Internal audit proposals

Introduction

Background

As part of the annual audit, the College’s auditors suggested that the College creates an internal audit function to enhance the College’sgovernance structure. Internal audit will help ensure compliance with the College’s policy and procedures, to emphasise the importance of the College’s internal controls and to achieve efficiencies. This echoes the Charity Commission guidelines as well as best practice.

At its meeting on 9 April 2010, Council agreed this and requested the Honorary Treasurer and Chief Executive to make recommendations for this.

Objectives

Unlike the annual audit which focuses on the accuracies of financial statements and the financial records, the primary objective of an internal audit is to enhance an organisation’s internal controls. With the College’s activities becoming more complex and external regulatory requirements becoming increasingly complicated, the use of an internal audit function can also be seen as a powerful management tool.

The scope of internal audit can be broad and involves the College’s entire operations. As it seeks to monitor all aspects (not just accounting) of the College’s operations, internal auditmay includeissues such as effectiveness and efficiency of operations; the reliability of financial reports; and compliance with applicable laws, regulations and internal policies. Although internal audit frequently involves measuring compliance with the organisation’s policies and procedures, internal auditors are not responsible for the execution of the organisation’s activities, they advise management and make recommendations to the Board of Trustees regarding how to better carry out their responsibilities. These principles are enshrined in Charity Commission guidelines[1] and the Combined Code[2], internal auditcould highlight those areas that trustees should be familiar with, in order to effectively govern the College and monitor the implementation and impact of their decisions.

Audit Committee

Although the Council has full management and control over the College’s affairs; Council may not be the appropriate body to monitor internal control processes and to examine regulatory and policy compliance in detail, as neither time nor large membership enable this. Similarly the Council may not possess the appropriate expertise and skills in overseeing and scrutinising these matters. It is therefore not uncommon for the Board of Trustees to delegate these supervisory powers to a sub-committee, commonly known as the Audit Committee. Reporting to the Council, its remit could include, inter alia, monitoring the integrity of financial reporting and accounting; reviewing the internal controls and risk management systems; and monitoring and reviewing the independence of both the internal and external auditors, the objectivity and the effectiveness of the audit process.

It is recommended that the College combines the audit committee functions with the Finance Management Committee (FMC) and forms the Finance and Audit Committee (FAC). To ensure the Committee has the broad range of skills and independence that are required, it is recommended that a professional accountant (say from another Medical Royal College) or qualified lawyer be incorporatedas a member of FAC. The Honorary Treasurer and members of FMC discussed this with the College’s external auditors briefly in the exit conference in March 2010 and the College’s external auditors confirmed that this would be an acceptable structure without burdening the College with yet another committee.

The above change is likely to require amendments in the College’s constitution, including changing the reference and remit of Finance Management Committee[3]. A copy of the suggested terms of reference is attached in Appendix 2. It is advised that the internal auditors report to the Honorary Treasurer during this interim period. Ideally, the internal auditor should have completed one assignment by Spring 2011 in advance of Buzzacott reviewing the College’s processes and systems as part of the 2010 audit.

Internal Auditors

In order to determine the scope of the internal audit, the performance of the work and communicate the results to the FAC, the internal auditors require organisational independence from management.In short, the structure must enable the internal auditors unrestricted evaluation of management activities.

Topics for the internal audit could include:

  • Corporate governance framework
  • Risk management systems
  • Finance areas such as budget control and payroll
  • Staff remuneration packages
  • Travel and subsistence expenses
  • Procurement (use of payment cards)
  • Treasury management
  • Law and regulation compliance, e.g. PCI DSS, Bribery Act 2010
  • New IT systems implementation
  • Business continuity/Disaster recovery planning

Depending on the programmes commissioned by the FAC, the internal audit process may involve straightforward internal checking, complex system review, internal appraisals of operations and financial planning.

Finance Section

September 2010

Appendix 2

Finance and Audit Committee

Terms of Reference

With the approval from Privy Council in updating the College’s Bye-Laws, the Council of the Royal College of Psychiatrists agrees the Finance Management Committee (FMC) be renamed as the Finance and Audit Committee (FAC). The original Terms of Reference for FMC was agreed by the Council (formerly CEC) in February 2007. This committee will continue to be a sub-committee of and report directly to the Council. The followings are its terms of reference.

Membership

Chair:Honorary Treasurer

Trustees:3 trustees representatives from Council

Professional:1 qualified lawyer or accountant

Attendance

Staff:Chief Executive

Director of Finance and Operations

Head of Finance

A committee secretary will attend to minute the meetings and carry out any related tasks, but will not be a member of the committee. The committee may ask any managers to attend meetings to present or discuss particular budgets or papers.

Powers

The committee is authorised by the Council to investigate any activity within its terms of reference. It is authorised to seek any information it requires from any employee and all employees are directed to cooperate with any request made by the committee.

The committee is authorised by the Council to obtain external legal or other independent professional advice and to secure the attendance of any person at any committee meeting with relevant experience and expertise if it considers this necessary.

Role

The primary role of the committee shall be defined as follows:

  1. to review and scruntise the annual business plans and budgets;
  2. to review and monitor management reports, focussing particularly on
  3. monthly management accounts, including those of CCQI and FSDS;
  4. cashflow projections; and
  5. College’s investment portfolio;
  6. to review and recommend any changes in financial policies and practices;
  7. to consider and recommend financial decisions, such as subscriptions rate, examination fees etc;
  8. to consider the appointment of external auditor, the audit fee, and any questions of resignation or dismissal of the external auditor;
  9. to review the annual accounts before submission to the Council, concentrating on areas involving
  10. a significant degree of judgement;
  11. significant adjustments resulting from the audit;
  12. the going concern assumption;
  13. compliance with accounting standards and legal requirements;
  14. the clarity of disclosures; and
  15. the consistency of accounting policies from year to year;
  16. to discuss problems and reservations arising from the audit and any matters the external auditor may wish to discuss (in absence of the management,including those staff who are on the committee, where necessary);
  17. to act as the body to whom the internal auditor reports on the internal audit functions and to discuss any issue that the internal auditor may wish to raise (in the absence of the management, including those staff who are on the committee, where necessary);
  18. to develop a programme of work for the internal audit, ensuring coverage of various topics that are required to be address; this could include but not limited to
  19. monitoring the integrity of financial reporting and accounting;
  20. reviewing the internal controls and risk management systems;
  21. reviewing effectiveness and efficiency of College’s operations; and
  22. considering other topics, as defined by the Council from time to time;
  23. to review the internal audit function, consider the major findings of the internal audit investigations and the management’s response, and ensure co-ordination between the internal and external auditors;
  24. to keep under review the effectiveness of internal control systems, and in particular review the external auditor’s management letter and the management’s response;
  25. to review, on a regular basis, its own performance, constitution and terms of reference to ensure it is operating at maximum effectiveness.

In discharging its duties, the aims of the Finance and Audit Committee are to:

  1. develop a culture of accountability in a way that is transparent and understandable;
  2. facilitate good communication between the College and its external auditors;
  3. increase the credibility and objectivity of financial reporting;
  4. enhance internal controls and risk management systems;
  5. strengthen the independence of audit function; and
  6. improve the quality of the accounting and auditing functions.

Frequency and Timing

In order to function effectively, the committee shall take account of the Council meeting schedule. It is suggested that the committee meetings follow the Council meeting schedule and precede those dates by 2-3 weeks.

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[1] see Internal Financial Controls for Charities (CC8), Charity Commission; Hallmarks of an Effective Charity (CC10), Charity Commission.

[2]The Combined Code on Corporate Governance, June 2008, Financial Reporting Council

[3] For example, Section XVIII of Bye-Laws, para 4; Section XVIII of Regulations part C