Joint Seminar Brussels 2017

Audit Committees in the European Public Sector Melvyn Neate 11 May 2017

Background The European Confederation of Institutes of Internal Auditing (ECIIA) and the European Organisation of Supreme Audit Institutions (EUROSAI) signed a Cooperation Agreement (2014) to facilitate the exchange of knowledge and information, develop a common understanding of public sector accountability and auditing and promote good governance across the European public sector. As part of this agreement, one of the initiatives was to explore the existence and operation of public sector Audit Committees across the European jurisdictions and to seek views on the potential or effective benefits arising from Audit Committees together with any obstacles that might prevent their effectiveness. After capturing these views the intention was to produce a paper describing the pan- European situation in the public sector with a view to promoting best practice.

Assignment Plan Background information The current situation in the UK government sector, explaining the role, purpose and composition of the AC together with the benefits it can bring. The attributes of effective ACs together with the benefits and some potential difficulties to establishing ACs in the public sector. Examination of the AC situation in the wider European public sector detailing both current practice and obstacles to the widespread deployment of audit committees. Conclusions. Recommendation aimed at promoting best practice across the European public sector.

The UK Government Sector The global financial crisis in 2008 triggered a series of regulatory responses. In Europe this paved the way for a system of financial supervision in the banking, insurance and financial markets sectors which included changes to the scope and expectations of ACs. The development and repositioning of ACs in the financial services sector led to a reappraisal of ACs in other sectors. In the UK, ACs are now recognised as key contributors to good corporate governance and the public sector has fully embraced their use and has developed guidelines and good practice for their operation across both central and local government.

Audit Committees in the UK Listed company boards are required to establish an audit committee of at least three, or in the case of small companies’ two, independent non-executive directors [UK Corporate Governance Code]. All UK ministries are similarly required to have Audit Committees. The National Audit Office regards effective Audit Committees as key to helping public organisations achieve good corporate governance.

Views of the Profession The Institute of Internal Auditors defines the AC in the private sector as, ‘the governance body that is charged with oversight of the organisation’s audit and control functions’. For the government sector, INTOSAI’s Internal Control Standards define the AC as, ‘A committee of the board of directors whose role typically focuses on aspects of financial reporting and on the entity’s processes to manage business and financial risk, and for compliance with significant legal, ethical and regulatory requirements’ [INTOSAI GOV 9100, Annex 2 Glossary, 2004].

Audit Committees in the UK The primary purpose of an AC in the UK government sector is to provide the Board and/ or the Accounting Officer with independent assurance on the adequacy and effectiveness of the organisation’s risk management framework, internal control environment and the integrity of the governance and financial reporting processes. HM Treasury guidance, Corporate governance in central government departments: Code of Good Practice 2017 provides that: The Board should ensure that there are effective arrangements in place for governance, risk management and internal control. The Board should be supported by an Audit and Risk Assurance Committee (ARC) chaired by a suitably experienced non-executive board member.

Audit Committees in the UK The Code of Practice makes 6 supporting provisions: The Board and Accounting Officer should be supported by an ARC. Advising on risk is a board role. The ARC should support the Board in this role. The ARC should not have any executive responsibilities or be charged with making or endorsing any decisions. The Board should ensure that the ARC is adequately supported. The ARC should lead the assessment of the Board’s annual Governance Statement. The ARC’s TOR should be made publicly available [NB In practice this means that all government departments and agencies must establish an Audit and Risk Committee.]

Audit Committees in the UK HM Treasury Audit and Risk Assurance Committee Handbook [April 2013] sets out 5 good practice principles for ARCs in UK central government: ARC should be independent and objective; each member should have a good understanding of the organisation’s objectives and priorities. ARC should have appropriate skills to enable it to function effectively. ARC should support the Board by reviewing the comprehensiveness and reliability of assurances on governance, risk management, the control environment and the integrity of financial statements and the annual report. The scope of the ARC should be formally defined in Terms of Reference and include all the assurance needs of the Board; the ARC should have particular engagement with the work of Internal Audit, Risk Management, the external auditor, financial management and reporting issues. ARC should communicate effectively with all key stakeholders, eg Board, CAE, external auditor, risk manager and other assurance providers.

Role of Audit and Risk Committee in UK Independent oversight , challenge and advice: Values and ethics. Strategic processes for risk, control and governance. Accounting policies/ accounts/ organisation’s annual report. Planned activity and results of both internal and external audit. Adequacy of management response to issues identified by audit activity. Assurances on the management of risk and corporate governance. Anti-fraud policies and whistle-blowing processes [NB Decision-making rests with management].

How should ARCs be organised? Members should ideally be non-executives. Executives invited to attend to provide information, explanations and take part in discussions. Attended by both Internal and External Audit. Terms of Reference approved by the Board.

AC Benefits ACs follow up on the work of both the internal and external auditors to ensure that their recommendations are actioned promptly and effectively by executive management. At their best, ACs consider the overall assurance situation and support and promote effective relationships between external audit, internal audit and other assurance providers. AC scrutiny and challenge can result in improvements to governance, risk management and internal controls as well as financial reporting and management. All of these factors facilitate better decision making. Finally, an effective AC can strengthen public confidence that the organisation is being independently scrutinised.

Surveys Having completed background research on Audit Committees, with particular focus on the UK public sector it was jointly agreed that EUROSAI and ECIIA would independently survey their members across Europe to determine the AC situation.

Conclusions for each question

CONFERENCE EUROSAI - ECCIA Obliged? 1 To what extent have Audit Committees been established in public sector? Obliged: 3 countries Not obliged: 6 countries Depends: 4 countries

CONFERENCE EUROSAI - ECCIA 2 Have any standards/ guidelines been developed for the existence/ operation of these Audit Committees?

3 Who are the members of these Audit Committees? CONFERENCE EUROSAI - ECCIA INTERNATIONAL REQUIREMENTS 3 Who are the members of these Audit Committees? All countries established INTERNATIONAL REQUIREMENTS

Who are they accountable to? CONFERENCE EUROSAI - ECCIA CROATIA: Supervisory Board 5 ESTONIA: Supervisory Board FINLAND: Board or Director General Who are they accountable to? GEORGIA: Board GREECE: A high ranking official HUNGARY: ITALY: Minister & Board of Directors MOROCCO: Board of Directors POLAND: Minister SERBIA: Supervisory board SPAIN: Board of Directors SWITZERLAND: Parliament of Board UK: Board & Council

What is their relationship with the Supreme Audit Institution (SAI)? CONFERENCE EUROSAI - ECCIA 9 What is their relationship with the Supreme Audit Institution (SAI)? 6 of the 13 observed countries agree that there are NO SPECIFIC STANDARDS OF RELATIONSHIP

What do you perceive as the main benefits of these Audit Committees? CONFERENCE EUROSAI - ECCIA First step 10 What do you perceive as the main benefits of these Audit Committees? Internal control Independence Good governance Transparency

Are there any disadvantages? CONFERENCE EUROSAI - ECCIA 11 Are there any disadvantages?

What are the main obstacles to their establishment? CONFERENCE EUROSAI - ECCIA 12 What are the main obstacles to their establishment? CONCLUSION: IT IS NOT TOO INTEGRATED AND NOT SUFFICIENTLY IMPORTANT LEGISLATIVELY

What are the main obstacles to their effective operation? CONFERENCE EUROSAI - ECCIA 13 Lack of knowledge, Experience & Independence What are the main obstacles to their effective operation?