1. 2003/04 was the Audit Committee's second year of operation and we believe the Committee has demonstrated an important role in maintaining and enhancing standards of accountability in an important public institution such as Parliament. During the year we have continued to work closely with House officials and officials from the National Audit Office, the House's external auditors, to ensure that the Administration's audit and accountability arrangements are in good shape and, as far as possible, reflect best practice in the public sector.

Review Of The Year 2003/04

2. Overall, the Committee is satisfied that the Administration is continuing to make good progress across a number of areas, such as internal audit arrangements and the production of Resource Accounts. In particular, we believe we have contributed to the development of a robust risk management system in the House Administration, maintaining a sense of proportion while keeping an eye on the major risks. However, there are also some areas where the Committee has concerns.

Works expenditure

3. Money spent on works represents approximately 35% of the Administration's annual expenditure. The improved control arrangements introduced in 2001/02 are still bedding in and we will keep their progress under review. There are two areas where the Committee has noted its particular interest: the transparency, control and management of budgets; and concern about weak project management. We are expecting to see improvements in project management in the coming year and we note the proposals to this end in the House's Business Plan.

4. Following an internal audit review, the Committee has also expressed concern to officials about the dependence of the Lords on the House of Commons for the provision of financial information about works and other shared services. We recognise that this is a complex area, but nevertheless we look to the Administration to seek to make improvements.

Security expenditure and management

5. The Committee has a role in ensuring that the processes used for conducting security arrangements are rigorous and effective and expenditure is well managed. The current security environment and several high-profile security incidents in recent months have reinforced the importance of this task. We attach importance to a very clear security decision-making structure in which decisions can be reached speedily. We are seeking reassurances that the processes for making the necessary decisions, and completing expenditure as requested, are fit for purpose.

6. During 2002/03 the Administration completed the renegotiation of the House's security contract (Special Services Agreement) with the Metropolitan Police Service. The Committee discussed the progress of negotiations several times with officials and made recommendations on the contract negotiations to the House Committee. In particular, the Committee pressed for the inclusion of performance targets and penalties for not meeting performance standards. The contract, which came into force on 1st April 2004, does contain performance indicators together with performance reports which will be discussed formally on a monthly basis. While progress on penalties was limited, the contract does for the first time contain clauses applying the House's standards of conduct to police and security officers. This allows Black Rod (and the Serjeant at Arms in the Commons) to investigate any improper behaviour and take any necessary action.

Resource Accounts for 2001/02 and 2002/03

7. The production of the Resource Accounts for 2001/02 with an unqualified opinion was a significant achievement for the House Administration. Inevitably for a first set of accounts under the new system, there were some areas where improvements could be made, including providing better financial information for management decisions, and we hope that these will be taken forward in the 2002/03 Accounts.

8. One area the Committee looked at was the significant variation in the value of the asset base (the Palace of Westminster) and the effect of this on the Resource Accounts. While we acknowledge that there is a degree of unreality about the exercise of valuing an asset base that will not be disposed of, we accept that the House has to comply with accounting disciplines and we are pleased that the valuation method has now been revised.

Internal and external audit arrangements

9. The Committee has continued to receive reports from the Internal Audit team and it approved the draft internal audit programme for 2004/05 which was more integrated with risk management. We have also made recommendations to the administration on issues raised in internal audit reports, and advised the Clerk of the Parliaments and the House Committee on the outcome of the joint audit review with the NAO on Members' expenses.

Risk management

10. The framework for risk management and risk reporting across the administration is continuing to develop and we note the Clerk of the Parliaments' confidence that systems are developing sufficiently to enable him to sign the Statement of Internal Control. The management of corporate risks is now reported to the Management Board on an annual timetable, and risk registers have been rolled out to all offices. The Administration has made good progress in developing a robust and proportionate risk management system in the House.

VFM

11. The Committee has encouraged the embedding of value for money in all the Administration's activities including, for example, the renegotiation of the postal services contract currently held with the Royal Mail. The VFM review of procurement proposed new responsibilities and a new procurement strategy for the House which will improve procurement services.

Relations with House of Commons Audit Committee

12. The Audit Committees of the two Houses share agendas and Minutes (through the Clerks) and we receive regular reports on the work of the Commons Audit Committee.

Functions and working methods of the Committee

13. As a Committee, we have sought to follow best practice in Audit Committee activity. The Treasury's Audit Committee Handbook, published in October 2003, set out policy principles and guidance which the Committee discussed. In line with the Handbook's recommendations, the Committee now meets 4 times per year. We also recommended the appointment of a second external member through open competition. The Handbook led us to discuss whether there should be any overlap in the membership of the Audit Committee and the House Committee; however we agreed that for the time being it was sufficient for the House Committee to receive Minutes from the Audit Committee. We will revisit this issue in the coming year.

The Year Ahead 2004/05

14. Our priorities for the coming year include seeking improvements in the control and management of works expenditure (in particular, improvements in project management) and security expenditure; and overseeing further developments in risk management and the implementation of new arrangements for procurement.

15. We welcome suggestions by other Members of the House for issues within the terms of reference which might merit our consideration; and welcome the views and comments of Members on this report.

ALEXANDER OF WEEDON

(Chairman)

BEST
CHRISTOPHER
SHUTT OF GREETLAND
DAME VALERIE STRACHAN

Membership:

Lord Alexander of Weedon (Chairman)
Lord Best
Lord Christopher
Lord Shutt of Greetland
Dame Valerie Strachan (External Member)

Terms of Reference:

The Audit Committee is appointed by the House Committee. Its terms of reference are:

1. To consider internal and external audit reports and other material, and to assess management responses thereto;

2. To recommend to the Accounting Officer a suitable annual internal audit work programme and to monitor progress against the audit plan;

3. To provide advice to the Accounting Officer in the exercise of his responsibilities;

4. To evaluate the adequacy of the risk management system and the suitability of the control arrangements reported to it, and to advise the Management Board accordingly;

5. To monitor value for money, good financial practice, appropriate internal controls, and effective governance throughout the administration of the House;

6. To make an annual report to the House, to be submitted, in the first instance, to the House Committee and to be published with the House of Lords' Annual Report.

Declarations of Interest:

The relevant financial interests of internal Members of the Committee are listed in the Register of Lords Interests. An up-to-date version of the Register can be found at: http://www.parliament.uk/about_lords/register_of_lords__interests.cfm

³³ The first of the administration's four objectives is "to ensure that the House and its committees have the necessary procedural, information, research, administrative and security support to meet at any time and in any circumstances".

³⁴ In the Constitutional Reform Bill [HL] as introduced, it would be for "the Minister" to provide staff for the Supreme Court. But the Select Committee on the Bill has recommended that the Court should be established according to the model of a non-ministerial department, and has indicated that the Lord Chancellor will bring forward amendments to effect this change. (HL Paper 125­I, session 2003­04, paragraph 268).