By Ashley Moore,2014-08-07 01:41
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    David Thomson

     Central Finance Group

     Rathgael House

     Balloo Road

     BANGOR BT19 7NA

     Tel: 028 9185 8150 (x 68150)





     cc: HOCS

     NI Perm Secs

     Mr O’Reilly

     CFG Grade 5s


Issue: Recently published guidance from HMT on audit


Timing: Routine.

    Recommendation: Departments to consider the application of this before DFP

    formally issues the guidance


    1. The increasing role of audit committees can be traced back to the wider

    developments over the last decade in UK corporate governance. These

    started in the wake of a number of financial scandals in the late 1980s/early

    1990s (e.g. Maxwell, BCCI, Polly Peck) with the publication in 1992 of the

    Cadbury Code. Those corporate collapses were characterised by a number

    of similarities such as dominant chief executives, clean audit reports for the

    period before collapse and ineffective (or no) non-executive directors.

    2. The Cadbury report made important recommendations to deal with such

    issues and these have now become best practice in business. The most

    important were that there should be at least three outside directors, that the

    role of chair and chief executive should be split and that audit committees

    should be established in all listed companies. A key theme at the heart of the

    Cadbury report is the role of the non-executive director.

    3. The Cadbury report was followed by three further major corporate governance

    reports in the 1990s Greenbury (mainly on executive pay), Hampel (a

    review of the implementation of Cadbury) and Turnbull (on internal control).

    Last year, there were a number of further reports the main ones being the

    Higgs report on non executive directors and the Smith report on audit


    4. Separately, in the public sector, we had the Sharman report a few years ago

    which addressed specific audit issues in the public sector. We implemented

    aspects of this last year in the Audit and Accountability Order.

Application to the Public Sector

    5. Many of the recommendations in these reports have been read across to the

    public sector and, as a consequence, there have been significant changes in

    the governance of departments and public bodies.

    6. However, I have had a concern about the direct read-across of some of the

    recommendations, especially on areas such as audit committees. The

    Cadbury recommendations were designed to overcome certain perceived

    weaknesses, and the creation of audit committees was largely to ensure that

    external auditors were not subject to undue influence by a dominant chief

    executive. However, this does not apply to the same extent to the public

    sector, especially government departments, with the particular role of the

    C&AG and the appointment of accounting officers.

    7. We had commenced work on a report to facilitate discussion as to how these

    concepts applied to the NI situation, but contact with HMT colleagues last

    year indicated that they were having similar concerns and consequently we

    stopped work on the issue, pending the outcome of HMT’s deliberations.

    HMT produced a handbook on audit committees last autumn (copy attached)

    and circulated this, under a DAO, in December.

Key points in the HMT guidance

    8. The HMT handbook draws on the recent reports and incorporates what it

    considers as best practice. It recognises the difference between the public

    and private sectors and concentrates on the internal role of audit committees

    i.e. it ignores the responsibilities for dealing with external audit which was one

    of the objectives of audit committees set out in the Smith report.

9. Some of the key points to note are

    ; The handbook contains 10 policy principles

    ; The “independent” perspective is central, with the implication that

    boards should have non- executive members

    ; There is a difference between a risk committee (which is executive)

    and an audit committee (which is advisory)

    ; A non-executive should chair the audit committee, not the Accounting


    ; If there are sufficient non-execs on the board, then audit committees

    should be made up entirely by them.

    ; Larger organisations should have four or more meetings of the audit

    committee per year.

    ; The handbook contains suggested terms of reference.

Implications for NI departments

    10. Most, if not all, NI government departments and major public bodies have

    audit committees. However the composition of the committees and the

    manner in which they operate differs. There are very few which have external

    members on committees and most accounting officers chair them. Many of

    the audit committees are also risk committees.

    11. A linked issue is the role of external board members on departmental boards.

    Whilst a number of agencies have adopted this practice, it is not common in

    NI departments to have external members on boards. Although I don’t have

    specific details, it would appear that an increasing number of Whitehall

    departments have such members.

    12. If we adopted the principles set out in the HMT handbook, then most

    departmental audit committees (and perhaps department boards) would

    change in structure and function.

Next Steps

    13. Normally, when HMT issues a DAO letter, we issue a similar DAO letter,

    amended as appropriate to the NI situation. However, if a DAO raises

    significant matters, we have circulated it in draft to get comments from

    departments. I consider that this is a good opportunity to review our

    governance procedures and I am generally supportive of the approach set out

    in the HMT handbook. But before formally issuing it, I would welcome any

    views on the principles in the HMT guide and the practical issues in

    implementing them.

    14. If the handbook is issued under a DAO, then departments will be expected to

    comply with the principles contained in it. Indeed, even if we didn’t formally

    issue it, the PAC will expect us to follow good practice. However, it is worth

    noting it is guidance based on principles, so there is flexibility in the


    15. PSG discussed last year the issue of non- executive directors and I am also

    copying this minute to permanent secretaries, who will wish to note these

    developments and who may wish to have a further discussion on the issue.


    Treasury Officer of Accounts

    The Attachment ‘The

    Audit Committee

    Handbook’ can be found on the AASD

    Website under



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