Hertfordshire County Council

Transcription

1 Hertfordshire County Council Annual Audit Letter for the year ended 31 March October 2015 Ernst & Young LLP

2 Contents Ernst & Young LLP One Cambridge Business Park Cambridge CB4 0WZ Tel: Fax: Members Hertfordshire County Council County Hall Pegs Lane Hertford SG13 8DQ 23 October 2015 Ref: Your ref: Direct line: Dear Members Annual Audit Letter 2014/15 The purpose of this annual audit letter is to communicate the key issues arising from our work to the Members and external stakeholders, including members of the public. We have already reported the detailed findings from our audit work in our 2014/15 in the following reports. 2014/15 Audit Results Report for Hertfordshire County Council Reported to the Audit Committee on 23 September /15 Audit Results Report for the Hertfordshire County Council Pension Fund Reported to the Pension Committee on 3 September 2015 and the Audit Committee on 23 September 2015 The matters reported here are those we consider most significant for the Council. We would like to take this opportunity to thank officers for their assistance during the course of our work. Yours faithfully Mark Hodgson Director For and on behalf of Ernst & Young LLP Enc. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. A list of members XNAMEXs is available for inspection at 1 More London Place, London SE1 2AF, the firm s principal place of business and registered office.

3 Contents Contents 1. Executive summary Key findings Control themes and observations Looking ahead Fees Relevant parts of the Audit Commission Act 1998 are transitionally saved by the Local Audit and Accountability Act 2014 (Commencement No. 7, Transitional Provisions and Savings) Order 2015 for 2014/15 audits. The Audit Commission s Statement of responsibilities of auditors and audited bodies (Statement of responsibilities). It is available from the accountable officer of each audited body and via the Audit Commission s website. The Statement of responsibilities serves as the formal terms of engagement between the Audit Commission s appointed auditors and audited bodies. It summarises where the different responsibilities of auditors and audited bodies begin and end, and what is to be expected of the audited body in certain areas. The Standing Guidance serves as our terms of appointment as auditors appointed by the Audit Commission. The Standing Guidance sets out additional requirements that auditors must comply with, over and above those set out in the Code of Audit Practice 2010 (the Code) and statute, and covers matters of practice and procedure which are of a recurring nature. This Annual Audit Letter is prepared in the context of the Statement of responsibilities. It is addressed to the Members of the audited body, and is prepared for their sole use. We, as appointed auditor, take no responsibility to any third party. Our Complaints Procedure If at any time you would like to discuss with us how our service to you could be improved, or if you are dissatisfied with the service you are receiving, you may take the issue up with your usual partner or director contact. If you prefer an alternative route, please contact Steve Varley, our Managing Partner, 1 More London Place, London SE1 2AF. We undertake to look into any complaint carefully and promptly and to do all we can to explain the position to you. Should you remain dissatisfied with any aspect of our service, you may of course take matters up with our professional institute. We can provide further information on how you may contact our professional institute. EY i

4 Executive summary 1. Executive summary Our 2014/15 audit work was undertaken in accordance with the Audit Plans we issued for the County Council and the Local Government Pension Fund on 25 March and 18 March 2015 respectively. The audits were conducted in accordance with the Audit Commission s Code of Audit Practice, International Standards on Auditing (UK and Ireland) and other guidance issued by the Audit Commission. The Council is responsible for preparing and publishing its Statement of Accounts, accompanied by an Annual Governance Statement (AGS). In the AGS the Council reports publicly each year on how far it complies with its own code of governance, including how it has monitored and evaluated the effectiveness of its governance arrangements in year, and any changes planned in the coming period. The Council is also responsible for having proper arrangements to secure economy, efficiency and effectiveness in its use of resources. As auditors we are responsible for: forming an opinion on the financial statements, including the Pension Fund, and on the consistency of other information published with them reviewing and reporting by exception on the Council s AGS forming a conclusion on the arrangements the Council has to secure economy, efficiency and effectiveness in its use of resources undertaking any other work specified by the Audit Commission and the Code of Audit Practice. Summarised below are the results of our work across all these areas: Area of work Audit of the financial statement of Hertfordshire County Council and its Pension Fund for the financial year ended 31 March 2015 in accordance with International Standards on Auditing (UK & Ireland). Form a conclusion on the arrangements the Council has made for securing economy, efficiency and effectiveness in its use of resources. Report to the National Audit Office on the accuracy of the consolidation pack the Council needs to prepare for the Whole of Government Accounts. Consider the completeness of disclosures on the Council s AGS, identify any inconsistencies with other information which we know about from our work and consider whether it complies with CIPFA/ SOLACE guidance. Consider whether we should make a report in the public interest on any matter coming to our notice in the course of the audit. Result On 23 September 2015 we issued an unqualified audit opinion on the Council s financial statements, including the fire-fighters pension fund. On 23 September 2015 we issued an unqualified audit opinion on the Local Government Pension Fund. On 23 September 2015 we issued an unqualified value for money conclusion. We reported our findings to the National Audit Office on 23 September No issues to report. No issues to report. EY 1

5 Executive summary Determine whether we need to take any other action in relation to our responsibilities under the Audit Commission Act. No issues to report. As a result of the above we have also: Issued a report to those charged with governance of the Council with the significant findings from our audit. On 8 September 2015 we issued our Audit Results Report in respect of the Council. We presented this report to the Audit Committee on 23 September On 17 August 2015 we issued our Audit Results Report in respect of the Local Government Pension Fund. We presented this report to the Pension Committee on 3 September and to the Audit Committee on 23 September Issued a certificate that we have completed the audit in accordance with the requirements of the Audit Commission Act 1998 and the Code of Practice issued by the Audit Commission. We issued our certificate on 23 September EY 2

6 Key findings 2. Key findings 2.1 Financial statement audit The Council s Statement of Accounts, which includes its Group Accounts, Local Government Pension Scheme Accounts and Fire-fighters Pension Fund Accounts, is an important tool to show both how the Council has used public money and how it can demonstrate its financial management and financial health. We audited the Statement of Accounts in line with the Audit Commission s Code of Audit Practice, International Standards on Auditing (UK and Ireland) and other guidance issued by the Audit Commission and issued unqualified audit reports on 23 September Our detailed findings were reported in our Audit Results Reports to the 23 September 2015 Audit Committee County Council and Group Accounts The main issues identified as part of our audit were: Significant risk 1: Risk of management override ISA (UK&I) 240 requires that we plan our audit work to consider the risk of fraud. This includes consideration of the risk that management may override controls in order to manipulate the financial statements. This risk also extended to the group accounts and the fire-fighters pension fund accounts. We focussed in particular on the potential for inappropriate capitalisation of revenue expenditure on Property, Plant and Equipment given the extent of the Council s capital programme. Findings: We did not identify any material misstatements, evidence of management bias or significant unusual transactions in our testing of journals and estimates Our testing to identify if any expenditure had been inappropriately capitalised did not identify any material mis-statements. Significant risk 2: Property asset valuation Valuation of property assets and capital expenditure are significant accounting estimates that have a material impact on the financial statements. As noted above revenue expenditure may be incorrectly capitalised. Findings: We placed reliance on the work of valuation experts employed by the Council and also used an independent valuer s market report to assess and challenge the assumptions made by the Council s valuer. We gained assurance that the accounting entries made reflected the transactions and revaluations that occurred during the year. We gained assurance that additions to Property, Plant and Equipment were properly classified as capital expenditure. EY 3

7 Key findings Other audit risk : Group accounts The Council set up two companies during 2013/14: Hertfordshire Catering Ltd, which is a wholly-owned subsidiary. Herts for Learning Ltd, of which 20% is owned by the Council and the remainder by schools. The Council continued to assess these interests as quantitatively and qualitatively material to the group and therefore continued to consolidate the companies into the Council s group accounts. For 2014/15 a full year s trading was consolidated. Findings: We reviewed the Council s assessment of its interests in companies and other entities which might require consolidation into group accounts. We agreed with the Council s assessment that only Hertfordshire Catering Ltd and Herts for Learning Ltd were sufficiently material to require consolidation. We issued instructions to the external auditor of these two companies and have maintained an appropriate relationship with them. They reported to us on the results of their audits. We received a copy of the signed audited accounts for both companies from their external auditors. We carried out testing of the consolidation of the Council s accounts with those of the companies and confirmed that appropriate disclosures were made in the group accounts. Other audit risk : Highways expenditure Internal Audit issued a limited assurance opinion in 2014 on highways contract management, indicating that there were significant weaknesses in key controls. The report noted that weaknesses had been identified in areas of invoicing, reconciliations, budget monitoring and coding of expenditure. Internal Audit reported to the Audit Committee in November 2014 that progress was being made on their recommendations, but the assurance opinion had not been changed as the recommendations were still work in progress and there was still work to be carried out to embed those processes during 2014/15. Work to settle the final amount due for 2013/14 continued throughout the year alongside review of the position for 2014/15. Findings: We tested the reconciliation of payments made during the year to applications by the contractor and tested nine months in detail with no issues identified. Our testing of infrastructure additions identified no evidence of expenditure miscoded as capital. We reviewed the overall reconciliation of highways capital expenditure with no issues identified. Last year we reported that the potential outcome for 2013/14 ranged from an underaccrual of 2.2 million if the Council paid the full amount claimed by the contractor to an overaccrual of 3.0 million if the Council paid 88% of the claim, based on the error rate identified in its testing of works carried out. During 2014/15 the Council paid the contractor 1.9 million and a further 0.7 million has been paid in 2015/16. Therefore the under-accrual in respect of 2013/14 was 2.6 million which is outside the range calculated last year. In 2014/15 the Council accounted for the amount it believed due of 40.3 million but recognised that the final amount to be agreed with the contractor was uncertain. This was disclosed as a contingent liability. Our estimate of the potential outcome ranged from an overaccrual of 0.3 million if the Council s position was accepted to an under-accrual of 3.0 million if the deductions and performance caps proposed by the Council were not accepted by the contractor. While there was uncertainty about the final outcome, we were satisfied that revenue and capital highways expenditure in the 2014/15 accounts was not materially misstated. EY 4

8 Key findings Other audit risk : Accounting for schools The Accounting Code followed by local authorities requires the recognition of schools property, plant and equipment in line with relevant accounting standards. However there has historically been a lack of specific guidance about how different types of schools should be accounted for. CIPFA issued in December 2014 LAAP Bulletin 101 Accounting for Non-Current Assets Used by Local Authority Maintained Schools. This suggested that where religious bodies provide buildings to voluntary aided and voluntary controlled schools, and these bodies are able to withdraw the buildings at any point, the buildings would not be an asset of the school. In this case they would therefore not be included in the Council s balance sheet. The Council reviewed the new guidance and assessed that no changes were required to the way it currently accounted for schools, so no restatements to the accounts would be required. Findings: We reviewed the Council s assessment of the new guidance and its current accounting arrangements and did not identify any issues with its approach. As a result no changes were made to the accounting treatment of schools: Community and Voluntary Controlled schools remained on the balance sheet Voluntary Aided, Foundation schools and Academies remained off the balance sheet. Other audit risk : Existence of plant and equipment assets Asset verification testing carried out by the Council and audit testing in previous years showed that the plant and equipment asset register included assets which had been disposed by the Council. Last year assets totalling 45.0 million were written off and a further extrapolated error of 2.7 million based on audit testing reported as a result of assets which had not been correctly removed from the asset register on disposal. The Council undertook further testing of assets on a similar basis to previous years and also wrote off fully depreciated assets. Findings: The Council s exercise this year focussed on testing ICT and schools assets, writing off those which could not be verified. This together with other notified disposals resulted in the write off of assets with a gross book value of 24.8 million. We tested a sample of these write offs and were satisfied with the treatment adopted. We selected a random sample of 42 assets with a value of 1.1 million from the population and obtained evidence of their continuing existence. We also tested from the residual balance in relation to the prior year errors and did not identify any further errors. We therefore concluded that the errors in previous years have been satisfactorily addressed. Our findings this year indicate that the asset verification exercises carried out by the Council over the last few years have improved the accuracy and reliability of the plant and equipment asset register. EY 5

9 Key findings Local Government Pension Fund Accounts We reported against a significant risk as follows: Significant risk 1: Risk of management override ISA (UK&I) 240 requires that we plan our audit work to consider the risk of fraud. This includes consideration of the risk that management may override controls in order to manipulate the financial statements. Findings: We did not identify any material misstatements, evidence of management bias or significant unusual transactions in our testing of journals and estimates Fire-fighters Pension Fund Accounts We reported a matter arising as follows: Milne v Government Actuaries Department (GAD) In May 2015, the Pensions Ombudsman published a decision which affects fire-fighters who retired between 2001 and The Ombudsman found that GAD had not updated the commutation factors which were used to calculate lump sums due on retirement and that firefighters who retired in this period were disadvantaged as a result. As a result of this decision these retired fire-fighters must be compensated. We discussed with the Council the treatment of this matter within the accounts. During the audit it was apparent that GAD and Department for Communities and Local Government (DCLG) would fund these payments which would be made by the Fire and Rescue Authorities but the exact method of funding and resulting accounting for these payments was not fully determined, in particular whether they would need to be paid via the fire-fighters pension fund. This was disclosed as a post balance sheet event, but no amendments were required to be made to the accounts. EY 6

10 Key findings 2.2 Value for money conclusion As part of our work we must also conclude whether the Council has proper arrangements to secure economy, efficiency and effectiveness in the use of resources. This is known as our value for money conclusion. In accordance with guidance issued by the Audit Commission, our 2014/15 value for money conclusion was based on two criteria. We consider whether the Council had proper arrangements in place for: securing financial resilience, and challenging how it secures economy, efficiency and effectiveness. We identified a significant risk in respect of these criteria. Significant risk: Financial pressures The Council s finances continue to be under significant pressure in the medium term. In its Integrated Plan 2015/ /18 the Council identified a budget gap of 56.4 million by 2017/18. The achievement of the Council s Integrated Plans to date has been good, with savings identified to close the budget gaps. However, the Council has to continue to deliver significant savings year on year in order to bridge the gap and balance its budget. Findings: We reviewed the Integrated Plan and the assumptions included within it. We also assessed Council s financial position, including the level of reserves (both general fund and earmarked) that the Council had at 31 March By the end of 2014/15 the Council had underspent its budget by 27.7 million. This was due to a number of factors such as underspending on a number of services, additional grant income and interest on balances and a release of reserves no longer required. This level of underspend was at a similar level to the prior year ( 31.4 million in 2013/14). In its Integrated Plan for 2015/16 the Council decided to increase its General Fund balance, which is available to meet unforeseen circumstances, from 3% of the net budget to 4%. This is to reflect the continuing uncertainties and challenges in future local government funding. As a result at 31 March 2015, the Council s General Fund balance stood at 30.6 million, compared to 25.2 million at 31 March The level of non-schools earmarked reserves increased from 77.1 million in March 2014 to 89.5 million in March 2015, an increase of 12.4 million. This increase was due primarily to a 10.0 million contribution to the Invest to Transform reserve to support the Council s future transformation and efficiency programme. The 2015/16 budget included an increase in council tax of 1.99%. The budget was balanced by savings identified of 39.3 million. By 2017/18 the Council will need to make savings of million per year. At the time the 2015/16 budget and Integrated Plan was finalised, 56.4 million of that amount was still to be found. Work is in progress on the 2016/17 budget and Integrated Plan. This will extend the medium term view to 2020 and will include further plans for future savings and efficiencies to address the budget gap as well as taking into account new financial pressures which have been identified. We are comfortable that the level of reserves (both general fund and earmarked) held by the Council at 31 March 2015 covers the budget gap identified within the medium term financial plan to an appropriate level. However, the Council does need to formalise the savings plans it is developing over the period of its Integrated Plan as soon as possible in order to address the budget gap. We issued an unqualified value for money conclusion on 23 September EY 7

11 Key findings 2.3 Whole of Government Accounts We performed the procedures required by the National Audit Office on the accuracy of the consolidation pack prepared by the Authority for Whole of Government Accounts purposes. We had no significant issues to report. 2.4 Annual Governance Statement We are required to consider the completeness of disclosures in the Council s AGS, identify any inconsistencies with the other information which we know about from our work, and consider whether it complies with relevant guidance. We completed this work and requested that some amendments were made to the AGS to appropriately reflect the implications of group accounts. These amendments were made and we did not identify any other areas of concern. 2.5 Objections received We did not receive any objections to the 2014/15 financial statements from members of the public. 2.6 Other powers and duties We identified no issues during our audit that required us to use powers under the Audit Commission Ac 1998, including reporting in the public interest. 2.7 Independence We communicated our assessment of independence to the Audit Committee on 23 September In our professional judgement the firm is independent and the objectivity of the audit engagement director and the audit staff has not been compromised within the meaning of regulatory and professional requirements 2.8 Certification of grant claims and returns We have not carried out any certification work in 2014/15. EY 8

12 Control themes and observations 3. Control themes and observations As part of our work, we obtained enough understanding of internal control to plan our audit and determine the nature, timing and extent of testing performed. Although our audit was not designed to express an opinion on the effectiveness of internal control, we must tell the Council about any significant deficiencies in internal control we find during our audit. We did not identify any significant deficiencies in the design or operation of an internal control that might result in a material misstatement in the Council s financial statements of which it was not already aware. EY 9

13 Looking ahead 4. Looking ahead There are a number of changes in accounting and auditing requirements that could have a significant impact on the Council s arrangements for the production of its financial statements. We have outlined what we see as the main challenges below. Description Highways Network Assets (formerly Transport Infrastructure Assets): The Invitation to Comment on the Code of Accounting Practice for 2016/17 (ITC) sets out the requirements to account for Highways Network Assets under Depreciated Replacement Cost. This is a change from the existing requirement to account for these assets under Depreciated Historic Cost. This change is to be effective from 1 April This will be a material change of accounting policy for the Council. It will also require changes to existing asset management systems and valuation procedures. Relevant assets may also be held outside of the highways department which will also have to be valued on the revised basis. Nationally, latest estimates are that this will add 1,100 billion to the net worth of authorities. Impact CIPFA have produced LAAP bulletin 100, which provides a suggested timetable for actions to prepare for this change. This has been supplemented by the issue of the Code of Practice on Transport Infrastructure Guidance Notes (May 2015) and ITC (July 2015). The Council is well placed to tackle this change as it has officer representation on the Highways Asset Management Finance Information Group, which also includes members from CIPFA, the Department for Transport and other professional bodies, which has a key role in assisting the implementation of the new Code. In order to successfully implement this change the Council will need to: demonstrate completeness of base information, working closely with highways and other relevant departments. ensure that valuation information is appropriate to the Council, and that national valuation indicators are not used without consideration of their appropriateness locally. consider the impact on any nonhighways assets. Better Care Fund The Better Care Fund (BCF) is a major policy initiative between local authorities, clinical commissioning groups (CCGs) and NHS providers with a primary aim of driving closer integration and improving outcomes for patients, service users and carers. From the 1 April 2015 BCF has been set up as pooled budgets between local government and NHS partners using powers available under preexisting legislation. The partners use the pooled fund to jointly commission or deliver health and social care services at a local level. Local BCF arrangements may be complex and varied, involving a number of different commissioning, governance and accounting arrangements that raise risks of misunderstanding, inconsistencies and confusion between the partners. There are also structural, cultural and regulatory differences between local government and the NHS, and it is important that these are understood and considered by all of the partners in the operation of the pool. In October 2014 HFMA/CIPFA produced Pooled Budgets and the Better Care Fund which provides more detailed guidance on the governance and finance issues underpinning the operation of a pooled budget and the associated risks and challenges faced by local government and NHS partners. EY 10

14 Looking ahead Description Impact Although local authorities, CCGs and NHS providers have experience of pooled budgets and established joint commissioning arrangements, pooled arrangements under BCF are likely to be on a much larger scale. Nationally the fund is comprised of a number of existing funding streams and will involve a minimum NHS spend of 3.8 billion together with other grant funding streams historically administered by local authorities. The detailed form of local pooled arrangements is not prescribed and has needed to be agreed between the partners. Pooled budget arrangements have been established in Hertfordshire for many years and the BCF builds on those arrangements. The BCF pool will be approximately 230 million in 2015/16. The Council is the host body for the BCF in partnership with East and North Herts, Herts Valleys and Cambridgeshire and Peterborough CCGs. The performance of the BCF will be reviewed by the Health and Wellbeing Board. Earlier deadline for production and audit of the financial statements from 2017/18 The Accounts and Audit Regulations 2015 were laid before Parliament in February A key change in the regulations is that from the 2017/18 financial year the timetable for the preparation and approval of accounts will be brought forward. As a result, the Council will need to produce draft accounts by 31 May and these accounts will need to be audited by 31 July. This will also apply to the Local Government Pension Fund accounts. These changes provide challenges for both the preparers and the auditors of the financial statements. The Council is fully aware of this challenge and has been working towards earlier accounts production and facilitating earlier audit in recent years. As we commented in our Annual Results Report, we believe that the Council is well placed to meet this earlier timetable. EY 11

15 Fees 5. Fees The table below sets out the scale fees and the final audit fees for 2014/15. Total Audit Fee Hertfordshire County Council Total Audit Fee Hertfordshire Pension Fund Non-audit work - Teachers Pensions return (see Note 1 below) Final fee 2014/15 Scale fee 2014/15 Final fee 2013/14 189, , ,693 27,991 27,991 27,991 13,000 N/A 15,000 Note 1 - The Council has asked us to carry out work on 2014/15 Teachers Pensions return. This work will take place later this year and we expect to charge a fee of 13,000. EY 12

16 EY Assurance Tax Transactions Advisory Ernst & Young LLP Ernst & Young LLP. Published in the UK. All rights reserved. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. ey.com