and Audit Regulations 2011 required an assessment of the Internal Audit service to be carried out annually against specific criteria set out in the CIPFA ‘Code of Practice for Internal Audit’ (the Code). The assessment had been carried out by two designated members of the Corporate Governance Group.

The Code identified the following key themes of the Internal Audit process that needed to be considered in the assessment:-

• Scope of the Internal Audit
• Independence
• Ethics for internal auditors
• Audit committees
• Relationships
• Staffing, training and continuing professional development
• Audit strategy and planning
• Undertaking audit work
• Due professional care
• Performance, quality and effectiveness

The assessment process involved identifying and collating evidence of compliance with the Code by way of interview with the Financial Planning and Audit Manager and reference to the following key documents and supporting records:-

• Previous assessment reports
• Internal Audit strategy and audit plan
• Annual Governance Report
• Internal Audit Progress Reports
• Customer Satisfaction Surveys

The previous assessment report was presented to Audit Committee on 25th June 2012 and contained the following recommendation:-

"A mid-year review be undertaken and reported to the Corporate Governance Group and to the Audit Committee regarding actual performance against planned productive audit days, highlighting any resulting changes to the audit plan for 2012/13."

This recommendation had been implemented, with a mid-year review being undertaken and reported in December 2012.

The assessment and supporting evidence had confirmed that there was a good level of compliance with the Code which facilitates the provision of a good Internal Audit service.

The detailed assessment of compliance with the Code was attached to the report.

Whilst the overall standard of Internal Audit was good, the assessment identified the following areas of excellent practice that were worthy of acknowledgement:-

• Ethics and professional care of auditors
• Relationship with senior management and Members
• Effective working with external auditors
• Training and continued professional development

The assessment identified opportunities for improvement which were summarised below:-

• Refresh of the partnership monitoring framework
• Refresh of the anti-fraud procedures and guidance
• Reporting of key audit outcomes from the audit programme
• Amendment of the audit plan structure to include priorities and summary of assignments to be completed
• Production of audit briefs
• Documentation of an access policy for audit files and records
• Strengthening of links between recommendations and risk registers
• Review of performance targets for monitoring and reporting

Details of the opportunities together with actions and timescales agreed with the Financial Planning and Audit Manager were attached to the report. All of the opportunities for improvement identified were fully supported by the Financial Planning and Audit Manager.

The Code indicated that it was good practice to rotate audit staff on areas that were audited frequently. The Financial Planning and Audit Manager was aware of the recommendation and managed staff rotation as effectively as possible. Given the size of the team and specialists within it, it was not possible to guarantee rotation of auditors in all cases. The Financial Planning and Audit Manager ensured that auditors of high risk areas were rotated annually wherever possible.

The assessment required a view to be taken on whether the Internal Audit Performance Management and Quality Assurance Programme added value and assisted the Council in achieving its objectives. The extent to which this was true was difficult to quantify and evidence. A view of compliance with this requirement had therefore been taken based on:-

a) The audit strategy being aligned to corporate objectives, and
b) The Internal Audit service operating a quality management system which was certified to the ISO9001 standard

The Public Sector Internal Auditing Standards (PSIAS) were a new set of standards that came into force in April 2013. These had been developed jointly by the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Institute of Internal Auditors (IIA) and replaced the Code upon which this assessment was based. Future assessments would be based upon PSIAS requirements, and the Internal Audit service were working towards ensuring compliance for the 2013/14 review.

The report concluded that the Internal Audit Service complied fully with all key requirements of the Code, and overall the level of compliance was very high.

On the basis of the assessment and supporting evidence the Internal Audit service was shown to be well managed. It provided a good standard of service covering all key aspects of its remit and was well regarded and effectively utilised by senior management.

No significant issues had been identified by the assessment process. The opportunities for improvement would improve service delivery and effectiveness, but they did not in themselves represent a material risk to the Internal Audit service or its ability to deliver the audit programme.
Consideration was given to a report on the Internal Audit Annual Report and Opinion 2012/13.

The Financial Planning and Audit Manager was required to produce a formal annual report and opinion under the CIPFA Code of Practice for Internal Audit in Local Government 2006 (the “CIPFA Code”). This formed an integral part of the formulation of the Council’s Annual Governance Statement, as required under the Accounts and Audit Regulations 2011 and the CIPFA “Framework for Delivering Good Governance in Local Government”.

The report encompassed the reporting requirements specified in Standard 10.4 of the CIPFA Code for Internal Audit.

From the testing undertaken by the Internal Audit Section over the course of the year, it was the opinion that the Council continued to have an adequate, and overall, an effective system of internal control, upon which it could place reasonable reliance to deliver the Council’s objectives, and detect fraud or other malpractice within a reasonable period of time.

This opinion would form part of the Annual Governance Statement that would be submitted to the Committee later in the year.

The overall opinion provided in the report was based upon the work performed during the year. The opinion did not imply that Internal Audit had reviewed all the risks and assurances relating to the Council, but was based upon the range of individual opinions arising from risk based audit assignments completed during 2012/13. These individual opinions were summarised within the report. An analysis of the recommendations supporting these opinions by priority was shown within the report and further detail was attached to the report.

No operational constraints had been placed upon Internal Audit apart from agreed budgetary control provisions.

From the risk-based Internal Audit assignment work undertaken during 2012/13, there were no issues of which were regard as sufficiently significant to be considered in relation to the preparation of the Council’s Annual Governance Statement.

The 2012/13 Annual Audit Plan was approved by the Audit Committee on 27th February 2012. The plan was developed using risk-based principles that started with the maintenance of an audit needs assessment of all the areas of the council that could be included within an annual audit plan. This needs assessment was split into work on corporate governance issues, work on fundamental financial systems, and work of a service base or cross council nature.

The 2012/13 Audit Plan initially comprised 1,518 audit days, based on 8 full time equivalent auditors. During the year a senior auditor commenced maternity leave and as a consequence the number of productive audit days was reduced to 1426. The reduction of 92 audit days prompted a re-examination of the plan. A number of audits were cancelled or deferred at the request of the manager. All Saints School converted to an Academy and therefore the audit had to be cancelled. Several audits were combined, and the contingencies set aside in the plan for new systems, sickness and ad hoc audit work were not fully called upon, therefore increasing the number of productive days available. This level of coverage was considered sufficient to ensure that a confident, evidence-based opinion can be provided.

The 2012/13 Plan had been fully completed with the exception of those listed in Appendix C (page 13) of the report. This did not impact on the ability to provide an overall opinion.

The Council’s Internal Audit service was operated in accordance with the CIPFA Code of Practice for Internal Audit in Local Government in the UK (2006).

In accordance with the requirements of the Accounts and Audit (England) Regulations 2011, a review of the effectiveness of Internal Audit had to be undertaken. The review assessed the service against the requirements of the CIPFA Code of Practice for Internal Audit in Local Government in the UK (2006) and had concluded that the service complies with the requirements of the code of practice.

The Internal Audit Section had a joint working arrangement with the Council’s External Auditor. Close co-operation between the Council’s internal and external auditors helped to ensure that audit resources were used efficiently and to maximum effect. The aim of the joint working arrangement was for External Audit to place reliance on the work undertaken on the Council’s financial systems. This would help their judgement on the Council’s financial control environment.

During the year the section successfully retained ISO 9001:2008 certification.

Internal Audit sought feedback on the service it provided by issuing a customer satisfaction survey at the end of each audit. For 2012/13 the section received an average satisfaction rating of 98%.
Consideration was given to a report that provided an account of the planned, proactive and responsive measures undertaken by the Health and Safety Unit for the fiscal year 2012-13, to maintain and improve the workplace health and safety control environment.

Recent changes to the legal landscape and the interpretation of existing health and safety laws, aimed to free employers from associated burdens of bureaucracy.

The report further detailed:-

1. Introduction
2. The role of the Health and Safety Unit
3. Leadership
4. Competence
5. Health and Safety Executive’s Public Services and Education Sector Intervention Plans
6. National legislative developments in occupational health and safety
7. Membership of external organisations
8. Improvements Made To The Workplace Control Environment
9. Health and safety audits, inspections and workplace recommendations
10. Sub-Contractors Safety Policy Appraisals
11. Construction Design and Management Regulations 2007
12. Raising Workforce Competence
13. Educational Visits Adviser - School’s Residential & Adventure Activity Appraisals.
14. Event Safety Management
15. Continuous Professional Development
16. Reported Accidents
17. Reported Assaults
18. Employee Protection Register
19. Key Issues for the year ahead.
20. Health and Safety Unit Service Plan 2013 / 2014
Consideration was given to a report on the Council’s Annual Governance Statement for 2012/13.

The Accounts and Audit (Amended) Regulations 2011 required all authorities in England to conduct a review at least once a year of the effectiveness of its governance framework and produce an Annual Governance Statement to accompany its Statement of Accounts. The deadline for completion of the Statement of Accounts for 2012/13 was 30th June 2013 at which point they were subject to the external audit process.

The audited Statement of Accounts and the Annual Governance Statement would be presented for approval to the Audit Committee on the 23rd September 2013.

A further requirement of the regulations stated that the Statement should be signed by the Chief Executive and the leading Member of the Council, following approval by the Audit Committee. A key objective of this signing off process was to secure corporate ownership of the statement’s contents.

The Annual Governance Statement included an acknowledgement of responsibility for ensuring that proper arrangements were in place around the governance of its affairs and an indication of the level of assurance that the system provides. The statement also included a description of the key elements forming the governance framework, a description of the process applied in reviewing the effectiveness of this framework, including the system of internal control, and an outline of the actions taken or, proposed to be taken, to deal with significant governance issues.

The Council’s Annual Governance Statement for 2012/13 was attached to the report. The Council had not identified any significant issues that were not being addressed within the Statement. Officers reported on the governance framework and control environment in place within the Council that enabled the detailed preparation of the statement. Mazars LLP, the external auditors, had been consulted on the process and the identification of key governance issues.
Consideration was given to a report that gave an update on the Council’s Statement of Accounts for 2012/13.

The Accounts and Audit Regulations (England) 2011 required all authorities in England to prepare their Statements of Accounts for 2012/13 by 30th June 2013. The completion of the accounts by this date was on target and the accounts would be passed to the auditors by the deadline.

The Accounts and Audit Regulations changed the process for approving the Statement of Accounts in 2010/11 and Members were required to approve the accounts after the audit had been completed and by 30th September. Attached to the report were the main accounting statements which were provided to give Members an insight into the main issues that were contained in the accounts. The statements may be subject to minor change.

The following key financial issues were included in the accounts:-

• Fixed Assets - the Council’s valuation of its assets amounts to £392 million and this is a decrease of £83 million over 2011/12, largely due to the revaluation of school land and buildings.

• Investments and Cash amount to £103 million. This is an increase of £9 million from the previous year.

• The Council’s current Long and Short Term Borrowing levels have remained at £57 million.

• The Council’s earmarked reserves (excluding schools) have increased to £104 million which is an increase of £10 million from the previous year. Reserves to fund on-going capital schemes have increased by £4.5 million while revenue reserves increased by £5.5 million largely due to grants received in advance and rationalisation of the insurance reserve.

• The level of General Fund balances at the 31st March, 2013 stands at £10.6 million and School Reserves stand at £8 million.

• The Council’s Pension Scheme deficit has reduced from £224 million to £204 million. The reduction of £20 million is due to an actuarial gain from changes in assumptions and the return on assets being higher than expected.

The completed accounts would be passed to the external auditor by 30th June 2013 and the statutory audit would formally commence on 8th July 2013. The audited accounts would be presented to Members for their approval at the meeting on 23rd September 2013.
Consideration was given to a report on the Annual Risk Management Report that provided details of progress made in developing and embedding risk management into the Council’s business. The report included details of the updated risk register for the purpose of reviewing the key risks that had been identified as having the potential to deflect services from achieving their objectives over the next 12 months and beyond. They also set out the actions being taken to ensure that the risks, and possible adverse outcomes, were minimised.

The Annual Risk Management Report was attached to the report and provided details of progress in embedding and delivering risk management. In addition, the report included details of the key risk issues facing the Council over the next year.

The Corporate Risk Register had been reviewed and updated to reflect changes in risk profile over the period 1st January 2013 to 31st March 2013. The changes comprised the addition of three newly identified risks that had been assessed and scored above 16 and the re-appearance of one risk that previously was removed from the register, but as a result of the latest review, had been added back in. The full Corporate Risk Register was attached to the report.

As four risk areas had been added to the Corporate Risk Register, the total number of entries at the end of the quarter was increased to seven.
Consideration was given to a report that provided an update to Members of the practical implementation, in year, of the Treasury Management Strategy approved by Council in February 2013.

The target for investment return in 2012/13 was £1.2m. The final out-turn figure of income achieved was £1.77m, a return £570,000 above target. The additional funds would be transferred in to general balances as a one off sum. The target for 2013/14 had been set substantially lower at £800,000. As was mentioned in a previous report an unintended consequence of the Funding for Lending Scheme had been the reduction of interest paid on investments. Under the scheme financial institutions were able to borrow money at the very low rate of 0.25%. Given this availability of cheap funding they had consequently reduced rates for private and establishment investors. There was an initial anomaly in that short term call accounts were paying more interest than longer term deposits. This had, in the main, been adjusted, and it was difficult to obtain any rate for any investment up to 12 months of 1%. To put the circumstances in context, at the time of the credit crunch crash in 2008 Stockton had a target of £4.6m for investment income return. This meant the Medium Term Financial Plan faced a pressure of £3.8m as a consequence of this reduced return. There may of course be a point in the future where rates start to rise and that pressure would be reduced, but at this moment in time there was little sign of that resurgence happening.

With regards to the five major banks performance for the first quarter, results were something of a mixed bag. HSBC improved on its performance from last year. Both Lloyds and RBS moved into profit, although some commentators questioned the sustainability of this improvement. Barclays and Santander produced results there were considerably worse than at the same time as the previous year. To add to concerns the Bank of England’s Financial Policy Committee on 27 March said the banks needed to raise an additional £25bn in extra capital to guard against potential losses. They did not however name which banks needed to raise what amounts. Needless to say this led to much speculation as to which banks most required additional funds. Some of this was dampened at the end of May when it was reported Lloyds and RBS would not require any further state aid, and would be allowed to increase their capital by previously agreed methods. The picture for UK banks continues to be one with a considerable degree of uncertainty.

The position in Europe also continued to be one which offers little optimism about a revival in the near future. On 26 April the EU government passed legislation which said that its banks also needed to increase their capital to increase cover for future liabilities. Interest rates were cut to a new low of 0.5% on 1 May to help stimulate economic growth, as that was not materialising. One minor shaft of light, amongst the gloomier picture, was the first quarter performance of the Spanish bank Bankia. In 2012 it produced record losses of 19.2bn euros and required an EU sponsored bailout. In the first quarter of 2013 it announced a profit of 74m euros with a hope that in 2013 it would see a return to normality.

Given the continued uncertainty about economic recovery, and the statements on banks ability to cover future losses, the Stockton approach on investments continued to be short term placements, with the inevitable impact on returns.
Consideration was given to a report on Localism Act 2011 - The New Standards Regime - Review of the Council's Local Standards Arrangements.

When the Council’s new local standards arrangements were approved, it was also agreed that they would be reviewed after 12 months of operation.

On 7 March 2012, Council agreed the new local standards arrangements for the Authority, as required by the Localism Act 2011. A copy of the report to Council was attached to the committee report.

Subsequently, on 18 July 2012 Council approved a new code of conduct for Stockton’s Members. A copy of this was also attached to the report.

When approving the new standards arrangements, it was agreed that they would be reviewed, along with the code of conduct, after 12 months of operation.

A review had been undertaken, and a copy of the draft review report was attached to the committee report.

Cabinet would consider the matter on 4 September 2013 and would make recommendations to Council for consideration on 11 September.

The Audit Committee was asked for its views on the report and the proposed recommendations to Cabinet in that respect, which were that:-

a. The review report is considered and agreed.

b. No changes are made to the Council’s code of conduct for members.

c. Appropriate advice, guidance and training continues to be provided in connection with the code.

d. Consideration is given to updating the descriptions of the principles of conduct in the preamble to the code, in light of the revisions to the descriptions of the Nolan principles.

e. The arrangements for dealing with member misconduct complaints remain as originally approved by Council.

f. The position of Norman Rollo, as Independent Person, and Mike Hill and Jeff Bell as reserve Independent Persons, be considered, taking into account the recommendations of the Appointment Panel.

g. Regular reminders, advice and guidance continue to be provided to Stockton’s members and to the members of Town/Parish Councils in Stockton’s area regarding the need to submit and keep up to date their registrable interests.

h. The procedures relating to the disclosure of interests and withdrawal from meetings; sensitive interests and dispensations, be reaffirmed.

i. Further training regarding the code of conduct, disclosable pecuniary interests and the arrangements for dealing with allegations of member misconduct be provided as and when required or considered appropriate.

j. The Monitoring Officer reviews the Council’s standards arrangements again after a further 12 months of operation, and that the outcome with any recommendation for change is reported back to Cabinet and Council for consideration.

With regard to recommendation f. above, the Standards (Independent Persons) Appointment Panel would be meeting on the 18th July to review the previous appointments of the Council’s Independent Person and two reserves in order to decide whether further terms of office should be recommended.

The Audit Committee’s views would be brought to Cabinet’s attention on 4th September.

Members felt that with reference to j above that any recommendation for change should also be brought back to the Audit Committee.
Members were presented with the Diary of Meetings and Work Programme for the Audit Committee for 2013/14.

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