The ICAEW’s Alison Ring argues that it is critical for councils to have strong audit committees and that government plans to make these compulsory should act as a wake-up call to some authorities in the sector.
The recent announcement from the government that local authority audit committees are to be made compulsory followed an update to CIPFA’s position statement on audit committees in local authorities and the police.
As ever, guidance of this nature can seem quite technical, and it may be tempting to treat this is as just part of the compliance process. A few extra boxes on the checklist to tick, another set of meetings to organise, more paper to generate. However, to treat this as a burden would be a big mistake.
An effective audit committee is one of the most critical elements to ensuring your governance is up to scratch and provides a huge amount of value by improving the quality of decision-making at all levels. The reverse is also true, with ineffective audit committees leaving the door open to poor decision-making, poor control, and poor use of public money.
The plan to make audit committees compulsory should be seen as a wake-up call to authorities across the country who haven’t yet got their act together.
An effective audit committee is one of the most critical elements to ensuring your governance is up to scratch and provides a huge amount of value by improving the quality of decision-making at all levels.
Importance of independent members
A key part of the legislative proposal is a requirement for at least one independent audit committee member, while CIPFA’s updated guidance includes a recommendation for a minimum of two independent members. This provides an opportunity for each authority to have at least one financially qualified individual as well as the flexibility to bring in experience from other fields, whether that be in running large operations, in housing management or construction, or in technology and data, to name just a few potential specialisms.
Of course, you may be lucky and have a councillor who is a qualified accountant or has relevant expertise in financial reporting, financial strategy, business planning, treasury management, risk management, corporate governance and internal and external audit. That is assuming they haven’t already been snaffled up by the cabinet or the finance committee!
Even then, independent members are still important. While they may not have voting rights outside the audit committee room, they have the advantage of bringing an external perspective, as well as not being involved in the politics of the council chamber. After all, there are many reasons why governance concerns may not be at the top of the immediate council agenda, however much we would like them to be higher up the priority list.
While independent members may not have voting rights outside the audit committee room, they have the advantage of bringing an external perspective, as well as not being involved in the politics of the council chamber.
Asking the right questions
Audit committees are at their most effective when they raise the bar for management teams by creating an expectation of best practice. These expectations include: prompt action to address identified weaknesses and to implement audit recommendations; self-critical evaluations on the operation of financial controls; decisions that are supported by well-researched business cases; clear thinking on key accounting judgements in preparing financial statements; comprehensive risk assessments; and a tone from the top about doing the right thing.
How, in a group of people meeting only a handful of times a year, can this be achieved? The answer is by asking the right questions.
The right questions at the right time can reveal where a decision was taken without proper assessment of the risks involved, prompting a chain of action that leads to an improvement in financial management.
A question about why it is taking so long to resolve an audit recommendation can identify resource issues that need addressing; a question about an accounting judgement can lead to a reappraisal of the underlying commercial nature of a transaction or the effectiveness of operational management in managing a risk area; and a question about a comment in the audit report can open up a discussion about the underlying quality of accounting records and what needs to be done to fix them.
This is why independent members are so important. Asking the right questions is often a challenge for councillors serving on audit committees, given that the world of accounting and audit may be unknown to them before they are appointed. How, for example, do you know to ask about the effectiveness of your authority’s control assurance framework if you don’t really know what one is, let alone what good looks like?
This is not to say that councillors on audit committees should sit on the sidelines and observe. They too are in a position to ask very good questions given their often very granular understanding of operational performance, as well as whether the expectations of individual service users and local communities are being met.
The right questions at the right time can reveal where a decision was taken without proper assessment of the risks involved, prompting a chain of action that leads to an improvement in financial management.
A lynchpin in the governance framework
Audit committees are central to how governance operates in practice, which is why the guidance also clarifies that their oversight role needs to be kept distinct from other finance-related responsibilities.
While it might seem to make sense to combine audit with risk for example, that can put audit committees into the difficult position of trying to evaluate their own assessment of risk.
Good governance only results if all the different elements of the structure – and the people who operate within that structure – are strong. A clear strategy, competent leadership, resourced finance teams, high-quality financial information, effective processes, rigorous decision-making, and a culture that places acting in the public interest as the highest priority. All are essential, but they are not enough on their own. Effective oversight by the audit committee is critical to making sure all this is happening.
So, while it may seem counterintuitive to ask you to put yourself in the position of being asked some very challenging questions – and you may curse me later – I believe that you need to take these developments as a call to action.
To make sure that you have an audit committee in place that is equipped with the tools it needs to do its job. To make sure it has the right membership. And an organisational culture that understands the important role the audit committee plays and that supports being held to account.
Alison Ring is director of public sector and taxation at the Institute of Chartered Accountants in England and Wales.
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