Internal audit helps local councils – fact or fiction?

LEGAL MATTERS

Fact: Internal audit is an aid to management (clerk/RFO/councillor)

Fiction: Internal audit is a threat to management

While some clerks dread the internal audit at Annual Governance and Accountability Return (AGAR) time, many welcome the opportunity to ensure that processes and procedures are operating properly with all current good practices.

Internal audit is at the “coal face” end, checking prime documents at the source stage, whereas external audit is a remote overview of figures and explanations. The two audits complement each other, providing assurance to the public that local councils are operating efficiently and effectively, while utilising their council tax precepts both transparently and accurately.

Yes, the internal auditor is checking the records to see that good practices are operating, thus ensuring financial accuracy and transparency. No, the internal auditor is not trying to catch anyone out, unless of course anyone is attempting to defraud the council.

Clerks can use the audit visit to ensure that they are fully updated on their processes and procedures. Ask the auditor if certain aspects are being performed properly or if there is a better way. If the internal auditor reviews several local councils, they will already have sound knowledge of common financial software and spreadsheet problems that have been satisfactorily resolved elsewhere. Why re-invent the wheel?

At AGAR time, the clerk can refer to the latest guidelines on governance and accountability, which are contained in the latest Practitioners’ Guide issued annually by the Joint Panel on Accountability and Governance (JPA), the National Association of Local Councils (NALC) and the Society of Local Council Clerks (SLCC). This provides a wealth of information on how to complete the AGAR forms correctly, while giving reasons for certain aspects required. These guidelines provide clerks with methods to operate with good governance, transparency and compliance.

Many councils will be under the £25,000 threshold (the higher of receipts or payments) and thus not subject to a mandatory external audit (a saving of £210 +VAT, as per the current five-year fee scale). However, all councils are subject to an annual internal audit. The auditors must be competent, totally independent and preferably well versed in the local council sector. When selecting an internal auditor for a medium or larger council, consideration should be given to whether the firm or individual has professional indemnity insurance. This gives added assurance for the council.

Clerks can often get recommendations from fellow clerks when selecting a new internal auditor. Since September 2022, a new Internal Audit Forum has been in existence, which provides local councils with online access to lists of internal auditors, operating across all the counties of England and Wales: www.internalauditforum.org.uk

Once an auditor has been chosen, a letter of engagement should be issued detailing the expected number of visits, scope of the audit and reporting frequency.

Many smaller parish audits (including of councils that are self-certificating) will be conducted via an annual visit or remote access to records. However, for medium and larger councils the use of interim audits during the financial year, with a final AGAR audit, is very useful. The advantage for the clerk/RFO and councillors is that it gives them assurance that processes and all bank reconciliations are accurate at various points in the year, and any minor errors (e.g. miscodings or correct VAT not noted for reclaim) can be amended within the actual year. The advantage for the auditor is that this spreads the audit activity throughout the year, allowing them to cover more councils, rather than packing all councils into the three-month AGAR deadline period up to 30 June each year. This also helps the clerk/RFO by reducing the pressure on their very busy year-end schedule of work.

Areas that the internal auditor should review are:

Bank reconciliations for all accounts and investments held, including any cash holdings. Test checks of receipts and payments for all methods including BACS, cheques, debit cards, direct debits, standing orders, direct credits and local backings. This will cover security and the internal controls in operation. Also review bank mandates for effectiveness and relevancy.
Payroll aspects (whether in-house or outsourced) require test checks of staff contracts and pay calculations, with payments to HMRC and relevant pension schemes.
Insurance cover for standard aspects (including employer and public liability), vehicle and driver cover, cyber cover and personal accident cover (including volunteers) should be properly held at appropriate levels.
The asset register is updated with all additions and disposals shown. Additions should be noted, with relevant serial numbers, at the net cost value (i.e .no VAT or delivery charges included). This will provide the actual figure for the AGAR Box 9. When an item is added to the asset register it should also be notified to the insurer for cover on the current policy.
Risk assessments for all relevant aspects of the council performed and minuted as such, before the relevant 31 March.
VAT is noted correctly in financial software or spreadsheets and claimed on a regular basis (monthly, quarterly or annually) from HMRC. More frequent refunds will assist the council’s cashflow. Some councils may require partial exemption calculations or opt to tax on land and buildings.
Perusal of council minutes, ensuring that all are properly signed and dated by the chair at the subsequent meeting. This makes any council decisions legally binding. Payment schedules should be attached as an appendix or included in the minutes for transparency purposes. Any reviews and updates to standing orders or financial regulations and all risk assessments should be fully minuted before the relevant 31 March. The auditor should look for actioning on various projects, grants sought and earmarked reserves/CIL monies held.
Budgetary control is operating during the financial year, with regular comparison between budget and actuals on cost codes, to allow for virement (transferring money between accounts) if needed. Ensure that a proper budgetary process operates at the end of each calendar year. This allows each council to decide its precept for the following financial year, ready to notify its unitary, borough or district authority by the end of January. The precept figure is then used by these authorities to set their area council tax figures. Council minutes should always show the actual precept amount requested, not just “unchanged” or the percentage increase.
Are internal checks and controls utilised to alert councillors to errors or fraud? For example, simple verification checks that bank statement figures used in bank reconciliations are actually sighted on the statements monthly and then initialled by the chair as correct. For larger councils, ensuring that staff duties are split, ensuring that no one person handles the payments/payroll processes without proper supervision and checks. Previously, this has often been the source of actual fraud within local councils’ finances.
Verification of AGAR Governance (Sheet 1) and Accounting (Sheet 2) for both accuracy and full completion. Review of the significant variances sheet (currently all variances of +/-15% require explanations by the external auditors). Ensure that the bank reconciliation covers all council holdings and short-term investments. Long-term investments must be noted in the asset register and only re-entered in the cashbook when withdrawn and repaid into council bank accounts. If the council prepares accounts in a receipts and payments format, Boxes 7 and 8 must agree. If the council uses an income and expenditure format, the internal auditor needs to test the accuracy of debtors, creditors and accruals. The I&E format will also need a full reconciliation of Boxes 7 and 8 to be submitted to the external auditor with all the normal AGAR paperwork.
Check that the AGAR sheets 1 and 2 have been properly signed, dated, minute reference noted, and minuted in sheet numerical order (i.e. Governance first, then Accounting).
Ensure that the public rights notice has been posted on the website and noticeboards showing the selected 30 days’ access period, and also that the announcement date is at least one day prior to day one of the period.

Finally, the internal auditor will complete and sign off the internal audit report on the AGAR (currently with a required “wet” signature), ready for sending to the external auditor or, if self-certificating, for placing on the council website and noticeboard(s).

I hope that you have all come to the right conclusion that the answer to the question in the title of this article is indeed fact. The internal audit is an aid to management and helps local councils by enhancing their own transparency for all their parishioners. Good luck to all for your 2023/24 internal audits!

Internal Audit Forum

Paul Reynolds is a FMAAT (Fellow Member Association of Accounting Technicians) based in Hampshire and has been involved in local government internal auditing for 55 years. He worked in major authorities for 35 years, then set up Fair Account on 1 April 2002, when the “lighter touch” AGAR audit system was first introduced into the local council sector. Fair Account has a large portfolio of councils covering eight counties in the South and South West of England. It provides internal audit services to local councils, village halls and youth clubs and audits councils of all sizes, from large towns (with offices) to small villages (with the clerk working from home). Paul also provides lectures for AAT and SLCC on internal audit.

https://internalauditforum.org.uk

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Written by Paul Reynolds, FMAAT, Fair Account

As appeared in Clerks & Councils Direct, September 2023