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30 September 2003
Comments from ACCA

ACCA welcomes the opportunity to comment on the draft Audit Committee Handbook prepared by HM Treasury. These comments have been prepared in consultation with members of ACCA's Internal Audit Sub-committee.

We believe that the draft Handbook should form the basis for suitable guidance for Accounting Officers and Boards of central government departments, agencies and non-departmental public bodies on the operation of their audit committees.

It is appropriate that the Handbook should take account of the relevant recommendations from Lord Sharman�s report and that it should be compatible with reports on private sector corporate governance. We are pleased, however, with the recognition that "private sector accountability structures [do] not translate directly into government structures" (page 2). This insight should be underlined throughout the Handbook by the consistent use of the term �governance� rather than the private sector term �corporate governance�.

Several key characteristics of audit committees recommended in the Sharman report have been omitted from the Handbook. These include the stipulation that the Accounting Officer and the Principal Finance Officer should not be members of the committee and that the committee should not be chaired by the Accounting Officer or another executive director. We recognise that during a period of introduction of audit committees these requirements may not be widely acceptable within the civil service. We believe, however, that the Handbook could make greater criticisms of such practices than are included currently at paragraph 2.2 and in principle seven.

It may be confusing that the proposed HM Treasury �principles� do not have the same mandatory status as the Combined Code�s �principles� for listed companies. In exceptional cases, for example, the Handbook allows a public body not to have an audit committee, a decision which must then be justified and documented. We believe that this approach should also apply to each of the ten principles in the Handbook. In addition, however, an organisation should also be required to explain, if necessary, on an exception basis, the reason for any non-compliance with these principles. Such explanations should be included in the organisation�s Statement on Internal Control.

The audit committee is only one mechanism for an Accounting Officer to gain assurance on the quality of governance and internal control within his or her organisation. Thus the first two words of paragraph 1.3 of the Handbook should be changed from "The ideal" to "An important".

The draft Handbook effectively rules out whistleblowing as never being appropriate behaviour (paragraph 2.3) for an audit committee. This begs the question, for instance, as to whether there may be circumstances when the audit committee is required to be constrained in the frankness of its dialogue with the external auditor (to avoid communicating areas of concern which the external auditor may not have considered) and whether it would always be out of order for the audit committee to communicate concerns upwards � for instance from an agency to a sponsoring department. In addition, individual members of an audit committee may, in appropriate circumstances, feel the need to blow the whistle on the activities of the organisation.

In providing advice on the use of non-executive directors or independent members on the Audit Committee, it would be beneficial to include a requirement that at least one member should have recent relevant financial experience. The Smith report (at paragraph 3.16) goes as far as to say that it is desirable for one of the members to be a qualified accountant. While the draft Handbook (in the Competency Framework at Annexe 3) includes reference to accounting and audit skills, it would be desirable to give this more emphasis by including it within the main body of the Handbook.

A balance needs to be struck between the ability of non-executive members of the audit committee to provide independent external advice to the Accounting Officer and the requirement for such members to have the necessary detailed knowledge and understanding of the civil service governance and control environment. For this reason we commend the Handbook for indicating the benefits of such non-executive members being recruited from other government organisations (paragraph 5.2). In addition, the Handbook could indicate that such an arrangement would help to spread good practice across the public sector. We believe, however, that the caveats to this arrangement included in the Handbook are not necessary and that this approach should be recommended more strongly.

Confusion may arise with the Handbook�s structure around 10 principles and then the use of the term "ideally" within these principles and the explanation (for example, principle five). As the foreword to the Handbook recognises, "no two organisations are exactly the same". For this reason we believe that, for example, the final sentence of principle five should be relegated to the explanation and the term "ideally" in this sentence and in paragraph 5.4 should be replaced by a term such as �generally appropriate�.

We believe that the guidance in paragraph 7.3 could be extended to suggest that it is good practice for the member of an audit committee to meet privately (without other attendees) with the organisation�s head of internal audit and with the external auditor at least once a year (as recommended in the Sharman report). In addition, paragraph 9.1 should indicate that the head of internal audit and the senior member of the external audit team should have the right of access to the chairman of the audit committee if and when the auditors consider this to be appropriate.

An audit committee may not necessarily have the skills for it to be responsible directly for reviewing the accounting policies and the financial statements of the organisation. Thus we believe that principle eight should be refined to limit the audit committee�s responsibilities for reviewing such aspects. The audit committee should, however, ensure that the organisation has a suitable process for reviewing these aspects of its management. In addition, the audit committee should be used to try and resolve differences of opinion between the organisation�s director of finance and its external auditor on these matters.

The eighth principle should indicate that an audit committee should have responsibility for:

• assessing the adequacy of internal audit in terms of, for example, its professionalism, resources, independence and scope
  
  and
  
  
• reviewing the external audit plan and considering aspects of the quality of external audit work and the results of any quality assurance reviews.

The explanation for the eighth principle should indicate that the audit committee should be responsible for providing guidance to the Accounting Officer or the Board on, for example, the internal audit plans and the appointment of internal auditors. The audit committee should also advise the Accounting Officer on the appointment (and, if necessary, dismissal) of the head of internal audit if this is to be a staff appointment.

We hope that you find these comments a useful aid to improving the Handbook further. We have included as an annexe to this letter some minor issues that we have identified. Please do not hesitate to contact me if you have any questions about our comments or would like further details.

Annexe
Minor issues

1. In paragraph 1.1 the word "audited" should be added after "Accounts are" at the beginning of the second sentence.
   
   
2. The term "filtering" in paragraph 1.4 requires further clarification. Otherwise, there is a risk that the Accounting Officer may not be made fully aware of relevant information or that information is provided which is not objective.
   
   
3. The word "ideally" in paragraph 4.2 is over strong. Non-executive members of the Board may provide a useful bridge with the audit committee, but this is not necessarily ideal.
   
   
4. In paragraph 7.1, a smaller audit committee may also assist with the development of a consensus or a common view across the committee.
   
   
5. The tenth Principle states that the audit committee should meet at least four times a year. In contrast, the Model Terms of Reference recommend that it should meet at least three times a year.
   
   
6. There is a conflict in the suggested timing of the review by the audit committee of the proposed internal audit plans.  Paragraph 10.1 states that this should be done before the financial year begins, whilst paragraph 10.3 suggests that this should be left to the spring meeting. The other items on the agenda for this meeting indicate that this would be done in the first quarter of the new financial year and certainly after the beginning of the financial year.

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