Stockton-on-Tees Borough Council

Big plans, bright future

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

Monday, 24th February, 2014
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 Barry Woodhouse (Chair); Cllr Derrick Brown, Cllr Michael Clark (Vice Cllr Wilburn), Cllr Phillip Dennis, Cllr Terry Laing, Cllr Mick Moore and Cllr Ross Patterson.
P Johnson, P McCann, M Skipsey, D MacDonald, A Barber (R); P K Bell (LD).
In Attendance:
M Barnes, M Kirkham (Mazars LLP).
Apologies for absence:
Cllr Alan Lewis, Kathryn Nelson and Cllr David Wilburn.
Item Description Decision
There were no interests declared.
The minutes of the meeting held on 2nd December 2013 were confirmed and signed by the Chair as a correct record.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RESOLVED that the briefing be noted.
RESOLVED that the revised Counter Fraud Strategy, the statement of expected responsibilities and associated action plan be approved.
RESOLVED that the report be noted.

1. The Internal Audit Charter be approved.

2. The proposed Audit Plan for 2014-15 be approved.

3. The indicative strategic Audit Plan for 2014-17 and the estimated resources available to deliver that plan be noted.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RESOLVED that the work carried out by the Audit Committee be noted.

RECOMMENDED to Council that the work carried out by the Audit Committee be noted.
RESOLVED that the Work Programme 2013/14 be noted.
RESOLVED that the draft Work Programme 2014/15 be noted.
4.00 pm - 6.00 pm


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

Mazars had completed all aspects of the Council’s 2012/13 audit, as follows:-

•the 2012/13 Annual Audit Letter had been issued, and was available on the Audit Commission website;
•Mazars had completed their work and certified the Council’s 2012/13 Housing and Council Tax Benefits Subsidy Claim, and submitted the required documentation to the Department for Work and Pensions within the prescribed timetable; and
•a report summarising the work done, fees and findings from certification of 2012/13 grants and other funding returns had been agreed with management and submitted to the Audit Commission.

Mazars had presented to the Committee in September 2013 on Audit Quality, highlighting the Financial Reporting Council’s Audit Quality Inspections Annual Report 2012/13. Mazars had learned that the 2012/13 audit of Stockton-on-Tees Borough Council had been selected for Audit Quality Review.

In November 2013 Mazars were commissioned to complete certification procedures on the Council’s Audit Grant Report and Accounts Return for Initial Teacher Training (ITT). The ITT Grant was no longer within the certification remit of the Audit Commission, but the Council had to arrange certification. Mazars completed agreed procedures and submitted the report to the National College of Teaching and Leadership before its deadline. Mazars fee for the work was £2,000, excluding VAT.

Mazars planning for the 2013/14 audit was well under way. Mazars were on target to present their Audit Strategy Memorandum to the Audit Committee at its next meeting. The document would set out the risks Mazars identified for both the opinion on the financial statements and the value for money conclusion, and the overall approach to the audit.

The report highlighted some significant emerging issues and developments in respect of:-

•Auditing the Accounts 2012/13, Quality and timeliness of local public bodies' financial reporting;
•Future of Local Audit: Consultation on Secondary Legislation, DCLG;
•Audit Commission oversight of audit quality, quarterly reports;
•Audit Commission consultation on 2014/15 fees;
•Financial Reporting Council Audit Quality Thematic Review: Materiality; and
•Tough Times 2013: Councils’ Responses to Financial Challenges From 2010/11 to 2013/14.
Consideration was given to a report on Mazars Certification of Claims and Returns.

Stockton-on-Tees Borough Council (‘the Council’) received more than £380m in funding from various grant-paying government departments. These departments attach conditions and restrictions to these grants which the Council must meet otherwise funding may be withdrawn or clawed-back.

It was therefore important that the Council could demonstrate that it:-

* Had put in place adequate arrangements to prepare and authorise each claim and return; and
* Can evidence that it had met the terms and conditions put in place by the grant paying body for each claim and return.

As the Council’s appointed auditor, Mazars acted as an agent of the Audit Commission to certify specified claims and returns.

The Audit Commission, in consultation with the grant-paying bodies, set out a programme of work in the form of Certification Instructions (‘CIs’) that Mazars must follow. It also set an overall framework under which Mazars carry out their certification work:-

* For claims and returns below £100,000 the Audit Commission did not make certification arrangements and as such Mazars were not required to carry out any certification work.
* For claims and returns between £100,000 and £500,000, the Audit Commission required Mazars to undertake limited tests to ensure that entries on the claim form agree with underlying records.
* For claims and returns over £500,000, Mazars assess the control environment the Council had put in place for preparing the claim to decide whether they could place reliance on these arrangements. Where Mazars could place reliance on the Council’s arrangements they undertook limited testing to ensure that entries on the claim form agree with underlying records.

Where Mazars could not place reliance on the Council’s control environment they carried out the full programme of testing in the Audit Commission’s CI.

On completion of the specified work Mazars issued a certificate, the wording of which depended on the level of work they had performed on each claim. The certificate stated whether the claim had been certified either without qualification; without qualification following amendment by the Council; or with a qualification letter. Where Mazars issued a qualification letter or the claim or return was amended by the Council, the grant paying body may withhold or claw-back grant funding.

As required by the Audit Commission’s CIs, Mazars had assessed the control environment for three claims and returns. Mazars had not noted any weaknesses in the Council's control environment for any claim or return.

A summary of progress on the issues set out in Mazars 2011/12 certification report was attached to the report.

Also attached to the report was a full analysis of all claims and returns on which Mazars had carried out certification work.

Of the three claims and returns Mazars certified in 2012/13, one was qualified and none were amended by the Council. Further details on qualified and amended claims were also attached to the report.

For 2012/13 the total fees charged for certification work was £30,713. This represented a significant reduction on fees charged in previous years (2011/12 £34,515) as a result of:-

* reduced work on claims or returns giving rise to few matters arising in previous years; and
* a reduction in the number of claims and returns for which the Audit Commission had made certification arrangements.

A breakdown of the fees charged for each claim or return was attached to the report.
Members were given a briefing from Mazars on Protecting the Public Purse Fraud Briefing 2013.

The Fraud Briefing covered the following areas:-

•Protecting the Public Purse (PPP) 2013 report - national picture
•Interpreting fraud detection results
•The local picture
-Checklist for those charged with governance
-Questions councillors may want to ask/consider

Fraud costs local government in England over £2 billion per year (source: National Fraud Authority)
•Fraud is never a victimless crime
•Councillors have an important role in the fight against fraud

Purpose of Fraud Briefing:-
•Opportunity for Councillors to consider fraud detection performance, compared to similar local authorities
•Reviews counter fraud strategy and priorities
•Discuss local and national fraud risks
•Reflect local priorities in a proportionate response to those risks
the Council was compared with the metropolitan districts and unitary authorities of the north west, north east and Yorkshire and the Humber regions

Interpreting fraud detection results:-
•Contextual and comparative information needed to interpret results
•Detected fraud was indicative, not definitive, of counter fraud performance (Prevention and deterrence should not be overlooked)
•No fraud detected does not mean no fraud committed (Fraud will always be attempted and even with the best prevention measures some will succeed)
•Councils who look for fraud, and look in the right way, will find fraud (There was no such thing as a small fraud, just a fraud that has been detected early)

Northern Councils without housing stock 2012/13 Social housing fraud
It was estimated that:-
•2 per cent of social housing stock outside London was subject to tenancy fraud;
•tenancy fraud represents the second largest financial loss to fraud in local government, costing £845 million in 2013; and
•when combined with the loss to tenancy fraud suffered by housing associations, the total value in England is £1.8 billion - making tenancy fraud five times greater than the annual loss due to housing benefit fraud.
The Prevention of Social Housing Fraud Act 2013 criminalises tenancy fraud
The legislation gives councils investigation powers and the ability to prosecute tenancy fraudsters on behalf of housing associations
Should you be using this legislation to work in partnership with local housing associations?

Stockton-on-Tees Borough Council Other frauds
•Procurement: 1 case, no value recorded
(Ave per Northern Met & UA: 1 case, valued at £3,660)
•Insurance: no cases
(Total Northern Met & UA: 1 case reported, with no value given)
•Social care: no cases
(Total Northern Met & UA: 19 cases reported, valued at £120,396)
•Economic & Third sector: no cases
(Total Northern Met & UA: 5 cases, valued at £127,200)
•Internal fraud: 1 case, valued at £200
(Ave per Northern Met & UA: 7 cases, valued at £16,635)
Correctly recording fraud levels is a central element in assessing fraud risk

It was best practice to record the financial value of each detected case.
Consideration was given to the Council’s updated Counter Fraud Strategy and associated Action Plan.

Stockton on Tees Borough Council had a responsibility to have a counter fraud and bribery arrangements in place and ensure that the management of the risk of fraud was placed at the very top of the Council’s governance arrangements.

This strategy defined the approach to managing the risk of fraud and bribery across the entire organisation and ensured that best practice was embedded across all services, projects and partnerships.

The strategy was designed to:-

- Encourage prevention
- Promote detection
- Ensure effective investigation where suspected fraud or corruption has occurred, and
- Take appropriate sanctions against perpetrators.

There was an expectation and requirement that all Members, employees, consultants, contractors and service users would be fair and honest, and if able to do so, provide help, information and support to assist the investigation of fraud and corruption.

The strategy explained how the commitment to reduce fraud would be delivered and provided advice on how individuals, including Members of the public, may raise concerns relating to fraud and corruption.
Consideration was given to a report on the work carried out by the Internal Audit Section and the progress made during the period 4th November to 31st January 2014 against the annual audit plan.

Internal Audit was an independent appraisal function established by the Council to objectively examine, evaluate and report on the adequacy of internal controls. This role ensured that there was proper economic, efficient and effective use of resources. It also ensured that the Council had adequate accounting records and control systems.

Attached to the report were details of the sections performance in the following areas:-

* Key Performance Indicators

* Details of audits by Service Groupings (2012/13 & 2013/14).

* List of audits completed and in progress and number of recommendations made (2012/13 & 2013/14)
Consideration was given to a report on the Internal Audit Charter and proposed annual Audit Plan for the financial year 2014/15.

The requirement for the Council to have an internal audit function was outlined in Section 151 of the Local Government Act 1972. More specific requirements were detailed in the Accounts and Audit (England) Regulations 2011 which required the Council to:-

“undertake an adequate and effective system of internal audit of its accounting records and its system of internal control in accordance with the proper practices in relation to internal control”.

The Council had delegated this responsibility to the Corporate Director of Resources.

The Public Sector Internal Audit Standards were published on 18th December 2012. These standards, which were based on the requirements of the Institute of Internal Auditors (IIA), were intended to promote further improvement in the professionalism, quality, consistency and effectiveness of internal audit across the public sector. They were mandatory and applied to all internal audit service providers, whether in-house, shared or outsourced.

There were three distinct areas covered by the standards:-

• A new definition of Internal Auditing;
• A Code of Ethics designed to promote an ethical, professional culture; and
• The International Standards for the Professional Practice of Internal Auditing.

CIPFA had provided guidance on the application of Public Sector Internal Audit Standard in the form of an Application Note. The Internal Audit Charter had been prepared in accordance with the Public Sector Internal Audit Standards and this guidance.

Under the standards, the Financial Planning and Audit Manager was required to prepare an Internal Audit Charter. This was a high level statement of how the Internal Audit Service would be delivered to meet the requirements of the legislation and the standards. The previous code of practice required an Audit Strategy and this was reported and approved by the Committee on 25th February 2013. The new Internal Audit Charter incorporated elements previously included in the strategy as well as any new requirements.

The revised charter attached set out the approach for the period 2014-2017 and gave details of:-

• Purpose of the Internal Audit Service
• Scope of Internal Audit work
• Access to Information
• Resourcing of the Service
• Future Development of the Service

The Internal Audit Charter was attached to the report.

The standards stated that a risk based plan designed to implement the audit charter and allow an annual internal audit opinion to be prepared should be produced. The plan was split into 2 parts, there was a detailed audit plan covering the period 2014-2015 and a strategic plan covering 2014-2017 with the period 2015-2017 being indicative. Best practice required that audit resources should target those areas that represented the greatest risk to the Council. The plan had therefore been based on assessment of risk drawn from a variety of sources, including:-

• Findings from previous audit reports and knowledge of Council systems
• Input from Corporate Management Team & Heads of Service,
• The organisation’s strategic objectives and priorities,
• Risk Registers,
• Any areas highlighted by special investigations,
• Any national issues or emerging risks.

As part of the process, the plan was subject to consultation with the Council’s external auditors. High priority was given to key financial systems, any significant corporate projects and specific areas requested by Management. A lower priority was given to systems which, although very important to stakeholders, had less impact corporately. All areas of activity were reviewed at least once in a five year period.

Continuous assessment of organisational risks was required given that some risks could escalate or diminish over time, whilst other risks could disappear altogether or be superseded by new risks over fairly short timescales. The plan was therefore indicative as it was inevitable that changes would be made during the year as the risk profile of the Council changes. This would be achieved through ongoing review and amendment in consultation with the Corporate Director of Resources. The Audit Committee would be informed of any significant changes to the plan.

The level of resources within the service could be identified as gross audit days based on 7.6 FTE’s with 1 officer part-time, which was equivalent to 1984 audit days. Allowances had been made for annual leave, bank holidays, sickness, training and administrative duties. No allowance had been made for staff turnover. The productive audit days to deliver the 2014-2015 Audit Plan was detailed within the report.

The proposed Internal Audit Plan for 2014-15 and indicative plans for 2015-16 & 2016-17 were attached to the report. The 2014-2015 plan provided a brief synopsis of the areas that would be covered during each audit review as well as the audit priority rating based on the audit risk assessment.

It had been assumed that the same level of annual resources would be available for the entire period 2014-2017. Based on this assumption there appearred to be adequate resources available to achieve the strategic plan.

The service was continuously striving to improve the way it operated and the following actions had been identified to further enhance the service:-

• Extend the amount of specific anti-fraud work being undertaken, specifically additional data matching.
• Undertake a process mapping exercise in CESC to ensure coverage within the audit universe is adequate and that the structure of the work is appropriate.
• Review and update monitoring and reporting procedures.
• Introduction of a programme of standard testing to ensure consistency of testing of corporate processes and procedures across all audits.
• Improved promotion of the service to provide managers and individuals with more information about the audit service and the audit process itself.
• Bringing together audit instructions/documentation into a single audit manual.
Consideration was given to a report on the Corpoate Risk Register.

Members were reminded that quarterly reports on the Corporate Risk Register were presented 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.

As a reminder, risks were scored on a scale of one to five for both ‘impact’ and ‘likelihood’. The scores were multiplied to generate a total score and any risks with a score of 15 or above were included on the Corporate Risk Register. For information, any risks scored between 9 and 12 were included on Service Group Risk Registers.

Members had requested that, in the absence of substantial changes to the register, quarterly reporting should be confined to highlighting significant additions and amendments since the previous update, with a detailed report incorporating a review of the Council’s risk management process being produced annually at the end of Quarter 4.

The interim report covered the period 1st October to 31st December 2013. All Service Groups had been contacted subsequently and the returns indicate that there had been some changes to the Authority’s risk profile over the months in question. The changes comprised the removal of one risk and the splitting of one risk into two to reflect the different risk management arrangements between children and adults.

Details of the entry in the register that was split and the risk removed from the register were summarised within the report.

As one new risk had been added and one removed, the total number of significant risks in the Corporate Risk Register at the end of the current Quarter was 11.

For purposes of record, the changes had been incorporated in the latest version of the full Corporate Risk Register and this was attached to the report.
Consideration was given to a report that detailed the regular non -responsive services provided by the Council’s Health and Safety Unit to monitor, improve and to ensure compliance of the health, safety and well-being control environment for the period 1st October 2013 to the 31st December 2013.

This detail encapsulated the regular, non-responsive activity of the Health and Safety Unit, including:-

1. Health and Safety Training
2. Health and Wellbeing Update
3. Accidents Reported
4. Physical Assaults Reported
5. Verbal Assaults Reported
6. Premises Audited
7. Construction (Design and Management) Regulations 2007 (CDM)
8. School’s Educational Residential Visits
9. Employee Protection Register Activity
10. Tendering Contractor Health and Safety Policy appraisal
11. Regulatory Update
12. Occupational Health
The Chartered Institute of Public Finance & Administration (CIPFA) stated that an effective Audit Committee would produce annual reports on its work and findings.

The report informed Members of the work of the Audit Committee during the past year and the sources of information upon which the enclosed Audit Committee opinion statement was based.

Members were reminded of the role of the Audit Committee which was:-

(a) Reviewing and monitoring the Council’s approach to risk management and corporate governance including the approval of the Statement of Internal Control.
(b) Monitoring the integrity of the Council’s financial statements and approving the Statement of Accounts.
(c) Reviewing any proposed changes to accounting policies and promoting discussion around these.
(d) Considering budget reports and the effect of government announcements on the Council’s finances.
(e) Reviewing Financial Update reports identifying the impact on the Medium Term Financial Plan.
(f) Approving the role and responsibilities of the Internal Audit Service
(g) Considering the reports of External Audit, as far as the Audit Commission’s rules permit and monitoring the effectiveness of auditor’s performance
(h) Approving the internal and external audit plans
(i) Reviewing Internal Audit work on a quarterly basis; internal and external annual reports together with any management response and receiving details of specific significant issues highlighted via audit work and referring to the Executive Scrutiny Committee; the Select Committees; Cabinet or Council, as appropriate, any issues arising which are key in nature
(j) Since the demise of the Standards Committee the Audit Committee has maintained an overview of the Council’s Constitution in respect of contract procedure rules, financial regulations and codes of conduct and behaviour, and considering the Council’s compliance with its own and other published standards and controls
(k) Consider details of key ethical and wider corporate governance issues

The Terms of Reference for the Audit Committee were approved by Council, at its meeting held on 25 January 2006, and formed part of the Council’s Constitution.

At its meeting in January 2011, Council also approved a Statement of Purpose for the committee:-

The purpose of the Audit Committee was 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.

The report covered the period from 1st October, 2012 to 30th September, 2013. As many other reports give opinions or results at the end of the financial year, the timing of the report was to show that the review / appraisal of the control environment within this Council were on-going.

The Audit Committee was in the third year of operation, there had been detailed and in depth questioning from Members and the relatively new Members appointed to the Committee despite being on a steep learning curve had grasped the ethos of Audit work. They had ensured a continuance of the review / appraisal process across the period of reporting and made a valuable and much appreciated contribution to the functions of the Committee alongside the longer serving members.

The opinions of the Audit Committee expressed in the report were based on information supplied by the following specialist risk assessment services:-

• The Council’s Monitoring officer,
• The Chief Accountant,
• The External and Internal Audit services,
• Health & Safety
• Risk Management and Insurance.
• A number of Corporate Governance reports.

The main thrust of all the specialist reports was to ensure risks were identified, managed appropriately and the resulting control environment was reliable. In receiving and challenging these reports the Audit Committee was well placed to form an independent over-view of the complete control environment including the Authorities Anti fraud Strategy as influenced by the Audit Commission report Protecting the Public Purse 2011 Fighting Fraud Against Local Government .

The membership of the Committee was slightly changed from the previous municipal year and therefore ensured work in progress was continued with newer Members posing searching questions alongside the in depth probing of existing Members. If the Audit Committee membership were to change dramatically and Members be required to report on a year of which they had no personal knowledge or experience (and therefore be reliant on the Officers upon whom they were supposed to exercise oversight), the previous Chair suggested that the Committee’s report cover the work on the Authority's control environment for the year ending 30th September.

The Members of the Committee had shown a strong commitment to the work for which they had been given responsibility and the Committee had functioned well. The Members had studied agendas and asked searching questions of officers not only presenting reports but also requesting further investigation of issues and explanation by the Chair, Vice chair and supporting officers of the Committee.

It was fortunate insofar as the make up of the Audit Committee membership was diverse not only geographically but also in experience and expertise. Members represented not only the North and South of the Borough but also the major conurbations and communities giving a broad spectrum of geographical and electoral knowledge.

This overview coupled with long serving Members with experience of Cabinet and Chairing Scrutiny Committees and members elected recently indicates a searching and enquiring membership with a varied and extensive knowledge capable of ensuring sound and ethical governance.

As well as looking at the Internal Audit Report, Corporate Risk Register and the Health and Safety Report at each meeting the Committee had, and would continue to include in its deliberations and debates External Audit Updates, Constitutional Updates (as required), and The Monitoring Officer's Report. And last but certainly not least The Role of Internal Audit.

There was a seamless transition outsourcing the Audit Commission's in-house audit practice providing an external overview of the Councils operations. In essence there had been no change from the previous situation although this had resulted in a substantial saving in audit fees for the Council year on year.

Under the Accounts and Audit (Amendment) Regulations 2006 an internal review of the Internal Audit service should be carried out each year. Consideration was given to the seventh such review, which had again been conducted under the auspices of the Corporate Governance Group. Two members of the Group had reviewed evidence and had formulated conclusions, findings and recommendations regarding the service, the details of which were submitted.

The financial statements were produced under International Financial Reporting Standards. This in itself is a major change to the accounting regime. The Council prepared well for the introduction of IFRS and produced the draft financial statements in time for the new statutory deadline of 30th September.

In conclusion:-

The Audit Committee was well established with comprehensive terms of reference. The Audit Committee had responsibility for risk management, internal control and financial reporting. The Chair of the Audit Committee prepared an annual report on the Committee's work for presentation to Cabinet. Effective corporate and ethical governance was critical to an authority’s performance and to demonstrating continuous improvement it was therefore, a fundamental element of the modernization agenda. Probity and high standards were an inherent part of corporate / ethical governance. They were also priorities in Law and Democracy’s Service Plan and in the Council Plan.

With regard to Changes during the year the demise of the Audit Commission and the transition to external providers was carried out without causing any problems.

Reductions in staffing and reorganisation of duties seemed to have been carried out in a seamless manner and the officers taking on extra duties and responsibilities had assured the Committee that the effects would not be to the detriment of the service.

The Council was facing increasing pressures around children's and Adult social care spending and this must be closely monitored as part of ongoing budgetary control.

In addition there were several other issues and developments that had impacted on Council budgets going forward, including devolving responsibility for Council Tax Benefit, transfer of public health budgets from primary care trusts, localisation of business rates and distribution of revenue funding to academies.

The Council took prompt and effective action to achieve the £3.8 million revenue savings required in 2011/12 arising from cuts in funding in year. Further ongoing reductions of £11.3 million in 2013/14 onwards had been built into the medium term financial plan and the ongoing efficiency, improvement and transformation programme set out how the Council would review services and deliver more savings in the future.

The robust and prudent investment regime had in the avoided issues similar to the collapse of the Icelandic Banks however difficult times had been faced due to a very low interest rate in the market. The continual monitoring of information on any changes in the investment sector being paramount both for internal control and the stability of the Authorities forward financial planning and officers have worked diligently to ensure maximum returns were achieved.

The Accounts and Audit Regulations 2011 changed the requirements regarding the completion and approval of the Annual Financial Statements. From 2010/11, annual Financial Statements had to be prepared by 30th June and to then pass them to external auditors for review. Authorities were required to present audited accounts for approval by those charged with governance by 30th September which was completed for the second year.

The financial statements were produced under International Financial Reporting Standards.
Consideration was given to the Work Programme 2013/14.
Consideration was given to the draft Work Programme 2014/15.

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