The committee received a late report from the external auditor which provided an overview of the council draft audit results for 2019/20.  Simon Luk, representing the external auditor EY, started by thanking the Head of Finance for the team’s assistance with a challenging audit in light of Covid.

Simon Luk drew the committee’s attention to page 13 of the external auditor’s report, which provided an overview of the material movements in the statement of accounts and highlighted the following;

·               There was a large increase in property, plant and equipment, by £0.264m.  There was also a £0.232m increase in the long term creditors.  This movement mainly related to the new Croxley Park finance lease entered by the council in 19/20, which had led to the recognition of a finance lease asset in PPE, and a corresponding lease liability in long term creditors.

·               The council had also received £92m from the developer of Croxley Park, including £72m to cover future planned property maintenance, £20m to cover future potential rental income shortfall, and another £4m where the council had chosen to ring-fence for Croxley Park.  The £92m had been invested in ST deposits, and therefore there was an increase of ST investments by about that amount in the current year.

·               As there were no conditions around these monies they were recognised as income in year in the comprehensive income and expenditure statement, and then moved to usable reserves.

·               Financing and investment income.  This was determined by investment property valuations and fluctuated due to changes in the market.

·               Surplus/Deficit in evaluation of PPE which fluctuated due to valuer estimations.

·               Re-measurement of the net defined benefit liability which had been affected by actuarial assumption that fluctuated year on year.

Simon Luk then addressed the significant risk section of the report, with an overview on page 15 and further details on subsequent pages.  He highlighted the following findings from areas of significant risks and areas of audit focus to the committee;

·               Misclassification of Avenue Car Park due to an error of £190m of longer term creditors being labelled as short term creditors that was corrected (page 15).

·               £0.105m was overstated in short term creditors due to incorrect cut off of Croxley Park rental receipts that was corrected (page 15).

·               5 further uncorrected projected misstatements had been identified (page15)

·               A £0.137m variance between the interest charged for the year end 31/03/2020 per the lease schedule (£3.8m) and the amount recorded in the general ledger (£3.950m) was identified (page 16).

·               A reclassification error of £1.1m relating to rental deposits for Croxley Park where they were not expected to be repaid within a year, from short term to long term creditors (page 16).

·               Accounting for the Acquisition of Croxley Business Park, as 2019-20 would be the first year of managing and accounting for the Croxley Business Park, this would be the first year of allocating income streams to correct accounting periods for this asset and therefore recognised income could be more prone to fraud or error.  (page 17)  Errors had been identified in the accounting of the £92m monies received as receipts in advance, a liability, when these should have been accounted for in usable reserves. There was also a misclassification of £3.7m capital payment of Croxley Park Finance Lease due in 1 year had been classified as a long term creditor instead of a short term creditor.

·               Valuation of Land and Buildings, following the Covid-19 outbreak in March 2020, there was potential for significant impact on the estimations and assumptions applied to asset valuations with qualified valuers reporting ‘material uncertainty’ within valuation reports.  (page 18)

·               A number of mis-statements arising from the PPE, IP and surplus assets (page 18-20). This had led to adjustments in the current year, as well as prior period adjustments. The overall amendment to PPE (net book value) was 2017/18: £14.432m, 2018/19: £17.711m, and 2019/20: £13.357m. The overall amendment to IP was 2017/18: £0.389m, 2018/19: -£2.422m, and 2019/20: -£11.905m. The overall amendment to surplus assets was 2017/18: £0.225m, 2018/19: £0.125m, and 2019/20: £0.579m.

·               The McCloud ruling meant that the remeasurement of the defined pension liability needed to be amended by £0.137m, but the authority had adjusted past service cost instead of other operating income.  Pension assets was overvalued by £0.648m. (page 23)

·               The valuation of NDR appeals provision was a high value estimate, with complex calculations. This meant that there could be a material misstatement in the accounts if this had been calculated incorrectly.

·               The Council had not charged minimum revenue provision (MRP) despite having a positive Capital Financing Requirement (CFR)(page 25). The Council had charged £0.083m for FY19/20 although it was recommended that the Council reviewed the breakdown of its unfinanced capital and reviewed its MRP policy to ensure that a prudent amount of MRP was being charged.

·               There were other uncorrected misstatements that were above reporting threshold that had been brought to the attention of the committee (page 35).

·               As a result of the above findings, a number of control deficiencies had been identified and recommendations had been made (summarised on page 44).

Councillor Watkin raised the issue with the external auditors that the summary of the audit results was difficult to comprehend for people without a professional financial background and requested a more top level summary.  The committee members agreed with this statement. 

The Head of Finance went on to explain that the external auditors had listed the changes that had occurred from the draft statement of accounts to the revised statement of accounts at appendix 1.  The changes made were necessary in order for the auditors to provide an unqualified audit opinion as set in the auditor’s report.   However, it should be noted that the adjustments were accounting adjustments that had no impact on the tax payer or the council’s general fund position.  There was one exception to this relating to an £83k adjustment for MRP which had been funded from reserves and built into budgets in future years.  Following on from Councillor Kloss’s query the Head of Finance expanded that the amended rental valuation on the Harlequin Shopping centre was a red book valuation at the balance sheet date and did not reflect the value that could be achieved if the asset was sold.  She then went on to clarify that the council’s accounts were prepared following proper accounting practice as set out in the CIPFA Code of Practice and based on International Financial Reporting Standards (IFRS ) which made the council’s balance sheet comparable with a private company accounts.  However, the impact of valuations was reversed out through the Movement in Reserves Statement. In practice the movement on the general fund should be the main focus for users of local authority accounts as this was the area that had the most impact on the financial sustainability of the council and had the possibility to impact on council tax payers. 

Councillor Bell requested further information regarding the understatement in long term investments in relation to the Watford Health Campus noted within the auditor’s report.  The Head of Finance advised that she would obtain further detail behind this to provide further clarity.

RESOLVED –

that the report is noted.