Governance of the Treasury Function
CIPFA Scottish Treasury Management Forum
Alan George, Regional Director
23rd February 2012
Governance and Accountability
Definition of Corporate
Governance
Key Principles of Corporate
Governance:
Openness
“The system by which
organisations are
directed and controlled”
Cadbury Report 1992
Integrity
Accountability
2
Corporate Governance
To comply with key principles, Authorities need to
consider
Organisational structures and processes
Financial reporting and internal controls
Standards of behaviour
Code of Conduct
3
Delivering good governance in Local
Government
(CIPFA / SOLACE)
Consider the
effectiveness of the
Authority’s risk
management
arrangements and
the control
environment
Seek assurance
that action is
being taken on
risk-related issues
identified by
auditors and
inspectors
Be satisfied that the
authority’s
assurance
statements properly
reflect the risk
environment and
any actions required
to improve it
4
Delivering good governance in Local
Government
(CIPFA / SOLACE)
Approve (but
not direct) the
Internal
Audit
Strategy and
monitor
performance
Review
summary
Internal Audit
reports, and
seek assurance
that appropriate
action has been
taken
Receive the
annual report
of the Head of
Internal Audit
Consider the
reports of
external audit
and
inspections
5
Definition of Treasury Management
The Management of the organisation’s...
Investments
Cash flows
Banking
Money market and capital market transactions
Effective control of the RISKS associated with those
activities
Pursuit of optimum performance consistent with those
RISKS
6
Treasury Management
Legislation
CIPFA’s
Codes of
Practice
Key Drivers
Risk Appetite
Capital
Expenditure
Plans
Strategic
Documents
7
Strategic Considerations
Capital Programme
Balance Sheet
Position
Deliverability of
Schemes
Budget Pressures
Slippage etc
Security of Capital
Budget Profiling –
Capital and
Revenue
Capital Receipts
Cash Flow
Management
8
Treasury Risk Management
Credit and Counterparty risk
Liquidity risk
Interest Rate risk
Exchange Rate risk
Refinancing risk
Legal & Regulatory risk
Fraud, error, corruption and
contingency management
Market value of investments
9
TM Risk Management
“the ongoing activity of
adjusting the authority’s
treasury exposure due to
changing market and
domestic circumstances in
order to manage risk and
achieve better value in
relation to the authority’s
objectives”
o
o
Doing nothing does not avoid
or minimise risk
Risk can be failure to take
advantage of opportunities
10
Balance Sheet
o
o
o
o
o
o
Year end
Level of Reserves and Balances
Cash Position
Capital Financing Requirement (CFR)
External Borrowing
Internal Borrowing
11
Council Balance Sheet
• Reserves & Balances





•
•
•
•
GF Balances
HRA Balances
Earmarked Reserves
Capital Grants etc
Provisions
Working capital surplus
Total reserves & balances
Investments
Internal Investments
= £145m
= £15m
= £10m
= £65m
= £40m
= £15m
= £ 15m
= £160m
= £ 95m
= £ 65m
12
Key Balance Sheet issues
• Capital Financing Requirement
= £370m
• External Borrowing
= £305m
• Under borrowed
= £ 65m
• Internal Investments
= £ 65m
• Capex over next 3 years
= £215m
• CFR Forecasts
= £392m (11/12)
= £398m (12/13)
= £390m (13/14)
13
Risk Management
1. Risk management is the identification and assessing of the
risks to which an organisation may be exposed
2. Assigning ownership of risks to specific individuals to
manage
3. The mitigation of those risks by implementing suitable
control and management measures
4. The acceptance of the residual risks as being risks worth
running
5. Periodic monitoring and reviewing of risks and risk
management
14
TM Code of Practice – summary
o
o
o
o
o
o
o
o
o
Responsibility for Risk Management lies with the organisation
Enhanced member involvement and understanding
Better Scrutiny
Training
Reporting requirements – Quarterly / Half Yearly
Reliance on Credit Ratings
Diversification
Monitoring of Indicators
Borrowing in advance – clear business case in place
15
Why is a Code needed?
•
•
•
•
•
•
To reflect Audit Commission’s report and findings
CLG and Treasury Select Committee review
Credit Crunch and Impact on banking system
Risk appetite
Increase in risk exposure
To maintain high and consistent standards in
looking after public funds for all Local Authorities,
Police Authorities etc
16
The Code’s four clauses:
•
Formal adoption of the “Four Clauses”
o
o
o
o
•
Clause 1 - Policies and Practices
Clause 2 - Reporting Requirements
Clause 3 - Delegation
Clause 4 - Scrutiny
Make the “Four Clauses” part of standing
orders and financial regulations
17
Clause 3: Delegation of responsibility for
treasury management to: • Cabinet / Committee / Council for implementing and
monitoring the TMPS & TMPs
• The responsible officer (S95) – for the execution &
administration of TM decisions in accordance with the
TMPS and TMPs
18
Clause 4: Scrutiny
The following body or group of individuals is nominated
to be responsible for ensuring effective scrutiny of the
TM strategy and polices:



Scrutiny Panel
Governance Committee
Audit & Governance Committee
19
Treasury Management Strategy Statement
Debt and investment portfolios:–
o
o
o
o
o
o
Interest rate forecast
Prudential and Treasury Management Indicators
Explanation of gross v. net debt
Policy on borrowing in advance of need
Policy on use of external service providers
Any extraordinary issues
20
The Financial Control Environment
Sound systems and
procedures
Chief Finance Officer – s.95
- ensuring adequate
accounting records and
expenditure is within
affordable limits
Financial Regulations,
Financial Plans and
Strategies
Medium Term Financial Plan
(MTFP) and Annual Budgets
Sound decision making
framework
Audit Committee
Internal and External Audit
21
CIPFA guidance for Local Authorities:
o
o
o
o
The Audit Committee (Corporate Governance Committee) is a
critical component in the overall corporate governance process
It should be independent from the executive and scrutiny
functions
It should provide assurance to elected members and members
of the public that systems on internal control are effective
It should provide assurance about the organisation’s
arrangements for managing risks
22
Treasury Management Practices
•
TMP 1
TMP 2
TMP 3
TMP 4
TMP 5
•
TMP 6
•
TMP 7
TMP 8
TMP 9
TMP 10
TMP 11
TMP 12
•
•
•
•
•
•
•
•
•
Treasury risk management
Performance measurement
Decision - making and analysis
Approved instruments, methods and techniques
Organisation, clarity and segregation of responsibilities &
dealing arrangements
Reporting requirements and management information
arrangements
Budgeting, accounting and audit arrangements
Cash and cash flow management
Money laundering
Training and qualifications
Use of external service providers
Corporate governance
23