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Introduction and aim
This briefing note examines the role of an institution’s audit committee. The need for the committee to have members with different expertise and skills is discussed, and its work in relation to both external and internal audit highlighted.
To comply with either the Committee of University’s Chairs (CUC) Higher Education Code of Governance, or the Scottish Code of Good HE Governance, higher education institutions (HEIs) are required to have an audit committee.
Funding council requirements
To access public funding HEIs need to meet the mandatory audit requirements of their funding council. Whilst the approach adopted across all national jurisdictions is broadly common, governors should seek to be familiar with the specific requirements applying to their institution.
Role of audit committee
A key role of audit committee is to offer assurance to governing bodies that they can have confidence that the institution is meeting its legal and regulatory requirements for accountability and compliance. In pursuit of this aim, the role of the committee is to exercise independent scrutiny and provide assurance that the ‘standards of control, management and governance are satisfactory.’4 The committee also fulfills an important role for external stakeholders, including, for example, the funding councils who seek assurances as to the institution’s proper and efficient use of public funds.
The audit committee will operate with delegated powers from, and make reports to, the full governing body. The committee’s duties will be detailed in its term of reference. These should be drafted to take account of the work of other committees of the governing body, and, in particular, the work of the finance (or equivalent) committee, where such a committee exists.
Typically, audit committees have a range of duties, including:
Membership and size
Audit committees should comprise of independent members who have the necessary knowledge and skills to help discharge the committee’s work. Members of the committee should not be involved in the institution’s executive decision-making. This does not preclude senior members of the executive being in attendance or invited, at the request of the committee’s chairman, to attend meetings of the committee to discuss specific matters. The institution’s external and internal auditors will be in attendance for some, if not all, of the committee’s meetings. The audit committees may also have the power to co-opt individuals onto the committee. This offers access to skills and expertise not available from the governing body, but with the disadvantage that the individual will have a more limited understanding of the institution as they do not attend meetings of the full governing body.
The size of the membership of audit committees varies in part due to differences in institutional size. The CUC’s ‘Handbook for members of audit committees in higher education’ suggests the committee should have a minimum membership of 3,5 while a study of audit committees has suggested the minimum number should be 5.6
Restrictions on membership
To avoid potential conflicts of interest, members of audit committee should not be members of the finance (or equivalent) committee, or vice a versa. If joint membership of the two committees is desired it should be subject to an explicit resolution of the governing body. The chair of the governing body should not be a member of the audit committee.
Officers of the committee
The governing body generally appoints the chair of audit, and the clerk will usually be the clerk or secretary to the governing body. A deputy chair of the committee may be appointed to carry out the duties of the committee chair should they be absent.
Composition and skills
To understand the rules and principles underlying the preparation of the institution’s financial statements and the auditors’ opinion, at least one member of the committee should have a background in finance, accounting or audit. However, given its wide remit, the committee should also, for example, be able to understand and question the accuracy and reliability of non-financial data submitted to external agencies (eg to the Higher Education Statistical Agency - HESA). With this in mind, a review of the workings of audit committees suggests the inclusion of a ‘representative from the academic community of sufficient standing… to provide a direct skillset applicable to the oversight of teaching, academic leadership, and research processes.’ 7
Meetings of the committee
Meetings of the audit committee are normally linked to the institution’s annual cycle of the business. The number of meetings will vary by institution and the associated volume of work, but most committees will meet at least 3 times a year.
The primary role of the external auditor is to examine institution’s record keeping and control systems, and form an opinion about, and report on, whether the annual financial statements give a true and fair view of the institution’s financial outcomes for the year. The audit committee will examine and agree with the external auditor the external audit plan and strategy prior to the commencement of the annual audit.
Once the audit is complete, the committee will review the institution’s draft financial statements and receive the external auditors’ opinion. This is formally reported to the institution by way of a management letter. The audit committee will consider a draft of the letter and make a recommendation to the governing body as to whether the chair of the institution’s governing body should agree and sign the letter.
The external auditors should be formally re-appointed each year by the governing body, usually on the basis of a recommendation made by the audit committee.
The work of an internal audit is to provide independent assurance about risk management, vfm and data quality. The service is either delivered by an internal function of the institution or by an external provider contract. The internal audit, plan agreed with the committee, details the specific areas of the institution’s operation that the internal auditors will examine in order to assess the adequacy and effectiveness of the institution’s risk management, control and governance arrangements over a 12-month period. The auditors will report their findings to management and the audit committee, giving their internal audit opinion as to the current arrangements, and, where appropriate, making recommendations for improvement. At the end of the year the internal auditors will produce an annual report of their work. This is submitted to the governing body and shared with the institution’s funding council.
One company is not allowed to provide both the institution’s external and internal audit services. The separation of the audit services recognises that the external auditor when reviewing the institution’s financial outcomes will frequently draw upon the work of the internal auditor to inform their judgments, and that this information should be independently and separately determined. The external provider of either audit service should be subject to periodic market testing.
Audit committees are required to prepare and submit an annual report of their work at the end of each financial year. The report is addressed to the governing body and the institution’s designated accounting officer and details how the committee has discharged its duties and the assessment of the adequacy and effectiveness of the institution’s arrangements in respect of:
The report should be submitted to the governing body prior to it agreeing the institution’s annual report and financial statements.
The effectiveness of the audit committee may be reduced by:
Questions to consider
End notes and further reading
Associate Director, Governance
Aaron Porter was appointed as Associate Director, Governance at the Leadership Foundation (LF) in January 2014. He is also a higher education consultant and a freelance journalist, having previously been president of the National Union of Students (NUS) in 2010 – 2011. He is also an associate for the LF and the Higher Education Academy (HEA), on the advisory network for the Office for Fair Access (OFFA) and CFE research and consultancy alongside a number of other portfolio roles.
During his high profile term at NUS, he was the first NUS President to be invited as an observer to the board of the Higher Education Funding Council for England (Hefce) and to address the annual Universities UK Conference in September 2010. In addition he served as a non-executive director on the boards of UCAS, the HEA and Endsleigh Insurance. He also co-chaired the Beer/Porter Student Charter group which reported to Higher Education Minister David Willetts in January 2011, and was a member of the Hefce Online Learning Taskforce and the review of External Examiners chaired by Dame Janet Finch both conducted in 2010/11.
Previous to his term as NUS President, Aaron served two successful terms as NUS Vice-President (Higher Education), helping to build NUS’ reputation with the sector. He also served as a non-executive board member for the Office of the Independent Adjudicator (OIA) and on the board of the European Students’ Union (ESU). He was also a member of the Burgess Implementation Steering Group and the National Student Survey Steering Group. In 2009, he was part of the UK delegation to the European higher education ministerial summit in Leuven, Belgium.
Aaron studied BA English at the University of Leicester and graduated in 2006. He then spent two years as a sabbatical and trustee of the students’ union, he was also the founding chair of Unions94 (the students’ unions of the 1994 Group). As a student he was editor of the student newspaper, ‘The Ripple’.
Governance Web Editor
David Williams is Governance Editor for the LF website. He has over 25 years experience of working in higher education, as both as an academic and senior manager. During this time he has worked closely with governing bodies, contributing to, and supporting their work
in a variety of ways.
As Governance Editor, David works with the wider LF community and its members to ensure the governance website offers a repository of information and signposts recent developments in the field on governance.