FINANCE: Protecting the accounts from meddling treasurers

Local authority heads should oversee internal auditing in councils, a new study advises. Paul Gosling reports

Giving local authority chief executives responsibility for overseeing internal auditing, and requiring councils to appoint audit committees, are the core recommendations made by the Institute of Internal Auditors United Kingdom, in its submission to the Department of the Environment and the Welsh Office as part of the consultation on accounting and auditing regulations for local authorities.

Internal auditing within councils is too involved with detecting and preventing fraud, and too little in improving efficiency and introducing higher-quality management, says the IIA-UK, which represents 4,000 internal auditors in the private and public sectors. It adds that the failure to create independence for internal auditors too often allows treasurers to squash reports that criticise financial management.

Neil Cowan is assistant director, finance, of Fyfe Regional Council, an ex-president of IIA-UK and one of the authors of the report. "Internal auditing does not make a big enough contribution to management," he says. "By having us report to the treasurer, it is restricting the scope of internal audit. It becomes finance-orientated, rather than being of benefit to the whole organisation.

"In many cases internal audit reports are subject to the final scrutiny of the treasurer, and that is not a good position to be in. If the treasurer can suppress a report, that is not a good situation for the organisation as a whole."

The IIA-UK says that local government regulations, which specify that internal audit is the responsibility of the "responsible finance officer", hinders the development of its role and restricts its effectiveness.

If the responsibility for appointing the head of internal audit, and overseeing the section's work, were transferred to the chief executive, then the role could be broadened to examine the quality of management as well as probity, says the IIA-UK. Such a move would remove internal audit reports from being subject to pressure from vested interests, particularly where the chief finance officer is specifically or implicitly criticised.

To prevent chief executives intervening to protect their own interests, independent audit committees should be established, allowing heads of internal audit to present reports directly to committee, without approval of any other officer.

Local authorities would be required to establish audit committees, in line with the obligation for NHS boards and the recommendation for companies in the Cadbury report on corporate governance. The emphasis in the NHS and the private sector is to involve non-executive directors in audit committees. The best parallel within local government would be to require all parties to be represented and debar chairs of council committees from membership, says the IIA-UK. This would help to give back-bench councillors more of a role.

The report continues: "Internal control is a holistic concept and is in the ownership of all managers: in reality, internal control is synonymous with management control. General and specialist directors and managers cannot shift their own responsibility for internal controls to a finance officer."

The IIA-UK's proposals have been firmly dismissed by the Chartered Institute of Public Finance and Accountancy. Nick Carroll, senior manager, local government finance, at Cipfa, says: "Statutory responsibility for an authority's financial administration rests with the chief finance officer. We believe it is important that this responsibility is not fragmented, and rests with a properly qualified officer."