Agenda Item
No.
HERTFORDSHIRE COUNTY COUNCIL
5
POLICY AND RESOURCES CABINET PANEL
FRIDAY 11 FEBRUARY 2011 AT 10.00AM
ESTABLISHMENT OF A SHARED INTERNAL AUDIT SERVICE
Report of the Director Resources and Performance
[Author:
Helen Maneuf, Interim Chief Internal Auditor
Tel: 01992 555320]
Executive Member: David Lloyd (Resources and Economic Wellbeing)
1.
Purpose of report
1.1
The purpose of this report is to seek support for the establishment of a
Shared Internal Audit Service by means of a partnership between
Hertfordshire County Council and:




East Hertfordshire District Council
North Hertfordshire District Council
Stevenage Borough Council
Welwyn Hatfield District Council
2.
Summary
2.1
The proposal is to create a Shared Internal Audit Service which will deliver
a full, professional internal audit function to meet the needs of the partner
Councils and the requirements defined in the Chartered Institute of Public
Finance and Accountancy (CIPFA) Code of Practice for Internal Audit in
Local Government in the United Kingdom 2006.
2.2
It is proposed that the Shared Service will be governed by a Partnership
Agreement which will set out the detailed arrangements for the Shared
Service. Partners will be required to sign-up to the terms and conditions of
this document for a set period of time in order to be part of the Shared
Service.
2.3
Human Resource implications of the transfer are being worked through in
consultation with District Councils.
2.4
The proposal will reduce the overall cost of internal audit in the Councils
which participate in the Shared Service, with efficiencies sought over the
period of the agreement.
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Item 5 – Establishment of a Shared Internal Audit Service
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3.
Recommendation
3.1
The Policy and Resources Cabinet Panel is invited to recommend that
Cabinet:
(i)
approves the proposal that Hertfordshire County Council hosts and
becomes a partner in the Shared Internal Audit Service between the
Councils identified at 1 above;
(ii)
authorises the Director Resources and Performance to make the
detailed arrangements to establish the Shared Internal Audit
Service, including admission of further interested parties if
appropriate.
4
Background
4.1
The function of Internal Audit is recognised by all councils as core to
effective governance, risk management, and control arrangements. The
requirement for councils to maintain appropriate and effective internal audit
arrangements is set out in the Accounts and Audit Regulations 2003 (as
amended 2006).
4.2
In Hertfordshire, the Pathfinder Programme took forward work to establish
shared services in a range of functional areas. Subsequently, detailed work
has been carried out to develop a proposal for a Shared Internal Audit
Service (SIAS), hosted by Hertfordshire County Council.
4.3
The following Councils have indicated their interest in participating in the
SIAS:




East Hertfordshire District Council
North Hertfordshire District Council
Stevenage Borough Council
Welwyn Hatfield District Council.
4.4
The Councils propose jointly to establish a Shared Service to deliver a full,
professional internal audit service to meet the needs of the Councils and
the requirements defined in the CIPFA Code of Practice for Internal Audit in
Local Government in the United Kingdom 2006.
5
Drivers for change
5.1
Internal audit teams have a vital role to play in helping Councils manage
effectively through the challenges they face by ensuring that governance,
risk management and control arrangements remain effective. To do this
successfully, internal audit teams need to be fit for purpose and provide
assurance of the necessary quality, depth and coverage. Often this will
mean giving assurance on complex and risky issues and using specialist
resources when necessary.
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Item 5 – Establishment of a Shared Internal Audit Service
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5.2
The partners consider that establishing a SIAS in Hertfordshire will allow
greater resilience in internal audit, and sufficient economy of scale to allow
for access to specialist audit skills.
5.3
The partners also require the SIAS to deliver efficiencies through
standardisation of approach and removal of duplication, allowing reductions
in the number of audit days required by each Council and consequent cost
savings.
5.4
Across the public sector an increasing number of partnerships and
consortia are emerging for the delivery of internal audit. The development
of the SIAS within Hertfordshire is line with these wider trends.
5.5
The most developed Shared Internal Audit Service involving both county
and district councils is the South West Audit Partnership (SWAP). SWAP
has stated that the key benefits it has delivered to its partners are:




Productivity increases of the order 25 per cent
More affordable specialist services as costs are shared
Cost reductions of the order of 10 per cent
Streamlining in managerial arrangements allowing greater
responsiveness and flexibility.
5.6
For Hertfordshire County Council specifically, a further driver is the
requirement to implement a new Strategy for Internal Audit which was
agreed by the County Council’s Audit Committee at its meeting on 16
December 2010. The Strategy aims to improve the performance of the
internal audit service at Hertfordshire County Council so that it is operating
at ‘good’ or ‘best practice’ levels. Whilst the Shared Internal Audit Service
is intended to support all partners, it will also be consistent with the
strategic drive to improve the County Council’s own internal audit
arrangements; for example by introducing new skills and ways of working.
6
Shared Internal Audit Service Model
6.1
The original work to assess options for delivery of the internal audit function
was carried out during 2009/10 under the aegis of the Pathfinder
Programme. Four options for provision were initially assessed as viable:1
1
These are defined in detail in Section 4 of the Outline Business Case 1 February 2010
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Option 1
Current position (no change)
Option 2
Collaboration or ‘virtual services’ option
Option 3
Council ‘hub’ or shared service option with
possibility of entering a contract with an external
supplier for specialist services and additional
capacity
Option 4
Outsourced services option.
6.2
The options were considered in the Outline Business Case for the Shared
Internal Audit Service which was discussed by Hertfordshire Chief Financial
Officers (HCFOs) in February 2010. The HCFOs decided that Option 3
should be explored in more detail. This shared service option was
considered to provide the opportunity to deliver the benefits of a ‘close’ inhouse service, greater resilience in an area where recruitment had been
difficult, and the scope to deliver efficiencies of process resulting from the
economy of scale of a larger service.
6.3
This decision led to the development of a detailed proposal for a Shared
Internal Audit Service to be delivered through a partnership hosted by
Hertfordshire County Council. The proposal also includes the option to
draw-down additional resource from an external supplier in order to
supplement the available ‘in-house’ resource.
6.4
The proposed objectives of the SIAS will be:
i)
to deliver a programme of high quality and reliable assurance on all key
governance, risk and control systems to each Council, operating in
accordance with statutory requirements, professional standards, and
recognised best practice methodology
ii)
to deliver high standards of customer service and be responsive and
flexible in its approach, offering the benefits of a ‘close’ in-house team
iii) to offer a wide base of experience, resilience, specialisms and skills,
taking advantage of the economy of scale available to larger audit
teams
iv) to deliver efficiencies through exploiting opportunities for joined-up
working, adopting a common methodology and service standards,
sharing knowledge, skills and expertise
v) to provide a supportive and stimulating working environment for those
staff working in the Shared Service with opportunities for career
development
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vi) to be open to future opportunities to expand the Shared Service, thus
enabling greater efficiencies to be achieved.
6.5
The key benefits will be:
i)
Increasingly effective use of the total audit resource available to
participating authorities resulting from knowledge sharing, efficiency in
research and development work and efficiency in audit planning
ii)
Economies of scale in terms of management structure, working
practices and systems. For example, only one Audit Manual will need
to be maintained, resulting in efficiency savings: many similar such
opportunities exist
iii) Enhanced career development and career opportunities for staff who
obtain roles in the SIAS
iv) Potential for other partners to join the SIAS, with further efficiencies
arising.
6.6
It is envisaged that the proposed arrangement will be a collaboration falling
within the scope of Section 1 of the Local Authorities (Goods and Services)
Act 1970, which allows authorities to collaborate in relation to
administrative, professional or technical assistance. This permits
Hertfordshire County Council to offer an internal audit service to the other
Councils and allows those other Councils to commission Hertfordshire
County Council to provide this service for a fee. Shared services is,
however, a new and complex area of law involving governance and
procurement issues, and further legal advice is being sought as to the most
appropriate legal structure for the SIAS.
6.7
Subject to that advice, it is proposed that the arrangement will be governed
through a detailed partnership agreement which will set out the
arrangements in place, standards and expectations, and performance
targets.
6.8
Thereafter, it is proposed that oversight of the SIAS will be through a joint
officer board comprising those Chief Financial Officers of the authorities
participating in the service, given their particular interest in ensuring the
adequacy and effectiveness of internal audit arrangements. The board will
monitor the performance of the Shared Service to ensure that it delivers the
standards and expectations set out in the partnership agreement.
6.9
Whilst the partners will jointly oversee the performance of the SIAS, the
responsibility for the adequacy of the whole system of internal audit will
remain with the Councils themselves, who will retain responsibility for
approving audit plans and monitoring delivery via the Councils’ respective
Audit Committees (or equivalent). The individual Councils will continue to:
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
be responsible for overseeing the effectiveness of the internal audit
function at Council level, and holding the Head of Internal Audit to
account for delivery

be responsible for the effectiveness of their respective governance,
risk management and control arrangements, holding managers to
account for delivery

receive regular progress updates on internal audit work, consider key
themes and issues, and take them forward as necessary.
7
Risks and Mitigations
7.1
In order to ensure that the SIAS is successful it will be necessary to ensure
that the following key risks are managed:
Risk
SIAS is unable to
deliver required work
during transitional
period
Mitigation
Best practice programme management,
change management and risk management
processes through the transformation, and
support to establish new ways of working
beyond into the ‘business as usual’ phase
Provision is being made for accessing
additional audit resource via the
establishment of a framework contract.
SIAS is unable to
provide adequate and
effective audit services
in line with
professional and
statutory requirements
at a time of major
change in the partner
Councils
All management roles within the service will
require significant experience of successful
delivery of internal audit services
Loss of key staff,
knowledge and
experience
Pre go-live: Equality Impact Assessments;
compliance with HR processes; a
commitment to staff consultation and
engagement
Existing employees across the Councils
have long standing and in depth knowledge
of audit requirements
HCFO oversight via the proposed joint
board.
Post go-live: creation of a stimulating and
rewarding working environment.
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Failure to deliver
efficiencies
Recognition within the partnership
agreement of the responsibilities on both
provider and client to deliver an efficient
process
Development of suitable management
information systems to allow performance
monitoring and remedial action as
necessary.
8
Financial arrangements
8.1
Initial indications of the level of service required have been given by the
partners, and this information has been used to determine indicative costs
of the proposed service. The costs will be shared with partners, in
proportion to the level of service they require, on a full recovery basis with
the overall position being cost neutral in terms of the County Council’s
budget.
8.2
The partners will require further work to identify efficiency targets and
deliver cost savings over time, and these targets will form part of the
partnership agreement. This will mean that over time the total cost of the
internal audit arrangements in Hertfordshire County Council and
participating districts will reduce.
8.3
From 2011/12 the Hertfordshire County Council cost for internal audit will
reduce by £100,000, irrespective of whether or not the proposed shared
service comes into being.
9
Human Resources arrangements
9.1
The Human Resources arrangements are being considered with support
from District Councils. Legal and Human Resources support is being
received in order to ensure that the process of employee transfer is
handled in accordance with the law.
9.2
The Director Resources and Performance has set in place the process for
appointing a Head of Assurance. This officer will act as Head of Internal
Audit to all the partners of the SIAS and fulfil the expectations of the Head
of Internal Audit as set out in CIPFA’s guidance document on the Role of
the Head of Internal Audit in Public Service Organisations (December
2010).
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10
Consultation arrangements
10.1 Each of the participating District Councils is carrying out its own
consultation process as part of respective decision making arrangements.
10.2 Arrangements are being made to consult with Audit Committee Chairmen
and External Auditors as key stakeholders in the Service.
10.3 Staff consultation arrangements are in train, with a joint staff briefing held
on 2 February. Further staff consultation will be carried out as part of the
process for transferring staff to the employ of Hertfordshire County Council
and into the roles within the Shared Internal Audit Service.
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