HERTFORDSHIRE COUNTY COUNCIL

POLICY AND RESOURCESCABINET 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

1.1The 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
  1. Summary

2.1The 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.

2.2It 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.

2.3Human Resource implications of the transfer are being worked through in consultation with District Councils.

2.4The 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.

3.Recommendation

3.1The Policy and Resources Cabinet Panel is invited to recommend that Cabinet:

(i)approvesthe 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.

4Background

4.1The 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).

4.2In Hertfordshire, the Pathfinder Programmetook 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 InternalAuditService (SIAS), hosted by Hertfordshire County Council.

4.3The 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.

4.4The Councils propose jointly to establish a Shared Serviceto 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.

5Drivers for change

5.1Internal 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.

5.2The partners consider that establishing a SIASin Hertfordshire will allow greater resilience in internal audit, and sufficient economy of scale to allow for access to specialist audit skills.

5.3The 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.

5.4Across 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.

5.5The most developed Shared Internal Audit Service involvingboth 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 increasesof 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.

5.6For 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’sAudit 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 AuditService 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.

6Shared Internal Audit Service Model

6.1The 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]

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.

6.2The 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 thatOption 3 should be explored in more detail. This shared service option was considered to provide the opportunity to deliver the benefits of a ‘close’ in-house 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.

6.3This decision led to the development of a detailed proposal for a Shared Internal Audit Service to bedelivered 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.

6.4The 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

vi)to be open to future opportunities to expand the Shared Service,thus enabling greater efficiencies to be achieved.

6.5The 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.

6.6It is envisaged that the proposed arrangement will be a collaborationfalling 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.

6.7Subject 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.

6.8Thereafter, it is proposed that oversight of the SIAS will be through a joint officer board comprising those Chief Financial Officersof 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.

6.9Whilst 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:

  • 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.

7Risks and Mitigations

7.1In order to ensure that the SIAS is successful it will be necessary to ensure that the following key risks are managed:

Risk / Mitigation
SIAS is unable to deliver required work during transitional period / 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
Existing employees across the Councils have long standing and in depth knowledge of audit requirements
HCFO oversight via the proposed joint board.
Loss of key staff, knowledge and experience / Pre go-live: Equality Impact Assessments; compliance with HR processes; a commitment to staff consultation and engagement
Post go-live: creation of a stimulating and rewarding working environment.
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.

8Financial arrangements

8.1Initial 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.

8.2The 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.

8.3From 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.

9Human Resources arrangements

9.1The 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.

9.2The 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).

10Consultation arrangements

10.1Each 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.

10.3Staff 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.

110211 Policy and Resources Cabinet Panel

Item 5 – Establishment of a Shared Internal Audit Service

1

[1]These are defined in detail in Section 4 of the Outline Business Case 1 February 2010