Agenda item

This short covering report introduces the second stage of annual reporting by our External Auditor, Grant Thornton UK LLP, following completion of the Statement of Accounts for 2020/21.  The Auditor’s report, attached as Appendix 1, is comprehensive and primarily details the Auditor’s findings on arrangements in place at SWTC to secure Value for Money.  It reports on whether all aspects of the Council’s arrangements for securing economy, efficiency and effectiveness in its use of resources are operating effectively.

The Auditor’s report includes a summary of findings and a hierarchy of recommendations to the Council which, in turn, are accompanied by the Council’s management comments.  The Auditor will present the report verbally at this meeting of the Committee.

The Portfolio Holder for Corporate Resources introduced the report:  

·                     The Council successfully published audited accounts on time this year and was one of only 9% of councils to do so this year.  

·                     The next stage of the external auditor’s work would be to review value for money. This has taken on a higher profile in the audit regulations and impacts all councils.  

·                     The Auditor’s report did not include any statutory recommendations but it did include one key recommendation and five improvement recommendations for the committee to consider.  

The Corporate Finance Manager provided a further introduction to the report:  

·         The report sets out the findings of the External Auditors report on financial sustainability, governance and improving economy, efficiency and effectiveness. These were all reviewed at a high level across the Council.  

·         The recommendations for the committee to consider were to note the report, note and endorse the management responses that are set out by the recommendations as management comments and to note the signing off and publication of the Statement of accounts for the year ended 31^st March 2021. 

Jackson Murray, Director - Grant Thorton introduced the report and raised the below points:  

·         This was the first time this committee will have seen an audit in this format as the Audit Code of Practice had changed meaning an opinion of value for money was no longer received but rather a commentary on value for money instead which was more detailed.  

·         The Executive Summary set out the risk assessment and the findings against the financial sustainability, governance and improving economy, efficiency and effectiveness.  

·         The impact of Covid 19 is reflected throughout the report.  

·         There were some improvement recommendations identified regarding the financial sustainability criteria and theimproving economy, efficiency and effectiveness criteria.   

·         There was a key recommendation made in respect of the governance criteria and that centred on the commercial investment strategy of the Council.  

·         For financial sustainability criteria satisfied that there are appropriate arrangements to achieve financial resilience. The Council was still fairly young but the medium-term financial planning had been considered and deemed reasonable. The improvement recommendations made relate to the production of budget books to provide further information and around the information supplied to members when approving capital carry forwards.  

·         Regarding governance the key recommendation is around the governance for the commercial investment strategy. Grant Thornton had not concluded that the Council was undertaking any unlawful activity but had concluded that the strategy represented a departure from prudent activity considering government guidance through the CIPFA prudential code.  

·         The commercial investment activity did raise financial risks to the council. This report did not say that any unlawful activity has occurred, nor did it say that those risks had materialised as to date they had not. However, decisions taken have led to the Council being exposed to risk.  

·         There have been a number of changes and improvements to governance arrangements over the last year and an ambitious Annual Governance Statement and Action Plan had been produced. It was important the changes outlined in the action plan were implemented.  

·         Regarding improving economy, efficiency and effectiveness criteria no areas of significant weakness had been identified. A recommendation had been made regarding the partnership register which was on the Annual Governance Action Plan but had gone past its implementation date.  

·         Grant Thornton issued a qualified opinion on the Council’s finances on 31^st September 2021. The final version of the report with qualified audit opinion would be publish prior to Christmas.  

·         There were five areas which were considered as being particular risk regarding the key recommendation on the Commercial Investment. These were securing long term non-PWLB financing, managing the impact on the general fund if commercial investment income was below target, ensuring prudent debt repayment was provided for in the budget, local government reorganisation and the need for the shadow council to understand the risk of the commercial investment portfolio and the need to comply with the new CIPFAprudential code when implemented.  

·         Local Government Reorganisation in Somerset means that the shadow organisation will also need to be aware of the risks of the Commercial Investment Strategy and the implications of the prudential code once that is implemented.  

During the debate the following points were raised: 

·                     Concerns were raised about the opinion in the report regarding the Council’s risk management reporting not giving sufficient information to members about mitigation and over what period actions were to be implemented.  

·                     Concerns were raised about how the new unitary council may view the Council’s investments and whether the Council was in danger from its commercial investments. It was responded by the Grant Thornton Director that there was strong governance around decisions but participation in commercial investment activity created risk regardless of what governance was in place. Officers responded that there was regular reporting to members on the commercial investment strategy and that information was also available on the website. Officers had worked to manage risk whilst implementing this strategy including working closely with treasury advisors on how best to manage borrowing. Somerset West and Taunton Council were not the only district in Somerset to have undertaken this activity. The Council awaited the publication of the new prudential code and would then assess its impact upon the Council’s financial planning for next year.  

·                     It was questioned why the commercial investment was flagged as red rather than amber in the report. It was responded by the Grant Thornton Director that this was because of the significance of the potential risk and based on guidance set out by the national audit office.  

·                     Concerns were raised about the Council having used £1.6m of reserves and £1.7m from underspends to finance the costs of Covid. Officers responded that the £1.6m was the shortfall in covid funding in 2021 financial year. Reserves still remained above the minimum.   

·                     Concerned about the minimum revenue position (MRP) for the commercial investment and being able to fund the budget and provide services going forward. It was responded by the Grant Thornton Director  that the MRP charge grew fairly significantly this financial year and was projected to grow again in the following financial year. This was because MRP became chargeable the year after investment. For the 2021 MRP charge Grant Thornton were satisfied that it was appropriate and gave it a green rating. Officers responded that the medium financial plan assumed a reasonable amount of income from the commercial investment portfolio and the intent was that the income covered the debt associated with the investments including minimum revenue provision. There was risk however, the portfolio had outperformed expectations at present so one of the options which may be considered was to use the surplus income from the portfolio to reduce the debt further.  

·                     Reassurance was sought that borrowing money other than PWLB would still be possible for the Council long-term at a reasonable rate. Officers responded that the majority of the borrowing the Council was undertaking as at a low interest rate. The Council was focusing on short-term borrowing for the commercial investment whereas for the HRA the focus was on long-term borrowing. There were options to borrow from other local authorities or banks.  

·                     It was raised that it would be useful for the mitigations in place for the commercial investments to be outlined alongside the risks. It was questioned whether every council that had commercial investments would now have a similar red flag in their audits and whether it should still be in red given the mitigation in place. It was raised that there was awareness of the risks of having a commercial investment portfolio when the decision was made to implement the strategy. The Grant Thornton Director responded that whether a council may have a red flag would depend on the scale of investment, level of borrowing and when funds were invested. The Council’s reporting on the purpose of the portfolio had been clear. 

·                     It was suggested that the income from the commercial investment portfolio would be useful to the new authority.  

·                     It was raised that undertaking benchmarking this year rather than next year may be beneficial for the council to undertake. It was responded by officers that some benchmarking was already undertaken internally.  

·                     It was asked about the recommendation to publish the budget books and what the time and cost to the Council of doing so would be. Officers responded that the main cost would be through officer time.  

·                     It was asked that the HRAincome slippage be outlined in greater detail. Officers responded that they would provide a written answer after the meeting. 

·                     A discrepancy in figures was raised. It was responded by officers that this was due to an error in the working papers.  

·                     It was raised that it was positive that the Governance arrangements were found to be sound. The rates for non-PWLB borrowing were also reassuring.  

·                     The report states that the commercial investment strategy represents a deviance from prudent practice and that this would be reflected in CIPFA’s guidance. It was asked if the commercial investment was a material risk, if the Council should be looking to suspend or not continue with the strategy. The Director for Grant Thornton responded that it was for the committee to consider the assurances and recommendations made by external audit and by managers within the wider context. Borrowing purely for yield, in the strictest reading of the prudential code, had never been prudent, but the revised code would be a tightening of those rules. 

The Committee resolved to note the recommendations in the report:  

2.1 The Committee is recommended to note the Auditor’s Annual Report in respect of 2020/21 and the recommendations recorded therein.  

2.2 The Committee is recommended to note and endorse management’s proposed responses and actions in adopting the recommendations made by the Auditor.  

2.3 The Committee is recommended to note the Auditor’s confirmation of his Unqualified Opinion on the Statement of Accounts for the year ended 31 March 2021. 

Chris Hall left the meeting at this point.