Agenda item

Purpose: This report provides Members with the revised draft audit findings report provided by Grant Thornton in respect of their external review of the 2019/20 Financial Statements.

Shannon Coleman-Slaughter presented the report (Agenda item 7).  This was a covering report presenting the external auditor’s revised audit findings on the Council’s 2019/20 accounts.  The key element of the report was around the section related to a material adjustment of £4.4 million to the Council’s financial statements in respect of the pension reserve.

Barrie Morris, Key Audit Partner and David Johnson, Audit Manager from Grant Thornton summarised the revised audit plan as set out in the accompanying appendix to the report. 

Mr Morris advised that revisions to the audit report were in light blue for ease of reference from the original report presented in February 2021. The report set out the remaining outstanding areas but all of the work of the external auditors had now been completed subject to the receipt of the updated Pension Fund auditor (Deloitte) letter of assurance.

Under guidance from the National Audit Office an agreement was in place for the external auditor to place assurance upon the work of the Pension Fund auditor, as such the external auditor would not be issuing their audit opinion on the Council’s accounts until receipt of the letter of assurance indicating that there were no outstanding matters which would impact upon that opinion.  Grant Thornton had been in liaison with Deloitte over recent months who had confirmed they were hoping to review the letter on 26 April 2021, following which the letter of assurance was imminently expected.  Subject to no new issues being identified within the letter of assurance, Grant Thornton would be in a position to issue their audit opinion as soon as practicable thereafter. 

Barrie Morris drew Members’ attention to the final fees charged for the audit and provision of non-audit services which showed an additional charge of £14,250 in respect to the additional cost arising out of Covid-19.  This reflected the delays and inefficiencies caused as a result of auditing the accounts remotely.  Mr Morris confirmed that no additional cost had been made as a result of the delay of the Pension Fund letter. The total fee of £109,273 compared favourably to the previous year’s fee of £119,773.

David Johnson summarised the key changes as a result of the Pension Fund liability:

•         An adjustment of £1.7m to the balance sheet as a result of the adjustment from the Pension Fund auditor work.

•         A letter of assurance had been provided by the Pension Fund auditor which had highlighted a number of issues, including:

­            Write-down of Pension Fund assets by approximately £31.5m. The Council’s share of this was approximately 13% and based on the figures disclosed equated to an adjustment of £4.4m. The accounts had been adjusted for this error.

­            Variances in membership data numbers between those submitted to the actuary and the data held on the Altair membership data system. Work completed at the Council to confirm data provided to the pension fund had been undertaken and no issues had been identified.

­            A variance of £8.5m in contributions at a Pension Fund level.

­            A variance of £16.6m in benefits payable at a Pension Fund level.

­            The letter noted that work was still ongoing and that the auditors were seeking further explanation from the Pension Fund as to the reason for the variances. Grant Thornton had therefore requested that an updated letter of assurance be provided once this work had been completed which would be reviewed upon receipt.

Councillor Jeff Beck thanked David Johnson for his summary.

Councillor Tony Lindon raised his concern that this was the second time West Berkshire Council had been subject to delays with the Berkshire Pension Fund and asked whether there would be a meeting to finalise the accounts when everything had been signed off.  The Chairman said a separate meeting would not be held but with Members’ approval the sign-off would be undertaken by the Chairman and appropriate Officer as in previous years.

Councillor Jeremy Cottam asked whether an explanation for the variances would be forthcoming and what action would be taken to rectify the situation in order to prevent the same thing happening again.  Shannon Coleman-Slaughter clarified that in respect of individual funds within Royal Berkshire she was not in a position to comment but the variances were to do with the asset values and the data and the assumptions that had been informed by issues the external auditors had found leading to a knock-on adjustment to the Council’s accounts.  David Johnson said the letter of assurance by Deloitte had been very specific that there had been an adjustment to the private equity fund which had been written-down by £31m. The letter had not given a detailed explanation as to why this was the case and he was not in a position to make any assumptions at this stage.  Councillor Jeff Beck asked Andy Walker to consider writing to the Pension Fund auditor to request a broad explanation as to why the fund had been written down by £31m.

Councillor Jeremy Cottam queried the duplication of over-stating the investment property that was not taken into account, why this had happened and whether more direct procedures had been put in place to prevent this type of mistake happening again.  Andy Walker offered reassurance that this area had been shored-up and would be stronger going forward to prevent a repeat of the same issue in the future. 

Councillor Adrian Abbs queried whether the decrease in the value of investment properties of £818k was accurate or whether it was significantly more, given the assessment was at level red indicating that the external auditors ‘disagreed with the estimation process or judgements that underpinned the estimate and considered the estimate to be potentially materially misstated’.  David Johnson said that in this case it had been noted that investment properties had been valued as single assets by the valuer which included both land and buildings. A comparison of this to the fixed asset register (FAR) identified that land and building had been split into separate entries. The value as per the FAR was agreed to the accounts and not to the valuer’s report meaning the land value had been duplicated and therefore the accounts had been overstated by approximately £6.1m. This was a material misstatement and the Council had adjusted to recognise the correct value. As stated previously, the Council had addressed this area and implemented measures to ensure there was no repeat of the issue.

Councillor Adrian Abbs asked what was the actual write-down in terms of asset value.  David Johnson confirmed that the adjustment on the investment property asset was £6.1m for the duplicate of land from the draft accounts submitted. Barrie Morris clarified that the £818k represented the decrease in the value of the investment and then £6.1m had been identified as an error where the asset had been double-counted. The rationale for giving the red assessment was that the valuation had been done on both land and buildings together and would have been clearer had they been done separately.

Councillor Andy Moore said the risk register considered a high risk to be £1m but the figures around materiality as stated in the report were substantially higher than that. Therefore, was there a suggestion that a high risk category might be missed if materiality was actually not considered to be £1m.  Barrie Morris said the materiality used by the auditors was an audit concept which asked how wrong did the accounts have to be before the users of the financial statements changed any of the decisions they might make on those financial statements.  For example, in a highly volatile business, materiality might be set at 0.5% but in a much more stable business with low risk and low investor activity, materiality might be at a higher percentage. For the public-sector, the auditors had set a maximum of 2% for authorities the size and complexity of West Berkshire, however, for West Berkshire they had lowered that materiality to reflect some local specific issues such as issues and areas identified in the previous year’s audit work to make sure the financial statements were as accurate as possible.  This had led to an overall materiality of 1.5% which was £5.4m but then set a concept of performance materiality which was just over £4m which was 75% of materiality, indicating a risk-based approach so only a sample of items was tested within materiality and if an error was identified then an allowance was made to tolerate for items not tested that would fill up the gap between. 

Councillor Andy Moore asked what the auditor’s understanding or judgement was of ‘value for money’. Barrie Morris said the value for money work undertaken for the 2019/20 audit was to look at the high-level arrangements the Council had in place to make sure that value for money was likely to be achieved and to try and identify those areas of significant risk.  What had been identified was that financial sustainability – making sure a robust budget process was in place and that savings plans were realistic and achievable – were appropriate, taking into account the pre-Covid era. Under new arrangements for the 2021 audit, following National Audit Office guidelines, whilst there would still be a focus around financial sustainability, there would also be specific queries around the governance of decision-making, i.e. was there appropriate information provided to ensure that Members were able to take a well-informed view and were informed of all the facts, as well as appropriate financial assessments and legal advice undertaken.  A further change would be to look at whether economy efficient and effectiveness was being achieved from the money being spent  - i.e. how effectively was the Council bench-marking and delivering the cost and quality of its services in comparison to other Councils.

RESOLVED that delegated authority to sign the 2019/20 Financial Statements would be delegated to the Council’s Executive Director for Resources (S151 Officer) and the Chair of the Governance & Ethics Committee, once the Council’s appointed external auditors Grant Thornton had provided a formal opinion on the 2019/20 Financial Statements and in the absence of further material changes.