Annual review of Internal Audit effectiveness

Report: 7
Date: 22 September 2006
By: Director of Internal Audit

Summary

Changes to the Accounts and Audit Regulations from the first of April 2006 include a requirement for the Authority to carry out an annual review of the effectiveness of Internal Audit. To assist the Committee in discharging this requirement on behalf of the Authority, this paper summarises the measures currently in place to monitor Internal Audit effectiveness, a proposed approach in the future and the role that the Audit Commission plays in this process.

A. Recommendation

That

1. the Committee endorses the current arrangements for measuring Internal Audit effectiveness; and
2. agrees the proposed way forward to enable the Authority to conduct an annual review of the effectiveness of Internal Audit, using the information on performance and effectiveness provided by the Director of Internal Audit together with any relevant opinion from the Commissioner and the Audit Commission’s appointed Auditor.

B. Supporting information

1. From 1 April 2006, the Accounts and Audit Regulations placed a new requirement on authorities to conduct an annual review of the effectiveness of the system of internal audit. The annual review can be informed, both by any review of Internal Audit by the Audit Commission and the results of any measures of effectiveness of internal audit put in place by the Director of Internal Audit.

2. Currently, the Audit Commission conducts a full review of the adequacy and effectiveness of internal audit every three years, although each year some Internal audit work will be reviewed and re-performed. The next full review of internal audit effectiveness will be in 2007/8.

3. Measures of effectiveness put in place by the Director of Internal Audit are largely those recommended by an independent PWC study commissioned by the Director of Internal Audit in 2000. Generally, they are designed to measure outputs and outcomes, as well as the timeliness of audit processes. The key effectiveness measures are:

• completion of the annual audit plan;
• issuing final audit reports within one week of the formal management response;
• achieving at least 90% acceptance of audit recommendations;
• achieving 80% customer satisfaction;
• achieving 50% implementation of audit recommendations within 12 months;
• achieving 100% implementation of high-risk recommendations within 12 months;
• finding a significant improvement in control during the follow-up audit;
• stemming losses and making significant financial savings as a result of audits and investigations.

4. Other harder to assess measures of internal audit effectiveness include:

• improvements in control in the MPS;
• the perceived standing of internal audit in the MPS;
• the adequacy of advice provided to those developing new systems in the MPS;
• support given to the Finance and Corporate Governance Committees;
• quarterly progress reports to Corporate Governance Committee;
• Annual Internal Audit Report

Annually measuring the effectiveness of Internal Audit

5. The regulations do not specify how this should be achieved by the Authority. CIPFA is currently revising its Code of Audit Practice (due to be issued later this year) to take into account changes in regulations, including this new requirement. CIPFA are likely to recommend that the annual review of the effectiveness of internal audit takes into account measures put into place by the head of internal audit and any review conducted by the external auditor. Options include:

1. Appointing an external consultant to conduct a review on behalf of the authority.
   • Advantages: Wholly independent, defensible.
   • Disadvantages: Costly, would still need an officer of the Authority to manage the work.
2. Using the information on performance and effectiveness provided by the Director of Internal Audit in conjunction with any relevant opinion from the Commissioner and the Audit Commission’s appointed Auditor for the Committee to take a view on behalf of the Authority. This would be supplemented by the Chief Executive’s opinion both as the Director of Internal Audit’s line manager and in the wider view of the impact of internal audit work on the MPA and the MPS.
   • Advantages: Cost effective, would not involve any additional work, likely to meet the standards.
   • Disadvantages: No wholly independent opinion on performance measures.
3. Seeking a peer review from another member of the GLA family via their head of audit.
   • Advantages: Cost effective (possible quid pro quo), would meet standards.
   • Disadvantages: Likely to be more time consuming as it will involve additional work.
4. Charging an officer of the Authority to conduct a review and write a report to the Corporate Governance Committee.
   • Advantages: In house control.
   • Disadvantages: Lack of expertise outside of Internal Audit, opportunity cost on officer’s other duties.

6. As this is the first year on which the Authority needs to conduct such a review it may be appropriate to take a least cost option and take the views of the proposed co-opted Member on Audit (should they be appointed) to ensure independence. On that basis I would recommend Option b at this stage.

C. Race and equality impact

There are no implications for race and equality in these proposals. However, any review undertaken would have to be fair, proportionate and relevant, three of the key principles which support equality, equity and diversity.

D. Financial implications

The recommended option 5b is considered a cost effective approach that can be contained within existing estimates. Other options other than 5a above are also cost effective solutions.

E. Background papers

None

F. Contact details

Report author: Peter Tickner, Director of Internal Audit, MPA

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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