Public Audit in Jersey: A Thinkpiece

R.11/2021

Contents

Introduction  3 Annual reporting by States established and States controlled entities 5

Entities to which the C&AG appoints auditors 7

Agreeing the entities to which the C&AG appoints auditors 7 The appointment of auditors to States controlled companies 13 Establishing a consistent appointment framework  15 Regulatory oversight of public sector auditors 15

Assurance arrangements for other entities 17 The assurance framework 21

Governance of the Office of the C&AG  26

Revocation of the appointment of the C&AG 26 Limitation of liability  26 Ability to continue operating 27

Appendix 1 – Provisions relating to appointment of auditors to States established and States controlled entities 28

Appendix 2 – Summary of recommendations and areas for consideration 45

Introduction

1. Public audit provides independent assurance to the people of Jersey on the extent to which public money is spent economically, efficiently and effectively and on whether the controls and governance arrangements in place within public bodies demonstrate value for money. Delivering that assurance requires that the framework for public audit is comprehensive and robust.
2. Public audit was embraced by Jersey in its constitutional reforms of 2005 with the establishment of the Office of Comptroller and Auditor General (C&AG). My predecessor's report Public Audit in Jersey (July 2013) compared the arrangements for public audit in Jersey to recognised international standards at that time and made recommendations for change. Her recommendations were accepted and necessary legislative changes were made through the adoption of the Comptroller and Auditor General (Jersey) Law 2014 (the 2014 Law).
3. The framework for public audit has three main stakeholders: the auditor, the responsible party and the intended users. The relationship between these stakeholders should be set out clearly in the constitutional arrangements for public audit:

• the auditor: the overall responsibility for public sector auditing should rest with the C&AG. Independent appointment of auditors is a fundamental principle of public audit both internationally and in Jersey.

• the responsible party: the responsible parties are the States of Jersey and States established and States controlled entities. They are responsible for the management of public finances, the production of financial statements, corporate governance arrangements and arrangements for securing economy, efficiency and effectiveness in the entities' use of resources.

• intended users: the intended users of public audit include the States Assembly as well as the general public.

4. As part of my first year in office, I have considered the arrangements for public audit in Jersey. In May 2020 I launched the first public consultation undertaken by the Jersey Audit Office. The consultation covered a proposed revised Code of Audit Practice which details how the C&AG discharges their statutory functions. The consultation also covered some areas where I had identified scope for improvement in public audit legislation.
5. Having considered the responses to the consultation and having reflected on my first year in office, this Thinkpiece sets out and explains my proposals relating to:

• annual reporting by States established and States controlled entities;

• entities to which the C&AG appoints auditors;

• assurance arrangements for other States established and States controlled entities;

• the assurance framework; and

• the governance of the Office of the C&AG.

6. The implementation of the recommendations and areas for consideration contained in this Thinkpiece will result in additional costs for the States of Jersey in some areas and a reduction in costs in other areas. I have considered carefully the benefits and potential costs associated with my recommendations and areas for consideration. I have concluded that the benefits of a more coherent and transparent framework for reporting and assurance outweigh the additional potential costs associated with implementation of my recommendations and areas for consideration.

Annual reporting by States established and States controlled entities

7. Throughout the world, the public sector is under more pressure than ever to demonstrate value for money for taxpayers. Annual reports from public bodies represent a formal record of accountability and should provide a clear picture of how taxpayers' money has been spent and what has been achieved.
8. Transparency in reporting and accountability are interrelated and mutually reinforcing concepts. Without transparency in annual reports it is more difficult to hold public sector entities to account. Transparency, however, has limited value unless there is also accountability, through consistent mechanisms to report on the use of public resources and a consistent assurance framework applicable to those reports.
9. My report Annual Reporting (August 2020) considered the quality of annual reports and financial statements produced by a number of public entities in Jersey. In the report I made recommendations to improve the framework and content of annual reports.
10. I also noted that the provisions relating to financial and non-financial reporting vary (Appendix 1). In particular:

• legislation is largely silent on the scope and nature of financial reporting by entities established or controlled by the States and on how the scope and nature of financial reporting is determined;

• where legislation provides for publication of an annual report accompanying the financial statements, the legislation usually makes no provision for the scope and content of the annual report or how such reporting should be determined; and

• there are varying timetables for financial reporting and responsibilities for publication.

11. In addition to the entities detailed in Appendix 1, there are other entities with significant operational independence (such as the Health and Safety Appeal Tribunal) where the relevant legislation imposes no requirement for separate financial or non-financial reporting.
12. In my view, higher quality financial and non-financial reporting would be facilitated by the establishment of a consistent framework. The legislation would not have to prescribe the framework but instead the mechanism by which it would be prescribed. This could be achieved through an amendment to the Public Finances (Jersey) Law 2019 (the 2019 Law) in a similar way to the provision for the

accounting standards for the States of Jersey being directed in the Public Finances Manual. Alternatively, this could be achieved using self-standing legislation.

13. My view was shared by all respondees to the relevant question in my public consultation.
14. Legislation in Jersey uses inconsistent terminology to describe entities that are established and entities that are controlled by the States. In order to enhance transparency and accountability, I consider that there would be benefit in establishing a consistent definition and list of States established and States controlled entities. This could be achieved through an amendment to the 2019 Law to set out a definition of States established and States controlled entities and to place a duty on the Minister for Treasury and Resources to specify by Order the entities that meet the definition.

Recommendation

R1.  Establish a consistent framework for the production of annual reports and

accounts for States established and States controlled entities.

Area for consideration

A1.  Establish a consistent definition in legislation of States established and States

controlled entities and place a duty on the Minister for Treasury and Resources to specify by Order the entities that meet the definition.

Entities to which the C&AG appoints auditors

Agreeing the entities to which the C&AG appoints auditors

15. Financial audit is one part of public audit and one part of the assurance framework. High quality audit of financial statements is facilitated by high quality financial and associated non-financial reporting. Financial audit focusses on determining whether an entity's financial information is presented in accordance with the applicable financial reporting and regulatory framework. This is accomplished by obtaining sufficient and appropriate audit evidence to enable the auditor to express an opinion as to whether the financial information is free from material misstatement due to fraud or error.
16. Independent appointment of auditors is a fundamental principle of effective public audit. My predecessor's report Public Audit in Jersey (July 2013) identified instances in which the Minister for Treasury and Resources or the Treasurer of the States was responsible for the appointment of auditors. Following publication of her report, the States Assembly adopted the 2014 Law that transferred the responsibility for most such auditor appointments to the C&AG.
17. However, there remain entities established by the States where the C&AG does not have the statutory responsibility for appointment of auditors. I have set out in Exhibit 1 details of the annual report, accounts and audit requirements of all States established and States controlled entities (other than companies) where legislation specifies that auditors are required to be appointed.

Exhibit 1: States established and States controlled entities (other than companies) where legislation specifies that auditors are required to be appointed

Entity name  Net Assets/  Stand-alone  Audit  Auditor Annual  financial  requirement and  appointed by

expenditure  statements  opinion  C&AG 2019  published

£000

Public  2,257,576

Employees'  net assets at

Pension Fund  31 December  Financial  Independent  C&AG is 2019  statements  auditor's opinion  responsible for

published  provided  appointing the auditor

expenditure  statements  opinion  C&AG

2019  published

£000

Jersey Teachers'  572,891

Superannuation  net assets at

Fund  31 December  Financial  Independent  C&AG is 2019  statements  auditor's opinion  responsible for

published  provided  appointing the auditor under

delegated authority

Jersey Financial  19,026

Services  annual

Commission  expenditure  Financial  Independent  C&AG is statements  auditor's opinion  responsible for

published  provided  appointing the auditor

Jersey Overseas  10,093

Aid Commission  annual

Legislation does expenditure  Financial  No separate audit

information  outside of the  not provide for the included in the  States of Jersey  C&AG to appoint

Jersey Overseas  audit  the auditor Aid Commission

annual report

Data Protection  1,479

Authority  annual

expenditure  Financial  Independent  C&AG is statements  auditor's opinion  responsible for

published  provided  appointing the auditor

Jersey  1,229

Competition  annual

Regulatory  expenditure  Financial  Independent  C&AG is Authority  statements  auditor's opinion  responsible for published  provided  appointing the

auditor

expenditure  statements  opinion  C&AG

2019  published

£000

Office of the  847  N/A Comptroller and  annual

Public Accounts Auditor General  expenditure  Financial  Independent

statements  auditor's opinion  Committee Chair is included in the  provided  independently

Office of the  responsible for the C&AG annual  appointment of the report  auditor in this instance

Commissioner  605

for Children and  annual

Legislation does Young People  expenditure  Limited financial  No separate audit

information  outside of the  not provide for the published to  States of Jersey  C&AG to appoint date  audit. There is a  the auditor discretion for the

Commissioner to

appoint an auditor

Gambling  574

Commission  annual

expenditure  Financial  Independent  C&AG is statements  auditor's opinion  responsible for

published  provided  appointing the auditor

Office of the  455

Financial Services  annual

Legislation does Ombudsman  expenditure  Financial  Independent

not provide for the (OFSO)  statements  auditor's opinion

published  provided  C&AG to appoint the auditor

Jersey Advisory  417

and Conciliation  annual

Service  expenditure  Financial  Independent  C&AG is statements  auditor's opinion  responsible for

published  provided  appointing the auditor

expenditure  statements  opinion  C&AG

2019  published

£000

Care  356

Commission  annual

Legislation does expenditure  Financial  No separate audit

information  outside of the  not provide for the

included in  States of Jersey  C&AG to appoint annual report  audit  the auditor

Jersey Bank  155  

Depositors'  annual

Legislation does Compensation  expenditure  Financial  Independent

not provide for the Board  (y/e 31  statements  auditor's opinion

C&AG to appoint January 2020)  published  provided

the auditor

Jersey Consumer  87

Council  annual

Legislation does expenditure  Financial  Independent

statements  auditor's opinion  not provide for the published  provided  C&AG to appoint

the auditor

Jersey Safety  36

Council  annual

Legislation does expenditure  Financial  Independent

statements  auditor's opinion  not provide for the published  provided  C&AG to appoint

the auditor

18. In some instances, the transactions of the entities in Exhibit 1 are included within the audited financial statements of the States of Jersey and are not audited separately. However, the governance and operational arrangements for these entities are independent of the States and the assurance that can be obtained is limited to the materiality adopted in the audit of the States of Jersey.
19. The materiality concept refers to the benchmark used by auditors to obtain reasonable assurance that their audit will detect any material misstatement that can significantly impact the usability of financial statements. The materiality adopted by the States of Jersey auditors in 2019 ranged between £15 million and £75 million.

20. My public consultation issued in May 2020 referred to three situations where the C&AG does not have the statutory responsibility for appointment of the auditor:

• the Treasurer of the States remains responsible for the appointment of the auditor of the financial statements of the Jersey Teachers' Superannuation Fund. Following my predecessor's 2013 report, the Treasurer delegated the function of appointment of the auditor to the C&AG pending proposed changes in legislation. However, no statutory changes were subsequently made;

• there is a statutory duty on the Chairman of the Jersey Overseas Aid Commission to present audited financial statements to the States Assembly but the legislation is silent on who appoints the auditor and the function is not currently performed by the C&AG; and

• the legislation to establish the Commissioner for Children and Young People entrusted the responsibility for the appointment of the auditor of the Commissioner's financial statements (and even the decision on whether to appoint an auditor) to the Commissioner rather than to the C&AG.

21. Since my public consultation, I have identified a further two situations where the C&AG does not have the statutory responsibility for appointment of the auditor:

• the Board of the Office of the Financial Services Ombudsman is responsible for the appointment of the auditor of the Office; and

• the Jersey Consumer Council appoints its own auditor.

22. In addition, the financial statements of the Jersey Safety Council are required to be audited by the States Auditor', an obsolete term.
23. In my view a consistent approach, giving the C&AG responsibility for the appointment of auditors of the financial statements of all entities established or controlled by the States (other than companies and the Office of the C&AG), would be appropriate. My view was supported by 80% of respondees to the specific question in my public consultation.
24. In response to the consultation, the Commissioner for Children and Young People opposed giving the C&AG responsibility for the appointment of the auditor of the Commissioner's financial statements. She cited the principles of autonomy from government of human rights institutions set out in the Paris Principles on National Institutions for the Promotion and Protection of Human Rights and General Comment No. 2 issued by the United Nations Committee on the Rights of the Child.
25. I fully respect such principles that are analogous to the Mexico Declaration on Supreme Audit Institution Independence against which I have benchmarked my own Office.

26. However, I would welcome reconsideration by the Commissioner given that in my view, a power of the C&AG to appoint the auditor of the Commissioner's financial statements is not inconsistent with the Commissioner's autonomy:

• the C&AG is an independent officer, reporting to the States Assembly and, by virtue of Article 17 of the 2014 Law, incapable of being directed by any person, including the Government of Jersey, in the discharge of their functions;

• the Office of the C&AG is a Non-Ministerial States Body, outside the Government of Jersey and the remit of the Principal Accountable Officer;

• any auditor appointed by the C&AG to audit the financial statements of the Commissioner has no function in respect of allocation of resources to or use of resources by the Commissioner. Their function is merely to report on the truth and fairness of the financial statements prepared by the Commissioner;

• there is no explicit provision in either the Paris Principles on National Institutions for the Promotion and Protection of Human Rights or General Comment No. 2 issued by the United Nations Committee on the Rights of the Child relating to the appointment of auditors of human rights institutions. Indeed, I identified that the financial statements of comparable entities in the United Kingdom, Australia and New Zealand are audited by the relevant Auditor General or an auditor appointed by the relevant Auditor General; and

• I already have, by virtue of Article 11 of the 2014 Law, a wide remit in respect of internal control, corporate governance and economy, efficiency and effectiveness in respect of the Commissioner.

27. I also noted in my public consultation that the C&AG has a duty to appoint the auditor of the financial statements of the Jersey Dental Scheme. In practice, no separate financial statements are prepared for the Scheme and its results are included within the financial statements of the States of Jersey, as are the results of the much larger Social Security Fund, Social Security (Reserve) Fund, Health Insurance Fund and Long-Term Care Fund. However, in the case of those funds, the legislation specifically provides that their results are included within the financial statements of the States of Jersey. In my view a similar approach in relation to the Jersey Dental Scheme would be appropriate. This view was shared by all respondees to the relevant question in my consultation
28. The necessary change to legislation could be achieved through amendment to the 2014 Law. Article 11(1) specifically refers to the Social Security funds and could refer to the Jersey Dental Scheme funds.

The appointment of auditors to States controlled companies

29. In common with other jurisdictions, the appointment of auditors to States controlled companies is governed by companies legislation. The public consultation I undertook did not consider whether the C&AG should be responsible for the appointment of auditors to States controlled companies.
30. I have however considered the arrangements in place in other jurisdictions. Exhibit 2 contains details of arrangements in place in the nations of the United Kingdom. In all nations, the C&AG is eligible for appointment as a company auditor.

Exhibit 2: Audit of Government controlled companies in the United Kingdom

United Kingdom

HM Treasury may by statutory order make C&AG auditor of a body which exercises functions of a public nature or is entirely or substantially funded from public money and have access to documents and if the body is a Companies Act company the order does not need to be laid before Parliament. (Section 25, Government Resources and Accounts Act 2000).  The C&AG is eligible to be appointed as a statutory auditor for a Companies Act company (Section 1226, Companies Act 2006).

Scotland

The Scott ish Ministers may by Order provide for a company registered in Scotland to be audited by the Auditor General for Scotland if it exercises in Scotland functions of

a public nature none of which relate to reserved matters and is funded entirely or substantially by a body whose accounts are audited by the Auditor General for Scotland (section 483, Companies Act 2006).

The Auditor General for Scotland is eligible to be appointed as a statutory auditor for a Companies Act company (Section 1226, Companies Act 2006).

Wales

The Welsh Ministers may by Order make provision about the audit of a body specified in Schedule 17 of the Government of Wales Act 1998 (section 144, Government of Wales Act 1998). Section 144 of the Government of Wales Act 1998 also allows the Welsh Ministers to add a public body' (being a body that exercises functions of a public nature or is entirely or substantially funded by public money) to Schedule 17. The effect of Section 144 is to allow the Welsh Ministers to provide that certain companies are audited by the Auditor General for Wales.

The Welsh Ministers may appoint the Auditor General for Wales as auditor

of any body where they are entitled to appoint the auditor (Paragraph 18, Schedule 8, Government of Wales Act 2006).

The Auditor General for Wales is eligible to be appointed as a statutory auditor for a Companies Act company (Section 1226, Companies Act 2006).

Northern Ireland

The Department of Finance and Personnel may by Order provide for the accounts of a body that exercises functions of a public nature or is entirely or substantially funded from public money to be audited by the Comptroller and Auditor General of Northern Ireland (Article 5, Audit and Accountability (Northern Ireland) Order 2003).

The Comptroller and Auditor General of Northern Ireland is eligible to be appointed as a statutory auditor for a Companies Act company (Section 1226, Companies Act 2006).

31. In all of the comparator jurisdictions noted in Exhibit 2, the Comptroller and Auditor General or equivalent is eligible to be appointed as a statutory auditor of a company. In addition, Ministers and/or Departments have the power to require certain companies to appoint the Comptroller and Auditor General or equivalent as their auditors.
32. Under Jersey legislation, a company is required to appoint an auditor if: it is a public company; its articles so require; or a resolution of the company in a general meeting so requires.
33. I have considered the arrangements in other jurisdictions and company legislation in Jersey. I consider that independent appointment of auditors is a fundamental principle of public audit. Whilst Ministerial and/or Departmental powers to appoint may in some instances be considered independent of States controlled companies, giving the C&AG the power to appoint auditors to States controlled companies would provide a greater degree of independence.
34. The C&AG and the Jersey Audit Office do not carry out financial statements audits currently and, where the C&AG has the power to appoint auditors, this power is exercised by appointing professional audit firms.
35. I therefore consider that legislation could be enhanced in Jersey by containing specific provision for the C&AG to have the power to appoint auditors to States controlled companies who exercise functions of a public nature or are substantially funded from public money.

Establishing a consistent appointment framework

36. Where statutory provisions exist relating to the appointment of auditors of entities other than the States of Jersey they are spread between different pieces of legislation (see Appendix 1). The statutory provisions are generally very limited:

• making different provisions about qualification for appointment;

• usually making no provisions about the responsibilities of auditors; and

• not providing auditors appointed by the C&AG with any explicit powers relating to access to information to fulfill their functions (in contrast to the provisions relating to the C&AG).

37. In my view, high quality public audit would be facilitated by a consistent statutory framework relating to the responsibilities and powers of auditors appointed by the C&AG. This view was shared by all respondees to the relevant question in my public consultation.
38. A consistent statutory framework could be achieved through amendment to the 2014 Law and the repeal of relevant provisions in other legislation.

Regulatory oversight of public sector auditors

39. Article 18 of the 2014 Law requires me to prepare and publish a statement of the manner in which I propose to discharge my functions. The Code of Audit Practice (the Code) revised in November 2020 discharges that responsibility.
40. In updating the provisions of the Code, I identified a gap in regulatory oversight of the entities to which I appoint auditors of financial statements. These audits are not obviously subject to inspection by statutory or professional bodies in either Jersey or the United Kingdom.
41. In order to address this issue, I have enhanced the Audit Quality Framework under the Code to allow the C&AG to review, or appoint a person or persons to review, the quality of audit work undertaken by auditors appointed by the C&AG, including through review of audit working papers. The position I have adopted in the Code would be enhanced if it was supported by legislation (for example, by amending the 2014 Law).

Recommendations

R2.  Amend legislation to give the C&AG a power to appoint auditors of financial

statements of all entities established or controlled by the States (other than companies).

R3.  Codify in legislation the existing arrangements for the preparation of the financial

statements of the Jersey Dental Scheme.

R4.  Establish a consistent statutory framework relating to the responsibilities and

powers of auditors appointed by the C&AG.

R5.  Update legislation to recognise the C&AG as the competent authority' for the

regulatory oversight of the auditors she appoints.

Area for Consideration

A2. Consult with relevant stakeholders on amending legislation to give the C&AG the

power to appoint auditors to States controlled companies who exercise functions of a public nature or are substantially funded from public money.

Assurance arrangements for other entities

42. I have identified a number of other entities established by or controlled by the States where, despite a requirement placed on the entity to produce an annual report, there is no requirement to produce audited financial statements nor to appoint an auditor. Exhibit 3 contains further details of these entities.

Exhibit 3: Entities established or controlled by the States that are required to produce an annual report but there are no requirements regarding audit

Entity name  Annual  Extent of financial information published in annual

expenditure 2019 report of entity

£000

States of Jersey  22,255 (budget)

Police

Limited financial information published in Annual Policing Report from the Police Authority

States Assembly  6,375

Financial information included in annual report Jersey Legal  310

Information

Board  Audited financial statements included in annual report Charity  137

Commissioner  (11 months)

Financial information published in annual report Criminal Injuries  73 (2018)

Compensation

Board  Financial information published in annual report Police  38

Complaints

Authority  Financial information included in annual report Jersey Law  13

Commission

Financial information included in annual report

Entity name  Annual  Extent of financial information published in annual

expenditure 2019 report of entity

£000

Charity Tribunal  Not published

Limited financial information published in annual

report

Complaints Panel  Not published

Limited financial information published in annual

report

Director of Civil  Not published

Aviation

Limited financial information published in annual

report

Independent  Not published

Prison Monitoring

Limited financial information published in annual Board

report

Jersey  Not published

Appointments

Limited financial information published in annual Commission

report

Jersey  Not published

Employment and

Limited financial information published in annual Discrimination

report

Tribunal

Mental Health  Not published

Tribunal

Limited financial information published in annual

report

States  Not published

Employment

Limited financial information published in annual Board

report

Tenancy Deposit  Not published

Scheme

Limited financial information published in annual

report

43. The Jersey Legal Information Board publishes a stand-alone set of audited financial statements. There is no statutory requirement for the Legal Information Board to have an audit. However, it elected to do so and appoints its own auditors for this purpose.
44. In addition to the entities in Exhibit 3, Statistics Jersey is an entity that is established by the States. However, no requirement has been placed on it to produce an annual report. Its transactions are included within the audited financial statements of the States of Jersey but are not disclosed separately. In addition to Statistics Jersey, there are other entities with significant operational independence (such as the Health and Safety Appeal Tribunal) where the relevant legislation imposes no requirement for separate financial or non-financial reporting.
45. In most instances, the transactions of the entities in Exhibit 3 are included within the audited financial statements of the States of Jersey. However, financial information regarding each entity is not always disclosed separately in the States of Jersey Annual Report and Accounts and the assurance that can be obtained is limited to the materiality adopted in the audit of the States of Jersey.
46. The materiality concept refers to the benchmark used by auditors to obtain reasonable assurance that their audit will detect any material misstatement that can significantly impact the usability of financial statements. The materiality adopted by the States of Jersey auditors in 2019 ranged between £15 million and £75 million.
47. The assurance that can therefore be obtained from the audit performed on the States of Jersey in respect of the entities listed in Exhibit 3 will vary due to the level of materiality used by the States of Jersey auditors when undertaking their audit of the consolidated States of Jersey accounts. The level of materiality adopted by the States of Jersey auditors exceeds the annual expenditure of each of the entities listed in Exhibit 3 apart from the States of Jersey Police.
48. I am of the view that further consideration should be given to the requirements for disclosure and audit of relevant financial information in respect of the entities listed in Exhibit 3 given that most of the entities operate with some degree of independence from the States of Jersey. My report Annual Reporting (August 2020) included a recommendation to introduce a set of minimum requirements for the annual reports of States controlled entities including appropriate reporting of annual financial information. It also suggested that consideration should be given to the potential to introduce a requirement for all States controlled entities to produce stand-alone financial statements prepared under a suitable accounting framework, such as Financial Reporting Standard (FRS)102.
49. This could be achieved through an amendment to the 2019 Law in a similar way to the provision for the accounting standards for the States of Jersey being directed in the Public Finances Manual. Alternatively, this could be achieved using self - standing legislation.

50. For completeness, I have repeated the recommendations and area for consideration contained in my Annual Reporting review below. The recommendations have previously been accepted and are due for action in 2021.

Recommendations

R6.  Introduce a consistent set of minimum requirements for the annual reports of other

States established and States controlled entities. These requirements should include appropriate reporting of annual financial information.

R7.  Introduce a requirement for Statistics Jersey to produce an annual report.

Area for consideration

A3.  Consider whether to introduce a requirement for all States established and States

controlled entities above a consistent size threshold to produce stand-alone financial statements prepared under a suitable accounting framework, such as FRS102.

The assurance framework

51. Once a framework is established for the publication of financial information by all States controlled and established entities, a framework for audit and assurance across all entities can be established.
52. There are different types of assurance that can be provided on financial statements and financial information published by an entity. An independent external audit of a set of financial statements published under a recognised accounting framework is the highest level of assurance that can be provided.
53. When an external audit is performed, the auditor will express a positive opinion as to whether the financial statements give a true and fair view of the state of the entity's affairs and performance for the year and whether the financial statements have been properly prepared in accordance with the recognised accounting framework.
54. There are other forms of assurance that can be obtained over published financial information. These will provide more limited assurance than an external audit but can nevertheless still provide some form of independent assurance. When providing limited assurance, the assurance provider will express their conclusion on a by exception' basis. For example, the assurance provider may state that nothing was found to suggest that the entity's accounts are materially wrong or inaccurate based on the limited work they have performed.
55. In England and Wales, some smaller charities may elect to be subject to an independent examination rather than an audit. An independent examiner does not report on the truth and fairness of financial statements. Instead they undertake a range of specified procedures and report by exception on matters that they identify in the course of their work.
56. In essence, an independent examination is a simple form of external scrutiny carried out by a suitably qualified independent person. The examiner will check whether the financial statements agree to the entity's underlying accounting records and whether applicable accounting rules and regulations have been followed in preparing the accounts.
57. By comparison, an audit is an in-depth scrutiny of the books, records and financial statements of an entity.
58. In the Isle of Man, the Government has amended its Audit Act 2006 to replace external audits with assurance reviews and independent examinations for smaller local government bodies. Independent examinations apply to bodies with expenditure of up to £100,000 per annum and assurance reviews (which are not a full audit) apply to bodies with expenditure of between £100,000 and £1,000,000 per annum.

59. The first building block of any effective assurance regime is the publication of financial information by the responsible entity. As noted earlier, some States established and States controlled entities publish limited (or in some cases no) financial information. I have therefore recommended a consistent framework requiring the publication of financial information prepared under a suitable accounting framework for all States established and States controlled entities.
60. Exhibit 4 summarises the building blocks of external assurance within a public sector environment.

Exhibit 4: The Building Blocks of Assurance

Appointment of  independent external auditor by  C&AG  

Appointment of  independent  Level

examiner by C&AG   Independent external auditor  of

providing an opinion  Assurance

Independent examination  providing limited assurance  

Published financial information prepared under a suitable accounting framework and  certified by the responsible entity  

61. Entities that are responsible for material amounts of public expenditure should be positioned at the top of the assurance framework requirements. In some cases, however, the scale of operations of States established and States controlled entities is small and there is a rationale for an independent examination regime for these entities.
62. The current assurance position for States established and States controlled entities is neither coherent nor consistent. In some instances, there is limited assurance on large and complex entities whilst at the same time the highest levels of assurance are being provided on smaller and less complex organisations. Exhibit 5 depicts the current assurance position.

Exhibit 5: The current assurance position

Level of Assurance

Note: The financial results for the entities marked with an asterisk are included within the audited

financial statements of the States of Jersey.

63. A starting point to a more consistent framework is to require those entities that do not publish an annual report or financial information to do so on a consistent basis. This could be achieved by enacting legislation that replaces the different reporting requirements in individual pieces of legislation and establishes an overarching framework. Such an approach is adopted by the Commonwealth Government in Australia. The legislation could, for example, allow for:

• different categories of entities to which different provisions could apply; and

• the prescription of specific reporting requirements by Order or through the Public Finances Manual.

64. In my view, for all States established and States controlled entities that publish financial information, there should be an assurance requirement for at least an independent examination by an examiner appointed by the C&AG.
65. For States established and States controlled entities with expenditure above £100,000 per annum, however, there should in my view be a requirement to produce financial statements that are audited by an auditor appointed by the C&AG.
66. For entities established or controlled by the States with expenditure below £100,000 per annum, I consider that it would be appropriate to allow the appointment by the C&AG of an independent examiner rather than an auditor to undertake an examination in accordance with Directions made by the C&AG.
67. Whilst I have suggested a threshold of £100,000 for an audit requirement, I recognise that there could be a rationale for a higher threshold being in place. Ultimately, any decision as to an appropriate threshold should consider the benefits and costs of an enhanced assurance framework.
68. The results of my suggestions would be that the Jersey Consumer Council and the Jersey Safety Council that are currently subject to an audit will move to an independent examination regime. The Criminal Injuries Compensation Board, the Police Complaints Authority and the Jersey Law Commission would also fall within the proposed independent examination regime. Similarly, other smaller entities that do not currently publish financial information would also start to do so and be subject to an independent examination regime by independent examiners appointed by the C&AG.
69. Larger entities that do or do not currently publish financial information and are not currently subject to audit in respect of their stand-alone financial information would fall into an audit regime with auditors appointed by the C&AG. This would include the States Assembly and the States of Jersey Police.

Areas for consideration

A4. For entities established or controlled by the States with expenditure not exceeding

a defined threshold based on expenditure per year, introduce a requirement for an independent examination to be undertaken in accordance with Directions made by the C&AG. This will replace the requirement for an external audit where such a requirement currently exists.

A5. Where applicable, give power to the C&AG to appoint independent examiners to

States established and States controlled entities with expenditure not exceeding a defined threshold per year.

A6. For entities established or controlled by the States with expenditure in excess of a

defined threshold per year, introduce the requirement for an audit by an auditor appointed by the C&AG once a requirement for the production of financial statements has been introduced.

Governance of the Office of the C&AG

70. The 2014 Law provided for the establishment of a Board of Governance (Board') for the Office of the C&AG. The Board was subsequently established by the Comptroller and Auditor General (Board of Governance) (Jersey) Order 2015 to keep under review the use of resources provided by the States Assembly to the C&AG. The Board comprises the C&AG and up to three independent members appointed by the States Assembly.
71. Experience of the operation of the Board has identified a number of areas where legislative change may be helpful.

Revocation of the appointment of the C&AG

72. The preservation of the independence of the C&AG is a pre-requisite for the effective discharge of the C&AG's function. The independence of the C&AG is promoted by their appointment for a seven-year non-renewable term with removal from office only on specified grounds (such as failure to perform their duties) and then only by resolution of the States Assembly on a proposition brought by the Chief Minister and Chairman of the Public Accounts Committee acting jointly. However, despite the knowledge of the Board of the operation of the Office, the legislation provides no role for the Board in event of consideration of a proposal to revoke the appointment of the C&AG.
73. In my view, and that of the Board, a role for the Board in the event of such a proposal would provide an additional safeguard. This view was shared by all respondees to the relevant question in my consultation.

Limitation of liability

74. To protect their ability to act without fear or favour, the C&AG has a wide-ranging statutory limitation on their liability for damages arising from the discharge of their functions. Despite the vital role of the Board of Governance in keeping under review the use of resources of the Office, there is no equivalent limitation of liability or indemnity for Board members other than the C&AG.
75. In my view there should be. This view was shared by all respondees to the relevant question in my consultation.

Ability to continue operating

76. The Board comprises three independent members of whom two are necessary to form a quorum. Given its small scale, a combination of a vacancy in office and illness of a member would render the Board inquorate and incapable of performing its functions. In my view, and that of the Board, legislative change to avoid this situation is appropriate. This view was shared by all respondees to the relevant question in my consultation.
77. In my opinion, and that of the majority of respondees expressing a preference, it would be appropriate to increase the membership of the Board by one to reduce the risk of the Board not being quorate and the inability of the Board to operate.

Recommendations

R8.  In addition to other safeguards, introduce a role for the Board of Governance in

any consideration of the revocation of the appointment of the C&AG.

R9.  Introduce a statutory limitation on the liability of independent members of the

Board of Governance or equivalent indemnity.

R10.  Increase the maximum number of independent members of the Board of

Governance to four.

Appendix 2 – Summary of recommendations and areas for consideration

Reporting by States established and

Recommendation

R1. Establish a consistent framework for

accounts for States established and

States controlled entities

the production of annual reports and States controlled entities.

Area for consideration

A1.  Establish a consistent definition in legislation of States established and States

controlled entities and place a duty on the Minister for Treasury and Resources to specify by Order the entities that meet the definition.

Entities to which the C&AG appoints auditors

Recommendations

R2.  Amend legislation to give the C&AG a power to appoint auditors of financial

statements of all entities established or controlled by the States (other than companies).

R3.  Codify in legislation the existing arrangements for the preparation of the financial

statements of the Jersey Dental Scheme.

R4.  Establish a consistent statutory framework relating to the responsibilities and

powers of auditors appointed by the C&AG.

R5.  Update legislation to recognise the C&AG as the competent authority' for the

regulatory oversight of the auditors she appoints.

Area for Consideration

A2. Consult with relevant stakeholders on amending legislation to give the C&AG the

power to appoint auditors to States controlled companies who exercise functions of a public nature or are substantially funded from public money.

Assurance arrangements for other States established and States controlled entities

Recommendations

R6.  Introduce a consistent set of minimum requirements for the annual reports of other

States established and States controlled entities. These requirements should include appropriate reporting of annual financial information.

R7.  Introduce a requirement for Statistics Jersey to produce an annual report.

Area for consideration

A3.  Consider whether to introduce a requirement for all States established and States

controlled entities to produce standalone financial statements prepared under a suitable accounting framework, such as FRS102.

The assurance framework

Areas for consideration

A4. For entities established or controlled by the States with expenditure not exceeding

a defined threshold based on expenditure per year, introduce a requirement for an independent examination to be undertaken in accordance with Directions made by the C&AG. This will replace the requirement for an external audit where such a requirement currently exists.

A5. Where applicable, give power to the C&AG to appoint independent examiners to

States established and States controlled entities with expenditure not exceeding a defined threshold per year.

A6. For entities established or controlled by the States with expenditure in excess of a

defined threshold per year, introduce the requirement for an audit by an auditor appointed by the C&AG once a requirement for the production of financial statements has been introduced.

Governance of the Office of the C&AG

Recommendations

R8.  In addition to other safeguards, introduce a role for the Board of Governance in

any consideration of the revocation of the appointment of the C&AG.

R9.  Introduce a statutory limitation on the liability of independent members of the

Board of Governance or equivalent indemnity.

R10.  Increase the maximum number of independent members of the Board of

Governance to four.

48  | Public Audit in Jersey: A Thinkpiece