This matter is the responsibility of the Portfolio Holder for Communications and Corporate Resources, Cllr Benet Allen.
Report Authors: John Dyson - Corporate Finance Manager, Jackson Murray – Key Audit Partner, Grant Thornton and Oliver Durbin – Audit Manager, Grant Thornton.
To consider the annual report of the Council’s external auditor Grant Thornton UK LLP outlining the findings from the audit of the 2021/22 Statement of Accounts for Somerset West and Taunton Council.
John Dyson, Corporate Finance Manager, introduced the report:
· Presenting to Members this evening the final statement of accounts for this authority for the 2021/22 financial year.
· Item 8 is the External Audit Findings Report which dovetails with item 10 the Statement of Accounts. The two items will be taken together as there are clear linkages between the two reports.
· The Statement of Accounts are prepared in accordance with International Financial Reporting Standards and a detailed Code of Practice which is backed up by regulations and professional guidance.
· Many other professional also contribute to the compilation of the accounts including teams across the council, qualified valuers, pension fund actuary and treasury management advisors.
· The draft accounts were published on the Council’s website by the statutory timescale of the 30 June 2022.
· The draft accounts and supporting workings are subject to review and independent scrutiny by our external auditors, Grant Thornton. In recent years there have been growing demands in terms of the audit process and scrutiny and challenge, putting a lot of pressure on finance and the audit teams alike in conducting the work following the compilation of the accounts.
· All of this work culminates in the audit findings report agenda item 8. The statement of accounts set before you this evening in agenda item 10 contains a range of adjustments and corrections and these are highlighted in the audit findings report.
· Since the publication of the agenda, one further correction is needed relating to car parks, and the explanatory note sets out the proposed change
· The changes made to the accounts between the initial draft and those that are in the agenda this evening are technical in nature. None of those changes actually impact on the general fund or HRA balances, and no changes have impacted on the reserves except for those made to unusable reserves of a technical nature and also to the capital grants unapplied account.
· CIPFA, working in tandem with the government and other parties are formulating a statutory override of an accounting treatment relating to infrastructure assets, that sits on the balance sheet under property, plant and equipment. The statutory override is needed to enable local authorities to conclude their accounts for 2021/22. That matter is outside of our control.
· Once the override and any guidance has been issued it is anticipated that some form of confirmation or explanation will be added to the accounting policies set out in the statement of accounts. This will then be a minor adjustment to those which will be made after this evenings meeting.
· In terms of the report recommendations, the committee is asked to consider the accounts as presented alongside the adjustment for car parks which we advised separately on at the end of last week. Due to the likely delay caused by the statutory override, it is requested that the committee delegate authority for the final approval of the statement of accounts to the committee chair in consultation with the Assistant Director Finance S151 Officer.
· In terms of good news, the deadline for approving and publishing the statement of accounts this year is the 30 November. We are well within that timescale (subject to the statutory override issue). We do remain ahead of many authorities. Many councils have not had their 2020/21 accounts approved yet.
· Effective working has been in place this year between the auditors and the finance team and we have had good communications and regular formal updates.
· We’ve generated a range of further improvements on top of last years including S106 reconciliations, progress for collating data relating to property, plant and equipment and achieving a 100% return from members and officers for related party transactions
· Management have embraced the audit recommendations which are set out in the audit findings report by electing to make adjustments and make improvements as far as is practicable.
Jackson Murray and Oliver Durban from Grant Thornton introduced their findings report for 2021/2022:
· Subject to the final checking of the accounts our proposed audit opinion is unqualified but important to set out that is at the moment. That’s a clean opinion and that’s the opinion that you want for your financial statements.
· Our other responsibility is in respect of value for money arrangements and this report will come before the Committee in December 2022.
· In terms of the infrastructure assets this is out of our control. It impacts all local authorities with infrastructure balances. Somerset West and Taunton Council has infrastructure assets on their balance sheet relating to flood defences and sea walls. So we need to wait for this override to come into place and truly understand what that means so any adjustments can be posted through the financial statements.
· Page 39 highlights the key headlines including what we have done and what is outstanding, including the infrastructure item. We also need to complete our final consistency check of this set of accounts and receive confirmations from our pension fund auditor.
· Halfway down page 39 lists the work outstanding on the car park valuations which has now been completed and an adjustment is due to be made to the final draft set of accounts.
· Pages 43 - 54 give more detail of the work performed on the risk areas identified in our audit plan. On page 43 the testing of journals didn’t identify any errors, however we did have a control finding relating to user administration rights and login changes. Page 45 we discuss the valuation of property, plant and equipment. The key findings related to the valuation of HRA properties and an incorrect number of garages, car parking was based on an assumption rather than actual figure, and the housing price index data used was the realisable value of land and was different to the index used for actual residential properties.
· We found that the impairment test for property, plant and equipment on car parks weren’t formally revalued in the year and this is what has caused the late adjustment to the accounts. We found that the methodology used for the valuation wasn’t appropriate, so we made a recommendation that was revisited by management. The proposed adjustment is based on an appropriate methodology.
· Page 46 covers our testing of the pension fund liability. There were no error or adjustments proposed but it’s worth noting that we found the inclusion of a previous year settlement for an historic subsidiary. It was concluded that the correct treatment was applied for this item but it took time for us to unpick what this meant for the draft accounts. Ultimately, we were satisfied that the figures and disclosures were correct. The only adjustment made was we took out a contingent liability that wasn’t included in the draft accounts because it wasn’t contingent anymore as the actual event had occurred.
· Page 53 covers a prior period adjustment identified in respect of the treatment of inventory versus assets under construction for Coal Orchard. This is based on the intended use of the site.
· Page 54 discusses in more detail the infrastructure issue that has already been flagged.
· Appendix A lists out the internal control findings. Appendix B covers prior year findings and our update on those findings and Appendix C lists out the adjustments that were made between the original draft accounts and to the final draft accounts that you have today.
· Appendices E and F are copies of our draft audit opinion and letter of representation. This is a clean unqualified audit opinion and it’s worth noting that our letter of representation includes only standard items and one relating to the prior year adjustment.
During the debate, discussion took place around:
· Insurance and whether incorrect valuations would impact on the cost we are paying on insurance. The officer confirmed that the valuations that are included in the statement of accounts follow actual market movements i.e. what they would be worth if we were to sell them. For the purposes of insurance they are going to be aligned to what it might cost to rebuild or replace something that might have been damaged say through fire, flood or otherwise. Information is provided to the insurers at a particular point in time which then informs the insurers and the price they would quote.
· Whether the Council would be in a position to complete the accounts by the statutory deadline of the end of November 2022 due to the infrastructure assets statutory override and where that leaves us legally. The officers confirmed that we need to wait for the statutory instrument so Grant Thornton are not able to issue an opinion until that comes into place. The likelihood is that the statutory instrument won’t be in place by the end of November. If this is the case the council will need to place a notice on its website stating that the audit is not yet complete and provide an explanation that it is due to waiting for the national guidance on infrastructure assets. Councils that have not met previous deadlines for publishing their accounts have not had any funding withdrawn or been subject to any other sanctions/penalties from the government.
· Last year Grant Thornton were able to issue the opinion on the SWT Statement of Accounts in advance of the statutory deadline and that the Council was one of the 9% nationally to get that opinion. Its anticipated that the majority of Councils will not be in a position to publish their audited Statement of Accounts by the end of November 2022.
· In 2022/23 the regulations have been updated to bring the statutory deadline for the publication of the audited Statement of Accounts to the end of September.
· Whether there had been any challenges to the accounts this year. The officer confirmed that there had not been any challenges this year or visits to actually look at the accounts.
· How the errors had arisen in respect of the methodology for calculating the number of garages, price index on houses and car park assets and expenditure assumptions rather than actual expenditure data. The officer confirmed that property, plant and equipment is updated by indices or making assumptions or an assessment as to what would be fair value to put into the balance sheet. Not every asset can be looked at to get a precise price so it’s done in a holistic way under different categories. The valuers are the experts in that field.
· In relation to car parks and the method of computation that is one aspect that the auditors raised last year in terms of how we gathered information and we put into place an improvement for this year for that. Last year we had income figures which didn’t tally with what we had in our ledger so we’ve improved on that and got it right this year. But then there is another aspect and that is expenditure. So an assumption was made on that and following the recommendation we have now put actual expenditure into the computation. That in itself have fed through a trail in the various statements hence the issuing of the note so you were all aware prior to the meeting.
· Materiality and public perception, and the fact that £1.135m was listed as being ‘sufficiently material’ rather than ‘material’. The external auditor confirmed that audit materiality is a concept they use - it’s a set benchmark all auditors use for this year our materiality level is just over £2m and that’s based on a benchmark using expenditure. That being said £1.1m is a lot of money. Management have accepted that and made an adjustment. The Auditors have to be confident that the accounts are ‘true and fair’ and not materially misstated. Normally any errors or adjustments or uncertainties over £100k would be reported to you as a committee and any value below that we would just discuss and raise with finance colleagues but not necessarily report to committee. The officer confirmed that £1m is a lot of money, but it’s whether or not you might regard it as a distortion of the figures or not. Is it likely to mislead the reader as to the overall value of that particular thing they are seeing in the accounts? Accounts are prepared in good faith and there has been work done to test that and as a result of that there are some things that have been identified that needed to be updated. None of the adjustments we have worked through with the auditors required any adjustments to the councils balances for either the general fund or HRA.
· Unitary Council and if the accounts are not signed off, if this impacts the Unitary Council. The officer confirmed that not all of the 2020/21 statement of accounts relating to year ending March 2021 in Somerset have been approved yet. We may be one of the first of the 5 authorities to take this year’s accounts before an audit committee for consideration. Given that in two of the authorities their audit doesn’t even start until January 2023 it is unlikely that their 2021/22 Statement of Accounts will be signed off before the end March 2023. It’s a recognised challenge being picked up by the finance workstream.
· The Unitary Council will need to prepare the accounts for each of the 5 authorities for the 2022/23 financial year. However, as the district councils won’t exist it will be the responsibility of the Unitary Council to approve the accounts for this financial year because that will be the body that’s taken on responsibility to do that on 1 April 2023. The Finance workstream are making sure that the right people are doing the right bits of work around preparing the accounts across all 5 authorities between now and next May, as we have until the end of May 2023 to produce the draft accounts.
· The Annual Governance Statement will be prepared and presented to the Committee in March 2023 before the organisation is dissolved. This is because it will need to be signed by the Chief Executive and Leader of the Council for each individual council
· The methodology of valuations including details of the bacon methodology. The external auditor confirmed that the beacon methodology was set up by the former Department of Communities and Local Government (DCLG). It’s a methodology for valuing large holdings of housing stock so the council has various beacon properties. For example you will have an area of Taunton and you will select a three bedroom terraced house and the valuer will value that property. He or she will then project that value across all of the other houses in that area, adding an additional amount for properties with more than three bedrooms or decreasing an amount for properties with fewer than three bedrooms. Each beacon property is valued at least once every five years. All other housing stock is indexed in the intervening years using a National index. For example if they say house prices have moved by 10% in the south west or Taunton in the last year that valuation uplift is applied to those other properties not subject to valuation in year. It’s the recognised methodology that the government suggest that gives the best estimate at the most realistic use of resource otherwise you would be valuing hundreds or thousands of properties annually which is not practical.
· How the Council procures a valuer. The External Auditor confirmed that as part of their work they consider the qualifications and experience of the valuer selected by the council to be their expert. A number of questions are asked of the valuers each year. That’s why some of the points are raised in our report because we challenge them and their valuations and then come back with responses. The SWT officer confirmed that he would provide a follow up response to Members in respect of the procurement process for appointing a suitably qualified valuer. It was agreed to add this to the tracker for the next meeting.
The Committee resolved to approve the recommendations in the report:
1. The committee is recommended to note the Audit Findings Report in respect of Somerset West and Taunton Council’s Statement of Accounts 2021/2022
2. The Committee is recommended to approve management’s proposed treatment of unadjusted misstatements, as set out in Appendix C of the Audit Findings Report
3. The Committee is recommended to note the Auditor’s Opinion in relation to the Statement of Accounts
(proposed Cllr Simon Coles; seconded Cllr Janet Lloyd)