Graham Liddell: It’s budget season – time for internal audit to add value

Budget setting is underway and what better time for internal audit to show it can add value and do a better job than artificial intelligence.

Finance teams are now fully immersed in budget setting for 2017–18. Most councils have a well-established annual processes, but cracks may be starting to show as budgetary pressures mount.

The next few months are probably not the right time to start inserting the audit nose and carrying out detailed testing, but it is a good time to start thinking about our approach.

We know that we are good at auditing the nuts and bolts of the process. But in today’s climate, this is not good enough. Internal audit teams are under threat, in the short term from contributing to back-office savings and in the longer term from our work being carried out by artificial intelligence. We need to demonstrate that we can add real value and what better place to start than the audit of the annual budget cycle.

In pursuit of complexity

We are at our most potent when we deliver complex and sometimes contradictory objectives:

• providing objective assurance together with subjective insights and advice
• commenting on governance arrangements whilst getting right into the detail of how a system works in practice
• assessing compliance with controls and the impact of control failures.

To deliver this complexity we will need creativity and imagination to determine how we obtain audit evidence and then use our critical thinking skills to interpret the results.

Data analysis

If there is one area that is crying out for using data imaginatively it is the audit of budgetary control. There is a wealth of information that can be used at various stages of the audit. Your chief finance officer will have some great ideas and, working with a data analyst, it shouldn’t be too tricky to develop a suite of information. This could include:

For targeting audit work

• services that regularly over or underspend
• services that have processed a large number of virements

For assessing whether controls are operating as intended

• number of budget holders who have not completed training in the last two years
• frequency that budget holders interrogate the financial management system to update budget outturn projections

For assessing effectiveness

• how the predicted outturn varies during the course of the year
• the extent of reliance on one-off windfalls and use of year-end adjustments/reserves
• how have these patterns changed over recent years?

The testing programme

The budget process involves the whole council from members to front-line service providers and so we have a lot of ground to cover. The good news is that we will probably have pretty good documentation of the system from previous years. The bad news is that we are unlikely to add much by simply re-performing last year’s testing programme.

The challenge, then, is to step back from previous years and design a creative and manageable programme of tests that will tell us something new and valuable. The best audit programmes use a variety of sources of evidence:

• data analysis, ideally to gain evidence about the whole population
• detailed sample tests to gain a deeper insight into specific areas
• talking to people to find out what works and what doesn’t

The programme will be informed by any data analysis we have carried out at the planning stage, the views of key stakeholders, including budget holders and the chief finance officer. To this mix, we can add the wealth of cumulative audit knowledge and experience gained from other audit work. This might include concerns about the control environment in particular services or control weaknesses for specific systems types of income or expenditure (payroll, contract management etc).

Audit insights and advice

During the course of the audit review we will, no doubt, have heard a range of strongly held views on what is wrong with the budget process and how it can be fixed. What distinguishes audit from these views is that our insights and advice are driven by evidence and application of some serious thinking. This comes towards the end of the audit and there are some important traps to avoid, particularly when time is tight.

• The first danger is that we miss out the serious thinking stage by jumping to prescriptive recommendations. In some cases, it may be appropriate to be prescriptive (if the control to ensure that the budget has been completely and accurately loaded onto the general ledger has lapsed, we would recommend that it should be reinstated). More often than not, however, prescriptive recommendations don’t address the underlying issue and irritate client managers.

• Just as bad, however, is to provide the analysis setting out the risks to the council without providing any meaningful way forward. If we can’t work with managers to develop practical audit recommendations, what value do we really add?

And finally…

There are, of course, many different ways to review the annual budget process. But what we can’t do is the same audit year after year. We need to take the opportunity to showcase our work and demonstrate our worth to the organisation. This means thinking creatively, applying professional judgement and working with managers to develop practical solutions. If we don’t, we might not get another chance.

Graham Liddell is head of Internal Audit at Brighton & Hove City Council.

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