Agenda item

Officers introduced the EY update on accounts.

The audit had progressed well since the last Committee to the point where EY were able to issue their draft audit results report. On other progress, the Capital Pooling certification was signed off by EY at the end of July and Hillingdon was very close to having the Housing Benefits certification signed off. This would hopefully come by mid-August, so 2021/22 was coming to a close in terms of the audit.

EY outlined their draft audit results.

It was confirmed that EY had issued the audit certificate for 2020/21, which had felt like a long time ago, however EY had had to wait for the National Audit Office to confirm that they were not going to ask EY to carry out any further work.

The report set out EY’s findings and they were close to finalising the 2021/22 audit. The report had been issued on Friday (04 August) and there had not been much progress since. EY were working through their review processes and were liaising with officers to resolve any matters that may arise.

EY had also completed their value for money risk assessment and there were no matters to report.

EY confirmed their plan to complete the report of the audit as the EY officer noted that they would be leaving EY in mid-October and they were keen to try and complete the audit as much as possible before this. EY planned to update the audit results report, which was before Members at the current meeting, with the final conclusions from the audit and to circulate to Members, and to arrange a meeting with the Chairman so that Members would receive the report about a week before EY would issue the audit opinion. Alongside this, EY would also like to issue the draft reporting on value for money by taking that approach, which would enable EY to conclude the audit effectively without being able to issue the certification for the same reasons relating to the National Audit Office. The reason for this is that the next Audit Committee meeting was scheduled for after the EY officer would have left EY and an extraordinary meeting was not the right way forward.

The main change in the scope of the audit was a change in materiality. EY had to reassess materiality levels in light of the audit differences identified and reported. With regard to the Better Care fund, planning materiality had reduced by £1m. EY were currently doing an exercise to determine the extent of that impact.

On audit differences, EY split the differences into two categories – those expected to stay unadjusted and those that have been agreed to be adjusted. However, EY were still to see an updated set of accounts which was being worked on.

The differences expected to stay unadjusted were with regards to pension liability; property, plant and equipment; and Council dwellings.

On pension liability, this was a judgemental understatement of pension liability due to the Goodwin case of £2.5m. This was a recurring audit difference from prior periods (2020/21: understatement of £2.6m) that was likely to recur in future reporting periods until the case was resolved.

On property, plant and equipment, this was a judgemental overstatement of land and buildings values of £3.9m due to differences in professional opinion between professional valuers (Wilks Head & Eve and EY Real Estates) on undeveloped land values, external development costs and Central Depot valuation. This was a recurring theme in reported misstatements from the previous year’s audit.

On Council dwellings, this was not a current difference, it related to a prior year difference and was an overstatement of property values by £8.6m due to additions in 2020/21 being valued on an incorrect basis as at 31 March 2021 (historic cost as opposed to EUV-SH).

The differences expected to be corrected were with regards to health and social care income and expenditure; housing benefit debtor and creditor; pension liability; property, plant and equipment; and disclosures.

On health and social care income and expenditure, this was an overstatement of income and expenditure in the amount of £41.6m due to grossing up of income and expenditure relating to the Better Care Fund arrangement. EY concluded that the Council should account only for its own share of income and expenditure. EY considered the Council’s assessment that no restatement of prior period comparatives was required under IAS8 qualitative and quantitative materiality criteria and concurred with their judgement.

On Housing benefit debtors and creditors, this was an overstatement of the debtors and creditors balance of £25.3m due to grossing up balances with the Department for Work and Pensions (DWP) instead of recognising the net balance only.

On pension liability, this was an understatement of defined pension liability by £21.6m following the triennial valuation as at 31 March 2022 and the update of the IAS19 schedule of results.

There were a number of miscellaneous differences with regards to property, plant and equipment. These were an understatement of a sample of land and building values by £2.5m due to incorrect gross internal area and land area size used by the Council’s external valuers Wilks Head & Eve; an overstatement of community assets of £1.4m due to the assets being incorrectly revalued when they are held at depreciated historic cost; and an overstatement of properties of £1.6m which were disposed of but not derecognised.

On differences in disclosures, EY suggested a number of enhancements in disclosures to ease the understanding of the accounts by the users. The most significant were: on infrastructure assets, splitting out infrastructure assets as a separate line on the face of the balance sheet and disclosing the movement in a separate note, as well as updating the accounting policies to reflect the new statutory instrument relating to infrastructure assets accounting; on the Better Care Fund, disclosure on the face of the Comprehensive Income and Expenditure Statement (‘CIES’) to explain why no equivalent net off adjustment was made for the Better Care Fund in 2020/21 comparatives; and on pension liability, amendments to the pensions liability note to reflect the updated schedule of results for March 2022 following the impact on the Council’s liability at the balance sheet dates as a result of assumptions used within the triennial valuation update.

There were significant risks: Valuation of land and buildings valued under the Depreciated Replacement Cost (‘DRC’) method and the Existing Use Value (‘EUV’) method; and Derecognition of infrastructure assets upon subsequent expenditure/ replacement. With regards to the significant risk of valuation of land and buildings valued under the DRC method and the EUV method, EY had received the management assessment of assets not valued in the year and management had estimated an impact of a £7.5 million understatement of such assets. This was currently under review and so EY were not concluding on this yet. 

These adjustments had no impact on the bottom line in the accounts or outturn figures.

There were also fraud risks: management override – misstatements due to fraud of error; risk of inappropriate capitalisation of revenue expenditure; and account adjustments made in the ‘movement in reserves statement’.

EY had completed their work on most of the enhanced risks. On the valuation of Council dwellings, EY had obtained sufficient assurance with regards to the valuation of Council dwellings as at 31 March 2022. However, EY’s review procedures had revealed that a number of dwellings added in 2020/21 were only revalued in 2021/22, resulting in a social housing adjusting factor revaluation loss of £8.6m recorded in 2021/22, which should have been recorded in 2020/21. Management had chosen not to restate the comparatives because a restatement was not considered to be material to the users of the accounts. EY had reported this as a prior year unadjusted misstatement in section 4 of the report.

There were some control observations. EY had not identified any significant deficiencies in internal controls but were recommending certain improvements, especially around fixed asset accounting and documentation retention on Key Management judgments on complex counting treatments.

Members asked whether it was normal for there to be such a loss of £8.6m for valuations of social housing. EY noted that the evaluation was based on the CIPFA code and it only accounted for a portion of the market value of the properties according to the accounting standards and that was what was driving the large drop in value.

The Chairman noted that the Committee were pleased to be getting to the end of the process and officers noted that there would be no delays in supplying EY with the finalised accounts.

RESOLVED: That the Audit Committee noted the position regarding the 2021/22 Statement of Accounts and Draft Audit Results Report and delegated authority to the Corporate Director of Finance (in consultation with the Chairman and incorporating any views from other Members of the Audit Committee) to approve these on behalf of the Committee and to report back to the next Audit Committee meeting on these matters for ratification.