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Comments from ACCA
December 2006

ACCA is pleased to respond to the consultation on the new edition of the Audit Committee Handbook. Our comments are based on the considerations of our members of ACCA's Corporate Governance and Risk Management Committee with expertise in, and experience of, audit committees in the Government sector.

The original Audit Committee Handbook (October 2003) significantly raised the standards of audit committees in central governmental bodies and in NDPBs. ACCA considers that this new edition will result in further steps forward in audit committee practice and effectiveness. In certain respects this guidance has the potential to take this sector further forward in the development and application of best practice for audit committees than is likely to occur in the private sector.

We have the following specific points.

The effect of the lack of joint and several liability

HM Treasury's Corporate Governance in Central Government Departments: Code of Good Practice makes the point that members of central governmental boards, unlike directors on company boards, do not have joint and several liability for the reliability of financial statements and for other matters. We are pleased that the new Handbook says that the role of audit committees is not identical between the two sectors. In particular, it points out that the audit committees covered in the Handbook should provide assurance to the Accounting Officer as well as to the Board.

Responsibilities of audit committees

In ACCA's experience, the audit committees addressed in this Handbook have tended to be relatively more focussed on the ‘need for explicit assurance about risk, control and governance' (p2) than they are in the private sector where the committee's responsibilities with respect to public reporting have been more prominent. So it is perhaps surprising that the only specific responsibility area referred to in Principle 1 is ‘financial reporting'. However, the adoption of resource accounting, the reliance on private finance initiatives, the importance of managing major projects well and the imperative for financial stewardship - all make it appropriate to enhance the role of public sector audit committees to scrutinise financial reports.

While the Handbook states that the audit committee's role is to provide guidance to the board, it may be suggested that it also has a role as a challenging mechanism to ensure the board is addressing significant risks and its own internal governance arrangements in an acceptable manner.

The growing importance of antifraud policies and fraud response plans has been recognised by the government in recent wide-ranging reviews, and we invite HM Treasury to consider including the oversight of this aspect as part of the audit committee's role.

We also recommend the Handbook include, or gives reference to, guidance on the legal liability of audit committee members and on what they should do if there is any significant disagreement between the audit committee and the rest of the board, or the accounting officer, on something within the committee's role.

Annual reports of audit committees

As HM Treasury's Corporate Governance in Central Government Departments: Code of Good Practice also requires that an audit committee should be established in accordance with the Audit Committee Handbook, the Handbook requires that an audit committee's annual report should include explanation of any non-compliance with the Handbook. This goes further than the 2006 Combined Code for listed companies where ‘comply or explain' applies to the 2006 Combined Code alone and not to the analogous further subsidiary guidance contained within The Smith Report.

It is good advice that an audit committee's annual report should include explanation of how they have applied, or not, the guidance in this Handbook. We are concerned however that making this a compliance requirement may both be more prescriptive than is required in a handbook and encourage a ‘tick box' mentality rather than a thoughtful approach on how to apply the principles of the guidance. We therefore suggest that, instead, annual reports should be required to provide a comprehensive (rather than boiler plate) explanation of how the principles in the guidance have been applied and of any significant matters where the guidance in the Handbook has not been followed.

The Handbook states that the audit committee's annual report should:

• ‘Comment on the comprehensiveness of assurances in meeting the Board / Accounting Officer's needs
• Comment on the reliability and integrity of these assurances
• Offer an opinion on whether the assurance available is sufficient to support the Board / Accounting Officer in their decision taking and their accountability obligations
• Draw specific attention to any issues the audit committee considers pertinent to the Statement on Internal Control and to any long term issues the Committee thinks the Board / Accounting Officer should give attention to.
• Comment on financial reporting for the year
• Comment on the quality of both Internal and External Audit and their approach to their responsibilities
• Comment on the audit committee's view of its own effectiveness, including advice on ways in which it considers it needs to be strengthened or developed.' (C5.3).

Rather than merely ‘comment on' ACCA would say that the audit committee should provide opinions on:

• The reliability of the annual financial statements
• The effectiveness of risk management and internal control
• The quality of the external audit and (where applicable) who should be appointed as the external auditors going forward
• The quality of the internal audit and of other internal review functions.

With respect to ‘ Comment on the audit committee's view of its own effectiveness, including advice on ways in which it considers it needs to be strengthened or developed ' ACCA suggests specifically, but not exclusively, that the audit committee should, within its annual report:

• set out the work of the audit committee over the past year including:
• the committee's programme of work
• the number of meetings and the attendance record of members
  and
• provide the results of the committee's review of its terms of reference and recommendations thereon.

It would usually be appropriate for the annual report of an audit committee to be provided to the board when it considers the adoption of the annual report, although by no means all audit committees in the private sector provide an annual report. For central government and NDPBs, we consider an audit committee's annual report should be addressed to both the accounting officer and to the board.

Regular reporting to the board

The Handbook is more flexible as to the way in which the audit committee will report regularly to the board and to the accounting officer. ACCA also considers that regular reporting to the board by the audit committee is usually best done if the Minutes of an audit committee are an agenda paper for the next meeting of the board, spoken to at that meeting by the Chair of the audit committee.

The mandatory obligation to have audit committees

This Handbook points out that audit committees should be established in all Departments, Executive Agencies and Non-Departmental Public Bodies. We note that, under the 2006 Combined Code, there is no similar requirement for a listed company to have an audit committee as the 2006 Code is silent on audit committees at the level of its ‘Principles', mentioning audit committees only at the level of its ‘comply or explain' ‘Provisions'.

Audit committee size

The Corporate Governance in Central Government Departments: Code of Good Practice requires a minimum of three members of the audit committee for entities most of which are likely to be no bigger than companies outside the FTSE350. We note that in the private sector, in contrast, compliance with the audit committee ‘provisions' within the 2006 Combined Code may be achieved when companies outside the FTSE350 have an audit committee comprising just two members.

Scope of work

We considered that Principle 4 on ‘Scope of Work' was sensible in stating that the scope of the audit committee's work should encompass all the assurance needs of the Board and of the Accounting Officer. Again, we are unaware of such a succinct statement of audit committee scope for the private sector. It is apparent that the demands on audit committee members will be high if they are to deliver on this scope.

We suggest the role of the audit committee in respect of internal auditing should include considering any quality assurance reviews carried out on the internal audit function.

Executives and audit committees

For pragmatic reasons, HM Treasury has in the past tolerated having executive members of audit committees where there have been insufficient external board members available. HM Treasury is now tightening its guidance on this and ACCA endorses the sentiment that an audit committee is not an executive committee. There is a temptation for some audit committees to act as if they are.

ACCA supports the principle in the Handbook that audit committees may sometimes need to meet without any executives being present. We consider, however, it would also be useful to state that it may, in extreme cases, be necessary for the audit committee to meet without the knowledge of any (or particular) executives that the meeting is taking place and that nothing within the committee's terms of reference or within Standing orders should be preventative of this.

We would be pleased to elaborate on any of the points above or respond to any questions you may have.

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