Agenda item

 

There were a number of items in this report.

 

Consultation

The government consultation aimed to clear the national audit backlog. The consultation had a number of phases. Phase one would focus on clearing audits for 2022-23 and prior periods by September of this year. Close-to-completion audits would be prioritised, while others may require an audit disclaimer. It was noted that Hillingdon would not have a 2022-23 Council audit. The government had not yet issued any guidance on audit opinions but it was emphasised that disclaimers were due to system resets, not underlying Council problems.

 

Phase two set future audit deadlines, aiming for normalcy by 2028-29. It was suggested that the audit deadline should be May 2025 for the 2023/24 audit, however officers and EY did not think that this was sensible as the audit period was too long and it also conflicted with other key pieces of work that both teams were doing at that time. This had been fed back to the government. It had been agreed with EY that both parties would work towards completing the audit around the November 2024 deadline. The consultation also suggested that local authorities should still publish their draft accounts at the end of May 2024.

 

2022-23 Value For Money Report

Despite the national reset affecting financial statement audits, value for money work continued. The value for money assessment for 2022-23 had been completed. Challenges included budget pressures, savings requirements, and an increasing DSG deficit were noted in the assessment.

 

No significant risks or weaknesses were identified, but financial sustainability challenges were noted. Continued focus was needed to maintain sustainability and sufficient reserves.

 

Members asked for clarity on the position of the Dedicated Schools Grant (DSG). There was a £23.5m deficit brought forward from 2021-22. No DSG funding was paid by the Department for Education (DfE) to the Council in 2023-24. Officers noted that discussions with the DfE continued regarding the safety valve agreement and deficit coverage. This issue cut across both the DfE and Department for Levelling Up, Housing and Communities (DLUHC). This was noted and Members suggested that it would be useful to have an update, possibly at the next Committee.

 

2022-23 Pension Fund Audit Results Report

Draft audit results for the 2022-23 pension fund audit were nearly complete, with no significant further delays expected. Accounts were in draft format, providing a true and fair view. An unqualified opinion was planned, once government issue guidance.

 

The going concern assessment covered the pension fund up to March 2026, providing sufficient coverage.

 

Membership data testing had been challenging this year but was completed.

 

On audit differences, a £2.7m difference had been identified. This was due to timing – accounts based on estimates versus updated information during the audit. An adjusted fair value classification point of £4.3m was flagged; discussions were planned for EY and the Council to discuss classifications next year as these were subjective in nature. An adjustment relating to fair value hierarchy and minor disclosure differences were noted.

 

Membership data point testing had been conducted, focusing on age, gender and classification. There were discrepancies with five members, which were being followed up with Hampshire. These differences were not significant. The way membership numbers had been recorded had changed. Membership numbers were now disclosed as per the record without removing duplicates, aligning with the triennial report. Two members’ declarations of interest were not received at the time of the audit but had since been received. Management should implement controls to ensure timely receipt of related party information. Overall, the report was positive, with only a small number of differences identified.

 

Members thanked officers for their work and congratulated them on completing the audit process.

 

Audit Certificate 2021-22

The 2021-22 audit certificate had been received. The audit had been completed in September 2023 but EY could not issue the certificate until the National Audit Office had confirmed that no further work was required by an auditor.

 

2023-24 EY Council Audit Plan

There were two audit plans, one for the Council and one for the Pension Fund. Officers were working towards a November 2024 completion for the 2023-24 accounts for both audits.

 

The audit plan for the Council audit for 2023-24 was provisional for two reasons. First, it had been developed in the context of the national reset proposed by the government. Second, while the consultation had been completed, auditors had yet to receive any indication of the policy or guidance to support the government’s intentions. The plan may need adjustments based on future developments. The planning work scope and strategy were well advanced, but subject to potential material amendments.

 

The plan outlined three phases: reset, recovery, and reform. The priority was the reset, which would be affected following the passing of legislation with a backstop date of September 2024. The recovery period will seek to rebuild assurances over a period of years to put the local audit system on a sustainable footing.

 

The Audit Committee, as those charged with governance for the Council, played a crucial role. The audit cannot be successfully completed without robust draft financial statements; good quality working papers; and sufficient resources to support the audit process. The external audit process often acted as a line of defence, but it was essential that internal controls caught issues before reaching external auditors.

 

The audit will focus on materiality and significant risks. Auditors will assess whether the Council had sufficient arrangements in place to receive assurance before the external audit.

 

EY gave an overview of the risks identifiedfrom the audit planning process for 2023-24. There had not been any significant changes in risk compared to the last audit in 2021-22.

 

The first risk was misstatements due to fraud and error. There were a range of procedures designed to respond to this.A specific risk under this umbrella was fraud risk related to revenue and expenditure recognition through inappropriate capitalisation of revenue expenditure.In local government, this related to Practice Note 10, which specified the need to consider fraud risks not only for revenue but also for expenditure.

 

Next, there was the significant risk of valuation of land and buildings valued under the depreciated replacement cost (DRC) method and the existing use value (EUV) method.Historically, there had been differences of specialist opinion in this area.

 

Next, there was the risk related to the recognition of infrastructure assets upon subsequent expenditure or replacement. This had been downgraded from ‘significant’ to ‘inherent risk’ in 2021-22. Although no misstatements were identified, the risk remained relevant due to implications for future arrangements as the Council transitioned from statutory instrument-based accounting to normal accounting for infrastructure assets.

 

The inherent risk around pension liability valuation was recurring and not new.

 

There was an inherent risk around valuation of council dwellings.While not typically identified as a significant risk, there was still an element of judgment involved in the valuation.

 

A new risk related to IFRS 16 disclosures.Although the new accounting standard for leases became effective from 2024-25, the Council was required to disclose its impact a year earlier. Qualitative and quantitative disclosures related to IFRS 16 would be assessed.

 

Planning materiality remained consistent with the 2021-22 audit, set at 1.8% of gross expenditure. Unaudited figures from 2023 were used as a starting point.

 

Performance materiality (applied at the account level) dropped from 75% in 2021-22 to 50% in 2023-24.This was primarily driven by the audit results from 2021-22 and it was taken into account that 2022-23 was not audited. The lowest level of materiality remained unchanged from 2021-22.

 

Members noted that they were interested in the disagreements between Internal Audit and External Audit and what those meant. Members noted that they were comfortable that those disagreements did not affect the fundamental financial reality of the Council. It was noted that all parties were happy to have any disagreements brought to the Audit Committee if necessary.

 

Members noted that a headline points or condensed summary in the report may be useful for substitute members.

 

Members asked when measuring financial performance and assessing risk factors, how did EY determine the yardsticks used to measure these, and how did the public know that these measures were fit for purpose. Officers summarised that there had been some debate on the materiality issueand the importance of setting that in context. Some of the issues that had arisen from previous audits, it was noted, did not actually impact on the Council’s bottom line – the general fund. There were a lot of grey areas around valuations. It was hoped that once the reset had passed there may be a simplification of the statement of accounts so that the public could better understand them.

 

The Cabinet Member for Finance was in attendance and noted an upcoming meeting with the external auditors, noting the importance of the progress on the national reset, which was a subject of concern.

 

It would be important to discuss the audit opinion in advance of 30 September. The government’s guidance on audit opinions was crucial, and early discussions would allow for better preparation and understanding. Ensuring transparency and timely communication with stakeholders was essential.

 

The deadline for finalising the 2022-23 audit was 30 September, while the 2023-24 accounts had a deadline of May 2025. Completing the 2023-24 audit by November would mitigate any potential damage from the 2023-23 opinion. The Cabinet Member asked if the 2023-24 audit could be finalised and issued by November 2024. However, practical considerations, workload, and coordination with relevant parties may impact the timeline. The plan aimed to conclude the 2023-24 audit and issue the report by November 2024. The backstop date in the consultation was initially set for May 2025, but it may be brought forward to March 2025 to avoid clashing with the NHS reporting season. Completing the audit by November 2024 would allow the authority to get closer to a normal cycle more quickly, considering other priorities like budget setting.

 

The form of the audit opinion was crucial. While boilerplate opinions cannot be used, guidance and early engagement would help tailor the opinion to each authority’s specific circumstances.The audit results report, due to be issued in September, should provide more flexibility for auditors to articulate the reasons behind any disclaimer of opinion.

 

The Cabinet Member also asked if there was the option to include some work on opening balances within the scope of the 2023-24 audit, which may mitigate the impact of not having a 2022-23 audit. In a corporate environment, when a disclaimer of opinion was issued, it typically took three years to rebuild assurances, especially related to opening balances. For the 2023-24 financial statements, the auditor would not have assurance over those opening balances due to the lack of a 2022-23 audit. However, the authority can work toward rebuilding those assurances in subsequent years. Guidance was awaited from either the Financial Reporting Council (FRC) or Department for Levelling Up, Housing and Communities (DLUHC) or National Audit Office (NAO) around what the expectations were in terms of rebuilding that assurance over opening balances.

 

Members asked how prepared the Council was for the implementation of the new IFRS16 standard. The new standard required organisations to bring most leases (including embedded leases within service contracts) onto the balance sheet. The Council needed to assess all its contracts to determine if they contained leases. For straightforward leases (e.g., leasing photocopy machines), assessment was relatively easy. For service contracts with embedded leases (where an asset is used as part of the service), it was more complex. The team was working with procurement to identify these embedded leases. Approximately 99% of these leases were expected to go on the balance sheet. EY had given a checklist to assist with this. The September deadline (for 2022-23) would not be affected because this risk pertained to the following year. The November deadline (for 2023-24) should also remain unaffected because it was a disclosure note rather than affecting the accounts directly.

 

The inherent risk was marked as red in the report to draw attention to it as a new risk. Inherent risk was lower in gradation compared to a significant risk. Inherent risks were typically related to new accounting standards that may impact the Council’s accounts. There was no immediate consequence, it was about ensuring compliance and transparency.

 

In September 2023, approximately 960 audit opinions were outstanding across local government in England. This was the size of the backlog and is what prompted the government to address the issue. There were currently roughly 640 opinions outstanding. The point of the reset was that an incremental approach would not solve the backlog. Many other authorities likely faced similar challenges due to the system reset and the impact on audit timelines.

 

The audit team had a relatively stable structure, including a team that dealt with the statement of accounts. Over the last 12 months, the team had developed a succession strategy, including apprentices to reinforce administrative tasks. Collaboration with colleagues from EY helped streamline processes and preparatory work. Challenges in the recruitment market were considered, and efforts were made to retain and develop existing staff. While confident at this point, challenges may emerge during the audit process.

 

The November deadline for the 2023-24 audit was ambitious but feasible. The team had started the audit, and an agreed plan was in place. Ongoing engagement and constructive work with officers were essential. The audit team aimed to be as prepared as possible, but unforeseen issues could arise during the audit process.

 

The audit fee was set by the Public Sector Audit Appointments (PSAA) based on competitive tendering. The fee covered the necessary resources, including specialists, to provide a robust opinion. While the audit team did not set the fee, they ensured the team was appropriately resourced to address the authority’s risks. The team that had been put in place was going to support a robust audit opinion.

 

2023-24 EY Pension Fund Audit Plan

The next report discussed was the pension fund account outline plan for 2023-24.

 

There was a general risk of misstatement due to fraud and error. There was a slight change to this because it was previously linked to incorrect posting of journals related to asset values and investment income. It had been determined that manipulation of investment income was the more likely area because there was so much triangulation for the valuation. The triangulation of figures from custodian and fund managers’ reports reduced the opportunity for manipulation.

 

The risk area of the valuation of complex Level 3 investments related to these investments being harder to value and they were considered higher risk due to their materiality. Increased judgement in the risk area of the classification of Level 2 and Level 3 investments lead to an elevated risk. Early work will be done to address this.

 

The risk area of actuarial disclosures (IISA 26) involved estimates and were highly material. Specialist actuaries will assist in assessing them.

 

Plan materiality was set at 1.8% of net assets, the highest level allowed for public sector pension funds. Performance materiality was set at 75% to account for relatively small errors.

 

There was a change in the EY audit pension fund manager for the 2023-24 audit.

 

RESOLVED: That the Audit Committee noted this report