The Engagement Lead and Manager from the external auditors, Grant Thornton, presented the Audit Findings report 2018/19. During the presentation of this report the following matters were highlighted for Members’ consideration:
· The external auditors were responsible for reaching an opinion on the Council’s statement of accounts, for issuing a value for money audit and for identifying any areas of concern.
· The external auditors had concluded that a statutory recommendation, under Section 24 of the Local Audit and Accountability Act 2014, needed to be issued to the Council.
· This was an unusual step to take but the external auditors had issued the Section 24 notice due to concerns about the financial sustainability of the Council’s general fund and Housing Revenue Account (HRA).
· Specifically the external auditors were concerned that the remaining balances in the general fund and the HRA were not sufficient for the Council to continue to use them to balance the budget and therefore a significant amount of savings would need to be achieved by the Council in 2019/20.
· Through issuing the Section 24 the external auditors were encouraging the Council to take urgent action before it became too late for the Council to balance its budget in future years.
· In issuing the Section 24 notice Grant Thornton was not seeking to criticise Officers. Members were advised that the Council’s Section 151 Officer and the Financial Services team had acted professionally and provided good advice to Members.
· Unfortunately, Grant Thornton had identified that there was a problem in terms of elected Members’ reluctance to take big decisions as well as short-term planning by elected Members when setting the Council’s budget.
· As part of the Section 24 notice Grant Thornton was required to make recommendations in respect of managing its budget moving forward.
· The Council was required at a public meeting of the Audit, Governance and Standards Committee, to confirm whether the Council accepted those recommendations and, if so, how the local authority intended to respond.
· As many Members and Officers would be on leave in August it was suggested that a response should be received by the end of September 2019.
· The external auditors were proposing three recommendations which officers were suggesting should be accepted by Members.
· The recommendations focused on the need to balance the Council’s budget in 2019/20 without using funding from balances, the need to develop a savings plan that would ensure the budget balanced in 2020/21 and the need to develop a realistic financial plan for 2021/22.
· A key reason for the external auditor’s decision to issue the Section 24 was the fact that the Council’s balances had been reducing at a significant rate. This was not sustainable in the long-term and if repeated in 2019/20 would cause balances to fall below the level recommended by the Section 151 Officer.
· The process in respect of the Council’s financial statements had also been challenging, with the external auditors having to work significant overtime in order to meet deadlines and there would be an additional financial cost to the Council arising from this extra work.
· Grant Thornton were still working on the Council’s accounts, though it was anticipated that this process would be completed by the statutory deadline of 31st July. However, if the deadline slipped this was unlikely to cause the Council problems and Members were advised that a lot of local authorities were struggling to meet this deadline.
· Unfortunately there were a number of issues identified in the financial statements that had also been identified in 2017/18 and should not have been repeated.
· The statement in respect of pensions related to a national issue, following a legal case that had implications for organisations’ pension liabilities across the country. As such the majority of local authorities were affected by this issue.
· However, the other issues identified by the external auditors in the financial statements had been avoidable.
· No instances had been identified of senior Officers attempting to manipulate the accounts, which was positive news.
· However, Grant Thornton had had difficulties identifying reports for testing and this had taken up a lot of additional time to resolve.
· Areas that the external auditors had asked the Council to amend had included a request for the narrative report to be rephrased in order to be more user friendly for the public and a request for the Council’s governance statement to include reference to the issues within the Housing Department that had been identified some years previously.
· Officers had chosen not to accept a suggestion in respect of land and buildings being under depreciated. Members were advised that this was not considered to be material and the external auditors were satisfied that the Council had an appropriate plan in place to address the issue.
· Grant Thornton were intending to issue an unqualified opinion in respect of the Council’s 2018/19 accounts.
· Two key risks had been identified in the value for money assessment; procurement and contract management, due to the past issues within the Housing Department, and the financial sustainability of the Council.
· Grant Thornton was issuing an adverse value for money assessment in respect of the Council’s financial sustainability. This was due to concerns about short-term decision making by Members and unwillingness to make big decisions amongst Members, a view that the Commercialism Board had made limited impact to date and the delays to the Management Review.
· There remained challenges in respect of the HRA moving forward. However, the external auditors reported that it was felt that reasonable progress had been made in addressing the issues that had been identified in the Housing Department and the correct approach to addressing these issues had been adopted by the Council.
The Executive Director of Finance and Corporate Resources suggested that as a meeting of the Audit, Governance and Standards Committee was not due to take place until October an extra meeting should be convened in September to provide Members with an opportunity to respond to the recommendations in the Section 24 notice. Officers also intended to provide an update to the Executive Committee in respect of this matter.
The Leader of the Council explained that the Executive Committee took the Section 24 notice and the recommendations arising from that very seriously. The Executive Committee would make tough decisions to ensure that the problems identified by the external auditors were resolved.
During consideration of this item Members raised the following points:
· The benefits of holding an additional meeting of the Audit, Governance and Standards Committee in September to provide Members with an opportunity to consider the implications of the Section 24 notice further.
· The potential for an action plan to be produced, setting out action that could be taken to address the points raised in those recommendations, for Members’ consideration in September.
· The need for the Executive Committee to have sight of this action plan, due to the Committee’s responsibility for making difficult decisions on behalf of the Council.
· The option for Officers to provide information about risks associated with any planned savings included within the action plan.
· The need for Members to consider both income and expenditure when seeking to resolve the problems identified by the external auditors.
· The possibility of reviewing why savings had not always been achieved in accordance with planned savings in the past. Members agreed that there would be some value in the Committee receiving an update in respect of lessons learned.
· The risks for the Council arising from including unidentified savings in the Medium Term Financial Plan, as such savings were not easy to achieve.
· The frequency with which Section 24 notices were issued to Councils. Members were advised that only one other Council in the region, Birmingham City Council, had been issued with a Section 24 notice and the external auditors were not aware of other district Councils being subject to a Section 24 notice.
· The reasons why the value of land and buildings had been under depreciated. Members were advised that Officers had been using an overly complicated spreadsheet which meant that there was a higher risk of errors occurring.
· The work that Officers were undertaking to resolve this issue. The Committee was informed that the Council would be developing a new assets register and the lessons learned through the audit process would be addressed to ensure that improvements were made in the future.
· The reduction in the external audit fee for the Council that had occurred in previous years and the extent to which the costs had increased back to previous levels given the costs of additional work that had been undertaken. Members were advised that the costs were roughly equivalent.
· The potential to amend the savings template used by Officers to ensure that forecasting was more accurate in future.
· The difficulties experienced by the external auditors in terms of accessing information and the potential for Officers to plan ahead, particularly in cases where the same areas were audited on an annual basis. Members were advised that Grant Thornton had found the Finance Team to be very helpful.
· The occurrence of problems that had been identified by the external auditors in the financial statements in both 2017/18 and 2018/19 and the action that Officers were taking to ensure that this did not recur in future. Officers explained that there would be action plans in place for teams as well as individual staff members to ensure that all training needs were identified and addressed.
· The potential for the new finance enterprise system to help manage the Council’s finances. Officers advised that the system would be developed in a way that ensured weaknesses within existing systems were addressed.
· The progress in respect of the introduction of the new enterprise finance system and the deadline by which the system would be introduced. Officers explained that the contractors would go online from 19th August 2019 onwards. Whilst the system would not be fully operational for approximately 18 months there would be some high priority areas that would be launched early, which was likely to include the Council’s new land and building asset register.
· The need for staff to undertake data cleansing prior to the launch of the new finance system and for appropriate resources to be allocated to this work.
· The need for the new finance system to be project managed effectively. Officers advised that a Project Manager had been appointed and a member of the Internal Audit team would be reviewing the roll out of the system.
· The fact that the new system would not be in operation during the finalisation of the Council’s account in 2019/20.
· The work that had been undertaken by the Commercialism Board to date. The Chief Executive advised that the board had considered a lot of suggestions made by staff, had played a pivotal role in the introduction of Rubicon Leisure and had undertaken a review of the Council’s fees and charges. Consultants would start working with the Council from 1st August 2019 to help identify other commercial opportunities.
· The reasons for the delay to the Management Review. The Chief Executive explained that there had been a number of HR issues which had caused the delays.
· The types of decisions that had been taken by Members which were considered symptomatic of the short-term decision making identified by the external auditors. Members were advised that the decision in February 2019 to increase Council Tax by 2.2 per cent, rather than the maximum level of 2.9 per cent that it could have been increased before triggering a referendum, exemplified this short-term decision making. This had saved each household less than £2, so had probably not been noticed by residents, but had cost the Council in terms of removing a significant amount of potential income over the following four year period.
In conclusion to discussions in respect of this matter Members thanked the Council’s Section 151 Officer, the Financial Services team and Grant Thornton for their hard work.
1) the Audit Findings Report 2018/19 be approved;
2) the recommendations made under section 24 of the Local Audit and Accountability Act 2014, be approved to include the following :
a) A full assessment of the deliverability of the £1.13 million savings challenge for 2019/20 and the agreement and monitoring of actions by the Executive that either prevent or minimise the further use of both General Fund and HRA balances in 2019/20.
b) A financial plan for 2020/21 that includes the identification of further deliverable savings and income generation schemes, cost base reductions and Council Tax increases that eliminates the planned £1.17 million use of General Fund balances and ensures there are no further calls on HRA balances. This will require Members to take difficult decisions about sustainable levels of service and increases in Council Tax.
c) Agreement of a realistic financial plan for 2021/22 that has deliverable savings and seeks to ensure that there are no further planned uses of General Fund and HRA balances that would put them below a financial sustainable level.
3) the Committee request that officers prepare a full and comprehensive response to Grant Thornton to detail actions to be taken to address the concerns raised and for an additional Audit, Governance and Standards Committee meeting to take place before the end of September 2019 to review and approve that action plan; and
4) the draft letter of representation be approved.