(Interim Strategic Director) To consider the attached report from the External Auditor regarding the Council’s Final Accounts for 2018/19 (AGC-008-2019/10).
The Council’s external auditors, Deloitte, presented a report on their audit of the Council’s Accounts for the year ended 31 March 2019.
The External Auditor explained that it had been a difficult audit for both the Council and the external auditors, with significant delays in completing the audit process due primarily to the recent loss of significant corporate knowledge within the Finance team and weaknesses in the arrangements for the preparation of the final accounts. However, the audit was now moving towards a completion and the External Auditor expected to issue an unqualified opinion if no further issues were uncovered.
The External Auditor reported that three significant risks had been identified at the beginning of the audit process, and these were: management override of controls; Capital Expenditure; and the valuation of fixed assets and investment properties. The defined benefits pension scheme was also identified as an area of audit focus.
For the first significant risk, the External Auditor clarified that this included the potential for Officers to use their judgement to influence the financial statements as well as the potential to override the Council’s controls for specific transactions. Some control deficiencies had been identified, but there were no instances of inappropriate management override of controls in relation to the transactions tested. For the second significant risk, some errors in relation to inappropriate capitalisation of demolition costs were identified, and the Council’s management had indicated that they would review these transactions. In respect of the third significant risk, work on the Council’s property valuations was ongoing but a number of recommendations had been identified by the valuations specialists for discussion by the Council’s management with their Valuers.
In relation to the defined benefits pension scheme, administered by Essex County Council, the Council’s pension liability had been affected by the McCloud legal judgement regarding potential discrimination in the implementation of transitional protections following changes to public sector pensions schemes in 2015. As a result of this, the Council had adjusted its pension liability by £1.6million based on assumptions regarding future salary increases and the age of the membership. The External Auditor had reviewed these assumptions and on the whole they had seemed reasonable.
The External Auditor drew the Committee’s attention to the recommendations that had been made as a result of the audit so far in respect of: the quality of draft financial statements; preparation of accounting papers; documentation of controls and processes; review and approval of working papers; control of cash accounts; maintenance of contact information and mandates with third parties; evidence of the ‘rents to mortgages’ scheme; disposal processes; depreciation policy; production of debtor and creditor listings; elimination of internal recharges; retention of signed employee contracts; new accounting standards IFRS 9 and 15; preparation for IFRS 16; and the preparation of cash forecasts.
The External Auditor highlighted the two incorrect and unadjusted misstatements which had been identified regarding the incorrect capitalisation of disposal costs and the transfer of the building value of garages awaiting demolition to assets under construction. In both cases, management had been requested to correct the misstatements. Finally, the External Auditor stated that they had incurred additional costs in performing the audit for the Council, due to the difficulties and delays in obtaining information and the errors identified in the financial statements. This additional cost was currently estimated to be £40,000.
Mr T Jarvis commented that there was a considerable amount for the Council to learn from the External Auditor’s report and the Co-Opted Member was not reassured to note the intent to improve the process of preparing the Final Accounts; was there not a plan to implement the necessary improvements? The Interim Strategic Director reassured the Committee that Officers were already working to remedy the issues raised by the External Auditor, and an Improvement Plan had been drawn up. One element would be to have a test run preparing the Final Accounts after month 9 of the financial year using the available data. The Interim Strategic Director suggested a further recommendation to submit the Improvement Plan to the next meeting of the Committee for consideration, and this was agreed.
Mr T Jarvis added that, in respect of recommendation 5 concerning the supplementary audit fee, he would like to see a schedule detailing the items which had led to the additional cost of £40,000 submitted to the next meeting of the Committee. The External Auditor agreed to prepare a schedule itemising the extra costs incurred for the Committee’s next meeting. The Committee asked about the status of the Value for Money and Capital Expenditure audits. The External Auditor responded that the Capital Expenditure audit was substantially complete, whilst the Value for Money assessment needed to consider the challenges that had been faced by the Council before issuing a conclusion.
Ms N Nanayakkara commented that it was important for the Committee to recognise that there had been a poor handover when the previous senior Financial Officers had left the Council, and the existing infrastructure did not support the Officers that remained which was an internal control weakness. Ms Nanayakkara was also concerned that some issues were not picked up until the External Auditor noticed them, and would be interested to read the Improvement Plan when it was presented to the Committee’s next meeting. The Interim Strategic Director reassured the Committee that these issues had been included in the Improvement Plan, as well as the cashflow issues identified by the External Auditor.
The Chairman opined that the issues which had been identified mainly revolved around handover procedures when Officers left the Council. The Council needed to make sure that this did not happen again and develop some sort of written process for leaving staff to follow to ensure information was handed over to those staff remaining at the Council.
(1) That the comments made by the external auditor concerning the final accounts and the process of producing the final accounts be noted;
(2) That the areas where further follow-up is required and the completion of the outstanding “Value for Money” assessment be noted;
(3) That the intent of the Authority to make any necessary adjustments to the accounts to reflect the findings and suggestions of the External Auditor be noted;
(4) That the existing and future intent of the Authority, to address any process and procedure issues associated with the preparation of the Final Accounts to the satisfaction of the External Auditor by 31 December 2019 be noted;
(5) That, reflecting delays and interruptions in the audit work and the extent of the audit review, the payment of the supplementary external audit fee of £40,000 be approved and a schedule detailing the items incurring this additional cost be submitted to the next meeting of the Audit & Governance Committee; and
(6) That, on the advice of the Authority’s Section 151 Officer, the Chairman of the Audit and Governance Committee be delegated to make any final adjustments to the figures and text of the final accounts and report all such changes at the next meeting of the Audit and Governance Committee; and
(7) That the Improvement Plan detailing the changes to be implemented to address the process and procedure issues associated with the preparation of the final accounts be submitted to the next meeting of the Audit & Governance Committee.