Agenda item

Agenda item

External Auditor's report to those charged with governance, ISA 260

This report allows the Committee to ask questions of the external auditor concerning his ‘Report to those charged with Governance (ISA260)’ and to approve the Statement of Accounts for 2010/11.

Minutes:

The Committee received a report of the Head of Strategic Finance incorporating the External Auditor’s report to those charged with Governance (ISA260), the draft letter of Representation, the Statement of Accounts 2010/2011 and the Summary of Financial Outturn 2010/2011 which had been presented to Cabinet at its meeting on 26 September.

 

The Head of Strategic Finance apologised to the Committee that the documents had been late.  He explained that the Finance Team had had to close three sets of accounts.  There had been a significant amount of work to be carried out and the statement had had to be produced under International Financial Reporting Standards (IFRS).  This was the first time it had been necessary to comply with the new statutory accounting framework. This also resulted in a considerable amount of work for the External Auditor; hence the delay.

 

Richard Lawson informed the Committee that they were able to provide an unqualified opinion for the financial statement and the Value for Money Conclusions.  The report included details of areas that were being finalised.  He referred the Committee to page 23 of Appendix 1 to the report and adjustments to the financial statement.  The figures were below the materiality limits and it was for the Committee to take this into consideration when making its decision. 

 

The Head of Strategic Finance explained the phrase ‘materiality’; this referred to the size of any financial adjustment.

 

A Member stated that in order to be able to scrutinise the report, the Committee needed plenty of time to be able to evaluate the information.  It was very difficult to do this in two days.  The process needed to be more streamlined.  The Member asked for further clarification about the reason the draft financial statement missed the original deadline.  He was concerned there was a weakness in the process and the accounts needed to be agreed at this meeting.

 

Paul Dossett responded that the Council had issued the primary statement.  A full set of working papers had not been supplied at the start, but this was not considered to be a major concern, but they should have been ready.  Discussions had been held with officers regarding next year’s process.  It was acknowledged that the Shared Services team had produced three sets of accounts.  Synchronisation of the process needed to be streamlined.  It was necessary to engage with other services, including Revenues and Benefits.  He added that by combining IFRS and Shared Services, it was likely that it would not be perfect the first time.  A large amount of IFRS work carried out this year would not recur next year.  He acknowledged that Members needed sufficient time to scrutinise the papers.

 

The Head of Strategic Finance informed the Committee that the full set of financial statements should ideally have been ready for 30 June.  He had discussed the matter with the Director of Resources at Three Rivers District Council.  The External Auditor had identified the issue of capacity pinch points and it was possible that some external resource might be required in order to meet the deadline.  Officers did not want the same thing to happen again next year.  This year had been a learning curve for the Shared Services staff.  The Revenues and Benefits’ systems were settling down.  There had been three new members of staff recruited to the team, two of whom were from the private sector.  The Head of Strategic Finance said that he would endeavour, with the Director of Resources at Three Rivers, to ensure that next year everything reached Grant Thornton by 30 June.

 

The Chair said that he was pleased the Councillor had highlighted this matter.  He considered that generally Shared Services was a good process but there were practical issues.

 

The Finance Manager advised the Committee that the Finance team were closing the accounts on a new financial system.  The full set of paperwork had been provided to the Auditor prior to the commencement of the Audit.  The statement had been available on the Council’s website prior to this date. 

 

The Member asked for an explanation why the papers had not been provided in an electronic format as in 2009/10.

 

The Finance Manager responded that electronic papers had been supplied.  In previous years working papers had been burned to disc and provided to the Auditors.  She explained that usually the Auditors provided the Records Required Listing several weeks before the Audit.  This year combining the two formats had been difficult.  The problem had been more related to lack of co-ordination.

 

Richard Lawson added that previously the information had been presented on a disc as soon as they entered the Council.  This year that was not the case and the information was produced as the audit proceeded. 

 

The Head of Finance Shared Services commented that the format had not been as the auditor had wanted but the same standard had been achieved as in the previous financial year.  The information was available electronically.  He confirmed the information had been provided when requested and not as they entered the Council.

 

Paul Dossett stated that prior to Christmas 2011, a detailed list of all working papers required would be sent to the Council for the audit of the 2011/12 Accounts.

 

The Head of Strategic Finance said that the closing timetable had slipped by one month and he assured Members that this would not happen again.

 

Paul Dossett informed the Committee that the Finance team had responded with the required information as quickly as they could.  The Auditors had, however, struggled with getting the information from Revenues and Benefits.

 

The Member commented that it appeared that Revenues and Benefits was delaying the process.  He added that the service needed to be scrutinised.

 

Another Member said that he had noted Revenues and Benefits had been highlighted in the Internal Audit Annual Report and this service could be discussed more at that point of the meeting.  The service’s performance was scrutinised at Overview and Scrutiny Committee and had been noted as a concern.  He agreed that a scrutiny Task Group could be set up to review the service.  Members of the Committee could take part in the Task Group.

 

Paul Dossett informed the Committee that the next key piece of work was certification of the Housing Benefits Subsidy claim.  He felt this might present a challenge.  He would report back to Audit Committee on the progress. 

 

Richard Lawson stated that recently he had audited the Business Rates closure of accounts which had taken longer than normal.  The benefit claim audit would possibly be more problematic.  This audit would commence on 6 October.

 

Following a question about misstatements, Richard Lawson explained that the statement had been received and formularised, but there were two matters which could not be completed and overall amounted to £320,000.

 

Paul Dossett added that if the amount was a large figure the accounts would be qualified.  The issue had been raised at it was above triviality.  The Committee needed to consider management’s comments or whether it wanted the matter reviewed.  If it were reviewed the deadline would be missed.  He assured members the money had not gone astray.

 

The Finance Manager explained that the misstatements related to netting a debtor against a creditor.

 

The Head of Strategic Finance informed the Committee that the Council collected £63 million and the adjustment should be seen in that context.

 

A Member acknowledged the comments and was pleased that the accounts had not been qualified.  He asked how the difficulties which had arisen on this occasion could be prevented from happening again.  He asked whether it would be possible to have a report for a future meeting.

 

The Head of Strategic Finance said that with reference to Revenues and Benefits, the service was improving.  He advised that Shared Services was the contractor and the Council was the client.  The Council needed to ask for an explanation why the accounts were not perfect.

 

The Member said that one area of concern was Revenues and Benefits and the other was ICT.

 

The Head of Strategic Finance stated that he would ensure that a report was available at the next meeting covering all the outstanding issues relating to the Revenues and Benefits health check.  He hoped that all issues would have been resolved by that meeting.

 

A Member commented that the figures needed to be correct.  Although the percentage was not very high, it was a significant amount.  He asked whether the IT risk highlighted in the report was the only risk in this service.

 

Paul Dossett explained that the risk highlighted was specific to the accounts.  It was clear that there were other ICT issues.  Richard Lawson confirmed it was not a full audit of ICT.

 

The Head of Strategic Finance referred the Committee to Appendix 2 of the report.  He confirmed that the Chair of Audit Committee had signed the letter of representation with him, earlier that evening.  The Finance Manager had a copy of the letter for Grant Thornton.

 

The Head of Strategic Finance then turned to Appendix 3 of the report, the Statement of Accounts 2010/11.  The Annual Governance Statement had been signed by the Mayor and Managing Director.  Section 13 of the document set out the significant governance issues which had been identified.  The final Appendix, 4, was the report presented to Cabinet, which had also been considered at Budget Panel on 20 September.

 

Following a question from the Chair about the reduction in current assets, the Finance Manager replied that the General Fund had not reduced over the period.  The Earmarked Reserves had increased slightly.  The reduction was due to the Capital Programme which was funded by the use of Capital Receipts and this was why the figure had decreased.  The offset was the variation between the debtors and creditors.   

 

The Chair asked for an explanation about the reference to pension costs and what could be done to resolve this matter. 

 

The Head of Strategic Finance said that this was a national problem.  It was also occurring in the private sector.  Under a previous Government (in the early 1980s) an option to take a pension fund holiday had been introduced.  It was considered that 75% funding would be sufficient.  Many local authorities had taken up this option.  In addition Councils had allowed officers to retire at 50 with added years and this had put pressure on the pension fund.  The Local Government Pension Scheme could invest in stocks and shares, government bonds and property and therefore the depressed state of the stock market impacted on the fund.  Recently, there had been changes to the Local Government Pension Scheme; officers were required to contribute more and it was now linked to the Consumer Price Index and not the Retail Price Index.  It was believed that this one change saved 1% per year.  The deficit would close but it would be a long-term effort.  If the Council wished, it could apply to the Secretary of State to use its Capital Receipts to close the deficit.  Watford Borough Council was not able to do this as all receipts were committed.

 

A Member referred to the use of reserves as referred to in the officer’s report and the report from the Auditor.

 

The Head of Strategic Finance said that the Medium Term Financial Strategy period referred to the use of £3 million of reserves over four years.

 

Following a further question about the level of reserves, the Head of Strategic Finance said that there was an ongoing debate between himself and Grant Thornton, whether there were too many different reserves.  Some of the reserves had been set aside for specific projects, for example the replacement of the refuse vehicles.  This specific reserve meant that the Council would hopefully have sufficient funds to buy new vehicles as they were required.  The whole area of reserves would be reviewed by Budget Panel and Cabinet during discussions about next year’s budget.

 

Paul Dossett commented that there had been discussions as to whether some of the money should be in the General Fund or earmarked reserves.  He was aware that some local authorities had used their reserves and this left limited leeway to meet any future challenges.  He said that from the Auditor’s point of view if there was a sudden reduction in the amount of reserves, for example if they were halved, the Auditor would need to consider whether there were sufficient reserves remaining to meet any future needs. 

 

Further to a Member’s question whether the level of reserves was prudent or conservative, Paul Dossett explained that the General Fund Balance had reduced and he would not want to see it decrease further.  The Earmarked Reserves were related to specific schemes and could only be used for those specific purposes.  He was currently happy with the reserves.

 

The Head of Strategic Finance added that in his opinion the reserves were at a good level but needed to be used on a phased basis.

 

A Member commented that Councillors needed to take the officer’s view which was backed by Grant Thornton.  There was a prudent approach and the Committee needed to have confidence in its officers.

 

The Chair and the Head of Strategic Finance signed the Statement of Accounts.

 

RESOLVED –

 

1.      that the external auditor’s ‘Report to those charged with Governance’ be noted.

 

2.      that the Committee’s comments be noted.

 

3.      that the Committee confirms that it is satisfied that the accounting policies adopted are the most appropriate.

 

4.      that the Statement of Accounts be approved.

 

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