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Supplementary Document
Defence Audit Committee Annual Report 2005-06
Produced by Ministry of Defence
(A paper by the Chair of the Defence Audit Committee)
1. Underits terms of reference the Defence Audit Committee is required to report annually to the Accounting Officer in advising him on the Statement on Internal Control he is required to sign as part of the Departmental Resource Accounts. Additionally, the Corporate Governance Code of Good Practice for Central Government Departments encourages departments to report annually on the work of the Audit Committee.This report therefore sets out the main activity of the Committee from November 2005 to June 2006 to review the Department’s control and assurance arrangements for 2005-06.
2. TheCommittee met 5 times during the year, in November 2005 and January, March, May and June 2006. The minutes of its meetings were copied to Defence Management Board members, Top Level Budget Command Secretaries and Audit Committees. The Committee also considered a number of papers out-of-committee.
Review of Internal Control Systems 2005-06
3. TheCommittee reviewed a number of items in the course of the year in order to assure itself of the adequacy of the Department’s internal control arrangements, taking account of its advice to the Accounting Officer on the previous year’s SIC. These included: Departmental risk and assurance arrangements, including the Departmental assurance matrix, information assurance processes, reports to the Treasury on the MoD’s risk Management Assessment, and the Director of Economic and Statistical Advice’s review of Investment Appraisal and Post-Project Evaluation performance across the Department; Internal and external audit of the Department, including the Defence Internal Audit Programme and National Audit Office Audit strategy for 2005-06, an update from the Director of Internal Audit on ‘no assurance’ findings during the year, and advice from the NAO on its audit findings in 2004-05, including write-offs and losses declared in the 2003-04 Departmental Resource Accounts;
The future strategy and programme forinternal consultancy. The programme for production of theDepartmental Resource Accounts and Statement on Internal Control for 2005-06; Internal reviews of Corporate Governance practice, in particular the Annual Report setting out the Department’s corporate governance arrangements in relation to the Treasury’s Code of good practice;
Annual stewardship and process owner reports from2nd Permanent Under Secretary, as the Chair of the Defence Environment and Safety Board on safety and environmental management processes; the Chief of Defence Logistics on the health of the logistics process; the Finance Director on the health of financial systems; the Deputy Chief of the Defence Staff (Personnel) on the service personnel process; the Civilian Personnel Director on the civilian personnel process; the Science and Technology Director on management of scientific risk; the Director General Media and Communication on the communications process; the Director General Security and Safety as the Departmental Security Officer on security and business continuity; the Director of Defence Acquisition on the acquisition process; Directors of Operational Capability and of Internal Audit on their programmes and findings over the previous year; and from the Director of Performance and Analysis setting out the main conclusions from the review of Top Level Budget Holders’ Annual Assurance Reports. The Departmental Resource Accounts for 2005-06, in particular the losses statement, to consider whether they contained anything indicative of any systemic control failures. 4. Overall,the Committee was content that the information it reviewed during the year provided sufficient assurance that effective corporate governance arrangements were in place for all significant risks facing the Department, and that where areas of weakness had been identified, corrective action was in hand. In reviewing this information, it was particularly encouraged by the further improvement in the quality of financial accounting information, and in its presentation in the DRAc. This was a particularly impressive achievement at the same time as achieving closure of the accounts before the summer recess for the first time. On this basis, the Committee endorsed the draft Statement on Internal Control for the Accounting Officer’s signature.
Other Business
5.The Committee conducted the annual review of its operations as called for in its Terms of Reference, following which the Department sought to improve key elements of the process by which information for the Departmental Statement on Internal Control was collected from Top Level Budget organisations and subsequently reviewed.Under this Top Level Budget Holders were asked to provide a brief report, approved by their Audit Committee, to the Accounting Officer, that assured him as appropriate that their management systems were working adequately, and which drew to his attention any concerns about the operation of governance arrangements, particularly any failures of control that their Audit Committee judged to be significant at Top Level Budget level. They were also asked to provide a table setting out how their Audit Committee addressed specific areas of governance and stewardship to assure itself of the adequacy of the Top Level Budgets’ internal control arrangements, and the conclusions it reached.This again ensured a more detailed and transparent central scrutiny of the risk management and assurance arrangement in place across the Department by the Director of Performance and Analysis in cooperation with Defence Internal Audit, including the cross-checking of issues identified in the annual process and stewardship reports against Top Level Budgets’ information. This enabled the Committee to take an independent view of the adequacy of risk management and assurance arrangements
across the Department and offer substantive advice to the Accounting Officer on the Department’s Statement on Internal Control. A further review of this process will be conducted in the autumn to identify any lessons for the future.
6. Inits consideration of the Departmental Resource Accounts and Statement on Internal Control for 2003-04 the Committee noted that while it was satisfied that losses did not reflect any systemic control failures, it was nevertheless concerned that the headline figures could be misinterpreted and used, erroneously, to cast doubt on the effectiveness of management within the Department. The National Audit Office and Defence Internal Audit subsequently set cooperative work in hand during 2004­ 05 which continued into 2005-06, to review the management of the Department’s losses and special payments.
7. TheCommittee reviewed the findings of the Director of Economic and Statistical Advice on the quality of Investment Appraisal and Post Project Evaluations produced and approved at Top Level Budget level.This showed that although there were continued improvements in this area further work was still needed.A number of follow-up actions were taken, including a letter from Permanent Under Secretary to Top Level Budget Holders, a review of training materialby the Director of Economic and Statistical Advice, and revised Departmental guidance.The Committee will continue to keep progress in this area under review.
Issues for the Future
8. Inits work in 2005-06 the Committee identified a number of specific issues that it intended to consider further in the coming year as part of its rolling review of the Department’s assurance systems. These included: the work of the Defence Management Board and senior management to improve the management of safety and environmental protection; review of risk management arrangements across the Department, particularly in respect of the Defence Management Board’s work in hand in this area; implementation of Departmental wide IT systems and in particular the Defence Information Infrastructure; the results of follow-up work to review the Department’s arrangements for information assurance; continuing improvements in management accounting information, given the increasing priority the Department is placing on this in the context of Defence Industrial Strategy and the development of the Finance Director’s Simplify and Improve programme.
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