The minutes of the meeting held on 8 June 2011 were accepted as a correct record.

AUDIT COMMITTEE WEDNESDAY 14 MARCH 2012 Report: Author: Action: Status: Minutes of the meeting of Audit Committee held on Wednesday 5 October 2011 Clerk to the Corporation Approve Open Present: Chris Macklin (Chair) Susan Bickerton Anthony Garnett Allan Steele In attendance: Claire Leece (Baker Tilly) Paul Alton (Baker Tilly) Karen Finlayson (PWC) John Holt Jackie Doxford A/421 Welcome/Apologies In the absence of Chris Macklin from the early part of the meeting Allan Steele agreed to take the Chair until his arrival. Allan Steele welcomed everyone to the meeting. Apologies for absence were received from Louise Ions, Richard Thorold, Peter Gray of Baker Tilly, Katie Reeves and Wayne Brown of PWC. The Chair invited members to declare any interests on any item on the agenda. No interests were declared at this stage in the meeting; however, members noted that should the direction of debate on any item result in a potential conflict of interest this should be indicated during the meeting. Members were also reminded to advise the Clerk of any changes to be made to the declaration of interests. A/422 Minutes of the meeting held on 8 June 2011 The minutes of the meeting held on 8 June 2011 were accepted as a correct record. A/423 Matters Arising A/410 Internal Audit Reports 09/06 IT Risk Management In response to an enquiry from the Chair on when the planned recovery day was to take place the Director of Finance indicated that it was imminent. A/424 Five Year Strategic and Operational Internal Audit Plan to 31 July 2016 Karen Finlayson of PWC introduced a revised Five Year Strategic and Operational Internal Audit Plan which covered the period to 31 July 2016. Following the comments received at the meeting in June 2011 the Audit Plan had been revised to include more value enhancement reviews and the revised strategic plan was presented as Appendix 1. It was noted that Appendix 1 showed the possible wider scope of each review but the actual review will be negotiated with the individual sponsor nominated by the College. In response to a request from the Chair for his views on the revised Plan the 1

Director of Finance commented that there were fewer reviews overall and expressed some concern that the College may not be as well covered as in past years. The Plan as presented focused heavily on finance and less on other issues. A member commented that there was a lot of low level mandatory work and enquired whether it is possible to reduce this and increase the value enhancement reviews. He added that the programme should always look at value for money. He expressed the view that the IT reviews were placed too far in the future of the Plan; given the pace at which IT is moving three years is too long to wait for a review. Commenting on Corporate Governance he suggested that the review should encompass more than a review of minutes and that it would be useful if Risk Management included benchmarking. Karen Finlayson commented that the Audit Code of Practice for SFA is now well out of date. In other sectors 10% of internal audit focus is on finance and the rest is on other aspects. She indicated that she was happy for questions to be raised with SFA about balance and the heavy financial focus. The Chair commented that if the financial reviews could be spread out and less time spent on mandatory reviews the Committee would be happy. He asked whether it is possible for Audit Committee to decide to change the balance without referral to SFA. Karen Finlayson explained that SFA could challenge this at a future date and added that if an assurance map could be produced it may be possible to counterchallenge any challenge from SFA. The Chair asked for an opinion from Baker Tilly, the College s Regularity Auditors. Claire Leece explained that in terms of the Regularity Audit Baker Tilly do some initial testing and have never found any reasons as a result of that testing for an impact on their regularity work. A member suggested that the key risks are the College s business risks and therefore the internal audit programme would be reviewing finance as part of the overall review process. In response to a suggestion from another member that it would be appropriate to move to a proper risk based approach he commented that the key underpinning is the risk management system and if there is confidence in that there is confidence in the rest. In response to a suggestion from Karen Finlayson that the phasing of the IT review could be changed the Director of Finance commented on past experience where auditors who had undertaken IT reviews were not up to the advanced level of the College s systems. A member added that there is need for an intelligent IT audit, not a format based on a tick list. Karen Finlayson explained that PWC has a team of specialist IT auditors who concentrate only on that area of work. Another member enquired about the nature of dissatisfaction with previous IT audits. The Director of Finance explained that auditors had been more concerned about securing doors and locating machines than looking at levels of security in using the cloud or in firewalls. Commenting on Corporate Governance, Karen Finlayson indicated that it was possible to conduct a theme based review across different areas. Turning to Risk Management she indicated that it is possible to do benchmarking. Allan Steele, in the Chair, suggested that a letter should be sent to SFA on behalf of the Committee to seek an opinion on revising the balance of the internal audit programme better to meet the current and future needs of the College. Chris Macklin joined the meeting Chris Macklin in the Chair 2

Playing Devil s Advocate Chris Macklin, in the Chair, suggested that SFA may respond that in the current economic climate the College should go back to the basics in internal audit as internal controls often go by the wayside in hard times. He added that he would be interested to see how SFA reacted. A member enquired whether it would be wise to go for a less bullish approach. The Chair commented that as the financial climate changes the College may need to go back to a more orthodox approach and that it is essential to pick the right time to be bullish. Whilst a change of balance may be acceptable for Year 1 of the Plan, SFA may expect that the College should have more formal controls in Years 2, 3 and 4. There is a danger that the College will be deemed to have chosen an audit regime which did not enable risks to be managed. The Chair and the Director of Finance agreed to draft a letter to SFA and to seek comments from Karen Finlayson before sending it off. The Director of Finance expressed the view that there is need to have confidence in the Audit Plan. A member enquired about the subject of the financial review for 2011/2012. In response to Karen Finlayson s suggestion of Financial Governance he commented that this might create space for something more useful. The Director of Finance indicated that he was happier with that topic than a review of Treasury Management and General Ledger Control. Karen Finlayson indicated that she would change the reviews planned for November 2011 to do this and then look at the programme for the remainder of the year. A member requested a copy of the PIs used by PWC and asked about feedback to Audit Committee. It was noted that PWC seeks the views of Audit Committee via a questionnaire and also against a set of KPIs. Another member referred to a paragraph in the introduction to the Audit Plan which appeared to suggest that the Plan was what was available for the level of fee the College was prepared to pay. Karen Finlayson commented that Gateshead College spends a lot less on internal audit services than other colleges of a similar size in the sector. The member responded that from experience the Committee is aware that in general the College s systems of control are adequate. Audit Committee had made a decision to test the market and to go out to tender and the engagement of PWC was based on their offer made as part of the tender process. Karen Finlayson suggested that there had been an element of misinterpretation about what PWC could provide on a fixed budget. The member responded by asking whether this was an inference that that Audit Committee was placing the College at risk by limiting the budget. Karen Finlayson indicated that it was not. The Chair commented that all audit opinion is subject to the rider based on the work we have undertaken and that there is never 100% assurance whatever the amount expended. Karen Finlayson agreed to review and revise the Plan to take into account the Committee s comments and to produce a Plan for consideration by Audit Committee at the joint meeting with Finance and General Purposes Committee on 30 November 2011. A/425 Update on Financial Statements Audit Claire Leece of Baker Tilly gave an oral update on progress with the Financial Statements Audit. There were no issues to highlight in terms of work covered to date. 3

In terms of the Audit Plan it was noted that there are three significant audit events: the accounting treatment of the Sports Academy with classrooms under licence; the accounting treatment of the new lease for the Sports Academy and the unusual way in which the leasing arrangement evolved; and the funding for the Skills Academy for Sustainable Manufacturing and Innovation where part of the funding is from Nissan as a loan of equipment. There is a need to deal carefully with all three events in case there are other issues which arise from them at a later date, which will require detailed discussion. The situation regarding the North East Apprenticeship Company, a joint venture with Gateshead Council was also highlighted. The accounts were not included in the audit in 2010 as they were minimal. Currently there is discussion ongoing about whether to wind-up NEAC in due course. The balance to be determined is whether there is need to consolidate the NEAC accounts with the College accounts. In terms of size the NEAC accounts are very small and it may therefore be better to disclose the information in full but not to consolidate the accounts. A/426 Risk Management Plan The Director of Finance introduced a report to which was appended a copy of the updated Risk Management Plan. It was noted that the Plan had been updated since the June meeting of the Committee to include new risks around the new funding environment and the requirement to be more proactive in terms of collecting fees. There is a major risk in the responsibility of employers of 19+ learners for the payment of fees. A member enquired about Risk 9 and the risk that the PIP Project may not take place. The Director of Finance explained that the initial information received from One North East about the PIP Project did not indicate the risks in terms of redundancy and pensions costs of transferring staff. If the College does not act with care in negotiating the transfer arrangements it will pick up the history of previous service with the Civil Service. To date the College has not taken on PIP and has not incurred any expenditure. Another member enquired about the definitions of acceptable and unacceptable in terms of the net risk score and suggested that a column could be included in the Plan for proximity of risk. The Chair commented on the early Autumn target dates for student numbers and suggested that it was probably too early to report on these in the first week in October. The Director of Finance explained that new software introduced by SFA requires a period of debugging before it can supply reasonable answers. The College has met its targets in terms of 16-18 recruitment but it is too early to comment on other areas. A new version of the SFA software, with bugs eradicated, is due for release but until it is in use the College will have to cope with the data from the existing version. A/427 Financial Management Control Evaluation The Director of Finance introduced a report which requested that Audit Committee should review the content of the Financial Management and Control Evaluation document completed by the College and confirm its agreement to the proposed grades 4

before submission to the SFA. The document covers the following areas: strategic oversight; operational oversight; subcontracting arrangements; long-term financial planning; short-term financial planning; risk management; internal control; and financial monitoring. The Committee noted that the main area of concern is around franchising and subcontracting. The College has reduced the number of franchise partners and has introduced more controls in the franchising arrangements but at the current time it is not considered appropriate to improve the scoring. A member suggested that it would be helpful to provide additional evidence in the section dealing with subcontracting and the Director of Finance agreed to include this and to submit the revised document to the joint meeting of Audit Committee and Finance and General Purposes Committee on 30 November 2011 for final sign off. The Chair commented that he hoped that by the time of the 2012 FMCE the College will have moved to an all outstanding return. RESOLVED to approve the proposed grading of the FMCE and to request that additional evidence be added to Area 1 Section 3 Sub-contracting Arrangements before final sign off A/428 Other Business There was no other business A/429 Date of the next meeting The next meeting is a joint meeting of Audit Committee and Finance and General Purposes Committee on 30 November 2011. The next meeting of Audit Committee is on 14 March 2012. 5