The role of the Non-Executive
Director in governance
Steve Connor
Mersey Internal Audit Agency
9th July 2002
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Mersey Internal Audit Agency
Todays Agenda
 History / Development of Corporate
Governance
 The NHS perspective
 Accountabilities and responsibilities
 Corporate Governance and Controls
Assurance
 Internal Audit / External Audit and the Audit
Committee
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Mersey Internal Audit Agency
The Development of
Corporate Governance
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Cadbury Report 1992
Greenbury Report 1995
Nolan Report 1995
Hampel Committee 1996
London Stock Exchange 1998
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Combined Code
 Turnbull Report 1999
 HM Treasury
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Mersey Internal Audit Agency
Cadbury Principles
 Openness
 Integrity
 Accountability
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Mersey Internal Audit Agency
Nolan Principles
Selflessness
 Integrity
 Objectivity
 Accountability
 Openness
 Honesty
 Leadership
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Mersey Internal Audit Agency
Turnbull Report
An organisations system of internal
control has a key role in the
management of risks that are significant
to the fulfilment of its business objectives
and should be embedded in the
operations of the organisation and form
part of its culture.
It should cover all risks
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Mersey Internal Audit Agency
What prompted the
governance industry?
 BCCI
 Polly Peck
 Maxwell
 But still companies saw governance as
bureaucracy that added cost……
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Mersey Internal Audit Agency
The Private Sector
Perspective
Good corporate governance matters. It matters to
business because it contributes to sustainable
long-term success. It matters to shareholders - and
others interested in the company - because it
ensures them a transparent and productive
relationship with the enterprise concerned. It
matters to UK plc because if we get corporate
governance right, we will have more successful,
innovative firms to create the investment and wealth
that benefits all our citizens.
SPEECH BY THE RT HON STEPHEN BYERS MP,
SECRETARY OF STATE FOR TRADE AND INDUSTRY
TO THE PIRC ANNUAL CORPORATE GOVERNANCE CONFERENCE - 23
MARCH 1999
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Mersey Internal Audit Agency
Corporate collapses
continue
“Could it happen to us?”
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Mersey Internal Audit Agency
Rogue Traders
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Mersey Internal Audit Agency
Allied Irish Banks (AIB) says the alleged fraud
discovered earlier this month at its US subsidiary had
been going on for five years.
"The periods in which the losses arose extend back to
1997," said chief executive Michael Buckley.
I am
determined to
spare no effort
in repairing the
damage we
have suffered
Michael Buckley
AIB chief
The revelation came as the bank reported its results for 2001
and finalised the losses it incurred as a result of the fraud at
$691m (£484m).
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Mersey Internal Audit Agency
WorldCom fires CFO over
$3.8bn fraud claim
The group's shares dropped 75 per
cent in after-hours trading after the
company confirmed that Scott
Sullivan, chief financial officer, had
stepped down and it had accepted
the resignation of David Myers,
senior vice president and controller.
WorldCom confirmed that it was
investigating whether about $3.8bn
of operating expenses were
recorded as capital spending over
the last five quarters, boosting
cashflow and margins. If confirmed it
would be one of the biggest
corporate frauds in history.
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Mersey Internal Audit Agency
When things go wrong
 Senior Executives who
permitted or encouraged
misleading accounting
treatment.
 An Audit Ctte that signed off
misleading accounts.
 A board that was ineffective in
supervising managers’ actions.
 Whistleblowers’ complaints that
were ignored or whitewashed.
 Individuals enriched by
transactions with the company
that employed them.
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Mersey Internal Audit Agency
Lord Wakeham quits UK
press body over Enron
Lord Wakeham, 69, joined
Enron in 1994 and sat on the
audit and compliance
committee, which was
supposed to ensure proper
procedures were in place. He
described his decision as "a
matter of honour".
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Mersey Internal Audit Agency
Where was the Audit
Committee?
 The members of the audit committee have
mostly declined to comment publicly and
people close to them say none has yet
received a subpoena to testify to the
investigations into Enron's demise.
 The silence will do little to answer critics who
say the committee failed to draw sufficient
attention to the dubious practices in place at
an apparently thriving business.
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Mersey Internal Audit Agency
Corporate Governance in
healthcare
The systems and processes by which
health bodies lead,direct and control their
functions, in order to achieve
organisational objectives and by which to
relate to their partners and wider
community.
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Mersey Internal Audit Agency
HM Treasury
How Turnbull provisions can be adapted
to the public sector.
Statutory requirement for a Statement on
Internal Control.
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Mersey Internal Audit Agency
NHS Corporate Governance
framework
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SO’s / SFI’s
Decisions Reserved for the Board
Scheme of Delegation
Code of Conduct
Code of Accountability
Code of Openness
Audit Committee
Remuneration and Terms of Service
Controls Assurance
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Mersey Internal Audit Agency
The NHS Perspective
“How do you equate the total
accountability of the board with
the physical impossibility of
knowing everything that is being
done in the board’s name.”
Sir Stuart Burgess, 1995
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Mersey Internal Audit Agency
Bristol Royal Infirmary
 In the period from
1991 to 1995
between 30 and 35
more children under
1 died after openheart surgery in the
Bristol unit than
might be expected
had the unit been
typical of other PCS
units in England at
the time.
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Mersey Internal Audit Agency
Dr Shipman
 Family GP Harold
Shipman had become
the focus of Europe's
biggest ever murder
investigation
 Convicted of 15
murders, he is
suspected of killing
more than 297 patients
over 24 years.
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Mersey Internal Audit Agency
Proposed Legislation –
Corporate Liability
 Corporate killing – intended to make
companies (including Health Trusts and School
Boards) accountable in criminal law when they
fall far below the standards that could
reasonably be expected in the circumstances.
The proposed maximum penalty would be an
unlimited fine and an order to correct the
original cause of any accident. A company’s
assets could also be frozen pending the
institution of criminal proceedings on a charge
n
of corporate killing.
Mersey Internal Audit Agency
When enquiries report…..
A consistent conclusion of public enquiries is that systems,
not individuals, are to blame.
Communication, record keeping, monitoring of policy
implementation, training, leadership are all examples of
commonly cited system failures.
Responsibility for the effectiveness of systems rests
unequivocally at the Board table.
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Mersey Internal Audit Agency
Controls Assurance
“…a process designed to provide
evidence that NHS bodies are doing their
reasonable best to manage themselves
so as to meet their objectives and protect
patients, staff, the public and other
stakeholders against risks of all kinds”
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Mersey Internal Audit Agency
Governance and controls
assurance in the NHS
Clinical
Assurances
(Clinical Governance
Report/Annual Report)
Clinical care
The
environment
of care
Financial
resources
CLINICAL
GOVERNANCE
ORGANISATIONAL
CONTROLS
FINANCIAL CONTROLS
Organisational
Assurances
(Annual Report)
Financial
Assurances
(Annual Accounts)
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Mersey Internal Audit Agency
Risk management
Clinical
Assurances
(Clinical Governance
Report/Annual Report)
Clinical care
The
environment
of care
Financial
resources
CLINICAL
GOVERNANCE
ORGANISATIONAL
CONTROLS
FINANCIAL CONTROLS
Organisational
Assurances
(Annual Report)
Financial
Assurances
(Annual Accounts)
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Mersey Internal Audit Agency
How assurance is reported
Management
assurance
Independent
assurance
Board
Clinical
Governance
Committee
CEO
Executive
Team
Audit
Committee
Risk
Management
Committee
Miscellaneous
risk groups
Internal
Audit
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Mersey Internal Audit Agency
An Effective Audit Committee
“an effective Audit Committee will satisfy
itself that there are processes in place to
make sure that significant issues will
“bubble up” to the attention of the
Committee or the full Board.”
K Gibson, Chairman, Corporate Practices Committee
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Mersey Internal Audit Agency
An Effective Audit Committee
 Membership
 Authority
 Meetings
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Mersey Internal Audit Agency
Membership
 Not less than 3 Ned’s.
 Effective oversight through objectivity and
relevant experience.
 Chair of Trust should not be a member.
 Where possible one NED with a financial
background.
 Internal Audit / External Audit / Director of
Finance.
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Mersey Internal Audit Agency
Authority
 Must have sufficient authority to act with
independence.
 Committee of the board.
 Formal meetings with minutes to trust board
meeting.
 Should have explicit authority to investigate
any matters within its terms of reference, and
full access to information.
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Mersey Internal Audit Agency
Meetings
 Limited time.
 Secretary / Admin Support.
 Agenda and briefing papers.
 Timing of meeting planned in advance.
 Number of meetings?
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Mersey Internal Audit Agency
Purpose of an Audit Committee:
Financial Probity
To independently contribute to the Board’s overall process
for ensuring that an effective internal control process is
maintained.
Primary focus has been:
 financial systems;
 financial information;
 compliance with law,
guidance and codes of
conduct.
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Mersey Internal Audit Agency
How the work will be
delivered
The Future
1. Statement of
Internal Control
Minimum
1. Finance
2. Compliance
3. Verification
4. Report
2. Advice on the
management of
risk
3. Coordination of
assurance
functions
4. Facilitation
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Mersey Internal Audit Agency
Perceptions of Audit
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Mersey Internal Audit Agency
What the papers say…
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Mersey Internal Audit Agency
The Audit Process
 Audit plans based on clear risk
assessment
 Monitoring of significant issues
 Follow up
 Private discussions
 Governance, Risk Management and
Controls assurance
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Mersey Internal Audit Agency
External Audit: Who’s who
Audit
Commission
appoints, regulates and advises
auditors
conducts national research
inspects Best Value
receives PIDA referrals
Auditors
District Audit
other suppliers: KPMG, PwC, etc
District Audit
70% of appointments
arm’s length agency
c. 1,500 staff in England and Wales
about 60 District Auditors
Appointments
PCTs
NHS Trusts
local authorities
fire authorities
police authorities
etc
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Mersey Internal Audit Agency
External Audit: Responsibilities
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Mersey Internal Audit Agency
External Auditors special
powers and duties in the NHS
 Refer unlawful matters
to Secretary of State
 Report in the Public Interest
(Section 8 report) a copy of
which also goes to
Secretary of State
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Mersey Internal Audit Agency
Working with internal audit
 Shared risk assessments
 Managed audit
 External Audit reliance on Internal
Audit
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Mersey Internal Audit Agency
Differences between
Internal and External Audit
External Audit
Internal Audit
• Externally appointed
• Employed or internally
appointed
• Independent from the
Trust
• Part of the Trust’s internal
Corporate Governance
arrangements
• Statutory functions and
responsibilities
• More flexibility within the
prescribed framework
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Mersey Internal Audit Agency
Summary
 NED’s play a key role in effective Corporate
Governance
 Constructively challenge
 Sufficient and timely information
 Access to training
 Need a strong effective Audit Committee
focussed on the assurance agenda
 Risk register as the basis of an assurance
framework
 Coordination of reviewers
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Mersey Internal Audit Agency