SPECIAL ISSUE

THE KENYA GAZETTE

Published by Authority of the Republic of Kenya
(Registered as a Newspaper at the G.P.O.)

Vol. CXVIII—No. 40 NAIROBI, 15th April, 2016 Price Sh. 60

GAZETTE NOTICE NO. 2690 missions and purposes. The National Treasury should be consulted on
governance issues whenever questions arise as to what is the preferred
THE PUBLIC FINANCE MANAGEMENT ACT practice or when practical problems arise on the application of the
(No. 18 of 2012) guidance provided in this document. It should be noted that not all
entities are board-governed agencies and the National Treasury should
THE PUBLIC FINANCE MANAGEMENT REGULATIONS, 2015 be consulted whenever more clarity is required on whether a specific
entity is board-governed.
The function of an Audit Committee is to support the Executive
AUDIT COMMITTEE GUIDELINES FOR COUNTY GOVERNMENTS Management, Accounting Officers, Boards, and Board Chairs by
FOREWORD monitoring and reviewing the risk, control and governance processes
that have been established in the entity pursuant to Board policies. This
The Public Finance Management Act, 2012 and Public Finance is achieved by introducing an independent perspective and a process of
Management Regulation, 2015 requires that each public entity shall constructive challenge, not to undermine the actions of the Board or
establish an Audit Committee. The Audit Committee form a key management, but to help the Executive Management, Accounting
element in the governance process by providing an independent expert Officers, and the Boards be fully assured that the most cost-effective
assessment of the activities of top management, the quality of the risk control and governance processes are in place. The governance
management, financial reporting, financial management and internal processes enhance the performance of the entity and the Audit
audit, to the board of directors or a supervisory board or executive Committee takes an independent view of these processes. It is therefore
management. important to draw the membership of the Audit Committee from those
who are not management or board members who perform executive
Another important role is to ensure that external audit functions.
recommendations are fully addressed, that the quality of internal audit
is of an appropriate standard and that line management has full regard The role of the Audit Committee has been carefully defined in
to internal audit recommendations. Properly exercised, their role is these Guidelines where the Audit Committee also includes a finance
vital in being the watchdog for the independence of internal audit and role, a risk function or other functions, as these may encompass
in ensuring that the information made available to the owners (the management roles.
stakeholders) is reliable thereby enabling them to make judgements
about the quality of the management and the future prospects for the Care should be taken to distinguish between any roles that have a
public entity. management function and the role of the Audit Committee. Audit
Committee members should have no management or executive
The purpose of this guidance is to provide those responsible for functions.
establishing, appointing and overseeing Audit Committees with HENRY K. ROTICH,
information on discharging their respective roles within the Public Cabinet Secretary, National Treasury.
Service Sector
ACKNOWLEDGEMENT
The guidance in this document is to help:
The four pillars of good corporate governance are the board of
 Executive Management, Accounting Officers, Boards, and directors (management), the internal auditors, the audit committee and
Board Chairs work out the best arrangements for their agencies. the external auditors. The audit committee‘s principle role is that of
providing oversight of financial reporting, risk management, internal
 Audit Committees and individual members of Audit
Committees understand their role and the ways in which they control, and governance processes.
should function. Establishment and operationalisation of audit committees in the
 The National Treasury officials to oversee an entity‘s board and public sector marks a major milestone in the Government‘s endeavour
Audit Committee practices. to improve and strengthen public financial management and
governance process. The Guidelines will enable audit committees and
This guidance is intended to offer ―best practices‖ on Audit other stakeholders reflect on their mandate, roles and responsibilities in
Committee operations, capable of implementation into the public risk management, internal controls and governance.
sector governance entities responsible for a wide range of differing

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I recognize the efforts of the Internal Auditor General Department 1. INTRODUCTION

for packaging these Guidelines. I also acknowledge the other 1.1. Background
stakeholders, especially officers from the County Government whose
comments were invaluable. (a) Treasury Circular No AG3/086/6/ (61) of 8th August 2000
represented the first initiative towards establishment of
Reference for benchmarking purposes was made to other countries Ministerial audit committees. However, the performance of
that have well established audit committees including Canada,
audit committees in some ministries was not effective due to
Australia, Thailand and South Africa. Their audit committee guidelines lack of clear guidelines on their independence and objectivity.
are rated by The Institute of Internal Auditors (The IIA) as being
among the best. (b) The enactment of Public Finance Management Act, 2012 and
the need for credible oversight framework necessitated a need
These Guidelines should set the minimum standards in the
to review the First Edition of the Guidelines issued in July
operationalisation of public sector audit committees.
2006.
DR. KAMAU THUGGE, 1.2. Purpose of These Guidelines
Principal Secretary, National Treasury.
(a) The purpose of these guidelines is to combine the best
GLOSSARY OF TERMS, CONCEPTS AND ACRONYMS practice principles from the available materials with practical
advice from the Public Sector Accounting Standards Board to
Internal auditing is an independent, objective assurance and provide more detailed and practical guidance for audit
consulting activity designed to add value and committee members, accounting officers and other personnel
improve an organization‘s operations. It who are involved with audit committees.
helps an organization accomplish its
objectives by bringing a systematic, (b) These guidelines are designed to assist public entity
disciplined approach to evaluate and Executive Management, Accounting Officers, and the Boards
improve the effectiveness of risk and senior managements in making suitable arrangements for
management, control and governance their audit committees, and to assist those serving on audit
process.-(the Institute of Internal Auditors committees in carrying out their role. It is intended to assist
IIA-Inc). Executive Management, Accounting Officers, and the Boards
and senior management in the implementation of the relevant
Accountability Structure of responsibility. provisions of corporate governance codes.
AO Accounting Officer. (c) The guidance contains recommendations about the conduct of
Audit An examination or review that compares the audit committees‘ relationship with the board, with the
―what is‖ with ―what should be‖ and provide executive management and with internal and external
feedback for corrective actions. auditors. There is need for a frank, open working relationship
and a high level of mutual respect and trust, particularly
Board includes management boards, commissions between the audit committee, board chairman, and the chief
and councils.
executive. The audit committee must be prepared to take a
CEO Chief Executive Officer. robust stand, and all parties must be prepared to make
Charter A document that clearly defines purpose, information freely available to the audit committee, to listen
to their views and to talk through the issues openly.
scope and responsibilities of any
engagement. 1.3. Scope and application
Control The functional part of a system that provides The guidelines apply to departments and governing bodies within
feedback on how the system is the public sector. Throughout the guidelines the word ‗entity‘ refers to
accomplishing its purpose or objectives. both departments and governing bodies.
COSO A system of internal controls or control 2. ESTABLISHMENT AND EFFECTIVENESS OF AUDIT
framework defined by Committee of
COMMITTEES
Sponsoring Organizations of the Treadway
Commission (U.S.). 2.1. Requirement to have an audit committee
Evaluation The assessment of the impact of a program 2.1.1. Public Finance Management Act 2012
at a particular point in time.
(a) The Public Finance Management Act, 2012 imposes
GOCs Government Owned Corporations. significant responsibilities on accounting officers and
Governance The combination of processes and structures governing bodies, including the duty to manage the entity
implemented by the board in order to inform, efficiently, effectively and economically and to establish and
direct, manage and monitor the activities of maintain appropriate systems of internal control and risk
the organization toward the achievement of management (section 66).
its objectives. (b) Section 73(5) of the Public Finance Management Act 2012
provides that each accounting officer of a department must,
Monitoring Continuous assessment of a program. and each governing body shall establish an audit committee
Oversight Supervision by management or delegated for the entity.
authority. 2.1.2 Public Finance Management (County Government)
PAC Public Accounts Committee. Regulations 2015 (Part XIII)
(a) All Public entities are of sufficient complexity to warrant
PIC Public Investment Committee. establishing and maintaining an audit committee. The main
Policy A statement setting out an organization‘s expectation is that such a function will make a positive
position on a particular issue. contribution to the efficient, effective and economical
management of the entity.
Program A plan of action which includes planning,
(b) For smaller Public entities, factors such as their complexity
resource allocation, implementation, and size, the existence of an internal audit function and
monitoring and evaluation.
whether the governing body has sufficient time to consider
Risk management A process to identify, assess, manage, and audit issues accurately should be part of the evaluation
control potential events or situations, to process in deciding whether to establish its own or share an
provide reasonable assurance regarding the audit committee with another entity as appropriate.
achievement of the organization‘s objectives.
(c) The decision and evaluation process undertaken to determine
Transparency Clarity and openness in the processing of whether to establish a shared audit committee be recorded
transactions and the structure of flow of and periodically reviewed to ensure it remains appropriate.
transactions.
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2.2. Objectives of Audit Committee papers in a timely manner to enable full and proper
consideration to be given to the issues.
(a) The purpose of the audit committee is to provide assistance to
the accounting officer or governing body. An audit (d) The accounting officer should make funds available to the
committee‘s roles and responsibilities will be set out in its audit committee to enable it to take independent legal,
charter and will be determined after consideration of entity accounting or other advice when the audit committee
specific factors. An audit committee can involve all or a reasonably believes it necessary to do so. The facilitation
combination of the following duties and responsibilities: should include funding of budgets prepared by the Audit
Committee to cover the following:-
(i) Obtain assurance from management that all financial
and non-financial internal control and risk management (i) Meetings expenses and members‘ allowances;
functions are operating effectively and reliably. (ii) Secretariat expenses;
(ii) Provide an independent review of an entity‘s reporting (iii) Independent review/study;
functions to ensure the integrity of financial reports.
(iv) Training of Members/Secretariat;
(iii) Monitor the effectiveness of the entity‘s performance
management and performance information. (v) Any other activity/task as approved by the audit
committee.
(iv) Provide strong and effective oversight of an entity‘s
internal audit function. 2.6. Capacity Building of Audit Committee
(v) Provide effective liaison and facilitate communication 2.6.1 Induction
between management and external audit.
(vi) Provide oversight of the implementation of accepted Newly appointed members will undergo an induction training in
order to acquire knowledge on duties, roles and responsibilities of audit
audit recommendations.
committees in the public sectors
(vii) Ensure the entity effectively monitors compliance with
legislative and regulatory requirements and promotes a 2.6.2 Continuous Training
culture committed to lawful and ethical behaviour.
Serving audit committee members will be entitled for training on
2.3. Rationale of having an Audit Committee emerging trends about audit committees, internal audit, external audit,
governance, risk and internal controls funded by the entity.
(a) The existence of an independent audit committee is
recognised internationally as an important feature of good 3. MANDATE, ROLES, DUTIES AND RESPONSIBILITIES
corporate governance. An audit committee can benefit an
entity by: 3.1. Mandate
(a) The audit committee should drive the assessment of the
(i) Acting as a forum for dialogue between the accounting performance of the head of internal audit.
officer or governing body, executive management and
the internal and external auditors. The communication (b) Examine internal and external audit reports and
recommendations after management response to ensure action
helps facilitate a better awareness of each party‘s
responsibilities and provides a more efficient and is taken.
coordinated audit process. (c) There should be in place adequate mechanisms of enabling
the audit committee facilitate adequate disposal of all
(ii) Promoting the integrity and quality of internal and
external reports by providing a high level of assurance PAC/PIC recommendations. This is done by following up to
ensure positive action is taken
and check.
(d) The audit committee is responsible for communicating with
(iii) Fostering and promoting a more effective and efficient
the internal and external auditors. In its overseeing role, the
audit process by providing an independent review of the
committee should focus on:-
internal audit annual work plan and reports.
(iv) Providing a ‗no surprises‘ environment in an entity, (i) The changing business environment;
particularly with regard to the prompt identification of (ii) Changing financial reporting requirement;
risks and threats to the entity.
(iii) Audit findings, including comments governance, risk
(v) Providing a depth of knowledge that assists and controls;
management discharge its responsibilities in the most
(iv) Proposed audit scope and audit coverage and
effective and efficient manner.
approaches with respect to complex, high risks, and
2.4. Accountability judgment areas;
(a) Audit committees do not substitute for the executive function (v) Management response to specific audit
in an organization. In this regard the Accounting Officer/CEO recommendations.
remains accountable for making decisions for which they are
personally accountable to the legislature through relevant 3.2. Roles
committees. (a) The audit committee plays a key role with respect to the
(b) The Accounting Officers/CEO should update Audit integrity of the entity‘s financial information, its system of
Committees on the changes of the organization operations governance, risk and internal controls, and the legal and
continuously, to increase the efficiency and effectiveness of ethical conduct of management and employees.
the audit committee.
(b) Depending upon circumstances affecting an entity, the
2.5. Audit Committee Resources functions undertaken by an audit committee will generally
encompass the following areas:
(a) The audit committee should be provided with sufficient
resources to undertake its duties. (i) Evaluating whether processes are in place to address
key roles and responsibilities in relation to risk
(b) The audit committee should have access to the services of the management.
entity‘s secretariat on all audit committee matters including:
assisting the chairman in planning the audit committee‘s (ii) Evaluating the adequacy of the control environment to
work, drawing up meeting agendas, maintenance of minutes, provide reasonable assurance that the systems of
drafting of material about its activities for the annual report, internal control are of a high standard and functioning
collection and distribution of information and provision of as intended.
any necessary practical support.
(iii) Performing an independent review of the financial
(c) The accounting officer and/or the entity secretary should statements to ensure the integrity and transparency of
ensure that the audit committee receives information and the financial reporting process.
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(iv) Monitoring the effectiveness of an entity‘s performance possible improprieties in matters of financial reporting or other
information and compliance with the performance matters. The audit committee‘s objective should be to ensure that
management framework and performance reporting arrangements are in place for the proportionate and independent
requirements. investigation of such matters and for appropriate follow-up action.
(v) Evaluating the quality of the internal audit function, 3.3.4 Internal controls and risk management systems
particularly in the areas of planning, monitoring and
reporting. (a) The audit committee should review the entity‘s internal
(vi) Engaging with external audit and assessing the financial controls (that is, the systems established to identify,
adequacy of management response to issues identified assess, manage and monitor financial risks).
by audit. (b) The entity‘s management is responsible for the identification,
(vii) Reviewing the effectiveness of how the entity monitors assessment, and management and monitoring of risk, for
compliance with relevant legislative and regulatory developing, operating and monitoring the system of internal
requirements and promotes a culture committed to control and for providing assurance to the board and
lawful and ethical behaviour. executive management that it has done so. Except where the
3.3. Responsibilities board or a risk committee is expressly responsible for
reviewing the effectiveness of the internal control and risk
3.3.1 Financial reporting management systems, the audit committee should receive
(a) The audit committee should review, and report to the board reports from management on the effectiveness of the systems
and executive management on, the significant financial they have established and the conclusions of any testing
reporting issues and judgements made in connection with the carried out by internal and external auditors.
preparation of the entity‘s financial statements (having regard (c) Except to the extent that this is expressly dealt with by the
to matters communicated to it by the auditor), interim reports, board or risk committee, the audit committee should review
preliminary announcements and related formal statements. and approve the statements included in the annual report in
(b) It is management‘s, not the audit committee‘s responsibility relation to internal control and the management of risk.
to prepare complete and accurate financial statements and
disclosures in accordance with financial reporting standards 3.3.5 The internal audit process
and applicable rules and regulations. However the audit (a) The audit committee should monitor and review the
committee should consider significant accounting policies, effectiveness of the entity‘s internal audit function. Where
any changes to them and any significant estimates and there is no internal audit function, the audit committee should
judgements. The management should inform the audit consider annually whether there is a need for an internal audit
committee of the methods used to account for significant or function and make a recommendation to the board and
unusual transactions where the accounting treatment is open executive management, and the reasons for the absence of
to different approaches. Taking into account the external such a function should be explained in the relevant section of
auditor‘s view, the audit committee should consider whether the annual report.
the entity has adopted appropriate accounting policies and,
where necessary, made appropriate estimates and judgements. (b) Senior management and the board require objective assurance
The audit committee should review the clarity and and advice on governance, risk and control. An adequately
completeness of disclosures in the financial statements and resourced internal audit function shall provide such assurance
consider whether the disclosures made are set properly in and advice. There may be other functions within the entity
context. that also provide assurance and advice covering specialist
areas such as health and safety, regulatory and legal
(c) Where, following its review, the audit committee is not
compliance and environmental issues.
satisfied with any aspect of the proposed financial reporting
by the entity, it shall report its views to the board and (c) When undertaking its assessment of an internal audit
executive management. function, the audit committee should also consider whether
(d) The audit committee should review related information there are any trends or current factors relevant to the entity‘s
presented with the financial statements, including the activities, markets or other aspects of its external environment
business review, and corporate governance statements that have increased, or are expected to increase, the risks
relating to the audit and to risk management. Similarly, where faced by the entity. Such an increase in risk may also arise
board approval is required for other statements containing from internal factors such as organisational restructuring or
financial information (for example, summary financial from changes in reporting processes or underlying
statements, significant financial returns to regulators and information systems. Other matters to be taken into account
release of price sensitive information), whenever practicable may include adverse trends evident from the monitoring of
the audit committee should review such statements first internal control systems or an increased incidence of
(without being inconsistent with any requirement for prompt unexpected occurrences.
reporting under the Listing Rules). (d) In the absence of an internal audit function, management
3.3.2 Narrative Reporting needs to apply other monitoring processes in order to assure
itself, the audit committee and the board that the system of
(a) Where requested by the board or executive management, the
internal control is functioning as intended. In these
audit committee should review the content of the annual
circumstances, the audit committee will need to assess
report and accounts and advise the Executive Management,
whether such processes provide sufficient and objective
Accounting Officers, and the Boards or executive
assurance.
management on whether, taken as a whole, it is fair, balanced
and understandable and provides the information necessary (e) If the external auditor is being considered to undertake
for stakeholders to assess the entity‘s performance, business aspects of the internal audit function, the audit committee
model and strategy. should consider the effect this may have on the effectiveness
(b) This report will inform the board‘s statement on these matters of the entity‘s overall arrangements for internal control and
required under Code of Governance for Public and State stakeholder perceptions in this regard. Stakeholder
Officers and the Code of Governance for State Corporations perceptions are likely to be influenced by:
(Mwongozo). In order for the board to make that statement, (i) the rationale set out in the annual report for the work being
any review undertaken by the committee would need to performed by the external auditor;
assess whether the narrative in the front of the report was
consistent with the accounting information in the back, so as (ii) the nature and extent of the work performed by the
to ensure that there were no surprises hidden in the accounts. external auditor;
3.3.3 Whistle blowing (iii) how the independence and objectivity of the external
The audit committee should review arrangements by which staff of auditor and internal audit function have been
safeguarded; and
the entity or any other person may, in confidence, raise concerns about
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(iv) Whether, in the absence of internal audit work, the audit undertaken by the external auditors to address those
committee is wholly reliant on the views of the external risks;
auditor about the effectiveness of its system of controls
relating to core activities and significant locations. (ii) consider the robustness and perceptiveness of the
auditors in their handling of the key accounting and
(f) The audit committee should review and approve the internal audit judgements identified and in responding to
audit function‘s remit, having regard to the complementary questions from the audit committee, and in their
roles of the internal and external audit functions. The audit commentary where appropriate on the systems of
committee should ensure that the function has the necessary internal control;
resources and access to information to enable it to fulfil its
mandate, and is equipped to perform in accordance with (iii) obtain feedback about the conduct of the audit from key
appropriate professional standards for internal auditors. people involved, for example the head of finance, head
of accounts and the head of internal audit; review and
(g) The audit committee should approve the appointment and/or
monitor the content of the external auditor‘s
termination of appointment of the head of internal audit with
management letter, in order to assess whether it is based
sufficient reasons provided for the same.
on a good understanding of the entity‘s business and
(h) The performance assessment of the head of Internal Audit establish whether recommendations have been acted
should be driven by the Audit Committee and should not be upon and, if not, the reasons why they have not been
left at the discretion of the management. acted upon; and
(i) In its review of the work of the internal audit function, the (iv) Report to the board and/or executive management on
audit committee should: the effectiveness of the external audit process.
(i) ensure that the internal auditor has direct access to the
3.3.7 Independence, including the provision of non-audit services
board chairman and to the audit committee, and is
accountable to the audit committee; Where the external auditor is not the Auditor-General:
(ii) review and assess the annual internal audit work plan;
(a) The audit committee should assess the independence and
(iii) receive a report on the results of the internal auditors‘ objectivity of the external auditor annually, taking into
work on a periodic basis; consideration relevant law, regulation and professional
(iv) review and monitor management‘s responsiveness to requirements. This assessment should involve a consideration
the internal auditor‘s findings and recommendations; of all relationships between the entity and the audit firm
(including the provision of non-audit services) and any
(v) meet with the head of internal audit at least once a year
safeguards established by the external auditor. The audit
without the presence of management; and
committee should consider whether, taken as a whole and
(vi) Monitor and assess the role and effectiveness of the having regard to the views, as appropriate, of the external
internal audit function in the overall context of the auditor, management and internal audit, those relationships
entity‘s risk management system. appear to impair the auditor‘s independence and objectivity.
3.3.6 Annual audit cycle (b) The audit committee should seek reassurance that the auditors
(a) At the start of each annual audit cycle, the audit committee and their staff have no financial, business, employment or
should ensure that appropriate plans are in place for the audit. family and other personal relationship with the entity which
could adversely affect the auditor‘s independence and
(b) The audit committee should consider whether the auditor‘s
objectivity, taking account of relevant Ethical Standards for
overall work plan, including planned levels of materiality,
Auditors. The audit committee should seek from the audit
and proposed resources to execute the audit plan appears
firm, on an annual basis, information about policies and
consistent with the scope of the audit engagement, having
processes for maintaining independence and monitoring
regard also to the seniority, expertise and experience of the
compliance with relevant requirements, including current
audit team.
requirements regarding the rotation of audit partners and
(c) The audit committee should review, with the external staff.
auditors, the findings of their work. In the course of its
review, the audit committee should: (c) The audit committee should develop and recommend to the
board the entity‘s policy in relation to the provision of non-
(i) discuss with the external auditor major issues that arose audit services by the auditor, and keep the policy under
during the course of the audit and have subsequently review. The audit committee‘s objective should be to ensure
been resolved and those issues that have been left that the provision of such services does not impair the
unresolved; external auditor‘s independence or objectivity. In this context,
(ii) review key accounting and audit judgements; and the audit committee should consider:-
(iii) Review levels of errors identified during the audit, (i) whether the skills and experience of the audit firm make
obtaining explanations from management and, where it the most suitable supplier of the non-audit service;
necessary, the external auditors as to why certain errors
might remain unadjusted. (ii) whether there are safeguards in place to eliminate or
reduce to an acceptable level any threat to objectivity
(d) The audit committee should also review the audit and independence in the conduct of the audit resulting
representation letters before signature and give particular from the provision of such services by the external
consideration to matters where representation has been auditor;
requested that relate to nonstandard issues. The audit
committee should consider whether the information provided (iii) the nature of the non-audit services;
is complete and appropriate based on its own knowledge.
(iv) the fees incurred, or to be incurred, for non-audit
(e) As part of the on-going monitoring process, the audit services both for individual services and in aggregate,
committee should review the management letter (or relative to the audit fee; and
equivalent). The audit committee should review and monitor
management‘s responsiveness to the external auditor‘s (v) the criteria which govern the compensation of the
findings and recommendations. individuals performing the audit.

(f) At the end of the annual audit cycle, the audit committee (d) The audit committee should set and apply a formal policy
should assess the effectiveness of the audit process. In the specifying the types of non-audit service (if any):
course of doing so, the audit committee should:
(i) for which the use of the external auditor is pre-approved
(i) review whether the auditor has met the agreed audit (i.e. approval has been given in advance as a matter of
plan and understand the reasons for any changes, policy, rather than the specific approval of an
including changes in perceived audit risks and the work engagement being sought before it is contracted);
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(ii) for which specific approval from the audit committee is 4. MEMBERSHIP, APPOINTMENT AND REPLACEMENT
required before they are contracted; and
4.1. Composition
(iii) from which the external auditor is excluded.
(a) The board and/or the accounting officer should establish an
(e) Pre-approval of the use of the external auditor may be audit committee of at least three, in the case of smaller
appropriate where the threats to auditor independence are entities and five in the case of larger entities.
considered low, for example if the engagement is: -
(b) The board should satisfy itself that at least one member of the
(i) routine in nature and the fee is not significant in the audit committee has relevant qualifications and expertise in
context of the audit fee; or audit, financial management, or accounting with experience
in public service or devolved system of government and
(ii) for an audit related service . knowledge in risk management and is a member of a
(f) The non-audit services that fall within the second category in professional body in good standing.
paragraph 3.3.7(d) above are likely to be those which, (c) The membership to audit committee should be diverse
because of their size or nature or because of special terms and through an appropriate mix of skills and expertise to be
conditions (for example, contingent fee arrangements), are informed by the nature and the mandate of the respective
thought to give rise to threats to the auditor‘s independence. entity. An appropriate skills mix would ensure effectiveness
As a consequence, careful consideration will be needed when of the internal oversight having availed the required expertise
determining whether it is in the interests of the entity that within the committees.
they should be purchased from the audit firm (rather than
another supplier) and, if so, whether any safeguards to be put (d) The Committee members must be able to dedicate sufficient
in place by the audit firm are likely to be effective. time to the performance of Audit Committee work.
(g) In determining the policy, the audit committee should take (e) The committee can co-opt persons will specialized skills on a
into account the possible threats to auditor objectivity and need basis where such specialized skills are not available
independence and the Ethical Standards for Auditors within the committee
regarding the provision of non-audit services by the external
audit firm. 4.2. Appointment

(h) The audit committee should agree with the board and/or Terms and mode of appointment of audit committee members for
executive management the entity‘s policy for the employment county governments is as indicated in the matrix below.
of former employees of the external auditor, taking into Appointment Matrix
account the Ethical Standards for Auditors and paying
particular attention to the policy regarding former employees Appointment and Composition of Members of Audit Committees in
of the audit firm who were part of the audit team and moved County Governments
directly to the entity. The audit committee should monitor
application of the policy, including the number of former 1. County County Assembly
employees of the external auditor currently employed in Governments
1. The County Assembly shall
senior positions in the entity, and consider whether in the competitively source for 3 members of
light of this there has been any impairment, or appearance of
its Audit Committee from suitably
impairment, of the auditor‘s independence and objectivity in qualified persons, one of whom shall be
respect of the audit.
the chair.
(i) The audit committee should monitor the external audit firm‘s 2. The Audit Committee shall report to the
compliance with the Ethical Standards for Auditors relating to
County Assembly through the County
the rotation of audit partners, the level of fees that the entity Assembly Clerk.
pays in proportion to the overall fee income of the firm, or
relevant part of it, and other related regulatory requirements. 3. The county speaker shall nominate one
senior officer to sit in the Audit
(j) A degree of flexibility over the timing of rotation of the audit
Committee.
engagement partner is possible where the audit committee
decides that it is necessary to safeguard the quality of the County Executive
audit. In such circumstances, the audit engagement partner
may continue in this position for an additional period of up to 4. The County Executive shall
two years, so that no longer than seven years in total is spent competitively source for 4 members of
in this position. The audit committee should disclose this fact its Audit Committee from suitably
and the reasons for it to the shareholders as early as qualified persons, one of whom shall be
practicable. the chair.

(k) The annual report should explain to shareholders how, if the 5. The County Governor shall nominate
auditor provides non-audit services, auditor objectivity and one senior officer to sit in the audit
independence is safeguarded. The explanation should: committee

(i) describe the work of the committee in discharging its 6. The Audit Committee shall report to the
responsibilities; Governor

(ii) set out the audit committee‘s policy on the engagement

4.3. Term of office of members (including Chairs)
of the external auditor to supply non-audit services in
sufficient detail to describe each of the elements in (a) The initial term of appointment to the committee should be for
paragraph 3.3.10(d), or cross-refer to where this a period of not more than three years. The term of appointment
information can be found on the entity‘s website; and can be extended for a further three years, giving a maximum
total period of service of six years.
(iii) set out, or cross refer to, the fees paid to the auditor for
audit services, audit related services and other non-audit (b) The term should only be extended after the performance of the
services; and if the auditor provides non-audit services, member has been reviewed.
other than audit related services, explain for each
significant engagement, or category of engagements, (c) Members of the Audit Committee shall be appointed by
what the services are, why the audit committee individual letters of appointment by the appointing authority.
concluded that it was in the interests of the entity to The letters of appointment should clearly spell out the effective
purchase them from the external auditor (rather than date and the term for which the appointment will run;
another supplier) and how auditor objectivity and
(d) The Treasury shall nominate an officer to be appointed by the
independence has been safeguarded.
respective appointing authority as the Treasury representative.
 15th April, 2016 THE KENYA GAZETTE 1399

The Treasury representative shall perform functions (b) In setting the agenda, the most significant risks and threats to
enumerated in the appointment letter; the entity should be emphasised as well as the ongoing
evaluation of what is being done to mitigate such risks.
(e) A person shall cease to be a member of an audit committee if- (c) The agenda and documents supporting matters to be
(i) that person is convicted of a criminal offence and sentenced discussed in the meeting should be circulated to the audit
to a term of imprisonment of not less than six months; or committee members and persons who are to attend the
meeting at least 14 days in advance. This is to provide time
(ii) that person is absent from two consecutive regular meetings
for consideration of the matters or request for additional
of the committees without leave of absence; or
supporting information.
(iii) that person resigns, in writing, from the audit committee;
or 5.2. Frequency and Timing of Meetings
(iv) that persons‘ term of office expires; or (a) The audit committee should meet at least quarterly; the
timing of meetings will depend on individual entity
(v) that person ceases to be member by virtue of withdrawal of
processes, audit reporting and financial statement preparation
his or her nomination to the audit committee by the
timeframes. For example, the audit committee should meet to
nominating institution; or
review the financial statements before they are submitted to
(vi) that person becomes an employee or officer of the External Auditors.
concerned entity; or
(b) The timing of audit committee meetings should be planned
(vii) that person is discovered to have a conflict of interest as annually in advance to ensure the availability of all members.
prescribed as at the time of his appointment and failed to The timing should be communicated to other personnel such
disclose it; or as internal and external audit and line management, so that
(viii) The audit committee is disbanded. their availability can also be confirmed as they may be
required to attend selected meetings.
4.4. Chairman
(c) The committee Chair may call additional meetings as
(a) Effectiveness and true independence of the audit committee necessary to address any matters referred to the committee or
hinges on the chair‘s effectiveness. in respect of matters that the committee wishes to pursue.
(b) In the appointment of the Chairman of the Audit Committee, 5.3. Attendance
careful consideration shall be given to leadership qualities
because the Chairman of the Audit Committee is the person 5.3.1 Quorum
who gives rise to confidence in the overall efficiency of the
A quorum shall consist of at least three (3) members of the
Audit Committee which would be beneficial to the effective
committee, one of whom shall be an independent external member.
planning, and bringing the meetings to right direction.
5.3.1 Proxies
(c) The characteristics of an effective audit committee chair
include: As members are appointed on the basis of personal qualities and
skills, proxies are not permitted if a member is unable to attend a
(i) An independent proactive leader with confidence and
meeting.
integrity;
5.4. Voting
(ii) A highly respectable and experienced person, who
possesses strong interpersonal skills and time available to (a) The notice of meeting which will require voting must specify
develop and closely monitor the committee agenda; clearly the issues and names of persons to be deliberated on
and require any member of the Audit Committee who has any
A person with excellent working knowledge of an audit
interest in a matter to be considered to declare before
committee‘s functions and risk management frameworks;
deliberations and voting on such matter.
4.5. SECRETARY
(b) Views of all dissenting members shall be taken and
The entity‘s head of internal audit shall be the secretary to the appropriately recorded.
committee.
5.5. Minutes of meetings
4.5.1 Role of the Secretary
(a) Meetings should be conducted on a formal basis and be
(a) Draft the audit committee‘s meeting agenda for the effectively minuted by the secretary to record the proceedings
Chairman‘s review, performing work pertaining to and any decisions made.
summoning of meetings, facilitate the distribution of the
(b) The minutes should cover each agenda item and document
material to the audit committee members, and write up the
the discussion held and the outcome or conclusion from the
minutes of the audit committee meetings;
discussions. This would include any recommendations, action
(b) Maintain a record for the audit committee‘s meetings that
points, allocation of tasks to relevant person, allocation of
detail all required activities to ascertain whether they are
time for follow up and further consultation. The minutes
completed and assists the committee in reporting to the
should contain sufficient information to provide an
Accounting Officer/Board/Full Council what it has
understanding of the activities of the audit committee and the
accomplished.
committee‘s recommendations, conclusions and outcomes.
5. MEETINGS OF THE AUDIT COMMITTEE (c) The minutes of meetings to be prepared and distributed to
committee members within 7 working days after the
Audit committee meetings should be held on a timely and regular
conclusion of the meeting.
basis and their proceedings, recommendations and discussions
formally minuted. A meeting agenda should be prepared and (d) The minutes should be confirmed as true record of the
distributed in advance to enable adequate evaluation by committee meeting at the next meeting. If any important details have
members. A detailed agenda and strong chairing is vital in order that been incorrectly recorded or omitted, they should be
committee meetings remain focused. discussed and the minutes amended prior to confirmation at a
subsequent meeting.
5.1. Agenda setting
(e) After the minutes are confirmed as true record of the meeting,
(a) The committee should determine its own agenda. However, it
they should be signed by the Chair and the Secretary.
is considered beneficial for the committee Chair to liaise with
the accounting officer or chief executive of the governing (f) Copies of the minutes should be distributed to all members.
body, management, internal audit and external audit prior to
setting the agenda so that recent developments can be (i) In addition, a copy of the audit committee minutes
included. should be forwarded to stakeholders who may have an
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interest in the activities of the audit committee, for action plan which he or she shall submit to the Chairperson of
example external audit and management. the audit committee within fourteen days.
5.6. Initial information requirements for the Audit Committee (d) The Accounting Officer of a national or county government
entity may by invitation attend audit committee meetings.
When a new audit committee is constituted and when new
members are appointed the secretariat shall be required to produce the 6.2. Meetings with Accounting Officer or Governing Body
following:
(a) It is considered beneficial after each audit committee meeting
(i) The Public Finance Management Act, 2012, the Public for the Chair to issue a brief or minutes to the accounting
Finance Management Act, Regulations 2015 officer, giving the audit committee resolutions and
recommendations for implementation)
(ii) The strategic plan of the entity
(iii) The service charter (b) It is also considered beneficial for the Chair to meet with the
accounting officer or governing body at the end of the year to
(iv) Performance contract review the performance and achievements of the audit
(v) Budget and procurement plan committee and also to discuss the key issues and focus of the
audit committee for the coming year.
(vi) Risk policy framework and risk profile
(vii) The Internal Audit Strategic plan. 6.3. Relationship with Line Management

(viii) An internal Audit charter that spells out the Internal (a) The role of the audit committee with respect to line
Audit Purpose, Authority and Responsibility for management will focus mainly on management‘s response to
approval by the committee. audit findings and implementation of audit recommendations.
(ix) Internal Audit Budget and risk based Annual Work (b) The audit committee should determine whether
Plan, management‘s response to address the audit findings is
(x) Audit committee sample charter satisfactory, cost-effective and in line with the entities risk
management framework. The audit committee should also
(xi) Any other relevant legislations, guidelines or ensure that the recommendations will enhance the
documents. effectiveness and efficiency with which the entity delivers its
services.
5.7. Progress Reports from Internal Audit Unit
During regular meetings, the internal audit unit should provide the (c) If required, line management may by invitation attend audit
committee meetings but they are not eligible to vote.
audit committee with a progress report summarizing;
(a) Work performed in comparison with the approved Annual 6.4. Relationship with External Audit
Work Plan; (a) External audit and the audit committee should have a strong
(b) A report on consulting engagements undertaken and other and candid relationship. Open, regular, frank and confidential
special assignments; dialogue should be the norm, allowing the audit committee to
utilize the technical knowledge and experience of external
(c) Key issues emerging from Internal Audit work; audit in assessing, for example, the quality of the entity‘s
(d) Management response to key audit findings and internal control systems and financial reports.
recommendations;
(b) Audit committee shall be instrumental in facilitating
(e) Risks which management has accepted to undertake which communication and effective relationship between internal
are not acceptable according to the Internal Auditor‘s audit and external audit.
opinion.
(c) The internal audit shall, on behalf of the audit committee
(f) Major disagreements with management. monitor and report on the implementation of external audit
(g) Major limitations affecting the achievement of internal audit findings and recommendation.
objectives.
7. COMMUNICATIONS WITH STAKEHOLDERS (REPORTING)
(h) Key issues emerging from external audit work
7.1. Introduction
(i) A report on cooperation between internal and external audit
The common stakeholders of the public sector entities who will be
(j) Internal and External Quality Assurance reports on the
Internal Audit function if any. interested in audit committee reports will include;

(k) Periodic management accounts and or budget performance (i) Accounting officers
reports either quarterly or half yearly. (ii) The board/ council/ senate
6. KEY RELATIONSHIPS AND ACCESS TO AUDIT (iii) The national/ county treasury
COMMITTEES (iv) Top Management
6.1. Relationship with Accounting Officer or Governing Body (v) External audit
(vi) Internal audit
(a) A key role of the audit committee is to act as an independent
source of counsel to the accounting officer or governing body (vii) Development partners
and to act as a forum for the resolution of any (viii) Citizens
audit/management disagreements.
(ix) Shareholders
(b) The accounting officer or governing body has a key role in
supporting the effectiveness of the audit committee by; (x) Other oversight agencies
7.2. Audit committee reports
(i) Providing capacity building to all public national
government entity audit committees; (a) The audit committee in the course of its work will issue
(ii) providing policies and guidelines on audit committees; periodic, annual and special / investigative reports. The
reports of the audit committee will be accessed by the
(iii) monitor the effectiveness of audit committees; and stakeholders through the management;
(iv) Providing periodic updates of Audit committee
(b) The audit committee should produce periodic reports to the
activities through the website.
accounting officer/ governing body/ chief executive officer
(c) The accounting officer of the concerned entity shall be citing key issues affecting the operations of the entity.
responsible for the implementation of the recommendations Investigative / special reports should be addressed to the
made in the audit reports and shall develop response and requesting authority.
 15th April, 2016 THE KENYA GAZETTE 1401

(c) The annual report of the audit committee should include; GAZETTE NOTICE NO. 2691
(i) Introduction and background THE PUBLIC FINANCE MANAGEMENT ACT
(ii) Audit committee effectiveness (No. 18 of 2012)
(iii) Preparation of the audit committee charter THE PUBLIC FINANCE MANAGEMENT REGULATIONS, 2015
(iv) Calendar of activities
(v) Significant issues considered by the committee; AUDIT COMMITTEE GUIDELINES FOR N ATIONAL G OVERNMENT
FOREWORD
(d) The internal audit effectiveness
The Public Finance Management Act, 2012 and Public Finance
(i) Internal audit charter Management Regulation, 2015 requires that each public entity shall
establish an Audit Committee. The Audit Committee form a key
(ii) Strategic plan element in the governance process by providing an independent expert
(iii) Risk based annual work plan assessment of the activities of top management, the quality of the risk
management, financial reporting, financial management and internal
(iv) Internal audit reports audit, to the board of directors or a supervisory board or executive
management.
(v) Positioning, staffing and facilitation of internal audit
function; Another important role is to ensure that external audit
recommendations are fully addressed, that the quality of internal audit
(e) Effectiveness of management is of an appropriate standard and that line management has full regard
(i) Strategic plan and delivery of mandate to internal audit recommendations. Properly exercised their role is vital
in being the watchdog for the independence of internal audit and in
(ii) Performance contract ensuring that the information made available to the owners (the
stakeholders) is reliable thereby enabling them to make judgements
(iii) Annual procurement plan about the quality of the management and the future prospects for the
(iv) Annual budget public entity.

(v) Risk management policy and profile The purpose of these guidelines are to provide those responsible for
establishing, appointing and overseeing Audit Committees with
(vi) Adequacy and effectiveness of internal control information on discharging their respective roles within the Public
Service Sector
(vii) Governance structures and processes
The guidance in this document is to help:
(viii) Tone at the top;
 Executive Management, Accounting Officers, Boards and
Board Chairs of Public entities to work out the best
8. ASSESSMENT OF THE AUDIT COMMITTEEPERFORMANCE arrangements for their entities.
8.1. Annual Self-Assessment  Audit Committees and individual members of Audit
Committees understand their role and the ways in which they
(a) The audit committee should assess its performance and should function.
achievements against its mandate, roles, duties &
responsibilities that should be captured in the calendar of  The National Treasury officials to oversee an entity‘s board
activities on an annual basis. The aim of the self-assessment and Audit Committee practices.
is to ensure that the audit committee is meeting its objectives These guidelines are intended to offer ―best practices‖ on Audit
efficiently and effectively. The self-assessment report should Committee operations, capable of implementation into the public
be presented by the Chair to the accounting officer/ governing sector governance entities responsible for a wide range of differing
body. The report should be ready at the same time as the final missions and purposes. The National Treasury should be consulted on
accounts of the entity. governance issues whenever questions arise as to what is the preferred
(b) Areas for self-assessment should include the audit practice or when practical problems arise on the application of the
committees‘ understanding, communication and oversight guidelines provided in this document. It should be noted that not all
responsibilities in regard to the financial statements, risk entities are board-governed agencies and the National Treasury should
management, internal controls, compliance, ethics, be consulted whenever more clarity is required on whether a specific
management, internal auditing, external auditing, resources entity is board-governed.
and special assignments and investigations. The function of an Audit Committee is to support the Board by
(c) The committee should also assess its composition, training, monitoring and reviewing the risk, control and governance processes
meetings, charter and performance. that have been established in the entity pursuant to Board policies. This
is achieved by introducing an independent perspective and a process of
(d) Where the self-assessment highlights a need for constructive challenge, not to undermine the actions of the Board or
enhancements to the role, operational processes or management, but to help the Board be fully assured that the most cost-
membership of the committee, the Chair should take action to effective control and governance processes are in place. The
ensure that such enhancements are implemented. The Chair governance processes enhance the performance of the entity and the
may need to consult with the accounting officer or governing Audit Committee takes an independent view of these processes. It is
body to obtain appropriate support to ensure all enhancements therefore important to draw the membership of the Audit Committee
are implemented. from those who are not management or board members who perform
executive functions.
8.2. Management feedback
The role of the Audit Committee has been carefully defined in
The audit committee should seek feedback from the senior these guidelines where the Audit Committee also includes a finance
management on their effectiveness. role, a risk function or other functions, as these may encompass
management roles.
8.3. Use of an External Facilitator (External Evaluation)
Care should be taken to distinguish between any roles that have a
The audit committee may use an external facilitator to provide
management function and the role of the Audit Committee. Audit
assistance with the self-assessment process. The committee Chair and Committee members should have no management or executive
external facilitator should provide feedback to the audit committee
functions.
members and present the findings of the evaluation to the accounting HENRY K. ROTICH,
officer or governing body.
Cabinet Secretary, National Treasury.
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ACKNOWLEDGEMENT Policy A statement setting out an organization‘s

position on a particular issue
The four pillars of good corporate governance are the board of
directors (management), the internal auditors, the audit committee and Program A plan of action which includes planning,
the external auditors. The audit committee‘s principle role is that of resource allocation, implementation, monitoring
providing oversight of financial reporting, risk management, internal and evaluation
control, and governance processes.
Risk management A process to identify, assess, manage, and
Establishment and operationalisation of audit committees in the control potential events or situations, to provide
public sector marks a major milestone in the Government‘s endeavour reasonable assurance regarding the achievement
to improve and strengthen public financial management and of the organization‘s objectives.
governance process. The ―guidelines‖ will enable audit committees and
other stakeholders reflect on their mandate, roles and responsibilities in Transparency Clarity and openness in the processing of
risk management, internal controls and governance. transactions and the structure of flow of
transactions
I recognize the efforts of the Internal Auditor General Department
for packaging these Guidelines. I also acknowledge the other 1. INTRODUCTION
stakeholders, especially Accounting Officers whose comments were 1.1. Background
invaluable.
(a) Treasury Circular No AG3/086/6/ (61) of 8 th August 2000
Reference for benchmarking purposes was made to other countries represented the first initiative towards establishment of
that have well established audit committees including Canada, Ministerial audit committees. However, the performance of
Australia, Thailand and South Africa. Their audit committee guidelines audit committees in some ministries was not effective due to
are rated by The Institute of Internal Auditors (The IIA) as being lack of clear guidelines on their independence and objectivity.
among the best.
(b) The enactment of Public Finance Management Act, 2012 and
These Guidelines should set the minimum standards in the the need for credible oversight framework necessitated a need
operationalisation of public sector audit committees. to review the First Edition of the Guidelines issued in July
DR. KAMAU THUGGE, 2006.
Principal Secretary National Treasury. 1.2. Purpose of These Guidelines 2008
GLOSSARY OF TERMS, CONCEPTS AND ACRONYMS (a) The purpose of these guidelines is to combine the best
Internal auditing is an independent, objective assurance and practice principles from the available materials with practical
consulting activity designed to add value and advice from the Public Sector Accounting Standards Board to
improve an organization‘s operations. It helps an provide more detailed and practical guidance for audit
organization accomplish its objectives by committee members, accounting officers and other personnel
bringing a systematic, disciplined approach to who are involved with audit committees.
evaluate and improve the effectiveness of risk (b) These guidelines are designed to assist public entity
management, control and governance process.- Executive management, Accounting Officers and governing
(the Institute of Internal Auditors IIA-Inc) Bodies of Public entities, boards and senior managements in
Accountability Structure of responsibility making suitable arrangements for their audit committees, and
to assist those serving on audit committees in carrying out
AO Accounting Officer their role. It is intended to assist Executive Management,
Accounting Officers, and Governing Bodies of Public Entities
Audit An examination or review that compares ―what and senior management in the implementation of the relevant
is‖ with ―what should be‖ and provide feedback provisions of corporate governance codes.
for corrective actions.
(c) The guidelines contain recommendations about the conduct
Board includes management boards, commissions and of the audit committees‘ relationship with the board, with the
councils executive management and with internal and external
CEO Chief Executive Officer auditors. There is need for a frank, open working relationship
and a high level of mutual respect and trust, particularly
Charter A document that clearly defines purpose, scope between the audit committee chairman board chairman, and
and responsibilities of any engagement. the chief executive. The audit committee must be prepared to
take a robust stand, and all parties must be prepared to make
Control The functional part of a system that provides information freely available to the audit committee, to listen
feedback on how the system is accomplishing its to their views and to talk through the issues openly.
purpose or objectives
1.3. Scope and application
COSO A system of internal controls or control
framework defined by Committee of Sponsoring (a) The guidelines apply to Parliament, Judiciary, departments
Organizations of the Treadway Commission and governing bodies within the public sector. Throughout
(U.S.) the guidelines the word ‗entity‘ refers to Parliament,
Judiciary, departments and governing bodies.
Evaluation The assessment of the impact of a program at a
particular point in time 2. ESTABLISHMENT AND EFFECTIVENESS OF AUDIT
COMMITTEES
GOCs Government Owned Corporations
1.1 Requirement to have an audit committee
Governance The combination of processes and structures
implemented by the board in order to inform, 1.1.1 Public Finance Management Act 2012
direct, manage and monitor the activities of the
organization toward the achievement of its (a) The Public Finance Management Act, 2012 imposes
objectives. significant responsibilities on accounting officers and
governing bodies, including the duty to manage the entity
Monitoring Continuous assessment of a program efficiently, effectively and economically and to establish and
maintain appropriate systems of internal control and risk
Oversight Supervision by management or delegated management (section 66).
authority
(b) Section 73(5) of the Public Finance Management Act 2012
PAC Public Accounts Committee provides that each accounting officer of a department must,
PIC Public Investment Committee and each governing body shall establish an audit committee
for the entity.
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1.1.2 Public Finance Management (National Government) (b) The Accounting Officers/CEO should update Audit
Regulations 2015 (Part XIII) Committees on the changes of the organization operations
continuously, to increase the efficiency and effectiveness of
(a) All Public entities are of sufficient complexity to warrant
establishing and maintaining an audit committee. The main the audit committee.
expectation is that such a function will make a positive 1.5 Audit Committee Resources
contribution to the efficient, effective and economical
(a) The audit committee should be provided with sufficient
management of the entity. resources to undertake its duties.
(b) For smaller Public entities, factors such as their complexity
(b) The audit committee should have access to the services of the
and size, the existence of an internal audit function and
entity‘s secretariat on all audit committee matters including:
whether the governing body has sufficient time to consider
assisting the chairman in planning the audit committee‘s
audit issues accurately should be part of the evaluation
work, drawing up meeting agendas, maintenance of minutes,
process in deciding whether to establish its own or share an
drafting of material about its activities for the annual report,
audit committee with another entity as appropriate.
collection and distribution of information and provision of
(c) The decision and evaluation process undertaken to determine any necessary practical support.
whether to establish a shared audit committee be recorded
(c) The accounting officer and/or the entity secretary should
and periodically reviewed to ensure it remains appropriate. ensure that the audit committee receives information and
1.2 Objectives of Audit Committee papers in a timely manner to enable full and proper
consideration to be given to the issues.
The purpose of the audit committee is to provide assistance to the
accounting officer or governing body. An audit committee‘s roles and (d) The accounting officer should make funds available to the
responsibilities will be set out in its charter and will be determined audit committee to enable it to take independent legal,
after consideration of entity specific factors. An audit committee can accounting or other advice when the audit committee
involve all or a combination of the following duties and reasonably believes it necessary to do so. The facilitation
responsibilities: should include funding of budgets prepared by the Audit
Committee to cover the following:
(i) Obtain assurance from management that all financial and
non-financial internal control and risk management functions (i) Meetings expenses and members‘ allowances;
are operating effectively and reliably. (ii) Secretariat expenses;
(ii) Provide an independent review of an entity‘s reporting (iii) Independent review/study;
functions to ensure the integrity of financial reports. (iv) Training of Members/Secretariat;
(iii) Monitor the effectiveness of the entity‘s performance (v) Any other activity/task as approved by the audit
management and performance information. committee.
(iv) Provide strong and effective oversight of an entity‘s internal 3. MANDATE, ROLES, DUTIES AND RESPONSIBILITIES
audit function.
(v) Provide effective liaison and facilitate communication 3.1. Mandate
between management and external audit. (a) The audit committee should drive the assessment of the
(vi) Provide oversight of the implementation of accepted audit performance of the head of internal audit.
recommendations.
(b) Examine internal and external audit reports and
(vii) Ensure the entity effectively monitors compliance with recommendations after management response to ensure
legislative and regulatory requirements and promotes a action is taken.
culture committed to lawful and ethical behaviour.
(c) There should be in place adequate mechanisms of
1.3 Rationale of having an Audit Committee enabling the audit committee facilitate adequate
disposal of all PAC/PIC recommendations. This is done
(a) The existence of an independent audit committee is by following up to ensure positive action is taken
recognised internationally as an important feature of good
corporate governance. An audit committee can benefit an (d) The audit committee is responsible for communicating
entity by: with the internal and external auditors. In its overseeing
role, the committee should focus on:-
(i) Acting as a forum for dialogue between the accounting
officer or governing body, executive management and (i) The changing business environment;
the internal and external auditors. The communication
helps facilitate a better awareness of each party‘s (ii) Changing financial reporting requirement;
responsibilities and provides a more efficient and (iii) Audit findings, including comments on controls;
coordinated audit process.
(iv) Proposed audit scope and audit coverage and
(ii) Promoting the integrity and quality of internal and approaches with respect to complex, high risks,
external reports by providing a high level of assurance
and judgment areas;
and check.
(v) Management response to specific audit
(iii) Fostering and promoting a more effective and efficient
recommendations.
audit process by providing an independent review of the 3.2. Roles
internal audit annual work plan and reports.
(a) The audit committee plays a key role with respect to the
(iv) Providing a ‗no surprises‘ environment in an entity, integrity of the entity‘s financial information, its system of
particularly with regard to the prompt identification of
internal controls, and the legal and ethical conduct of
risks and threats to the entity. management and employees.
(v) Providing a depth of knowledge that assists
(b) Depending upon circumstances affecting an entity, the
management discharge its responsibilities in the most functions undertaken by an audit committee will generally
effective and efficient manner.
encompass the following areas:
1.4 Accountability (i) Evaluating whether processes are in place to address key
(a) Audit committees do not substitute for the executive function roles and responsibilities in relation to risk management.
in an organization. In this regard the Accounting Officer/CEO (ii) Evaluating the adequacy of the control environment to
remains accountable for making decisions for which they are
provide reasonable assurance that the systems of internal
personally accountable to the legislature through relevant control are of a high standard and functioning as intended.
committees.
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(iii) Performing an independent review of the financial statements 3.3.3 Whistleblowing

to ensure the integrity and transparency of the financial
reporting process. (a) The audit committee should review arrangements by which
staff of the entity or any other person may, in confidence,
(iv) Monitoring the effectiveness of an entity‘s performance raise concerns about possible improprieties in matters of
information and compliance with the performance financial reporting or other matters. The audit committee‘s
management framework and performance reporting objective should be to ensure that arrangements are in place
requirements. for the proportionate and independent investigation of such
(v) Evaluating the quality of the internal audit function, matters and for appropriate follow-up action.
particularly in the areas of planning, monitoring and 3.3.4 Internal controls and risk management systems
reporting.
(d) The audit committee should review the entity‘s internal
(vi) Engaging with external audit and assessing the adequacy of
financial controls (that is, the systems established to identify,
management response to issues identified by audit. assess, manage and monitor financial risks).
(vii) Reviewing the effectiveness of how the entity monitors
compliance with relevant legislative and regulatory (e) The entity‘s management is responsible for the identification,
assessment, and management and monitoring of risk, for
requirements and promotes a culture committed to lawful and
ethical behaviour. developing, operating and monitoring the system of internal
control and for providing assurance to the board and
3.3. Responsibilities executive management that it has done so. Except where the
board or a risk committee is expressly responsible for
3.3.1 Financial reporting
reviewing the effectiveness of the internal control and risk
(e) The audit committee should review, and report to the board management systems, the audit committee should receive
and executive management on, the significant financial reports from management on the effectiveness of the systems
reporting issues and judgements made in connection with the they have established and the conclusions of any testing
preparation of the entity‘s financial statements (having regard carried out by internal and external auditors.
to matters communicated to it by the auditor), interim reports, (f) Except to the extent that this is expressly dealt with by the
preliminary announcements and related formal statements. board or risk committee, the audit committee should review
(f) It is management‘s, not the audit committee‘s responsibility and approve the statements included in the annual report in
to prepare complete and accurate financial statements and relation to internal control and the management of risk.
disclosures in accordance with financial reporting standards The internal audit process
and applicable rules and regulations. However the audit
committee should consider significant accounting policies, (j) The audit committee should monitor and review the
any changes to them and any significant estimates and effectiveness of the entity‘s internal audit function. Where
judgements. The management should inform the audit there is no internal audit function, the audit committee should
committee of the methods used to account for significant or consider annually whether there is a need for an internal audit
unusual transactions where the accounting treatment is open function and make a recommendation to the board and
to different approaches. Taking into account the external executive management, and the reasons for the absence of
auditor‘s view, the audit committee should consider whether such a function should be explained in the relevant section of
the entity has adopted appropriate accounting policies and, the annual report.
where necessary, made appropriate estimates and judgements. (k) Senior management and the board require objective assurance
The audit committee should review the clarity and and advice on risk and control. An adequately resourced
completeness of disclosures in the financial statements and internal audit function shall provide such assurance and
consider whether the disclosures made are set properly in advice. There may be other functions within the entity that
context. also provide assurance and advice covering specialist areas
(g) Where, following its review, the audit committee is not such as health and safety, regulatory and legal compliance
satisfied with any aspect of the proposed financial reporting and environmental issues.
by the entity, it shall report its views to the board and (l) When undertaking its assessment of an internal audit
executive management. function, the audit committee should also consider whether
there are any trends or current factors relevant to the entity‘s
(h) The audit committee should review related information
presented with the financial statements, including the activities, markets or other aspects of its external environment
that have increased, or are expected to increase, the risks
business review, and corporate governance statements
relating to the audit and to risk management. Similarly, where faced by the entity. Such an increase in risk may also arise
from internal factors such as organisational restructuring or
board approval is required for other statements containing
financial information (for example, summary financial from changes in reporting processes or underlying
information systems. Other matters to be taken into account
statements, significant financial returns to regulators and
release of price sensitive information), whenever practicable may include adverse trends evident from the monitoring of
internal control systems or an increased incidence of
the audit committee should review such statements first
(without being inconsistent with any requirement for prompt unexpected occurrences.
reporting under the Listing Rules). (m) In the absence of an internal audit function, management
needs to apply other monitoring processes in order to assure
3.3.2 Narrative Reporting
itself, the audit committee and the board that the system of
(c) Where requested by the board or executive management, the internal control is functioning as intended. In these
audit committee should review the content of the annual circumstances, the audit committee will need to assess
report and accounts and advise the board or executive whether such processes provide sufficient and objective
management on whether, taken as a whole, it is fair, balanced assurance.
and understandable and provides the information necessary (n) If the external auditor is being considered to undertake
for stakeholders to assess the entity‘s performance, business aspects of the internal audit function, the audit committee
model and strategy. should consider the effect this may have on the effectiveness
(d) This report will inform the board‘s statement on these matters of the entity‘s overall arrangements for internal control and
required under Code of Governance for Public and State stakeholder perceptions in this regard. Stakeholder
Officers and the Code of Governance for State Corporations perceptions are likely to be influenced by:
(Mwongozo). In order for the board to make that statement, (i) the rationale set out in the annual report for the work
any review undertaken by the committee would need to being performed by the external auditor;
assess whether the narrative in the front of the report was
consistent with the accounting information in the back, so as (ii) the nature and extent of the work performed by the
to ensure that there were no surprises hidden in the accounts. external auditor;
15th April, 2016 THE KENYA GAZETTE 1405

(iii) how the independence and objectivity of the external (i) review whether the auditor has met the agreed audit
auditor and internal audit function have been safeguarded; plan and understand the reasons for any changes,
and including changes in perceived audit risks and the
(iv) Whether, in the absence of internal audit work, the audit work undertaken by the external auditors to address
those risks;
committee is wholly reliant on the views of the external
auditor about the effectiveness of its system of controls (ii) consider the robustness and perceptiveness of the
relating to core activities and significant locations. auditors in their handling of the key accounting and
(o) The audit committee should review and approve the internal audit judgements identified and in responding to
audit function‘s remit, having regard to the complementary questions from the audit committee, and in their
roles of the internal and external audit functions. The audit commentary where appropriate on the systems of
committee should ensure that the function has the necessary internal control;
resources and access to information to enable it to fulfil its
(iii) obtain feedback about the conduct of the audit from
mandate, and is equipped to perform in accordance with
key people involved, for example the head of finance,
appropriate professional standards for internal auditors.
head of accounts and the head of internal audit;
(p) The audit committee should approve the appointment and/or review and monitor the content of the external
termination of appointment of the head of internal audit. auditor‘s management letter, in order to assess
whether it is based on a good understanding of the
(q) The performance assessment of the head of Internal Audit
should be driven by the Audit Committee and should not be entity‘s business and establish whether
recommendations have been acted upon and, if not,
left at the discretion of the management.
the reasons why they have not been acted upon; and
(r) In its review of the work of the internal audit function, the
audit committee should:- (iv) Report to the board and/or executive management on
the effectiveness of the external audit process.
(i) ensure that the internal auditor has direct access to the
board chairman and to the audit committee, and is 3.3.7 Independence, including the provision of non-audit services
accountable to the audit committee;
Where the external auditor is not the Auditor-General:-
(ii) review and assess the annual internal audit work plan;
(l) The audit committee should assess the independence and
(iii) receive a report on the results of the internal auditors‘
objectivity of the external auditor annually, taking into
work on a periodic basis;
consideration relevant law, regulation and professional
(iv) review and monitor management‘s responsiveness to the requirements. This assessment should involve a consideration
internal auditor‘s findings and recommendations; of all relationships between the entity and the audit firm
(v) meet with the head of internal audit at least once a year (including the provision of non-audit services) and any
without the presence of management; and safeguards established by the external auditor. The audit
committee should consider whether, taken as a whole and
(vi) Monitor and assess the role and effectiveness of the
having regard to the views, as appropriate, of the external
internal audit function in the overall context of the
auditor, management and internal audit, those relationships
entity‘s risk management system.
appear to impair the auditor‘s independence and objectivity.
3.3.6 Annual audit cycle
(m) The audit committee should seek reassurance that the auditors
(g) At the start of each annual audit cycle, the audit and their staff have no financial, business, employment or
committee should ensure that appropriate plans are in family and other personal relationship with the entity which
place for the audit. could adversely affect the auditor‘s independence and
objectivity, taking account of relevant Ethical Standards for
(h) The audit committee should consider whether the Auditors. The audit committee should seek from the audit
auditor‘s overall work plan, including planned levels of firm, on an annual basis, information about policies and
materiality, and proposed resources to execute the audit processes for maintaining independence and monitoring
plan appears consistent with the scope of the audit compliance with relevant requirements, including current
engagement, having regard also to the seniority, expertise requirements regarding the rotation of audit partners and
and experience of the audit team. staff.
(i) The audit committee should review, with the external (n) The audit committee should develop and recommend to the
auditors, the findings of their work. In the course of its board the entity‘s policy in relation to the provision of non-
review, the audit committee should: audit services by the auditor, and keep the policy under
review. The audit committee‘s objective should be to ensure
(i) discuss with the external auditor major issues that
that the provision of such services does not impair the
arose during the course of the audit and have
external auditor‘s independence or objectivity. In this context,
subsequently been resolved and those issues that have
the audit committee should consider:-
been left unresolved;
(i) whether the skills and experience of the audit firm make it
(ii) review key accounting and audit judgements; and the most suitable supplier of the non-audit service;
(iii) Review levels of errors identified during the audit, (ii) whether there are safeguards in place to eliminate or
obtaining explanations from management and, where reduce to an acceptable level any threat to objectivity
necessary, the external auditors as to why certain and independence in the conduct of the audit resulting
errors might remain unadjusted. from the provision of such services by the external
auditor;
(j) The audit committee should also review the audit
representation letters before signature and give particular (iii) the nature of the non-audit services;
consideration to matters where representation has been
(iv) the fees incurred, or to be incurred, for non-audit services
requested that relate to nonstandard issues. The audit
both for individual services and in aggregate, relative to
committee should consider whether the information provided
the audit fee; and
is complete and appropriate based on its own knowledge.
(v) The criteria which govern the compensation of the
(k) As part of the on-going monitoring process, the audit individuals performing the audit.
committee should review the management letter (or
equivalent). The audit committee should review and monitor (o) The audit committee should set and apply a formal policy
management‘s responsiveness to the external auditor‘s specifying the types of non-audit service (if any): -
findings and recommendations. (i) for which the use of the external auditor is pre-approved
(i.e. approval has been given in advance as a matter of
(l) At the end of the annual audit cycle, the audit committee
policy, rather than the specific approval of an
should assess the effectiveness of the audit process. In the
engagement being sought before it is contracted);
course of doing so, the audit committee should:-
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(ii) for which specific approval from the audit committee is 4. MEMBERSHIP, APPOINTMENT AND REPLACEMENT
required before they are contracted; and
4.1. Composition
(iii) from which the external auditor is excluded.
(a) The board and/or the accounting officer should establish an
(p) Pre-approval of the use of the external auditor may be audit committee of at least three and not more than five.
appropriate where the threats to auditor independence are
considered low, for example if the engagement is: - (b) The board should satisfy itself that at least one member of the
audit committee has relevant qualifications and expertise in
(i) routine in nature and the fee is not significant in the audit, financial management, or accounting with experience
context of the audit fee; or and knowledge in risk management and is a member of a
professional body in good standing.
(ii) for an audit related service.
(c) The membership to audit committee should be diverse
(q) The non-audit services that fall within the second category in through an appropriate mix of skills and expertise to be
paragraph 3.3.7(d) above are likely to be those which, informed by the nature and the mandate of the respective
because of their size or nature or because of special terms and entity. An appropriate skills mix would ensure effectiveness
conditions (for example, contingent fee arrangements), are of the internal oversight having availed the required expertise
thought to give rise to threats to the auditor‘s independence. within the committees.
As a consequence, careful consideration will be needed when
determining whether it is in the interests of the entity that (d) The Committee members must be able to dedicate sufficient
they should be purchased from the audit firm (rather than time to the performance of Audit Committee work.
another supplier) and, if so, whether any safeguards to be put
in place by the audit firm are likely to be effective. (e) The committee can co-opt persons will specialized skills on a
need basis where such specialized skills are not available
(r) In determining the policy, the audit committee should take within the committee
into account the possible threats to auditor objectivity and
independence and the Ethical Standards for Auditors 4.2. Appointment
regarding the provision of non-audit services by the external Terms and mode of appointment of audit committee members for
audit firm. various categories of public sector entities is as indicated in the matrix
(s) The audit committee should agree with the board and/or below.
executive management the entity‘s policy for the employment 4.2.1.Appointment and Composition Matrix
of former employees of the external auditor, taking into
account the Ethical Standards for Auditors and paying Appointment and Composition of Members of Audit Committees in
particular attention to the policy regarding former employees Various Public Sector Entities
of the audit firm who were part of the audit team and moved
Entity Appointment
directly to the entity. The audit committee should monitor
application of the policy, including the number of former 1. Ministries and 1. Cabinet Secretary of each respective
employees of the external auditor currently employed in Departments Ministry will constitute audit
senior positions in the entity, and consider whether in the committee by nominating members
light of this there has been any impairment, or appearance of as follows- one (1) member external
impairment, of the auditor‘s independence and objectivity in to the ministry but from the larger
respect of the audit. Public service, two (2) members
external from the respective ministry
(i) The audit committee should monitor the external audit and public service; one of whom
firm‘s compliance with the Ethical Standards for shall be the Chair.
Auditors relating to the rotation of audit partners, the
level of fees that the entity pays in proportion to the 2. The CS of each ministry shall
overall fee income of the firm, or relevant part of it, and request the National Treasury to
other related regulatory requirements. nominate a Treasury representative
as per Regulation 174 (4) to serve in
(ii) A degree of flexibility over the timing of rotation of the the ministry‘s Audit Committee.
audit engagement partner is possible where the audit
2. Parliament 1. Three (3) members of audit
committee decides that it is necessary to safeguard the committee shall be nominated from
quality of the audit. In such circumstances, the audit
among the PRLSCOL members.
engagement partner may continue in this position for an
additional period of up to two years, so that no longer 2. The National Treasury shall
than seven years in total is spent in this position. The nominate a treasury representative to
audit committee should disclose this fact and the the audit committee
reasons for it to the shareholders as early as practicable.
3 The Judiciary 1. The Judiciary‘s Audit Committee
(t) The annual report should explain to shareholders how, if the
auditor provides non-audit services, auditor objectivity and shall comprise of at least three (3)
members of the JSC none of whom
independence is safeguarded. The explanation should:
shall have executive role.
(i) describe the work of the committee in discharging its
2. The JSC shall appoint the chair of the
responsibilities;
committee.
(ii) set out the audit committee‘s policy on the engagement 3. The National Treasury representative
of the external auditor to supply non-audit services in in the J.S.C shall be part of the 3
sufficient detail to describe each of the elements in member.
paragraph 3.3.10(d), or cross-refer to where this 4. Independent The Commissions will constitute their
information can be found on the entity‘s website; and Commissions whose audit committees as follows;
(iii) set out, or cross refer to, the fees paid to the auditor for commissioners are on a 1. Two (2) independent audit committee
audit services, audit related services and other non-audit full time basis in the
members sourced competitively; each
services; and if the auditor provides non-audit services, commissions, (TSC, respective commission shall appoint
other than audit related services, explain for each CRA, PSC, IEBC,
the chair person amongst the 2
significant engagement, or category of engagements, Kenya National members
what the services are, why the audit committee Commission on Human
concluded that it was in the interests of the entity to Rights and Equity 2. One (1) commissioner with as little as
purchase them from the external auditor (rather than Commission etc) possible executive responsibilities;
another supplier) and how auditor objectivity and 3. One National Treasury
independence has been safeguarded. representative.
 15th April, 2016 THE KENYA GAZETTE 1407

9 Public Funds (within the 1. The guidelines under Ministries and

5. a) Other commissions 1. The Audit Committee shall Administration of a Departments shall apply.
as indicated in schedule comprise of at least three (3) State Department or
ii members of their respective any other National
commission who have no, (as far as Government Entity)
possible) executive roles. Schedule V.
2. The National Treasury shall 10. All Public Schools 1. The county education boards to
nominate a treasury representative constitute Sub County audit
to the audit committee committee with 3 – 5 independent
members as appropriate.
(b) (i) Controller of 1. The guidelines under Ministries and
Budget Departments shall apply. 2. The Cabinet Secretary/Education or
his /her nominee shall nominate his
(ii) Director of Public
Prosecutions representative in each audit
committee.
( iii) OAG
C) The National 1. The National Security council shall 4.2.2. Term of office of members (including Chairs)
Intelligence Service, nominate 4 members of audit
(a) The initial term of appointment to the committee should be
Defence Forces. committee. for a period of three years. The term of appointment can be
witness protection e.t.c.
2. The National Treasury shall extended for a further three years, giving a maximum total
(NB. all security nominate a treasury representative period of service of six years.
organs)
to the audit committee.
(b) The term should only be extended after the performance of
6. All Government Owned 1. The respective Boards will the member has been reviewed.
Enterprises Operating nominate at least three (3) of their
on the basis of Board members who, as far as (c) Members of the Audit Committee shall be appointed by
Commercial possible do not have executive roles individual letters of appointment by the appointing authority.
Principles.(Schedule ii) in the Board, to serve in the Audit The letters of appointment should clearly spell out the
Committees. effective date and the term for which the appointment will
run;
2. The Board shall appoint the chair of
the Audit Committee. (d) The Treasury shall nominate an officer to be appointed by the
3. The Treasury representative in the respective appointing authority as the Treasury
various Boards shall be a member representative. The Treasury representative shall perform
of the Audit Committee. functions enumerated in the appointment letter;

7. National Government 1. The respective Boards will (i) A person shall cease to be a member of an audit
Entities (Regulatory nominate at least 3 of their board committee if—
Agencies) -Schedule iii members who, as far as possible do (a) that person is convicted of a criminal offence and
not have executive roles in the sentenced to a term of imprisonment of not less
Board, to serve in the Audit than six months; or
Committees; the board shall appoint
a chairperson among the 3 (b) that person is absent from two consecutive regular
members. meetings of the committees without leave of
absence; or
2. The National Treasury nominee
shall be a member of the audit (c) that person resigns, in writing, from the audit
committee. committee; or

8. National Government 1. The respective Boards will (d) that persons‘ term of office expires; or
Entities (Executive nominate at least 3 of their Board (e) that person ceases to be member by virtue of
Agencies, Research members who, as far as possible do withdrawal of his or her nomination to the audit
Institutions, Public not have executive roles in the committee by the nominating institution; or
Universities, Public Board, to serve in the Audit
(f) that person becomes an employee or officer of the
Tertiary Education and Committees; the board shall appoint
concerned entity; or
training Institutions, a chairperson among the 3
National Referral members. (g) that person is discovered to have a conflict of
Health Facilities Boards 2. The Treasury representative shall be interest as prescribed as at the time of his
and Commissions appointment and failed to disclose it; or
a member of the Audit Committee.
(Financed through the (h) The audit committee is disbanded.
exchequer), Fund 3. In case of any entity in this category
Management that does not have a sitting Board 4.2.3.Chairman
Corporations, any other accordingly its enabling legislation,
Entity Established to the entity shall competitively source (a) Effectiveness and true independence of the audit committee
perform any other for at least 3 members of the hinges on the chair‘s effectiveness.
Public Function), etc.)- entity‘s Audit Committee,
(b) In the appointment of the Chairman of the Audit Committee,
Schedule IV depending on the size of the entity.
careful consideration shall be given to leadership qualities
In addition, the National Treasury
because the Chairman of the Audit Committee is the person
shall nominate a treasury
who gives rise to confidence in the overall efficiency of the
representative to the audit
Audit Committee which would be beneficial to the effective
committee;
planning, and bringing the meetings to right direction.
i. Or request the National Treasury to
recommend the sharing of an (c) The characteristics of an effective audit committee chair
already existing Audit Committee include:
as per the provisions of Regulation (i) An independent proactive leader with confidence and
174(2) of the PFM Regulations. integrity;
(ii) A highly respectable and experienced person, who
possesses strong interpersonal skills and time available
to develop and closely monitor the committee agenda;
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(iii) a person with excellent working knowledge of an audit (ii) Views of all dissenting members shall be taken and
committee‘s functions and risk management appropriately recorded.
frameworks;
4.4. Minutes of meetings
4.2.4.Secretary
(a) Meetings should be conducted on a formal basis and be
(i) The head of internal audit shall be the secretary to the effectively minuted by the secretary to record the proceedings
committee. and any decisions made.
4.2.4.1.Role of the Secretary (b) The minutes should cover each agenda item and document
the discussion held and the outcome or conclusion from the
(i) Draft the audit committee‘s meeting agenda for the discussions. This would include any recommendations, action
Chairman‘s review, performing work pertaining to points, allocation of tasks to relevant person, allocation of
summoning of meetings, facilitate the distribution of the time for follow up and further consultation. The minutes
material to the audit committee members, and write up should contain sufficient information to provide an
the minutes of the audit committee meetings; understanding of the activities of the audit committee and the
(ii) Maintain a record for the audit committee‘s meetings committee‘s recommendations, conclusions and outcomes.
that detail all required activities to ascertain whether
they are completed and assists the committee in (c) The minutes of meetings to be prepared and distributed to
reporting to the Accounting Officer/Board/Full Council committee members within 7 working days after the
what it has accomplished; conclusion of the meeting.
4.3. Meetings of the Audit Committee (d) The minutes should be confirmed as true record of the
Audit committee meetings should be held on a timely and regular meeting at the next meeting. If any important details have
basis and their proceedings, recommendations and discussions been incorrectly recorded or omitted, they should be
formally minuted. A meeting agenda should be prepared and discussed and the minutes amended prior to confirmation at a
distributed in advance to enable adequate evaluation by committee subsequent meeting.
members. A detailed agenda and strong chairing is vital in order that (e) After the minutes are confirmed as true record of the meeting,
committee meetings remain focused. they should be signed by the Chair and the Secretary.
4.3.1.Agenda setting
(f) Copies of the minutes should be distributed to all members.
(a) The committee should determine its own agenda. However, it
is considered beneficial for the committee Chair to liaise with In addition, a copy of the audit committee minutes should be
the accounting officer or chief executive of the governing forwarded to stakeholders who may have an interest in the activities of
body, management, internal audit and external audit prior to the audit committee, for example external audit and management.
setting the agenda so that recent developments can be
included. 4.5. Initial Information Requirements for the Audit Committee
(b) In setting the agenda, the most significant risks and threats to When a new audit committee is constituted and when new
the entity should be emphasised as well as the ongoing members are appointed the secretariat shall be required to produce the
evaluation of what is being done to mitigate such risks. following:
(c) The agenda and documents supporting matters to be (i) The Public Finance Management Act, 2012, the Public
discussed in the meeting should be circulated to the audit Finance Management Act, Regulations 2015
committee members and persons who are to attend the
meeting at least 14 days in advance. This is to provide time (ii) The strategic plan of the entity
for consideration of the matters or request for additional (iii) The service charter
supporting information (iv) Performance contract
4.3.2.Frequency and Timing of Meetings (v) Budget and procurement plan
(a) The audit committee should meet at least quarterly; the (vi) Risk policy framework and risk profile
timing of meetings will depend on individual entity
processes, audit reporting and financial statement preparation (vii) The Internal Audit Strategic plan.
timeframes. For example, the audit committee should meet to (viii) An internal Audit charter that spells out the Internal Audit
review the financial statements before they are submitted to Purpose, Authority and Responsibility for approval by the
External Auditors. committee.
(b) The timing of audit committee meetings should be planned (ix) Internal Audit Budget and risk based Annual Work Plan,
annually in advance to ensure the availability of all members. (x) Any other relevant legislations, guidelines or documents.
The timing should be communicated to other personnel such
as internal and external audit and line management, so that 4.6. Progress Reports from Internal Audit Unit
their availability can also be confirmed as they may be
required to attend selected meetings. During regular meetings, the internal audit unit should provide the
audit committee with a progress report summarizing;
(c) The committee Chair may call additional meetings as
necessary to address any matters referred to the committee or (a) Work performed in comparison with the approved Annual
in respect of matters that the committee wishes to pursue. Work Plan;
4.3.3.Attendance (b) A report on consulting engagements undertaken and other
Quorum special assignments;
A quorum should consist of a majority of members of the (c) Key issues emerging from Internal Audit work;
committee including the chair, one of whom should be an independent (d) Management response to key audit findings and
external member. recommendations;
Proxies
(e) Risks which management has accepted to undertake which
As members are appointed on the basis of personal qualities and are not acceptable according to the Internal Auditor‘s
skills, proxies are not permitted if a member is unable to attend a opinion.
meeting.
(f) Major disagreements with management.
4.3.4.Voting
(g) Major limitations affecting the achievement of internal audit
(i) The notice of meeting which will require voting must specify objectives.
clearly the issues and names of persons to be deliberated on
and require any member of the Audit Committee who has any (h) Key issues emerging from external audit work
interest in a matter to be considered to declare before (i) A report on cooperation between internal and external audit
deliberations and voting on such matter.
15th April, 2016 THE KENYA GAZETTE 1409

(j) Internal and External Quality Assurance reports on the The common stakeholders of the public sector entities who will be
Internal Audit function if any. interested in audit committee reports will include;
(k) Periodic management accounts and or budget performance (a) Accounting officers
reports either quarterly or half yearly.
(b) The board/ council/ senate
4.7. Key Relationships and Access to Audit Committees
(c) The national/ county treasury
4.7.1.Relationship with Accounting Officer or Governing Body
(d) Top Management
(a) A key role of the audit committee is to act as an independent
source of counsel to the accounting officer or governing body (e) External audit
and to act as a forum for the resolution of any
audit/management disagreements. (f) Internal audit
(g) Development partners
(b) The accounting officer or governing body has a key role in
supporting the effectiveness of the audit committee by; (h) Citizens
(i) Providing capacity building to all public national (i) Shareholders
government entity audit committees;
(j) Other oversight agencies
(ii) providing policies and guidelines on audit committees; 4.7.5.2. Audit committee reports
(iii) monitor the effectiveness of audit committees; and The audit committee in the course of its work will issue periodic,
annual and special / investigative reports. The reports of the audit
(iv) Providing periodic updates of Audit committee activities
through the website. committee will be accessed by the stakeholders through the
management;
(c) The accounting officer of the concerned entity shall be The audit committee should produce periodic reports to the
responsible for the implementation of the recommendations accounting officer/ governing body/ chief executive officer citing key
made in the audit reports and shall develop response and issues affecting the operations of the entity. Investigative / special
action plan which he or she shall submit to the Chairperson of reports should be addressed to the requesting authority.
the audit committee within fourteen days.
The annual report of the audit committee should include;
(d) The Accounting Officer of a national or county government
(i) Introduction and background.
entity may by invitation attend audit committee meetings
(ii) Audit committee effectiveness
4.7.2.Meetings with Accounting Officer or Governing Body
(a) Preparation of the audit committee charter
(a) It is considered beneficial after each audit committee meeting
for the Chair to issue a brief or minutes to the accounting (b) Calendar of activities
officer, giving the audit committee resolutions and (c) Audit committee trainings
recommendations for implementation.
(d) Significant issues considered by the committee;
(b) It is also considered beneficial for the Chair to meet with the (iii) The internal audit effectiveness
accounting officer or governing body at the end of the year to
review the performance and achievements of the audit (a) Internal audit charter
committee and also to discuss the key issues and focus of the (b) Strategic plan
audit committee for the coming year.
(c) Risk based annual work plan
4.7.3.Relationship with Line Management (d) Internal audit reports
(a) The role of the audit committee with respect to line (e) Positioning, staffing and facilitation of internal audit
management will focus mainly on management‘s response to function;
audit findings and implementation of audit recommendations.
(iv) Effectiveness of management
(b) The audit committee should determine whether (a) Strategic plan and delivery of mandate
management‘s response to address the audit findings is
satisfactory, cost-effective and in line with the entities risk (b) Performance contract
management framework. The audit committee should also (c) Annual procurement plan
ensure that the recommendations will enhance the
effectiveness and efficiency with which the entity delivers its (d) Annual budget
services. (e) Risk management policy and profile
(c) If required, line management may by invitation attend audit (f) Adequacy and effectiveness of internal control
committee meetings but they are not eligible to vote. (g) Governance structures and processes
4.7.4.Relationship with External Audit (h) Tone at the top;
(a) External audit and the audit committee should have a strong 4.8. Assessment of the Audit Committee Performance
and candid relationship. Open, regular, frank and confidential 4.8.1.Annual Self-Assessment
dialogue should be the norm, allowing the audit committee to
utilize the technical knowledge and experience of external (a) The audit committee should assess its performance and
audit in assessing, for example, the quality of the entity‘s achievements against its mandate, roles, duties &
internal control systems and financial reports. responsibilities that should be captured in the calendar of
activities on an annual basis. The aim of the self-assessment
(b) Audit committee may be instrumental in facilitating is to ensure that the audit committee is meeting its objectives
communication and effective relationship between Internal efficiently and effectively. The self-assessment report should
Audit and External Audit. be presented by the Chair to the accounting officer/ governing
body. The report should be ready at the same time as the final
(c) The internal audit shall, on behalf of the audit committee accounts of the entity.
monitor and report on the implementation of external audit
findings and recommendations. (i) Areas for self-assessment should include the audit
committees‘ understanding, communication and
4.7.5.Communications with Stakeholders (Reporting)
oversight responsibilities in regard to the financial
4.7.5.1.Introduction statements, risk management, internal controls,
compliance, ethics, management, internal auditing,
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1410 THE KENYA GAZETTE 15th April, 2016

external auditing, resources and special assignments and The National Construction Authority is a state corporation
investigations. established by the National Construction Authority Act, 2011, herein
referred to as the Act. The principle purpose of this Authority is to
(ii) The committee should also assess its composition, develop and stimulate growth in the construction industry for effective
training, meetings, charter and performance. service delivery, enhance the industry‘s role in economic development
(b) Where the self-assessment highlights a need for in order to realize the Kenyan people‘s dreams and aspirations as
enhancements to the role, operational processes or presently encapsulated in the Vision 2030 and other developmental
membership of the committee, the Chair should take action to blueprints and to regulate the activities in the industry through
ensure that such enhancements are implemented. The Chair registration and regulation of contractors and accreditation of
may need to consult with the accounting officer or governing construction workers. Section 5(2)(m) of the Act mandates the
body to obtain appropriate support to ensure all enhancements National Construction Authority to develop and publish a code of
are implemented. conduct for the construction industry.

4.8.2.Management feedback PREAMBLE

The audit committee should seek feedback from the senior Good corporate governance is accepted worldwide as a foundation
management on their effectiveness. that supports competitive advantage in any market. National
development is accelerated when business enterprises uphold the key
4.8.3.Use of an External Facilitator (External Evaluation) elements of corporate governance namely; discipline, transparency,
independence, accountability, responsibility, fairness and social
The audit committee may use an external facilitator to provide
responsibility. In the construction industry, the critical importance of
assistance with the self-assessment process. The committee Chair and
good corporate governance should be appreciated by all stakeholders
external facilitator should provide feedback to the audit committee
who should be under obligation to adhere to these provisions.
members and present the findings of the evaluation to the accounting
Construction professional service providers are also obliged, in their
officer or governing body.
role as trusted advisers, to assist clients to comply with these
provisions.

GAZETTE NOTICE NO. 2692 The development of the construction industry will be enhanced
when all stakeholders—
THE NATIONAL CONSTRUCTION AUTHORITY ACT
(a) have clearly stated and enacted corporate values;
(No. 41 of 2011)
(b) ensure that they perform efficiently, responsibly, accountably,
CODE OF CONDUCT FOR THE CONSTRUCTION INDUSTRY transparently, and with probity;
(c) recognize the legitimacy of interest of defined stakeholders;
IN EXERCISE of the powers conferred by section 5 (2) (m) of the
National Construction Authority Act, 2011, the Authority publishes the (d) engage in long-term relationships;
Code of Conduct for the Construction Industry in the Schedule hereto: (e) adopt agreed codes to tackle corruption and persist the
enforcement thereof;
SCHEDULE
(f) give due recognition to the respect for human rights;
PREAMBLE
(g) respect the well-being of employees by treating them fairly
1.0 PARTIES INVOLVED IN THE CONSTRUCTION INDUSTRY and with cultural sensitivity;
(h) practice and encourage greater environmental and social
1.1 Agent
responsibility;
1.2 Contractor
(i) avoid the use of harmful products and processes;
1.3 Employer
(j) promote collaborative partnerships with communities;
1.4 Procuring agents
(k) work to build capacity and recognize need for profitability in
1.5 Employee the private sector to ensure a vibrant and sustainable industry;
1.6 Client- Employer Representative (l) guard against abuse of power by the stronger party in
1.7 Subcontractor contractual relationships;
1.8 Tenderer (m) recognize the inherently dangerous nature of the industry and
give priority to occupational health and the safety of all
1.9 Supplier
employees and the public; and
2.0 PRINCIPLES GOVERNING THE CONDUCT OF PARTIES (n) engage with and share best practice.
3.0 ACCEPTABLE CONDUCT The Code of Conduct provides a facilitative tool for the
achievement of these principles as it represents an important step in the
3.1 Conduct of the agent
management of integrity and the creation of an environment within
3.2 Conduct of the contractor which business can be conducted in a fair and transparent manner. The
3.3 Conduct of the employer Code further forms an essential first line of defense in combating the
scourge of corruption.
3.4 Conduct of procuring agents
3.5 Conduct of employees 1.0 PARTIES INVOLVED IN THE PROCUREMENT VALUE
CHAIN FOR THE CONSTRUCTION INDUSTRY
3.6 Conduct of subcontractors
3.7 Conduct of tenderer This Code of Conduct applies to the various parties involved in all
construction works under the Act. The parties that may be directly and
3.8 Conduct of Supplier
indirectly involved include the following—
4.0 ENFORCEMENT OF THE CODE OF CONDUCT
1.1 Agent
5.0 MONITORING AND EVALUATION
A natural or juristic person or partnership who is not an employee
6.0 REVIEW OF CODE OF CONDUCT of the employer but who acts on the employer's behalf;

APPENDIX : FORM A AND B 1.2 Contractor

CODE OF CONDUCT FOR THE CONSTRUCTION INDUSTRY A natural or juristic person or partnership who contracts with an
employer to perform a contract;
This code may be cited as the Code of Conduct and Ethics for the
Construction Industry. The contract can relate to services, supplies and construction
works.
 15th April, 2016 THE KENYA GAZETTE 1411

1.3 Employer (e) observe due process taking account of the legitimate and
reasonable rights of all the parties;
A natural or juristic person, partnership, or organ of state entering
into the contract with the contractor for the provision of supplies, (f) not gain any value from any other party to the procurement
services, or construction works: value chain or the client in fulfilling their obligations;
(g) not undermine the development objectives of the employer
All institutions (a public body including national and county through conflicting personal interests;
governments and their departments, trading entity, constitutional
institution, municipality, public entity or municipal entity) which (h) disclose any circumstance which may possibly be construed
contracts with a contractor is an employer. A contractor who engages a as constituting a conflict of interest and excuse himself from
supplier, service provider or a subcontractor is also an employer. An deliberation on such matters;
employer is often referred to as a "client". (i) not engage in practices that gives one bidder an improper
advantage over another.
1.4. Procuring Agents
A natural person in the employ of an employer who acts in their 3.2 Conduct of the contractor
behalf to coordinate the activity of procurement of goods and services. The contractor or his employees should—
1.5 Employee (a) act professionally;
A natural person in the employ of an agent, contractor, employer, (b) undertake the contract with the objective of satisfying the
subcontractor or tenderer and who acts on their behalf. Note: An requirements of the employer by observing the spirit as well
employee includes an official in an organ of state. as complying with the letter of the contract and, in pursuit of
1.6 Client - Employer Representative this objective, co-operate with all other parties in the
procurement value chain;
A person who represents the developer on a site and acting as the
client‘s liaison with the contactor and the National Construction (c) aim to meet all statutory and contractual obligations fully and
Authority. timeously in regard to conditions of employment,
occupational health and safety, training, fiscal matters and
1.7 Subcontractor any other;
A natural or juristic person or partnership who is contracted by the (d) not attempt to influence the judgment, or actions, of agents,
contractor to assist the latter in the performance of his contract by employees, or representatives by inducements of any sort;
providing certain supplies, services, or construction works.
(e) employ subcontractors only on the basis of fair, unbiased,
1.8 Tenderer written subcontracts;
A natural or juristic person or partnership who submits a tender (f) not engage in unfair or unethical practices in dealings with
offer, an expression of interest or a request for proposal to perform a subcontractors;
contract in response to an invitation to do so.
(g) not make spurious claims for additional payment or time
1.9 Supplier extensions to the contract;
A natural or juristic person or partnership who is contracted by (h) not approach any client or employer representative directly in
either the employer or his agent, or the contractor or his agent to connection with a contract, save to clarify on any matter for
provide certain services or products. which such clarification may be sought;
2.0 PRINCIPLES GOVERNING THE CONDUCT OF PARTIES (i) not undermine the development objectives of the employer
In the interests of a healthy industry that delivers value to clients through pursuit of interests contrary to the employers stated
and society, the parties in any public or private construction contract objective;
procurement and execution should in their dealings with each other act (j) not engage in collusive practices that have direct or indirect
in the best interests of the contract and particularly— adverse impacts on the cost of the project to the employer.
(a) behave equitably, honestly and transparently; 3.3 Conduct of the employer
(b) discharge duties and obligations in a timely manner and with
The employer, his employees, or agent should—
integrity;
(a) not invite tenders without having a firm intention to proceed
(c) comply with all applicable legislation and associated
with the procurement;
regulations;
(d) satisfy all relevant requirements established in procurement (b) ensure that the basis on which tenders will be evaluated is
documents; clearly set out in the tender documents and that tenders are
evaluated and awarded accordingly;
(e) avoid conflicts of interest;
(c) employ contractors only on the basis of fair and equitable
(f) not maliciously or recklessly injure or attempt to injure the written contracts;
reputation of another party.
(d) not accept gifts, favors or other considerations, of anything
3.0 ACCEPTABLE CONDUCT more than token value from any other party to the procurement
value chain;
The Code of Conduct serves to establish the broad framework
within which an action, or default, by any party to the procurement (e) ensure that all documents relevant to any stage of the
value chain may be judged. Any action, or default, which conflicts procurement value chain are clear and comprehensive and set
with the code, is unacceptable. out the rights and obligations of all parties;
The following examples are not exhaustive, but serve to highlight (f) not breach the confidentiality of information, particularly
acceptable actions and defaults that are more commonly encountered. intellectual property, provided by tenderers in support of their
tender submissions;
3.1 Conduct of the agent
(g) not engage in unfair or unethical practices in dealings with
The agent or his employees should— subcontractors including the practice of trading one
subcontractor off against another in an attempt to obtain lower
(a) strictly observe the code of conduct laid down by the body prices;
governing his profession or trade;
(h) ensure that all tenderers are fairly treated and that tender offers
(b) act in a fair and equitable manner towards all other parties in are evaluated without bias;
the procurement;
(i) ensure that transparency is maintained in the tendering
(c) not accept gifts, favors or other considerations of anything
process. This implies—
more than of token value;
(i) inviting tenders as widely and publicly as possible;
(d) not unnecessarily, or through lack of diligence, cause delay
by any of the parties in the procurement value chain;
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1412 THE KENYA GAZETTE 15th April, 2016

(ii) stating clearly any prequalification criteria and (b) not exchange information regarding tenders with any other
considering only those who qualify; tenderer prior to the closing time and date for tenders;
(iii) opening tenders in public; (c) not knowingly price his tender in such a way as to gain an
(iv) making available key information, such as tender prices, unfair advantage from an obvious error or oversight, in the
tender documents;
basic award criteria and times required for completion,
and; (d) not attempt to influence the tender evaluation process;
(v) making known to unsuccessful tenderers the outcome of
(e) not approach any procuring agent, representative or employee
the evaluation process;
directly in connection with a tender.
(j) ensure that his obligations in terms of contracts with contractors
and agents are scrupulously and timeously met, particularly in 3.8 Conduct of Supplier
regard to making decisions; The supplier, his employees or agent should —
(k) ensure that legal requirements and principles are upheld in (a) be informed of all product regulations and abide by them;
relation to safety, health, the environment and sustainable
delivery management; (b) comply with all product bans and mandatory standards;
(c) market products according to their design and intended use;
(l) ensure that payments are made regularly and within the agreed
time schedule. (d) be aware of product liability laws and regulations.
3.4 Conduct of procuring agents 4.0 ENFORCEMENT OF THE CODE OF CONDUCT
Procuring agents or their employees should— (1) Section 5(2)(m) of the National Construction Authority Act,
(a) conduct themselves in the manner befitting the role which they 2011, makes provision for the development and publishing of this
are to perform in procurement; Code of Conduct while sections 22 and 23 make provisions for the
Board to initiate inquiries into the conduct of contractors and to
(b) strictly observe any code of conduct laid down by their appoint investigating officers to carry out investigation of any offences
respective employers and the provisions of all legislation and under the Act. To this end, the Board may convene and conduct an
regulations governing procurement; enquiry into any breach of the Code of Conduct and to issue summons
(c) perform their duties in an unbiased and conscientious manner, to any person to appear in person and produce documents relating to an
bearing in mind the legitimate interest of all parties to the inquiry.
procurement process and where relevant, the public;
(2) The Board may as appropriate sanction those who breach the
(d) ensure that they are not responsible for an unacceptable action, code of conduct by —
or default, being attributed to the respective employer;
(a) issuing a warning or a fine,
(e) not allow themselves to be influenced in the execution of their
duties by any consideration other than the legitimate and (b) referring the matter to the Kenya Police Service,
reasonable interests of the respective employers;
(c) referring the matter where a breach is in respect of an official
(f) not accept any gifts, favors or other considerations, of anything to the employer or to the accounting officer for action in terms
more than token value from any other party to the procurement of the Public Service Act,
value chain;
(d) suspending registration or deregistering contractors, or
(g) where they act on behalf of an employer, administer contracts
in an even handed manner; (e) referring the matter to a statutory body that has jurisdiction
(h) disclose any circumstance which may possibly be construed as over the matter.
constituting a conflict of interest and excuse themselves from (3) The sanctions by the Board are, however, a reactive way to
deliberations in such matters. enforce the Code of Conduct. The spirit of the Code is to facilitate a
3.5 Conduct of employees proactive platform for all parties in the procurement value chain to
commit to not only carry out business while upholding the stated
The employees should—
values of corporate governance namely; discipline, transparency,
(a) perform their duties in an unbiased and conscientious manner, independence, accountability, responsibility, fairness and social
bearing in mind the legitimate interest of all parties to the responsibility but to also do business only with those who uphold the
procurement value chain and the public; same values. Should this be done, adherence to the principles of the
code will form an integral part of all business processes.
(b) not entertain representations from any agent, tenderer,
contractor, or subcontractor, in regard to procurement, except 5.0 MONITORING AND EVALUATION
through the employer or such person as may be delegated by
the employer to act in the procurement; (1) The National Construction Authority will continuously monitor
the implementation of the Code of Conduct through existing structures.
(c) not be unduly influenced by, or accept any gifts, favors or other
considerations from any party which might have an interest in (2) The Authority shall also publish in its annual report a progress
the procurement value chain; on the implementation of the Code for reference by the public and all
(d) disclose any circumstance which may possibly be construed as stakeholders.
constituting a conflict of interest and should be excused from 6.0 REVIEW OF CODE OF CONDUCT
deliberations in such matters.
The National Construction Authority in collaboration with its‘
3.6 Conduct of subcontractors
stakeholders shall make provision for reviewing the Code from time to
The subcontractor should— time as deemed necessary but in any case no three years shall lapse
(a) in so far as is relevant, act in the same way as the contractor is before review.
expected to act and behave in a circumspect manner; FORM A
(b) not undermine the position of any contractor that has provided
a price in relation to a particular tender. Commitment to abide by the Code of Conduct for the Construction
industry
3.7 Conduct of tenderer
To: ...............................................................................................................
The tenderer, his employees or agent should—
............................................................................................................
(a) not become involved in collusion with other tenderers or
potential tenderers, except for the purpose of joint venture ............................................................................................................
formation or collective action to deal with unfair conditions or
other faults in documentation; ............................................................................................................
 15th April, 2016 THE KENYA GAZETTE 1413

(Name, Title and Address of Procuring Entity Representative) Relationship (Business or Personal): .........................................................
Project Title: ............................................................................................... Occasion on which gift was received: .......................................................
............................................................................................................ Description & (assessed) value of Gift:.....................................................
............................................................................................................ Suggested Method of Disposal:
............................................................................................................  retained by receiving staff;
DECLARATION  retained for display;
 shared among the officers;
I/ We :- ..............................................................................................
 reserve as luck draw prize at staff function;
............................................................................................................
 donate to charitable organization;
............................................................................................................
 return to offer; or
............................................................................................................  others (please specify)
(Name and address of person/ firm bidding for the service)
Signed: .........................................................................................................
do hereby declare that we shall abide with and uphold the provisions of
this Code of Conduct at all times in our relationships with all persons ...........................................................................................................
in the procurement value chain for the above mentioned works. ............................................................................................................
Signed: ............................................................................................... ............................................................................................................
............................................................................................................ (Name, designation of person receiving the gift)

............................................................................................................ Witnessed by: ..............................................................................................

............................................................................................................ ............................................................................................................
(Signature, Name and Title of authorized signatory)
............................................................................................................
Witnessed by: ..............................................................................................
............................................................................................................
............................................................................................................ (Either the procuring agent or the project manager)
............................................................................................................ (This form is to be submitted by any person receiving a gift in the
course of discharging duties within the defined project. It must be
............................................................................................................ submitted within seven days of receipt of the gift).
(Name and capacity of witness)
DANIEL OGWOKA MANDUKU,
FORM B Chief Executive Officer,
Report of gifts received .............................................................................. National Construction Authority.

To: (Employer)............................................................................................ STEVEN BWIRE OUNDO,

Chairperson of the Board,
Description of Offeror: .............................................................................. National Construction Authority.
Name and Title ............................................................................................
Company: ....................................................................................................
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PRINTED AND PUBLISHED BY THE GOVERNMENT PRINTER, NAIROBI