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

Monday, 25th February, 2013
04.00 p.m.
Conference Room 2, Second Floor, Municipal Buildings, Church Road, Stockton on Tees
Please note: all Minutes are subject to approval at the next Meeting

Attendance Details

Cllr Barry Woodhouse (Chair); Cllr Derrick Brown, Cllr Phillip Dennis, Cllr Ben Houchen, Cllr Ross Patterson and Mrs Sylvia Walmsley.
P Johnston, D Macdonald, M Skipsey, S Winship (R); F McKie (LD).
In Attendance:
M Kirkham, R Tribe (Mazars LLP)
Apologies for absence:
Cllr Kathryn Nelson, Cllr Alan Lewis and Cllr David Wilburn.
Item Description Decision
There were no interests declared.
The minutes of the meeting held on 3rd December 2012 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 report be noted.
RESOLVED that the report be noted.
REOLVED that:-

1. The Internal Audit Strategy and Terms of Reference be approved.

2. The Audit Plan for 2013/14 be approved.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RECOMMENDED to Council that the report be noted.
RESOLVED that the Diary of Meetings and Work Programme for the Audit Committee for 2011/12 be noted.
RESOLVED that the Work Programme for 2013/14 be agreed.
4.00 pm - 5.30 pm


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

With regard to progress on the audit, the planning element of the audit covered a wide range of audit work. In addition to planning meetings with senior officers and within the audit team, Mazars also:-

* Completed walkthrough tests of the Council's key financial systems to confirm their understanding of how they operated and to assess risks of misstatement in the financial statements;

* Determined what work will be needed to discharge their responsibilities in respect of their value for money conclusion; and

* Review the Council's prior year financial statements with a view to identifying any areas which may be at risk of material misstatement in the current audit year.

Mazars had completed most of their initial planning work. They had also wrote to the Audit Committee Chair and the Corporate Director of Resources about the arrangements that were in place for:-

* preventing and detecting fraud;
* ensuring the legality of transactions and identifying potential litigation;
* adopting the going concern principal for the accounts;
* related party transactions and relationships; and
* accounting estimates

The Audit Commission had published an updated value for money conclusion guidance for auditors, and Mazars had considered that guidance as part of their updated risk assessment. The specified criteria for the 2012/13 assessment were unchanged and focused on:-

* financial resilience; and
* challenging economy, efficiency and effectiveness

On 19th December Mazars had issued their 2012/13 fee letter. This would be presented as the Audit Strategy Memorandum. This set 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.

The annual report had also been issued on the audit of the grant claims and returns for 2011/12.
Consideration was given to a report on the external audit certificate of claims and returns.

Auditors appointed by the Audit Commission were required by section 28 of the Audit Commission Act 1998 to certify some claims and returns for grants or subsidies paid by the government departments and public bodies to the Council. A fee was charged to cover the full cost of meeting this requirement.

The Council was responsible for compiling grant claims and returns that followed the requirements and timescale set by the grant paying departments. The key features of the arrangements were:-

* For claims and returns below £100,000 the Commission did not certify arrangements.

* For claims and returns between £100,000 and £500,000, auditors undertake limited tests to agree form entries to underlying records, but did not undertake any testing of eligibility of expenditure.

* For claims and returns over £500,000, auditors assess the control environment for preparing the claim or return to decide whether reliance could be placed on it. Where there was reliance on the control environment, auditors undertake limited tests to agree form entries to underlying records but did not undertake any testing of the eligibility of expenditure or data. Where reliance could not be placed on the control environment, auditors undertake all the tests in the certification instruction and use their assessment of the control environment to inform decisions on the testing required. This meant the audit fees could be reduced for certification work if the control environment was strong.

* For claims spanning over more than one year, the financial limits above related to the amount claimed over the entire life of the claim and were tested accordingly. The approach impacted on the grants work carried out, placing more emphasis on the high value claims.

Stockton-on-Tees Borough Council received more than £300 million in funding from various grant - paying government departments. These departments attached conditions to these grants and where the Council could not evidence conditions have been met, the funding could be at risk.

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

• Had put in place adequate arrangements to prepare and authorise each claim and return (the control environment); and
• Can evidence that it had met the conditions attached to each claim

The report summarised the findings from certification work in respect of grants related to 2011/12 and included recommendations arising from the assessment of the Council arrangements for preparing claims and returns.

The control environment had been assessed for two claims and returns. No weaknesses were identified in the Council control environment. A summary of recommendations from previous years was attached to the report.

With regard to amendments and qualifications where certification work identified errors on a claim or return the Council would amend the claim or return to correct the error. Where the auditor concluded that the claim or return was not fairly stated or in accordance with the associated terms and conditions, a qualification letter was issued to the grant-paying body to draw its attention to the findings.

Of the four claims or returns certified in 2011/12 one was qualified and none were amended. A full summary of the claims and returns which were qualified or amended was attached to the report.

For 2011/12 the total fee for certification of claims and returns was £34,515. This was a significant reduction on fees charged in previous years as a result of:-

* a reduction in the number of claims above the £500,000 threshold; and
* an improvement in the Council’s arrangements for preparing claims and returns.
Consideration was given to the Audit Strategy Memorandum. The document set out Mazars audit plan in respect of the external audit of Stockton-on-Tees Borough Council for the year ending 31 March 2013.

The Plan set out Mazars proposed audit approach and was prepared to assist the Council in fulfilling its governance responsibilities. The responsibilities of those charged with governance were defined as to oversee the strategic direction of the entity and obligations related to the accountability of the entity, including overseeing the financial reporting process.

The communication with the Council was important in:-

* reaching a mutual understanding of the scope of the audit and the
responsibilities of the auditor and those charged with governance;

* sharing information to assist both the auditor and those charged with governance to fulfil their respective responsibilities;

* providing to those charged with governance constructive observations arising from the audit process; and

* ensuring as part of the two-way communication process that Mazars, as external auditors, gain an understanding of the attitude and views of those charged with governance of the internal and external operational, financial, compliance and other risks facing the Council which might affect the audit, including the likelihood of those risks materialising and how they are monitored and managed.

Mazars had been appointed to perform the external audit of Stockton-on-Tees Borough Council for the year to 31 March 2013. The scope of their engagement was laid out in the Audit Commission's Code of Audit Practice.

The Audit Commission had issued a copy of its Statement of Responsibilities of Auditors and of Audited Bodies to the Council. The Statement summarised where the different responsibilities of auditors and of the audited body begin and ended and Mazars undertake their audit work to meet these responsibilities.

Mazars complied with the statutory requirements governing audit work, in particular the:-

* Audit Commission Act 1998; and
* Code of Audit Practice for Local Government bodies.

Mazars were responsible for forming and expressing an opinion on the financial statements and reaching a conclusion on the arrangements the Council had put in place to secure economy, efficiency and effectiveness in the use of resources (the Value for Money conclusion).

Mazars were also required to report on the consistency of the Council Whole Government Accounts L-Pack with the audited financial statements.

Mazars audit did not relieve management or the Audit Committee, as those charged with governance, of their responsibilities.

The reported also detailed:-

* The independence of Mazars
* Mazars audit approach
* Reliance on internal audit
* Reliance on experts
* Significant risks and key judgement areas

With regard to value for money Mazars were required to reach a conclusion on the Council's arrangements to secure economy, efficiency and effectiveness in the use of resources.

Mazars conclusion on the Council arrangements was based on two criteria, specified by the Audit Commission:-

* securing financial resilience - focusing on whether the Council was managing the financial risks to secure a stable financial position for the foreseeable future; and

* challenging how the Council secured economy, efficiency and effectiveness - focusing on whether the Council was prioritising resources within tighter budgets and the need to improve productivity and efficiency.

Mazars had considered the risks that were relevant to their value for money conclusion and had not identified any significant risks that needed to be addressed specifically through their work. Mazars would focus their work on reviewing the robustness of the Council's update of its Medium Term Financial Strategy which would set out how it planned to make the savings required to ensure it had a balanced budget.

The report highlighted the audit timeline and gave details of the proposed team.

With regard to the audit fees, Mazars had kept the audit fee in line with the Audit Commission scale fee of £167,940.
Consideration was given to a report on the work carried out by the Internal Audit Section and the progress that had been made during the quarter October to December 2012 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.

Members were reminded that the list of all audit work undertaken in the period covered by the report had been circulated to all Councillors prior to the meeting. The intention was to give Councillors the opportunity to raise questions on issues that affected their ward or other areas of responsibility.

The Council had received the results of the data sent to the Audit Commission for matching in October 2012. This had resulted in 4,442 matches of which the NFI had recommended 674 to be prioritised for investigation. An analysis of the matches was detailed within the report.

This compared with 8,222 matches of which 2,885 were recommended for investigation when this exercise was last conducted two years ago. A similar analysis by category was not available.

Attached to the report were the details of the section’s performance in the following areas:-

* Key Performance Indicators

* Details of audits by Service Groupings (2011/12 & 2012/13)

* List of audits completed and in progress and number of recommendations made (2012/13).

It could be seen that as at 31st December, 76 audits had either been completed or near completion. This represented 65% of the plan and compared with 67% for the same period last year. The position at the 31st January 2013 had been assessed and showed only 16 audits remained to be started in the final two months of the year. There were no limited assurance opinions issued this quarter.
Consideration was given to a report on the Audit Strategy, Terms of Reference and proposed Annual Audit Plan for the coming financial year 2013/14.

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.

Members were provided with details of the following:-

* Internal audit Terms of Reference
* Audit Plan Summary 2013/16
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.

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 1 October to 31 December 2012. All Service Groupings had been contacted subsequently and the returns indicated that there had been some changes to the Authority’s risk profile over the months in question. This comprised the removal of one risk to the register, revision and update of a number of the remaining entries and of the numbering sequence where necessary. A copy of Corporate Risk Register - Updates and Deletions was attached to the report.

As one risk had been removed and none added to the Corporate Risk Register, the total number of entries at the end of the current quarter was reduced to 3.

The following risks had been managed down during the financial year to an extent that they had been removed from the corporate risk register:-

* Hardwick Regeneration Scheme
* Parkfield Regeneration Scheme
* Swainby Road Regeneration Scheme
* Balanced MTFP
* School Capital Programme
* Sickness Absence
* Equal Pay Claims
* Mandale Regeneration Scheme

For purposes of record, the changes referred to above had been incorporated in the latest version of the full Corporate Risk Register. This was available in the Member’s Library and following approval, an electronic copy incorporating the supporting risk assessment details would be placed on the intranet.
Consideration was given to a report that detailed the services provided by the Council's Health and Safety Unit to improve the health, safety and well-being control environment for the period 1st October to 31st December 2012.

The report covered the significant activity of the Health and Safety Unit, including partner and stakeholder involvement:-

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
Consideration was given to the Annual Report of the Audit Committee.

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:-

* Reviewing and monitoring the Council’s approach to risk management and corporate governance including the approval of the Statement of Internal Control.
* Monitoring the integrity of the Council’s financial statements and approving the Statement of Accounts.
* Reviewing any proposed changes to accounting policies and promoting discussion around these.
* Considering budget reports and the effect of government announcements on the Council’s finances.
* Reviewing Financial Update reports identifying the impact on the Medium Term Financial Plan.
* Approving the role and responsibilities of the Internal Audit Service
* Considering the appointment of the External Audit, as far as the Audit Commission’s rules permit and monitoring the effectiveness of auditor’s performance
* Approving the internal and external audit plans
* 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; the Standards Committee; Cabinet or Council, as appropriate, any issues arising which are key in nature
* The Audit Committee has responsibility, maintaining 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
* These issues and others which were covered by the Standards Committee changed under the Localism Act 2012 and will be reviewed later this year.

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, 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, 2011 to 30th September, 2012. 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 second year of operation, there had been detailed and in depth questioning from Members and the relatively newly elected members 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.

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.

The membership of the committee was unchanged from the previous municipal year and therefore ensured work in progress was continued. 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 are 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 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 indicated a searching and enquiring membership with a varied and extensive knowledge capable of ensuring sound and ethical governance.

Risk was a particular thrust for the Audit Commission and as a result wrote to the Audit Committee Chair and the Corporate Director of Resources to confirm amongst other topics their understanding of the arrangements in place for the prevention and detection of fraud, ensuring the legality of transactions and identifying potential litigation, related party relationships and transactions. This was responded to on behalf of the Committee by the Chair and Vice Chair of the committee and relevant officer.

Fraud was a particular issue resulting in the Commission publishing a document entitled Protecting the Public Purse 2011 Fighting Fraud Against Local Government highlighting emerging fraud issues and reviewed councils' progress in tackling the significant risks described in the Audit Commissions 2009 and 2010 protecting the public purse reports.

The Audit Commission wrote to the Audit Committee Chair and the Corporate Director of Resources to confirm their understanding of the arrangements in place for ensuring the legality of transactions and identifying potential litigation, preventing and detecting fraud, accounting estimates and other audit related issues. A joint response was submitted by the Chair and Vice-Chair on these issues

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, The Audit Commission Annual Governance Report 2010/11, The Annual Governance Statement, Constitutional Updates (as required), The Annual Report of Standards Committee and The Monitoring Officer's Report. And last but certainly not least The Role of Internal Audit.

The Audit Commission had previously advised the Audit Committee on the procurement exercise to outsource the Audit Commission's in-house audit practice. The Chair and relevant officer attended an initial meeting and presentation with the company which would provide an external overview of the Councils operations. In essence there would be no change from the previous situation although this would result in a substantial saving in audit fees for the Council.

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 sixth 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 was 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 statutory deadline of 30 June.

The report highlighted that the committees gratitude should be recorded to the officer responsible for monitoring and assessing the risk which the Authority was exposed to and wish him well in his retirement. His contribution to the control and exposure to risk was invaluable coupled with the contribution of all of the staff involved in the provision, monitoring and control of the Governance and management of the affairs of the Authority have ensured that:-

'The Council has a sound, effective system of internal control. The Audit Committee is now well established with comprehensive terms of reference. The Audit Committee has responsibility for risk management, internal control and financial reporting. The Chair of the Audit Committee prepares an annual report on the Committee's work for presentation to Cabinet. Effective corporate and ethical governance is critical to an authority’s performance and to demonstrating continuous improvement it is therefore, a fundamental element of the modernization agenda. Probity and high standards are an inherent part of corporate/ethical governance. They are 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 obviously one of the biggest changes seen to the audit process at any time in recent memory.

Reductions in staffing and reorganisation of duties seems 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 social care spending and income from planning and development applications, and these were being closely monitored as part of ongoing budgetary control.

In addition there were several other issues and developments that 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 £2.7 million revenue savings required in 2010/11 arising from cuts in funding in year. Further ongoing reductions of £3.8 million in 2011/12 increasing to £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.

In October the Government announced it would no longer guarantee the bail out of UK financial institutions in the future. This could of course have a knock on effect on Council investments but the Council's robust and prudent investment regime had avoided issues similar to the collapse of the Icelandic Banks. 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.

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.

The financial statements were produced under International Financial Reporting Standards.
Members were presented with the Diary of Meetings and Work Programme for the Audit Committee for 2012/13.
Members were presented with the draft Diary of Meetings and Work Programme for the Audit Committee for 2013/14.

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