Agenda item

The Committee considered the reports of the EY audit update for the London Borough of Hillingdon and the London Borough of Hillingdon Pension Fund.

Officers noted that good progress had been made. The previous Committee was informed that there had been a national issue with regards to disclosure and treatment of infrastructure assets. Subsequently, regulations and CIPFA accounting guidance had been issued and all issues, including the revised disclosure had now been closed off from an audit perspective. There was now a new national issue relating to pensions, however this was not seen as a big issue and progress had been made on this.

In other outstanding areas, officers continued to work with EY.

Regarding the Pension Fund, the audit was completed, noting the national issue. The draft results report was attached.

Council Audit

EY noted areas of audit focus. Fraud risk work had been completed since January on management overrides, generic risks and journal entry testing, and also on the risk of inappropriate capitalisation of revenues and expenditure. There were no findings to report. EY were still assessing their view to apply across other Local Authorities. On the valuation of land and buildings, progress had been made with officers since March 2022. Work had been agreed on infrastructure assets since January. On the pension liability valuation, there had been a national issue, and now the triennial valuation report had been issued since the last meeting. This was considered as subsequent information to be taken into account by management and by EY to determine if there might be a material impact on reported values as at the end of March 2022.

Management considered that the difference in the valuation of assets and liabilities related to the Pension Fund was not material compared to values recorded in the accounts. EY was still assessing their own view and was working on a consistent approach to apply across other Local Authorities.

On the valuation of Council dwellings, internal reviews had progressed, and the Council was working on a couple of follow up questions. New central government COVID-19 grants testing had been completed.

With regards to disclosures on going concern, these would have to be re-assessed as the audit was finished. The draft financial statements had been prepared on a going concern basis. Management’s assessment of going concern had been provided to EY, who will perform their planned procedures closer to the completion of the audit. This was an open item.

With regard to value for money, progress had been made, EY were reviewing responses from officers. Value for money was an area that EY had to re-visit. This was also an open item. No risks of significant weaknesses had been identified.

Members asked that when the audit was finished would there be a quick sign-off. EY noted that they were looking for a consistent approach. There was some uncertainty around the timeframe to resolve queries around the valuation of property, plant and equipment. It was noted that EY had other responsibilities with, for example, the NHS and National Audit Office and so were experiencing busy periods. EY were attempting to close down audits as quickly as possible, as well as trying to avoid issues for next year.

The Chairman asked EY about potential consequences. EY noted that Hillingdon’s audit was based out of the Reading office, and there were still 2020/21 and 2021/22 audits to complete before 2022/23 audits, which were not due to be starting until the new calendar year. It was important to close down older audits first. The Chairman asked officers about this and officers noted that it was not an ideal situation to potentially be closing down the 2022/23 financial year before the 2021/22 audit had been completed. Officers also noted good partnership working with EY, and that across London Local Authorities there was pressure to resolve issues, although generic issues were often not resolved as quickly. The Chairman asked if there would be any budget setting implications and officers noted that this would depend on what emerged from the audit, although the Medium Term Financial Forecast was not directly affected.

Members asked about the differences in valuation relating to property, plant and equipment and noted a formula for calculating depreciation. EY noted that depreciation was only part of the consideration. Valuation of some assets used a ‘modern equivalent asset approach’, and not like-for-like replacement values. Some assets were, for example, valued at market value, so there were different opinions on valuation. Local Government audits were more complex. If there were differences of opinion on valuations, a middle ground could not just be set – there were certain rules to follow. However, although Hillingdon and EY had come to different values both parties agreed the figures being presented by the Council did not require amendment as they fell within materiality limits. As there was subjectivity in terms of valuations both parties needed to apply a sensible approach to reach agreement.

Members asked about the next audit and whether other auditors were taking a similar approach in closing old audits before commencing new ones, acknowledging EY’s comments about the issues around the Reading office’s capacity. EY noted that other auditors were taking a similar approach, and that all offices were under pressure as there were audit staffing issues. EY could not confirm if all audit firms were looking to complete old audits first. New local government audit contracts took effect from 01 April 2023. EY noted that the Audit Commission was helpful. The Chairman noted that there had been more publicity around audit issues.

Pension Fund Audit

EY noted the same issue around the triennial valuation impact, though this was only a disclosure in the Pension Fund account. From the audit plan that was presented to the Committee in July 2022, on risks and results, all procedures had been completed; on risk of management override there were no findings; on some hard-to-resolve investments there was a recommendation of re-classification from Level 2 to Level 3. The CIPFA code was based on impacts for valuation: Level 1 for those easiest to value, up to Level 2, and Level 3 for those with unobservable inputs. Going concern had updated procedures (IAS26).

On audit differences, benefits expenditure was inflated by £1.8m in 2021/2022. This was caused by a catch-up adjustment due to the change in the benefit payment period upon transition to the new pension administrator. Previously benefits were paid from the 16^th of one month to the 15^th of the next month. The new administrator paid benefits from the 01^st to the end of the month. This had created a one-off position whereby 54 weeks of benefits had been accrued for during 2021/22. The additional £1.8m had not been adjusted because it was not deemed material by Management. EY had considered the impact on the prior year and concluded that any adjustment would be immaterial.

On the Actuarial Present Value of Promised Retirement Benefits (IAS 26 disclosure), there had been an unadjusted understatement of present value of promised retirement benefits by a judgemental difference related to the Goodwin case of £2.9m (£3.1 in the prior year).

There was some internal control classification relating to Level 2 and Level 3. It was recommended to ensure that inputs were monitored and classified as observable or unobservable accordingly. There was a second control recommendation around the calculation of membership numbers.

The Chairman asked officers if they were happy with the position the Council was in. Officers noted that there was a collaborative approach with some compromise. The new administrator was noted and that they were resolving historic issues contributing to membership number reclassifications. Furthermore, there were always discussions about classifications at Level 2 and Level 3 as the definition can be subjective.

The Chairman noted the expectation to issue an unmodified audit opinion and asked when this could be expected. EY noted that a draft audit opinion was included within the report, which would be finalised once the pensions triennial evaluation was cleared and the Council’s accounts was signed off.

RESOLVED: That the Committee:

1. Noted the progress of the 2021/2022 annual external audit; and

2. Delegated authority to the Corporate Director of Finance, in conjunction with the Chairman of the Audit Committee and other Audit Committee Members, to approve the 2021/2022 Statement of Accounts and Audit Results Report, and to report the outcome back to a subsequent Audit Committee meeting