Local Authority Internal Audit Virtual Forum

21 July 2021


Please note:

  • All Institute responses are boxed and highlighted blue
  • Where the chair comments in that capacity this box is highlighted in yellow
  • For confidentiality, the identities of all delegates/attendees are anonymised.

 

CEO's welcome

Thank you for joining us for our session today on financial stability and resilience as we look at the blind spot revealed in our latest research.

In addition to our guest speaker Stuart Brown, PWC Director, we are also joined by Liz Sandwith, the Institute’s Chief Professional Practices Advisor, Derek Jamieson, Regional Director and our chair Piyush Fatania, Head of Audit, Risk, Assurance and Insurance Services, Gloucestershire County Council, and member of the Institute’s Council.


Chair's opening comments

Welcome to our Local Authority Forum.

Thank you for joining what looks like being a particularly interesting session on financial stability and resilience. As you may be aware the Institute published its latest report Avoiding the blind spot: Supporting financial stability and resilience, on Monday 19 July 2021. Without a doubt, financial resilience and stability has been at the forefront of many organisations’ thinking over the past year. It is estimated that 2020 was marked by the biggest economic contraction in over 300 years. With the pandemic having impacted operations, many businesses have faced difficult decisions around cost-savings with budget cuts and redundancies. There have also been a number of challenges faced by internal audit teams such as competing priorities and lack of resources. Others have been affected by furlough or redeployment.


Key takeaways

Avoiding the blind spot: Supporting financial stability and resilience

Read the report here

Liz Sandwith, Chief Professional Practice Adviser, Chartered IIA said:

  • We conducted six sector specific roundtable discussions with 40 Chief Audit Executives from a range of sectors including financial services, hospitality, aviation and travel, retail, public sector and third sector. The discussions took place virtually in May 2021.
  • “Auditing financial stability is far more than just auditing financial processes. It is about effectiveness of an organisation as a whole, which in turn drives sustainability.” Chief Audit Executive, Large Public Sector Organisation
  • Internal audit should help the business to identify opportunities during economic strain eg. by helping to identify cost-savings, providing real-time assurance on initiatives and horizon scanning to ensure that any opportunities for the business are considered and seized at the right time.
  • Financial stability is a broad concept and is not just about auditing financial controls, treasury function or supplier sustainability. It is also about what value it delivers for service users and the resilience of the organisation.

Click here for Liz’s slides.


 

Financial Governance, Management and Resilience – Considerations for Internal Audit

Stuart Brown, PWC Director said:

  • Some of the themes around financial resilience relate to governance, tone from the top and culture.
  • The pandemic and 10 years of funding problems have added risk and complexity. Local authorities are responding by doing things differently, but this can add risk and complexity.
  • Preventative action needs to be taken to reduce issues being reported via external audit or via Section 114 notices after the event.
  • There is a clear role for internal audit to provide assurance and to raise the alarm if necessary.
  • Overspends are a problem, as is budget setting, but collective ownership works well. If services and departments are not part of the budget setting and overspend conversations, then it is difficult to get ‘buy-in’ from them.
  • Non-standard treasury management needs good governance and controls.
  • Internal audit is not there to form a view on the reported financial position. This is external audits remit, but internal audit can provide assurance particularly around emerging risks that might have an impact on the financial position.
  • Internal audit needs to share views on key risks with external audit.
  • The process around savings should be looked at by internal audit including monitoring he achievement of savings.
  • Investments in commercial vehicles or similar activities – governance and controls are needed in this area.
  • Internal audit needs to consider do we have the right skills and capabilities around companies and joint ventures risks.

Click here for Stuart’s slides.


 

Chair's closing comments

As internal audit professionals we need to make sure that we have done as much as we possibly can to bring to the attention of management and political leaders what the issues are that could affect the Council’s financial resilience. Councils are increasingly taking on more financial ventures and investments and we need to identify the risks around these.  We need to add value in new and different ways perhaps by doing more consultancy work and by doing less assurance work.

We can help our Councils to move on from risk management to risk and opportunity management, so that they themselves can explore more confidently new areas of activity which can increase their financial resilience.


Institute's comments

Our 2021 conference will be a hybrid of digital and in-person options. Click here to book.

Our next LA Forum meeting, 25 August 2021, will be on the evergreen topic of fraud.

Thank you for attending. As always if you have any ideas or suggestions for what we might include in future agendas please contact Liz Sandwith liz.sandwith@iia.org.uk 


Q&A and delegate comments/chat

Q Stuart, you correctly referenced culture and tone at the top at the start of your presentation. A number of internal audit functions have ongoing challenges with assessing these as part of their work. To what extent could a sequence of failings across the topics in the slide headed "areas to consider" indicate underlying issues with culture and tone?

A Yes, you could certainly look at the work you have already done and map it to this slide.

Q Stuart - Would some of these areas require an internal auditor with an accountancy qualification eg investments or could a lay internal auditor look at these?

A Both skill sets are helpful here. An Internal Auditor with a good skill set could provide adequate scrutiny and challenge, but there may be cases where an accountancy professional would be needed.

Q With regards Arm’s Length Companies and Joint Ventures - we are seeing that the governance is often "left to that company" when the owner is the Council - any tips in getting Councils to recognize that they are "responsible" and "own" the company?

A Remind the Council of its shareholder responsibilities, but equally they shouldn’t overly ‘hold on to the companies’ as these companies need to be left to do their work.

Q Stuart - are there any tips on the development of the audit committee to challenge and question a council's financial strategy more effectively?

A Training for members and those charged with governance is important. They need to be able to ask the right questions and provide the right challenge.

Q Is there a correlation with increased IT risk as councils apply technology solutions to try and make savings?

A It could cause a financial risk if your systems went down and certainly if service issues of IT transformation did not go well.

Q Question on the Chartered IIA report which mentions stress testing. Is this something that internal audit should be doing or something we should be recommending management consider?

A Internal audit shouldn’t do the stress testing – they should be looking though to see if it has been done.

Comment

More of an observation / current challenge than a question. But we (internal auditors) also need to rise to the challenge to think differently about how we audit some of these areas. Certainly, in my experience, asking our teams to consider 'cost of control' over compliance is a real mindset shift. Despite our clients having the appetite for it!