Agenda item

(External Auditor) International Standard on Auditing 260 requires the External Auditor to report to those charged with governance certain matters before they give an opinion on the Statutory Statement of Accounts. The External Auditor has indicated that their audit of the Council’s Statutory Statement of Accounts for 2014/15 is nearly complete and that they wish to present their ISA260 report to this meeting. (AGC-008-2015/16).

The External Auditor presented the Annual Governance Report for 2014/15, the purpose of which was to advise the Committee of the significant findings arising from the audit of the Council’s financial statements and arrangements to secure economy, efficiency and effectiveness in the use of resources.

The External Auditor advised the Committee that one material misstatement had been identified, which related to incorrect data input into the Asset Management System. As a result of this misstatement, which concerned a historical cost depreciation adjustment, the balance on the Revaluation Reserve had been overstated by £6.554million with a corresponding understatement on the Capital Adjustment Account. It had been agreed to adjust for the error to ensure that both Statements were correctly stated. There had been one unadjusted audit difference identified, relating to the provision made by the Council for Non-Domestic Rates appeals, which would increase the draft surplus on the provision of services in the Comprehensive Income and Expenditure Statement by £88,000 to £15.863million. There was also a further misstatement of £877,000 in respect of Affordable Housing on the Balance Sheet, which should have been reported in the Comprehensive Income and Expenditure Statement.

The External Auditor highlighted the addendum report on the supplementary agenda, in respect of the valuation of the four Leisure Centres owned by the Council. As the figures for the original valuation of the Centres could not be verified, the Council had instructed an external Valuer to carry out a new valuation. The original valuation for the four Centres was £27.162million as at 31 March 2015; however, it was found that the useful remaining lives of three of the centres had been overstated, and the revised valuation had been calculated at £12.335million. This represented a reduction of £14.827million, which had also resulted in a corresponding reduction in the value of the Council’s Balance Sheet. Accounting requirements also necessitated that £12.690million of this reduction be charged to the Revaluation Reserve, with the remaining £2.137million charged to the Comprehensive Income and Expenditure Statement.

Subject to the adjustments outlined above, the External Auditors expected to issue an unqualified true and fair opinion on the Financial Statements for the year ended 31 March 2015. The External Auditor thanked staff from the Council for their co-operation and assistance during the audit.

The External Auditor reported that the Council’s key financial systems were considered generally adequate as a basis for preparing the financial statements, with no significant deficiencies identified in the Council’s internal controls during the course of the audit. The Annual Governance Statement was not considered misleading and complied with the necessary guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA). It was also intended to issue an unqualified value for money conclusion as it was felt that the Council had proper arrangements in place to secure economy, efficiency and effectiveness in its use of resources for the year.

The Committee expressed grave concern over the adjustment for the valuation of the Council’s Leisure Centres. It was explained that this situation had arisen due to the working papers for the original valuation not being available to support the figures in the Accounts; the Officer who had performed the original valuations was now on long term sick leave. The Committee was reassured that it was a technical accounting issue and it would not affect the daily provision of services from these Centres or the Council’s usable reserves. In reality, it would not affect the Council until the assets were disposed of, although it did have an effect on the Council’s Balance Sheet and financial position. The Director of Resources added that there was an ongoing maintenance programme in place and the Council had not experienced a reduction in use or shortfall in income from the Leisure Centres. The valuations for the Leisure Centres had now been rectified to the satisfaction of the External Auditors. The Chairman commented that working papers should be readily available to the External Auditors.

The Committee noted the under-valuation of the Leisure Centres in the Accounts, which had been rectified by the use of external Valuers. The Committee also felt that external Valuers should continue to be used for future valuations of the Leisure Centres to reduce the risk to the Council. The External Auditor confirmed that this would also remove the risk of working papers not being available. The Committee also felt that the internal controls on working papers produced by the Council’s in-house Valuers should also be investigated to avoid a repetition of this situation in the future.

In relation to the misstatement for Affordable Housing, the External Auditor added that it involved the receipt of Section 106 monies. The Council had still received the relevant monies, but it had been listed in the wrong place in the accounts; again, it was a technical accounting issue. The Director of Resources added that there was an Officer Group - consisting of Officers from Housing, Legal and Accountancy – which kept all Section 106 Agreements under review, which reported directly to the Council’s Management Board. The Committee felt that it would be more open and transparent to both Members and residents if this Officer Group reported to the Governance Select Committee.

In response to further questions from the Committee, The External Auditor explained that the Code of Audit Practice for Local Government specified the evaluation methodology to be used for the valuation of particular assets; Depreciated Replacement Cost would be an acceptable method to use in certain circumstances. The valuations for the Council’s Social Housing stock was performed by the District Valuer, and the External Auditors undertook other work to test the valuations. The Bad Debts provision within the Accounts was an estimate; the External Auditor would examine the Council’s methodology and test it to determine if it was materially accurate.

The Chairman thanked the External Auditors for their report and stated that he would be pleased to sign the draft Representation Letter.

Resolved:

(1)        That the Annual Governance Report for 2014/15 presented by the External Auditor be noted;

(2)        That the initial under-valuation of the Leisure Centres, and the subsequent rectification by the use of external Valuers, be noted;

(3)        That, in order to reduce risk, future valuations of the Leisure Centres be undertaken by external Valuers;

(4)        That the internal controls on working papers produced by the Council’s Estates and Valuation Team be reviewed;

(5)        That the Officer Working Group reviewing Section 106 Agreements be requested to submit regular monitoring reports to the Governance Select Committee; and

(6)        That the draft Representation Letter be signed by the Chairman of the Committee and the Director of Resources.