Agenda item
Update on the Annual Financial Accounts and outstanding audits - 2018/19 & 2019/20 (Verbal update)
Minutes:
Mr Kevin Bartle, Interim Corporate Director for Resources and Section 151 officer presented the verbal update in relation to the Annual Financial Accounts and outstanding audit of 2018/19 and 2019/20.
Mr Bartle provided some background information relating to the accounts and explained how statutory deadlines had been relaxed due to the pandemic. He said that due to significant issues with the accounts for 2018/19 and 2019/20 the deadlines for those years had been missed and ultimately this had had a knock-on effect in relation to the production of the 2020/21 and 2021/22 accounts. Mr Bartle explained there was also an issue with two outstanding certificates for the two previous years for 2016/17 and 2017/18 (although final audit reports had been received). Mr Bartle said he hoped Deloitte’s could start work on the 2020/21 accounts from the end of July 2022 onwards.
Commenting on the 2018/19 and 2019/20 accounts, Mr Bartle said these had been restated several times. He said the 2018/19 accounts had been restated six times and, on each occasion, the external auditors, Deloitte’s had identified further errors that required correction. Mr Bartle said whilst most of the errors had been rectified, he felt that officers of the Council had to draw a line, as to how far back they can go with corrections. He said Deloitte’s had issued their draft opinions in June 2022 and whilst he was hoping to report that the audits for those years had been completed, this was not the case. He reminded the committee that the 2018/19 and 2019/20 accounts had achieved a qualified opinion. In other words, there were matters of serious import that had not allowed for an unqualified opinion. Mr Bartle said that there were 4 matters identified for the 2018/19 and 3 for the 2019/20 accounts; one qualification had been resolved for the 2019/20 accounts. He said these matters would remain on record as the Council needed to move forward. He said there were some judgements that senior Officers had to make in discussion with Deloitte’s.
Referring to the 2016/17 and 2018/19 accounts, Mr Bartle explained that whilst the audits had been completed the Council was in an unusual position where the final certificates had not been issued by the former external auditors KPMG. He said this was ‘uncharted territory’ and a challenging position to be in. He explained that the certificates had not been issued due to an outstanding objection received by KPMG, which had not been expedited.
Mr Bartle said KPMG were working with Council officers to issue the certificates once the material matters raised, had been resolved. Mr Bartle explained that Deloitte were unable to issue their certificates for 2018/19 and 2019/20 until such time as KPMG had issued certificates for the previous years. This would not impact, however, on Deloitte’s ability to conclude their audit work for 2018/19 and 2019/20 or to start their work on later years.
In relation to the 2020/21 accounts, Mr Bartle explained these would need to be restated as one of the objections from the previous years related to group accounts. He said his team were working to consolidate the accounts for Tower Hamlets Homes and King George’s Field Charity Trust, (KGFT) accounts into the main Council accounts. Mr Bartle said it was important to get back on track and break this cycle of working on previous years’ accounts while trying to produce current year accounts. He said the Committee would hear about the significant improvements the Council has made regarding the production of the accounts and as such he hoped there would be no qualifications to the 2020/21 and 2021/22 accounts.
Mr Bartle said the challenges and significant issues identified in the 2018/19 and 2019/20 accounts were many, which led to an independent review being commissioned. Several recommendations were made which had been incorporated into the Finance Improvement Plan.
In response to comments and questions from members the following was noted:
- Mr Bartle confirmed that a ‘qualified opinion’ from the external auditors was viewed as negative because the auditors are saying the accounts represent a true and fair view of the financial position except for the items noted in the qualification. As such the council needed to aim for an ‘unqualified opinion’. Mr Bartle said they would be aiming for ‘unqualified opinions’ for future accounts however he could not guarantee this as the external auditors had not started work on these two years’ accounts.
- Mr Bartle said a significant amount of work had been undertaken as part of the improvement plan to improve the quality of working papers, with training provided to all budget holders and officers involved in the production of accounts. He said the Finance Team had been strengthened with additional staff employed to assist in the production of the accounts.
- Financial controls were scrutinised by Internal and External Audit. Members would get a sense of improvement via reports to the Committee and the number of ‘unlimited’ assurance reports.
- Issues relating to schools were in connection to data collection and returns. In some cases, the schools’ and Council data did not match. A considerable amount of work had been done to reconcile this, with a new system being introduced for payments made to schools.
- Referring to the KGFT accounts, of which the Council is the sole trustee, the 2019/20 accounts had not been lodged with the Charity Commission as was required and a working group to set about making improvements in procedures to produce the accounts in a short space of time. Mr Bartle said he was pleased the 1st and 2nd set of accounts had been ‘unqualified’ and had been consolidated with the main accounts.
- Mr Bartle said there were no financial penalties for the Council in relation to the late production of the accounts, save for the potential reputational damage to the Council.
The Chair thanked Mr Bartle for his presentation, before inviting officers from KPMG to comment on the 2017/18 and 2018/19 financial accounts.
KPMG
The Committee heard from Mr Andrew Cardoza, Mr Rashpal Khanura and Mr Antony Smith from KPMG.
Mr Cardoza said an objection had been raised in relation to a PFI initiative, relating to the 2016/17 accounts. He said this was a complex objection raised by a local elector, which they had seen across the county in several different audits. Mr Cardoza said the investigation had taken a considerable amount of senior auditor time as well as legal advice needed to complete the work on the objection.
Mr Cardoza said that at the same time, they completed their work on the 2017/18 audit and issued an unqualified opinion on the financial statements for that year on the 31st July 2018. Mr Cardoza said it still took a lot more work on the objection to determine as to whether the objection ought to be included in the accounts and thus reach a conclusion. Mr Cardoza said they completed the work on the objection in August 2019 at which point they had concluded their audit work. Mr Cardoza said they informed the Council in September 2019 of this and went on to issue financial opinions relating to the 2016/17 and 2017/18 accounts. He said that all that remained was the issue of the certificates once they had heard back from the Director of Finance at the Council.
Mr Cardoza said nothing further was heard back from the Council until such time Mr Bartle contacted them in late 2020 and then in February 2021. He said at this juncture the senior partner who had worked on the audits, had retired and as such this matter was picked up by Mr Cardoza in May 2021. He said there had been a long delay in their response however a meeting took place in July 2021 to understand what the issues were and what the current auditors, Deloitte’s were raising as concerns. He said they would consider the points raised in relation to prior year adjustments but due to the complex nature of the queries and the new information provided, it was taking time to investigate and conclude.
Mr Rashpal Khanura added that in order not to duplicate the work, they were waiting for their internal risk team to approve the ‘hold harmless’ letter from Deloitte before they began to assess the adjustments required. Mr Khanura said they would reassess the 2018/19 financial statements to satisfy themselves that the opening and closing balances were correct. He said they will then go through their internal consultation and review process before issuing the certificates for years 2017/18 and 2018/19.
Mr Cardoza said there would be an additional fee for the work KPMG is undertaking currently, since July 2021.
In response to comments and questions from members the following was noted:
- Mr Cardoza said KPMG were of the view that ‘group accounts’ were not necessary however they would consider new information provided by Deloitte’s. Mr Cardoza said this was an issue for the current external auditors but at the time they did not feel ‘group accounts’ were needed.
- The management fee to be charged would be at the Public Sector Audit Authority (PSAA) discounted rates. Mr Cardoza said they would give a full breakdown of the work and time taken to resolve the additional queries.
- Mr Cardoza said they could not commit to a timeline as to when the ‘hold harmless’ letter would be approved by their internal risk team, as this was uncharted territory. He said it was not in the remit of the three auditors present at the meeting, as the decision would need to be made by more senior staff in KPMG.
The Chair thanked KPMG for their presentation.
Deloitte
The Committee then heard from Mr Jonathan Gooding, Senior Partner at Deloitte. Mr Gooding said much of the background had already been described by Mr Bartle and as such he would only add that a huge amount of work had been undertaken by the Council and Deloitte’s to resolve the outstanding queries. Mr Gooding said the difficulties experienced regarding the previous years’ accounts related to control weaknesses, but they were to commence work on the 2020/21 and 2021/22 accounts as soon as possible. Mr Gooding said they were in the final stages of resolving the 2018/19 and 2019/20 accounts however could not issue final certificates until KPMG had completed their work.
In response to comments and questions from members the following was noted:
- Mr Gooding said work could be commenced on the 2020/21 audit however final sign off and the issue of certificates for the previous years 2018/19 and 2019/20 could only be issued once KPMG had signed off the 2016/17 and 2017/18 accounts.
The Chair thanked Mr Gooding for his update.