Agenda item
Interim report to those charged with governance (ISA 260) 2013/14
To consider the interim governance report issued by the Council’s External Auditor.
Minutes:
Andrew Sayers, representing External Auditors KPMG introduced, and highlighted key points, in the report which summarised the key findings arising from:-
· KPMG work to date at LBTH in relation to the Authority’s 2013/14 financial statements and those of the Local Government Pension Scheme it administered.
· Work undertaken to support KPMG’s 2103/14 conclusion on the Authority’s arrangements to secure economy, efficiency and effectiveness in its use of resources.
Points highlighted by Andrew Sayers included:-
· That given the correlation between matters being examined by the Pricewaterhouse Coopers (PwC) inspection, being undertaken for the Secretary of State for Communities and Local Government, and areas in scope for audit by KPMG, the Authority’s external auditor, [in relation to the financial statements for 2014/14 and reaching a conclusion on the Authority’s financial arrangements in place for securing economy, efficiency and effectiveness in its use of resources for 2013/14], the report before the Audit Committee was interim pending KPMG consideration of the outcome of the PwC Inspection report. In the period leading up to PwC Inspection report, KPMG had focused on undertaking other normal planned audit work and activities to reach a Value for Money conclusion.
· The majority of the planned audit work had been completed and based on this KPMG had not identified any matters that would adversely impact on its opinion of the Authority’s financial statements; similarly for the Pension Fund.
· During the KPMG audit the Authority had identified two significant adjustments to the financial statements, which related to the grossing up of debtors and creditors, and the late notification of a creditor by an NHS organisation. The first had no impact on the net worth of the General Fund and the latter was covered off by an ear-marked provision. ????The provision for National Non-Domestic Rates of £3 million required an adjustment, but this was well below the materiality level????
· The KPMG audit had identified a significant risk arising from the implementation of the General Ledger system, however based on the outcome of audit testing a conclusion had been reached that outputs from the GL system could be relied on in auditing the financial statements.
· The audit of property, plant and equipment, which was an inherently risky balance due to the potential for impairment/ valuation changes and required judgement/ estimation uncertainty; the audit had not identified any significant issues; however a recommendation on the future approach to valuations had been made.
· There had been significant changes in the accounting treatment of National Non-Domestic Rates and due to balance sheet variances this area had been an audit focus. No significant issues had been identified and an adjustment had been made for provision.
· Risk had been identified in respect of the triennial valuation of the Pension Fund relating to inaccurate data provided to the actuary impacting on actuarial figures in the accounts. Work completed to test source data and controls on accuracy had not identified any issues???
· The quality of the accounts and supporting papers was good and audit queries were dealt with efficiently.
· The Authority’s control environment was effective, however a weakness had been identified in that key reconciliations [bank account and payroll] had not been completed on a regular basis during 2013/14. This was a high risk matter and a recommendation had been made to mitigate this in future.
· Outstanding issues before a final audit opinion could be given were outlined.
· The methodology to reach a Value for Money conclusion was outlined, but until the PwC Inspection report was considered no conclusion could be made. It was noted that savings plans appeared robust and achievable, although there was risk for all local authorities in delivering these.
· AC members were signposted to matters requiring completion before an audit certificate could be issued. It was noted that no formal objection to the Authority’s 2013/14 financial statements had been received to date.
· Assurance of KPMG independence in relation to the audit of the financial statements was given.
A discussion followed which focused on clarification being sought and given on the following points:-
· The impact on finalisation of the KPMG audit and report of waiting for the PwC Inspection report. The statutory deadline for finalisation of the Authority’s accounts was 30 September and KPMG would not be able to sign these off by then. KPMG needed to consider the findings of the PwC Inspection report and also consider undertaking additional audit work arising from it. KPMG had focused its audit to date on completion of standard audit work prior to the PwC Inspection report.
· The implications of missing the statutory deadline for finalisation of the accounts. The final accounts would still be presented to the AC for noting, however there were no formal sanctions beyond adverse publicity.
· The adjustments amounting to £5 million relating to grossing up of debtors and creditors (£3.7 million) and the late notification of a creditor by an NHS organisation (£1.3 million). The debtors and creditors should be grossed up not netted off and this had not occurred, however neither matter impacted on the net worth of the General Fund. The latter also accounted for the difference in pre-audit (£8 million) and post-audit transfers (£6.7 million) to earmarked reserves reported on page 6 of the KPMG Interim report.
· Referencing Appendix 1/ recommendation 3 relating to Land and Building valuations, how would the recommendation be progressed? Was there evidence of under-valuation? Was the Authority not required to undertake regular valuations, and was infrequent valuation best practice? Given low valuations was there an appropriate link between valuations and house prices? This issue related to periodic year-end property valuations and the audit had examined impairment and upward trends and a need to tidy up the General Ledger going forward had been highlighted. No under-valuation had been identified, however there was a risk of this. The Authority had undertaken valuations in line with policy and best practice of a valuation every 5 years taking account of material changes in the intervening period. Property valuations were relatively stable although house prices were not. The Audit had identified that the Authority should carry out more effective valuations and how to achieve this.
· Grave concern expressed that a recurring trend of non-completion of key reconciliations had been identified. This was basic accountancy and, although noting that implementation of the Agresso accounting system had significantly impacted the ability to undertake reconciliations, assurance sought that regular reconciliation of balances would be undertaken going forward. The problem caused by Agresso was briefly outlined, however processes were now in place for regular reconciliations of the bank account and payroll.
· The calculation of a materiality level of £23 million for the Authority’s financial statements and audit differences of £1.1 million being deemed insignificant.
· The identification by the KPMG audit that not all Budget variances over £250k had an adequate explanation, and AC member consideration that the threshold for such variances was too high and departments should be examining variances of a lesser scale. A monthly analysis was undertaken and the Interim Corporate Director Resources expected departments to signpost variances over £100k. Going forward, departments had been asked to provide a much better explanation of variances throughout the year, in response to the audit recommendation. However the corporate variance threshold of 3250k needed to be placed in the context of a £1.2 billion gross spend. Noting the Officer response an AC member commented that he expected information to be available on £5k variances if the AC wished to dive down that far.
· Referencing Appendix 2/ recommendation 1 relating to the completion of the corporate governance review and expeditious addressing of any findings a progress update was sought. Some elements of the review, which was currently being undertaken, with the support of the Local Government Association, had been completed, and the Head of Paid Service was leading. A written update would be sought in line with the commitment to keep KPMG and the AC briefed.
· Requested that a brief statement summarising the current financial position of the Authority be presented quarterly to the AC. Interim Corporate Director Resources undertook to provide this from available benchmarking information.
· Requested that the summary statement of accounts, currently undergoing final checks and intended for presentation with the final set of accounts to the AC, be circulated to all AC members.
The Chair Moved and it was:-
Resolved
That the contents of the Interim report to those charged with governance (ISA 260) 2013/14, be noted.
Action by:
Chris Holme (Acting Corporate Director Resources)
Supporting documents: