To receive from BDO (external auditors) a report highlighting the key issues arising from the Council’s financial statements for the year ending 31 March 2016.
RECEIVED from BDO (external auditors) the Audit Completion Report on the Statement of Accounts 2015/16 and the Use of Resources.
1. The report presented BDO’s audit findings of the 2015/16 Statement of Accounts, the financial statements opinion. The report was introduced by Andrew Barnes (BDO) who highlighted:
a. In terms of the Key Audit and Accounting Matters, as detailed on pages 154 -167 of the report, highlighting significant risks that BDO had recognised, identified and first reported in the BDO Audit Planning report in February 2016:
· Management Override of Controls – This was a difficult risk because, management can do effectively what they want to override controls that are in place. Posted journals are also looked at and BDO undertake a large data analysis exercise. Once the correct data format had been achieved, BDO were able to perform their work on journal entries and concluded that these were appropriate for the preparation of the financial statements.
· Revenue Recognition – The key thing mentioned was that BDO found a small number of errors in the cycle, detailed at page 155 of the report. By looking at the overall effect of these errors, BDO were able to compare purchase statements in respect of where items are classed at and coded into wrong financial years.
· Property, Plant and Equipment (PPE) Valuations – BDO had an issue with the reported valuations at the end of the year. This was due to valuations taking place at the start of the financial year, as detailed on page 156 of the report.
· In terms of other risks, reported to the Committee at the start of the year, all of their work and all the work done by the accountants, BDO did not find any significant issues. All the work had been done in an appropriate manner.
· Related Party Transactions (as detailed at page 158 of the report) – Issues had arisen during the course of the audit and in respect of PPE, this was around classifications of some assets under construction. This was due to project officers not informing the financial management team that some of the assets had been certified as complete, before the end of the year and were therefore misclassified. The expectation from the finance teams was that these assets were still ongoing. However, this didn’t make any difference to the overall effect in the balance sheets.
· Writing Out of Depreciation – This identified error was a result of accumulated depreciation, reported in the accounts and detailed at Page 159 of the report.
· Non-Enhancing Capital expenditure – BDO investigations suggested that the expenditure incurred was valid capital expenditure and therefore have agreed with the accountants’ that the figure of £68.9m will be moved to the Revaluation decrease recognised in the LBE row of the accounts.
· Accumulated Staff Absences Provision – This affected teachers, where they had earned the right to holidays, up to 31 March 2016 and had not taken these. So there was an accumulated overspend of the accumulated provision, because of an error in this calculation to reflect what leave had been taken by the end of the financial year. This will be adjusted by next year and BDO have reported this as an unadjusted error in Appendix II as detailed at Page 181 of the report.
· Classification of Grant Income in Disclosure Note 34 – One item was listed in the grants income area, which in fact was not a grant but a different type of funding and therefore was a misclassification.
· Creditor Cut off – This item was about some of the cut off testing where BDO check that items have been entered into the correct financial years. An overall actual error of £28k was found, where there were items included in the wrong financial year. Having extrapolated BDO’s statistical view was that there is potentially a £2.1m amount in 2015/16 financial year which should be in 2016/17 year. This has been reported as an unadjusted error as detailed in Appendix II on Page 181 of the report.
· VAT Debtor and Creditor – as detailed at Page 160 of the report.
· As detailed above, these were the key issues arising from the Audit.
b. In terms of the Use of Resources, as detailed on pages 174 – 177 of the report:
· Sustainable Finances - There were three risks that BDO had highlighted to the Committee regarding the medium term financial plan (MTFP). The Council is facing a challenging financial time with Central Government reducing the level of funding it receives, with demands placed on the Council increasing. BDO have therefore looked at plans in place to address that gap. The Council are doing a lot of work to make this happen, to deliver that level of change and to implement the things the Council are trying to do. The Council has had to use quite a lot of reserves in 2015/16, as has been detailed at page 174- 175 of the report. Plans have been put in place and are appropriate to deliver these changes. The work the Council are doing, it would not have an impact on the Value for Money conclusion (VFM).
· Enfield 2017 – This transformation project has been a long running re-structuring review about how the organisation works. BDO have looked at the programme in place to implement this and have concluded that they are suitable and appropriate in delivering the project. As a result significant cash savings are being realised. A large number of staff redundancies had occurred.
· Meridian Water – This is another very large scale, highly complex and long term regeneration project. BDO are looking at the progress of the project to date and the plans in place for the future. BDO concluded that the project is being run in a suitable manner and the plans in place will deliver it.
An objection had been received by BDO relating to the way the work on the project has been undertaken.
c. Appendix II, as detailed on pages 181 - 182 of the report highlights the unadjusted audit differences. Appendix III, as detailed at page183 of the report, highlights BDO’s recommendations and action plans with most of the management responses provided and agreed for implementation.
2. The following issues raised in response to the report:
a. Clarification was sought by Chaitali Roy (Independent Member) regarding the uncorrected classification misstatement of £13.7m, as detailed at page 158 of the report (Assets under Construction). BDO had identified a total value of £4.3m, but there still remained an actual uncorrected amount of £8.3m. BDO clarified that this was correct. The £4.3m was transferred and moved to the correct area. The £8.3m had not been moved from ‘Assets under Construction’. This figure was not material to the financial statements and BDO would extrapolate the error of £5.4m. This error had no effect on the balance sheet and did not take it over the materiality threshold.
b. Clarification by BDO as regards the writing out of depreciation risk, the overall effect of this risk is nothing, because the draft accounts showed that the accumulative depreciation figure was over stated aswell as the overall original gross costs. These had been netted off and did not make a massive difference.
c. The accumulated staff absences provision (page 160 of the report) process by which the Council account for school’s staff absences was still the same and correct. The model showed that these absences (leave) had been taken after the financial year end for 2015/16. But in reality these absences had started 3 days before the financial year end. Therefore the £4.1m element should have been recognised as leave taken by teachers within the financial year. Accountants were now aware of this issue and systems would have to be changed to accommodate this issue.
d. Clarification by BDO that the extrapolated error of £6.4m relating to grant income disclosure was accounted for by accountants but was a different kind of funding and not a grant.
e. BDO clarified that the assets detailed on the balance sheet did reflect the true position of the Council. BDO had looked at the assets detailed in the draft accounts initially and then having reviewed that information including what the valuers had said, BDO concluded that the Council was now in a better position.
f. Councillor Neville’s concern regarding Enfield 2017, the £31.6m of savings sought during 2015/16 and the figure of approx. £28m spent on agency staff and if BDO had taken account of this significant amount of spending. Clarification by Isabel Brittain (AD – Corporate Finance) that the savings achieved within the Council are based on actual spend within the Council. As an example, the 2015/16 spend on agency staff would be taken into account and whether or not the Council says it will deliver the savings, it will be the same in 2016/17. Agency staff are being used just before teams are re-structured in order to give the Council a more flexible work force and reduce long term redundancy costs. Those costs were fully accounted for and the savings shown were not just a budget paper exercise and is a net figure.
g. BDO were confident that they would be signing off the accounts by the statutory deadline but there was some further work to do as regards the audit completion. BDO enquired whether there was a contingency measure by which they could communicate, through the Chair, regarding any further identified errors that may be above their trigger level. This is due to the fact that BDO have some further pieces of work to complete and if any identified errors are above their trigger level, these would need to be reported back to the Council. The Chair agreed that these communications can be sent through the Chair of the committee and then distributed through the committee administrator.
ACTION: Metin Halil – Committee Administrator
h. BDO also clarified that in terms of the other issue, for completion of the audit, they had received 3 objections to the 2015/16 statement of accounts. Two had been received from Councillor Neville and one from a member of the public. None of these objections had been completed yet so the Audit Certificate could not be issued to close the accounts. BDO would need to focus on whether or not the objections had a material impact on either the financial statements or the conclusion of the use of resources. Whilst there may still be issues arising from the objections, there was nothing that BDO consider to have a material impact on their Accounts opinion or their use of resources conclusion. They would report back to the Committee once the objections work had been completed. The requirement by CIPFA for concluding the objections was 9 months, but BDO were not expecting to take that long.
3. Pension Fund Report – the key matters reported were as follows:
a. Management Override of Controls as detailed at page 6 of the report – There is a risk of management override of controls regarding the Council Pension Fund. No issues were identified in the review of appropriateness of journal entries and other adjustments made to the financial statements.
b. Revenue Recognition – This is specific to pension funds in relation to contributions to the scheme. To test assurance, BDO tested a large sample of contributions made to the present fund on a monthly basis. These are then traced back to payslips and generally there were no problems. Despite one issue relating to employee contributions external audit were quite happy with the contributions being made.
c. Fair Value of Investments (infrastructure & Private Equity) has been detailed on page 7 of the report and Fair value of Investments (other) has been detailed on page 8 of the report.
d. Investment Management Expenses – These have been fairly stated within the financial statements and the published CIPFA guidelines have been taken into account. The Council Pension team have made a really good effort by going through the reports and identifying those expenses separately and presenting them in the accounts. The Council Pension Team are a step ahead of the game, by actually implementing the CIPFA guidance to obtain and separate these additional charges.
e. Membership Disclosure – This is a large area of the accounts and work on this is in progress.
f. Consideration of Related Party Transactions – These are always a risk but do not always cause concern to the Pension Fund. As detailed at page 9 of the report, audit work is currently ongoing.
g. The next 3 items, detailed on page 9 of the report, are notes and not risks:
· Investment Assets Note
· Late Payment of Contributions
· Fair Value Hierarchy Disclosure
h. Control Environment (Significant Deficiencies) – This looks at the way deficiencies operate and one way of looking at this was by looking at contributions and benefits payable, as detailed on page 15 of the report.
i. There was an audit adjustment, as detailed on page 18 of the report, which has been corrected in the financial statements.
4. The following issues raised in response to the report:
· Management expenses had been worked out at £7.2m and the pension team have listed those separately in the accounts and have already reported this to the Pension Committee.
· Chaitali Roy (Independent Member) questioned the Pension liability assumptions, as detailed on page 10 of the report. This was about the net pension liabilities decreasing by £25.6m and the key changes to the assumptions relating to an increase in the expected future lifetime from age 65 for both men and women of 0.1 years and an increase in the discount rate from 3.2% to 3.4%. How had this been worked out. Clarification by BDO that the real issue was would be where the discount rate fell. The discount rate worked in the opposite direction, although its increasing it actually reduces the liability.
5. BDO expressed their thanks to Isabel Brittain and her finance team for their assistance over the past few weeks.
AGREED that the Audit Completion Report on the 2015/16 Statement of Accounts for the year ended 31 March 2016 be noted and approved and as a result the Council’s Financial Statement of Account be recommended for approval.