Introduction

1. This is the third Annual Report of the House of Commons Audit Committee, which was established by the House of Commons Commission on 15 May 2000. The Committee was formed following recommendations in the Review of Management and Services of the House of Commons by a team led by Mr Michael Braithwaite, which was published by the Commission in July 1999.

Membership

2. The Committee's membership at the start of the year was:

• The Rt Hon Eric Forth MP (Chairman);
• Mr Archy Kirkwood MP;
• The Clerk of the House;
• The Director of Finance and Administration; and
• Sir Thomas Legg KCB QC (external member)

Lord Sharman's review of audit and accountability for central government recommended that audit committees should not include the accounting officer or the principal finance office amongst their membership and this recommendation was accepted by the Government.[32] In consequence, since 29 April 2002, the Clerk of the House and the Director of Finance and Administration have not been members of the Committee. At the same time, the Commission agreed to the Committee's request for the appointment of a second external member of the Committee. Mr David Taylor FCA was subsequently appointed to the Committee.

3. The Clerk of the House and Director of Finance and Administration continue to attend meetings, although they may withdraw for specific items at the Committee's, or their own, request.

4. Sir William McKay KCB retired as Clerk of the House on 1 January 2003 and was replaced by Mr Roger Sands. Mr Kirkwood was awarded a knighthood on 1 January 2003.

Terms of Reference

5. The Committee's terms of reference are included as an annex to this report. The Committee held a special meeting on 11 March 2003 to discuss its terms of reference in light of the recommendations of the review of the role and responsibilities of audit committees led by Sir Robert Smith.[33] It recommended to the Commission two changes to its terms of reference: firstly, to make it clearer that the Committee acts on behalf of the Commission; and secondly, to enable the Committee to monitor and review the external auditor's independence, objectivity and effectiveness, and to make recommendations to the Commission about the external auditor's appointment. This latter recommendation reflected one of the conclusions of the Smith report. The Commission agreed to the changes on 7 April 2003.

Meetings

6. The Committee met four times in the financial year 2002/03, including the special meeting referred to above. It also held an informal meeting to discuss emerging best practice.

Relationship with the internal auditor

7. The Committee routinely receives an oral report at its meetings from the Director of the Internal Review Service (IRS) on the work of his unit. It agreed the IRS programme for 2003/04 and expects to discuss a paper from the Director of IRS on the future development of the unit during 2003/04.

8. The Committee reviewed the IRS annual report for 2002/03 at its April 2003 meeting. It is satisfied that the scope and nature of the work of IRS adequately underpins the assessment of the Accounting Officer on the system of internal control.

9. The Chairman of the Audit Committee visited IRS on 31 March. His visit included a meeting with staff at which the Director of IRS was not present.

10. The Committee has instituted new arrangements for monitoring reports from IRS and the responses they receive from management. These are now sent directly to the external members of the Committee, who may take matters up with management on the Committee's behalf. The external members may also report back to the Committee on significant matters. The new arrangements began in January 2003 and two reports have so far been dealt with in this way.

Relationship with the external auditor

11. The Committee has strengthened its links with the House's external auditor, the Comptroller and Auditor General, Sir John Bourn, and his staff of the National Audit Office (NAO). Discussion with NAO representatives has been a routine feature of the Committee's meetings, and the NAO received a note of the Committee's deliberations. The Committee also met with the NAO in a separate session, without the presence of the Accounting Office and his staff.

12. Following discussion of the Smith report, and the broadening of the Committee's terms of reference, the NAO will from now on have greater access to the Committee's papers and meetings, although the Committee will continue to meet from time to time without auditors present.

Relations with the House of Lords

13. The House of Lords Audit Committee was set up in summer 2002, under the chairmanship of Lord Alexander of Weedon. The chairmen of the two Audit Committees plan to meet to discuss topics of common interest. The Committee looks forward to working with its Lords counterparts in 2003/04.

Principal areas of work

14. The Committee took a close interest in the House Administration accounts for 2001/02, which were the first to be based on accruals rather than cash. This issue provided the main subject for discussion between the Committee and NAO representatives. The Committee intends to continue to oversee the preparation of the annual accounts. It has asked the NAO for its audit strategy memorandum for the 2002/03 accounts and for a paper on lessons learned during the preparation of the 2001/02 accounts.

15. Scope for joint working between the NAO and IRS has also been an issue of interest to the Committee.

16. The Committee considered an IRS value for money study of procurement policy, and the management response to it, at its July 2002 meeting. IRS agreed to monitor the progress made in implementing the study's recommendations, which included the establishment of a House-wide procurement service. The Committee is likely to look again at this area in 2003/04.

17. The Committee also discussed security expenditure, an issue to which it may return in 2003/04.

18. IRS were asked for a breakdown of the different areas which could be covered in a value for money study of facilities management. Utilities and office services were identified as areas for further work. IRS have been invited to specify how this work could be undertaken during 2003/04.

19. Risk management has again been a major issue of concern to the Committee. An IRS paper on the House's compliance with the Turnbull report on internal controls was discussed.[34] The Committee agreed to return to the issue of compliance by 2005. The Board of Management has recently discussed an IRS paper on risk management, and the Committee intends to take an interest in the Board's decisions on this matter.

20. Discussions of the Committee's role and responsibilities led to some consideration of the arrangements for scrutinising expenditure from the Members' Estimate, on, for example, Members' salaries and allowances. The Members' Estimate is laid before Parliament by the Government and is supervised by The Speaker: it is not a matter for the Commission and is therefore currently beyond the remit of the Committee.

Annex

The Committee's current terms of reference are shown below, with the additions agreed by the Commission on 7 April 2003, on the recommendation of the Committee, shown in italics:

On behalf of the Commission, to:

• have general oversight of the work of internal audit and review, with particular emphasis on promoting economy, efficiency and effectiveness, on value-for-money studies, and on risk assessment and control assurance;
• receive and consider reports from the Internal Review Service (IRS), together with management letters and other external audit material;
• monitor and review the external auditor's independence, objectivity and effectiveness, and to make recommendations to the Commission about the external auditor's appointment; and
• advise the Accounting Officer in the exercise of his responsibilities;
• consider and recommend to the Accounting Officer the internal review programme;
• encourage best financial practice, use of resources and governance in the House administration;
• report annually, the report to be published with the Commission's Annual Report.

33   Audit Committees: Combined Code Guidance, report to the Financial Reporting Council by Sir Robert Smith, published Jan 2003 Back

34   Internal Control, Institute of Chartered Accountants, Sep 99 (known as the Turnbull Report) Back