Agenda item

External Audit update

Minutes:

The Chair opened the item by thanking EY and officers for their reports and moved straight to questions.

 

The Chair referred to the Independent Auditor’s Report, which noted that there was a significant weakness in the authority’s arrangements to identify and manage risks to its financial resilience and asked what had led EY to that conclusion. The DSG deficit was larger than the Council’s available reserves and this was a factual concern. Budget deterioration had occurred during the year, with a significant overspend. Weaknesses in baseline budgeting and demand forecasting had contributed to the overspend. The Medium-Term Financial Plan (MTFP) for 2024/25 included a steep increase in required savings. EY clarified that external auditors reporting a significant weakness in financial sustainability was a serious matter. EY would present an interim report at the next meeting to update on progress.

 

Members asked officers how this had happened and how it can be avoided in future. The Medium-Term Financial Strategy was based on four key elements: funding, demand-led growth, savings, and corporate items. Root causes identified included: demographic pressures in adult social care, children’s services, and temporary accommodation; inaccuracies in demand modelling; and delays in housing stock expansion which had reduced expected savings. Mitigation measures included: the launch of a Financial Improvement Programme; collaboration with external partners for benchmarking and process review; and increased focus on worst-case scenario planning.

 

The Committee requested a report from officers at the next meeting to update on financial risk assessment procedures and budget-setting methodology.

 

The Chair referred to the Independent Auditor’s Report, which also noted that there was a significant weakness in the authority’ arrangements with regards to the way the authority records, processes and reports on the information it holds, which undermines the ability of the authority to take proper informed decisions, manage its risks and meet its statutory deadlines, and asked how EY came to this conclusion.

 

Evidence for this included the delay in the production of the draft accounts and the inspection period not taking place in line with statutory requirements; Internal Audit’s limited assurance opinion citing poor data quality and reliance on manual records; and difficulties experienced by EY in completing the 2023/24 audit.

           

Officers acknowledged that routine officer-level governance was increasingly focused on financial recovery. Democratic governance processes (such as delegated authority sign-offs) remained intact. A comprehensive governance improvement programme was underway, including a “Five Pillars” review by Grant Thornton, and integration of Oracle systems to streamline data and improve transparency.

 

Officers presented that ‘governance’ had been used as a general point, though the main governance challenges were related to finance structures, systems and processes, including processes for budget monitoring.  Officers explained there was a finance improvement programme underway, supported by Grant Thornton, who will implement best practice. Officers also explained the wider non-finance related governance work underway across the Council and proposed a training session for the Audit Committee on financial governance and all other governance. It was suggested that this training be conducted before the next meeting. Inviting Grant Thornton to be part of the training would be considered.

 

Members referenced the reduction of reserves and suggested three contributory factors: a delay in adjusting the Council Tax Reduction Scheme post-pandemic; differences of opinion between finance and service teams on income generation (e.g. parking charges); and inconsistent data reporting, especially in SEND forecasting.  Officers did set out the significant improvements across the SEND data and forecasting.

 

On the Council Tax Reduction Scheme, officers noted that there had been a big impact on this of COVID which saw a 16% increase in demand.

 

Officers acknowledged the poor condition of data and work was ongoing to streamline data sources. This included the implementation of Oracle EPM, a budget monitoring platform, by month two of the financial year. It was reiterated that there needed to be accountability for budgets but that the right tools were needed to assist this.

 

EY clarified that their report covered 2023/24 and that they were not able to complete sufficient procedures to be able to give an opinion on the financial statements as a whole. What they had done, within the appendix of their report, was provide the Committee with a summary of the work they had been able to complete.

 

Members asked about the frequency of no assurance items and asked if this was due to data quality or a lack of resource within the finance directorate. EY noted that it was a combination of factors. There was a weakness in data quality which contributed to EY not being able to complete all of the necessary procedures. It was an acknowledged factor that capacity was one element that had led to quality challenges.

 

Journal entry testing was incomplete due to late data provision. The Oracle transition had some data issues that had caused delays for the 2024/25 audit.

 

Members asked about the position of the Council relative to other authorities. EY noted that while a number of councils had deficits on their DSG, Hillingdon was towards one end of the spectrum. It was reiterated that EY had found a significant weakness in financial sustainability.

 

Officers added that they had set a budget and a course of action to address the scale of the challenge, which was acknowledged. Officers were working through the closing of the accounts which would inform the first periods of the new financial year. Shortcomings were being addressed.

 

Members referred to the failure to complete procedures to check if there were had been inappropriate capitalisation of revenue expenditure. EY reiterated the overall conclusion around not being able to complete procedures within the timeframes. There was a need to rebuild assurances after several years of disclaimed opinions. Most beneficial to this was assurance over the balance sheet at the reporting date of 31 March 2024.

 

On plans for the current audit, EY noted that they would have expected to have an audit plan for 2024/25 to present to the Committee. They were not in this position because there had been delays in receiving ledger data from the Council. These delays were linked to the Oracle transition. EY would bring a full plan that sets out the risk to the financial statements. On the value for money side, EY intended to being an interim commentary to the next Committee. Officers noted draft accounts for 2024/25 were targeted for completion by the end of June. There would be an emphasis on accuracy over speed to ensure public consultation readiness.

 

RESOLVED: That the Audit Committee:

 

  1. Noted the final position regarding the Statement of Accounts and Audit Results Report for 2023/24 for ratification;

 

  1. Noted the high-level process that will be followed regarding the delivery and audit of the 2024/25 Accounts; and

 

  1. Noted the draft plan for the Audit of the 2024/25 Pension Fund Accounts.

 

Supporting documents:

 

Councillors and meetings