TWELFTH
ANNUAL REPORT
of the Audit Committee of the
Department of Agriculture and Food
for the year ended 31st December 2006
Contents
Page Section1 MembershipoftheAuditCommittee 2 Section2 Chairman’sStatement 3-4 Section3 RoleoftheAuditCommittee 5 Section4 OperationoftheAuditCommittee 6 Section5 AuditCommitteeObjectivesfor2006andRelatedOutcome 7-8 Decentralisation TheSinglePaymentScheme TheRiskManagementProcess ReviewingtheworkofInternalAuditUnit Section6 AuditEnvironmentoftheDepartment 9-10 TheComptroller&AuditorGeneral TheCertifyingBody TheCourtofAuditors OLAF(EUAnti-FraudUnit) CommissionAuditServices Section7 ReviewofInternalAuditUnitWorkin2006 11-12 ProgrammeofWork StructuralFunds Scrutiny StaffingandTraining Section8Prioritiesfor2007 13
Section 1: Membership of the Audit Committee
TheAuditCommitteeoftheDepartmentofAgricultureandFoodconsistsofseven members,allbutoneofwhomareexternaltotheDepartmentitself.Thecomposition oftheCommitteein2006wasasfollows:
Mr. Michael Downes, ChairmanoftheCommittee.Mr.DownesistheGroupInternal
AuditorofCorasIompairEireann,theNationalTransportBody.
Professor Niamh Brennan. ProfessorBrennanisaCharteredAccountantand
MichaelMacCormacProfessorofManagementintheSchoolofBusinessinUniversity CollegeDublin.
Ms. M. Claire O’Connor. Ms.O’ConnorisChiefFinancialOfficerofWestLBIrelandand
amemberoftheWestLBCBBAuditCommittee.SheisaformerDirectoroftheNational DisabilityAuthorityandICCBankplc.ClaireisanAuthoritymemberofSustainable EnergyIreland.
Mr. Eamon O’Connor. Mr.O’ConnoristheDirectorofInternalAuditintheOfficeofthe
RevenueCommissioners.
Ms. Helen Nolan. Ms.NolanisaCharteredAccountantandistheGroupChiefInternal
AuditorwithBankofIreland.
Mr. John Thompson. Mr.ThompsonisaPrincipalOfficerintheDepartmentofFinance,
SectoralPolicyDivision.HehasresponsibilityfortheAgricultureVote.
Mr. Aidan O’Driscoll. Mr.O’DriscollisanAssistantSecretaryGeneralintheDepartment
ofAgricultureandFood(DAF).Hehasresponsibilityforaccounting,auditingandfinancial control,andalsoforeconomicsandplanning.
Mr. Mark Quinlan, HigherExecutiveOfficer,DAF,istheSecretaryoftheCommittee
HereplacedMs.JaneMcGeeasSecretaryduringtheyear.TheCommitteewouldlike tothankMs.McGeeforhervaluableassistancetotheoperationoftheCommittee duringhertimeasSecretary.
Mr. John Donnelly retiredfromtheCommitteein2006.Mr.Donnellyhadserved
asChairmanoftheCommitteeforsevenyears.TheCommitteewouldliketo acknowledgehisenormouscontributiontotheworkoftheCommitteeandtowish himwellinthefuture.
Section 2: Chairman’s Statement
Statement by the Chairman of the Audit Committee
of the Department of Agriculture and Food
ItgivesmegreatpleasuretopresenttheAnnualReportofthe AuditCommitteeoftheDepartmentofAgricultureandFoodfor theyearto31stDecember2006. Iamverypleasedtoexpressmysatisfactionwiththefinancialmanagementofthe demandingandcomplexprogrammesoperatedbytheDepartmentofAgricultureand Food.SkilledandcompetentofficialsatalllevelsoftheDepartmentareresponsible fortheimplementationoftheseprogrammes. AnefficientandeffectiveInternalAuditUnitsupportsthemanagementofthese programmes.IamsatisfiedthattheInternalAuditUnitiswellledandappropriately resourced.ThereportoftheCertifyingBodyontheEAGGFGuaranteefundreinforces myopinion. TheCertifyingBodyissuedanunqualifiedauditopinionandfoundthatnomajorissues arosefromtheadministrationoftheEAGGFGuaranteefund,whichisasignificant achievement,anddemonstratesthatthefinancialcontrolsoperatedbytheDepartment areoperatingsatisfactorily. TheAuditCommitteesetoutanumberofprioritiesforitsworkin2006.These included: •Decentralisation,andinparticular,themanagementoftherisksarisingfromthe process. •ThecontrolsinplacefortheSinglePaymentScheme.
•The Risk Management process, with a focus on how it is utilised to further improve the control structure and to enhance Business Continuity Planning in theDepartment.
•Continuing to review the work of the Internal Audit Unit to ensure that a comprehensivebodyofqualityauditworkiscompleted. TheAuditCommitteecarriedoutasignificantamountofworkinrelationtothese prioritiesduringtheyearandSection4ofthisreportoutlinestheoutcomesinrelation totheseobjectivesingreaterdetail. TheAuditCommitteereceivespresentationsfromkeyunitsoftheDepartmentatits meetings.ThesepresentationsformanimportantcontributiontotheCommittee’swork andassistappropriateoversightofbestpracticethroughouttheDepartment.
4 TheroleoftheAuditCommitteeistoadviseontheoperationoftheinternalaudit functionintheDepartmentandtoadviseonbestpracticeforriskmanagement.The AuditCommitteealsohasastatutoryfunctioninoverseeingtheapplicationofthe ScrutinyRegulation.IamsatisfiedthattheAuditCommitteedischargesitsobligations inrespectofthatrole. IwanttopaytributetomypredecessorasChairmanoftheAuditCommittee,John Donnelly.IhadthepleasureofbeingamemberoftheAuditCommitteeduringJohn’s seven-yearperiodasChairman.HeledtheAuditCommitteeinamostableand professionalmannerandgaveunsparinglyofhistimeandexpertisetotheworkof theAuditCommittee. IwouldalsoliketoacknowledgethecontributionofmyfellowmembersoftheAudit Committee.Theircommitment,knowledgeandadviceensurethatthehighestlevelof expertiseisavailabletotheDepartmentatalltimes. Michael Downes Chairman March2007 Michael Downes
Section 3: Role of the Audit Committee
TheAuditCommitteewasestablishedtoadvisetheMinisterforAgricultureandFoodon theinternalauditpoliciesandthemanagementofrisk,appropriatetothefunctioning oftheDepartmentofAgricultureandFood.TheCharteroftheAuditCommitteesets outitsroleandtermsofreference.TheCommitteehasthreemainroles,namely: •ToadviseontheoperationoftheinternalauditfunctionwithintheDepartment. •TomonitortheapplicationofCouncilRegulation(EEC)No.4045/89,asamended, morecommonlyidentifiedastheScrutinyRegulation. •Toadviseonbestpracticeforriskmanagement. TheCommitteehasresponsibilityforthefollowing: •ReviewingandadvisingontheproposedprogrammeofworkforInternalAudit withintheDepartment.•Approving and periodically reviewing, a charter for Internal Audit which clearly definesthepurpose,authority,roles,responsibilitiesandreportingrelationships oftheAuditCommittee,InternalAuditandmanagementoftheDepartment.
•Assessing the results of completed internal audit reports, evaluating the effectiveness of internal control and advising the Minister of its conclusions thereon.
•AdvisingtheMinisterontheeffectivenessoftheInternalAuditfunction.
•Monitoringtheimplementationoftheauditplan.
•Requestingspecialreportsfrominternalauditasconsideredappropriate.
•Assessing the implementation of agreed corrective actions by management havingregardtofollow-upaudits. •Fosteringthedevelopmentofbestpracticeintheinternalauditfunction. TheScrutinyRegulationdealswiththescrutinybyMemberStatesoftransactions formingpartofthesystemoffinancingbytheEAGGFGuaranteefund.Therelevant fundsarethosethatarereceivedbycommercialcompaniesandotherundertakings throughtheirparticipationinmarketsupportsystems,suchasexportrefunds,operation ofinterventionpurchases,etc.Inaddition,theoperationofthemilksuperlevyregime isalsoincludedinthescopeofscrutiny. TheAuditCommitteereviewsandmonitorstheoperationoftheDepartment’sRisk ManagementprogrammeandadvisestheMinisterandSecretaryGeneralontheextent andeffectivenessofthisprocess. TheAuditCommitteehasnoexecutivefunctions,norpowers.Ithasnoroleinthe detailedauditprocessorinthesigningoffofauditreports.Neitherdoesithaveany responsibilityorinvolvementinthereviewandapproval(onbehalfofmanagement) ofannualfinancialstatements(eithernationalorEU).
Section 4: Operation of the Audit Committee
TheCommitteemetfourtimesin2006.TheCommitteeheldoneofitsmeetingsinthe newLaboratorycomplexinBackwestonandanothermeetinginGovernmentBuildings inPortlaoise. TheCommitteereceivedpresentationsatitsmeetingsduringtheyearfromSenior ManagersfromseveralDivisionsandfromofficialsfromtheOfficeoftheComptroller andAuditorGeneral.Thesepresentationswereinadditiontothequarterlyreports, plansandotherinformationreceivedfromboththeauditandscrutinyfunctionsof InternalAudit. InMaytheCommitteeandtheInternalAuditUnitjointlyhostedanAuditSeminar. InternalAuditUnitstaff,theCommittee,Departmentalmanagementandauditorsfrom otherGovernmentDepartmentsattendedtheseminar.Awiderangeoftopicswere coveredintheseminarincludingpresentationsontheSinglePaymentScheme,the roleofOLAF,developmentsinInternalAudit,andimplicationsofthenewCAPfinancing regulationsinIreland. TheCommitteeappreciatesthecontinuedsupportthatitreceivesfromboththeMinister andtheSecretaryGeneral.TheCommittee’schairmanmetboththeMinisterandthe SecretaryGeneralduring2006todiscusstheworkoftheCommittee.
Section 5: Audit Committee Objectives for 2006 and
Related Outcomes
The2005AnnualReportoftheCommitteesetoutanumberofprioritiesforitswork in2006.Thesewere: •Decentralisation,and,inparticular,themanagementoftherisksarisingfromthe process. •ThecontrolsinplacefortheSinglePaymentScheme.•The Risk Management process, with a focus on how it is utilised to further improve the control structure and to enhance Business Continuity Planning in theDepartment.
•Continuing to review the work of the Internal Audit Unit to ensure that a comprehensivebodyofqualityauditworkiscompleted. Decentralisation TheDepartment’sheadquartersstaffwillbedecentralisingfromDublintoPortlaoiseas partoftheGovernment’sdecentralisationplan.TheCommitteemetwiththeAssistant SecretaryGeneralresponsibleforthedecentralisationprocessin2006.Theprocess ofdecentralisationcontinuedduringtheyear,withoveronehundredpostsacrossa rangeofDivisions(includingfivestafffromtheInternalAuditUnit)nowmovedfrom DublintoPortlaoise.Itisexpectedthisprocesswillcontinueonaphasedbasis,with allstafffullydecentralisedby2009.FurtherdecentralisationofstafffromtheCorkcity andMallowofficestoFermoyandfromtheCorkandLimericklaboratoriestoMacroom isalsoplanned. TheCommitteehadconcernswithregardtothecontrolrisksthatcouldariseas aconsequenceoftheinevitablelossofcorporatememoryandskillsduringthe decentralisationprocess.TheCommitteewasparticularlyconcernedtoensurethatthe levelofskillsandexperienceintheInternalAuditUnitwasprotectedand,ifpossible, enhancedduringthedecentralisationprocess.TheCommitteewillkeepdecentralisation developmentsunderreviewduringthecurrentyear.
The Single Payment Scheme
TheCommitteewaskeptinformedonprogressregardingtheimplementationofthe singledecoupledfarmpaymentandreceivedanumberofpresentationsfromscheme managementduringtheyear.Paymentstotalingover€2.3billionhavebeenmade toapproximately130,000farmerssinceDecember2005underthisscheme.The CommitteewillcontinuetomonitorthecontrolsysteminplacefortheSinglePayment Schemeandwillhavefurtherupdatesfromschememanagementinthiskeyarea during2007.
The Risk Management Process
TheCommitteereceivedpresentationsfromseniormanagementwithresponsibility fortheRiskManagementprocesswithintheDepartment.TheCommitteeparticularly focusedontheareaofBusinessContinuityPlanning.TheDepartmentmadesubstantial progressindevelopingaformalBusinessContinuityPlanincludingtheinstallationof anITDisasterRecoverysiteforthen-Tierenvironment.TheCommitteewillcontinue tobekeptinformedofprogressinthisareaduringthecurrentyear.
Reviewing the Work of the Internal Audit Unit
TheCommitteecloselymonitorstheworkoftheInternalAuditUnitduringtheyear.There wereanumberofstaffchangesintheUnitin2006.TheCommitteecontinuestobe satisfiedwiththequalityofworkcarriedoutbytheUnit.TheCommitteeemphasised theneedtoensurethatmanagementprovideresponsestothefindingsofauditreports promptlyinorderthatthefinalisedreportscanbeproducedinatimelymanner.The Committeehasaparticularinterestinensuringthatthehighstandardssetbythe Unitarecontinuedinthecontextofdecentralisation.TheCommitteewillcontinueto monitorstaffingissueswithintheUnitasfurtherdecentralisationoccurs. TheCommitteeissatisfiedthatithasachievedtheobjectivesthatitsetitselfinthe yearunderreviewinrelationtotheareasindicatedabove.
Section 6: Audit Environment of the Department
TheDepartmentspendsapproximately€3billioneachyear,approximatelytwo-thirdsofwhichisfundedbytheEuropeanUnion.TheDepartmentisalreadyhighly decentralised,withmajorfacilitiesinCavan,PortlaoiseandWexford,aswellaslocal officesinallcounties.FurtherdecentralisationisongoingintheDepartmentaspart oftheGovernment’sdecentralisationpolicy. TheDepartmenthassixty-fiveDivisionsinelevenfunctionalareaswitheachoneheaded byamemberoftheManagementCommitteeTheseareinturnstructuredintofour mainGroupsi.e.Policy,FoodSafety&QualityofProduction,AgriculturePaymentsand CorporateDevelopment.TheInternalAuditUnitissituatedintheEconomics,Planning andFinancialSystemsareathatispartoftheCorporateDevelopmentGroup.The DirectorofInternalAudithasadirectreportinglinetotheSecretaryGeneral. TheDepartmentoperatesinadynamicenvironment.TheSinglePaymentScheme, whichwasintroducedin2005andpaysoutapproximately€1.3billiontoover130,000 farmersannually,hashadamajorimpactontheDepartment’soperations.NewCAP Financingregulationswereintroducedin2006thatsetspecificrequirementsand rulesonthefinancingofexpenditurefallingundertheCAP,includingexpenditureon ruraldevelopment.TheseregulationsestablishedaEuropeanAgriculturalGuarantee Fund(EAGF)andaEuropeanAgriculturalFundforRuralDevelopment(EAFRD).These newregulationsintroducetherequirementforaStatementofAssuranceinrelation totheannualaccountsofthePayingAgencysignedbytheDirectoroftheaccredited PayingAgency.AnewEURuralDevelopmentRegulationfortheperiod2007-2013 setsoutthemeasuresthatwillbeeligibleforfundingundertheincreasinglyimportant “secondpillaroftheCAP”.Apackageofmeasuresworth€6.8billiontofarmersfor theperiod2007-2013wasagreedin2006,relatingtotheagricultureelementsof theRuralDevelopmentProgramme.ThisfundingiscomprisedofExchequerfunding of€4.7billionand€2.1billionfromtheEAFRD. AswellashavingitsInternalAuditandScrutinyfunctions,DAFhasfivesourcesof independentexternalaudit.Thenumberofauditbodiesarisesprimarilyfromthelarge percentageoftheDepartment’sexpenditurethatisfundedbytheEU.Theroleofthese externalauditorsisoutlinedinthefollowingparagraphs:The Comptroller & Auditor General
TheComptroller&AuditorGeneralhasafulltimestaffpresencebasedintheDepartment, whoauditallDepartmentalexpenditure.TheComptroller&AuditorGeneralreports annuallytothePublicAccountsCommitteeonfindingsarisingfromhisaudits.The primaryresponsibilityoftheComptroller&AuditorGeneralisinrelationtonational expenditure.
0 The Certifying Body
EURegulationsrequirethatanauditcertificateandareportontheinternalcontrols ofDAFfromanindependent‘CertifyingBody’mustaccompanytheAnnualAccounts thataresubmittedtotheCommission.Deloitte&TouchewereappointedasCertifying Bodyin2000followingapublictenderingprocessandweresubsequentlyre-appointed in2003.ApublictenderprocesstoappointaCertifyingBodyforanewperiodwill takeplacein2007.UnderthenewCAPFinancingregulationsbothEAGFandEAFRD expenditurewillbeincludedintheannualcertificationprocessfrom2007.
The Court of Auditors
TheCourtisrequiredtogiveastatementofassurance(similartoacertificategivenbythe ComptrollerandAuditorGeneral)onthereliabilityoftheEuropeanCommunities’accounts andthelegalityandregularityofthetransactionsunderlyingthoseaccounts.
OLAF (EU Anti-Fraud Office)
OLAFistheEuropeanAnti-FraudOffice.TheOfficehasresponsibilityforconducting administrativeanti-fraudinvestigationsinallmemberstatesandalsooutsidetheEU. TheDepartmentco-operatesfullywithOLAFandassistsinanymissionsthatthisbody undertakesinIreland.
Commission Audit Services
AuditServicesfromtheEUCommissionalsocarryoutanumberofauditsannuallyon theDepartment’sexpenditureofEUfundedschemesandtherelatedcontrols. Anindicationoftheextentofauditcoveragebythesebodiesduringtheyearisshown inthefollowingtable.
Approximate Audit Coverage in Person Days
Audit Body 2006 2005 2004 Comptroller&AuditorGeneral 430 480 495 CertifyingBody 518 444 460 CourtofAuditors-missiondaysinIreland 81 40 94 EUCommission-missiondaysinIreland 48 36 30 InternalAudit 1,872 1,792 1,897 TOTAL 2,949 2,792 2,976 OneofthekeyindicatorsoftheadequacyofthecontrolenvironmentintheDepartment isthelevelofEUdisallowancesthatareimposed.TheCommissionimposes disallowancesonMemberStatesininstanceswherethereareinadequatecontrol procedures,non-compliancewithEUrulesonagriculturalexpenditureorlate payments.Intheten-yearperiod1996-2005inclusiveIrelandhadthethirdlowest levelofdisallowancesintheEU-15. TheCertifyingBodyissuedanunqualifiedauditopinionfortheEAGGFGuarantee accountsfortheyearto15thOctober2006andinitsreporttherewerenoaudit findingsclassifiedasmajor.
Section 7: Review of Internal Audit Unit work in 2006
Programme of work The2006InternalAuditPlanwasagreedbothbytheAuditCommitteeandbythe Department’sManagementAdvisoryCommittee.Progressinimplementingtheplan wasmonitoredbybothCommitteesbymeansofquarterlyprogressreportsthatwere presentedbytheInternalAuditUnit. TheInternalAuditUnitcarriedoutanextensivebodyofauditworkin2006,with seventeenauditreportsissuedandanotherfouralmostcomplete.Inviewofthe requirementforongoingspecialistsupportforthearea,theITauditfunctiontendered in2005forITauditexpertise.AcontractwasputinplaceinOctober2005which provides100dayssupportoveratwoyearperiod.AnewtenderprocessforITaudit expertisewillcommencein2007. TheInternalAuditUnitisrepresentedinanumberofdifferentauditnetworks,including, theHeadsofInternalAuditForum,EUnetworksofEAGGFauditandcontrolbodies andtheUKInterdepartmentalInternalAuditGroup.TheDirectorofInternalAudit alsoattendstheDepartment’sAccreditationReviewGroupandRiskManagement Committeemeetings. Structural Funds The2006StructuralFundauditplanfocusedonthe5%samplechecksandsystem auditrequirementsofRegulation438/01.AdedicatedsectionwithinIAUcarries outthisworkfortheon-farminvestmentschemesandForestryGuidanceschemes managedwithinDAF.AForestryinspectorwasrecruitedtotheUnitin2006tocarry outthenecessarychecksundertheForestrymeasures.InthecaseoftheLeaderand PEACEprogrammesthistaskhasbeenoutsourcedtotheinternalauditfunctionsof theDepartmentsofCommunity,RuralandGaeltachtAffairsandEnvironment,Heritage andLocalGovernment.Progressinalltheseareaswassatisfactoryin2006. Scrutiny Asinallpreviousyears,deadlinesforsubmissionofannualprogrammes,reportsand riskanalysiscriteriarelatingtotheScrutinyRegulationhavebeenmet.The2005/06 AnnualWorkProgrammewascompletedonscheduleanditisexpectedthatthe 2006/07Programme,whichendson30thJune,willalsobecompletedontime. The2005/06scrutinyauditprogrammecomprisedof89scrutiniesofcommercial organisationswhichwerecarriedoutbybothDepartmentandRevenueteams.The calculatedminimumnumberofscrutiniesprescribedbytheRegulationwas67. Closeco-operationwithotherMemberStatesandtheCommissionservicescontinued duringtheyear.ACommissionauditoftheapplicationoftheScrutinyregulationtook placein2006andfoundthattheregulationwaswellimplementedinIreland.Staffing and Training
TheCommitteecontinuestocloselymonitorthestaffingresourcesavailabletothe Unit,particularlyinrelationtothestaffchangesthatwilloccurasaresultofthe decentralisationprocess.TheInternalAuditUnitcomprisedatotalofnineteenstaff attheendof2006,ofatotaloftwenty-onesanctionedposts. TheCommitteeispleasedtonotethattheUnitcontinuestoundertakeasubstantial leveloftraining.FormaltrainingofstaffintheUnitin2006amountedto172staffdays, thesamelevelasundertakenin2005.Themajorpartofthe2006trainingprogramme relatedtointernalauditmodularcoursesrunbytheInstituteofPublicAdministration,IT auditcourses,computerskills,languagesandvariousotherrelevantcourses,including thoseheldbytheInstituteofInternalAuditors,AssociationofCharteredCertified AccountantsandtheInstituteofCharteredAccountants.TheUnitcontinuestofacilitate trainingofauditcolleaguesfromthenewMemberStateswherepossible.
Section 8: Priorities for 2007
TheCommitteeeachyear,setsoutanumberofpriorityissuesforitsownworkprogramme inadditiontoitsnormalfunctionsasoutlinedintheCharter.Theprioritiesidentified for2007aresetoutbelow.
The Single Payment Scheme
TheSinglePaymentSchemewillcontinuetobethemajorschemeoperatedbythe Department.Paymentsofover€1.3billionannuallywillbemadetoIrishfarmers.Itis imperativethatastrongcontrolsystemisinplaceforaschemeofthisscale.In2007 theCommitteewillfocusonensuringthattherecommendationsofauditscarriedout onthisschemebytheInternalAuditUnitandtheCertifyingBodyareimplementedand thatthehigheststandardsofcontrolareobserved. Decentralisation Thedecentralisationprocesscontinuestohaveamajorimpactontheworkofthe Department.TheCommitteewillcontinuetomonitorthisprocessanditsassociated risksandwillberegularlyupdatedonitsprogress.
The New CAP Financing Regulations
NewCAPFinancingregulationswereintroducedin2006thatsetspecificrequirements andrulesonthefinancingofexpenditurefallingundertheCAP,includingexpenditure onruraldevelopment.TheseregulationsestablishedaEuropeanAgriculturalGuarantee Fund(EAGF)andaEuropeanAgriculturalFundforRuralDevelopment(EAFRD).These newregulationsintroducetherequirementforaStatementofAssuranceinrelation totheannualaccountsofthePayingAgencysignedbytheDirectoroftheaccredited PayingAgency.In2007theCommitteewillmonitortheimplementationofthesenew regulationswithintheDepartment.
Reviewing the Work of the Internal Audit Unit and the Risk Management Process
TheCommitteewillcontinuetomonitor,onaquarterlybasis,theworkoftheInternal AuditUnittoensurethatasubstantialbodyofqualityauditworkiscompleted.The Committeewillparticularlyfocusonthepromptreturnofmanagementresponsesin orderthatfinalisedauditreportscanbeproducedinatimelymanner.TheCommitteewill alsobeupdatedroutinelyontheimplementationstatusofauditrecommendations. TheCommitteewillalsocontinuetoreceiveupdatesontheRiskManagementprocess andBusinessContinuityPlanningdevelopmentsintheDepartment. MichaelDownes,ChairmanNiamhBrennanClaireO’Connor MichaelDownes,ChairmanNiamhBrennanClaireO’Connor
