The Audit Findings for the Police and Crime Commissioner for Merseyside and the Chief Constable of Merseyside Police

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1 The Audit Findings for the Police and Crime Commissioner for Merseyside and the Chief Constable of Merseyside Police Year ended 31 March September 2015 Fiona Blatcher Engagement lead T E fiona.c.blatcher@uk.gt.com Paul Basnett Manager T E paul.s.basnett@uk.gt.com Dave Catherall Executive T E dave.a.catherall@uk.gt.com 2015 Grant Thornton UK LL 7 September 2015

2 Ms Jane Kennedy Police and Crime Commissioner for Merseyside Mr J Murphy Chief Constable of Merseyside Police September 2015 Dear Jane and Jon Grant Thornton UK LLP Royal Liver Building Liverpool L3 1PS T +44 (0) Audit Findings for the Police and Crime Commissioner and Chief Constable of Merseyside for the year ending 31 March 2015 This Audit Findings report highlights the significant findings arising from the audits of the Police and Crime Commissioner (PCC) and Chief Constable for the benefit of those charged with governance (in this case yourselves), as required by International Standard on Auditing (UK & Ireland) 260. Its contents have been discussed with management and the Audit Committee. As auditors we are responsible for performing the audits, in accordance with International Standards on Auditing (UK & Ireland), which are directed towards forming and expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities for the preparation of the financial statements. The contents of this report relate only to those matters which came to our attention during the conduct of our normal audit procedures which are designed primarily for the purpose of expressing our opinion on the financial statements. Our audit is not designed to test all internal controls or identify all areas of control weakness. However, where, as part of our testing, we identify any control weaknesses, we will report these to you. In consequence, our work cannot be relied upon to disclose defalcations or other irregularities, or to include all possible improvements in internal control that a more extensive special examination might identify. We do not accept any responsibility for any loss occasioned to any third party acting, or refraining from acting on the basis of the content of this report, as this report was not prepared for, nor intended for, any other purpose. We would like to take this opportunity to record our appreciation for the kind assistance provided by the finance team and other staff during our audit. Yours sincerely Fiona Blatcher Engagement lead Chartered Accountants Grant Thornton UK LLP is a limited liability partnership registered in England and Wales: No.OC Registered office: Grant Thornton House, Melton Street, Euston Square, London NW1 2EP. A list of members is available from our registered office. Grant Thornton UK LLP is authorised and regulated by the Financial Conduct Authority. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. Please see grant-thornton.co.uk for further details Grant Thornton UK LLP Audit Findings Report 2014/15 Date 2

3 Contents DRAFT Section Page 1. Executive summary 4 2. Audit findings 9 3. Value for Money Fees, non-audit services and independence Communication of audit matters 38 Appendices A Proposed audit opinion for PCC B Proposed audit opinion for the Chief Constable 2015 Grant Thornton UK LLP MOPAC and MPS Audit Findings Report 2014/15 July

4 Section 1: Executive summary 01. Executive summary 02. Audit findings We anticipate providing an unqualified opinion on the financial statements, and an unqualified value for money conclusion. 03. Value for Money 04. Fees, non-audit services and independence 05. Communication of audit matters 2015 Grant Thornton UK LL 7 September 2015

5 Executive summary Executive summary Purpose of this report As the external auditor appointed to both the PCC and the Chief Constable for Merseyside we are required by the Audit Commission's Code of Audit Practice to report our audit findings to the PCC and the Chief Constable as the individuals charged with governance for the office of the PCC and the Merseyside Constabulary respectively. This report (our Audit Findings Report) highlights the key matters arising from our audits of the PCC's and the Chief Constable's financial statements for the year ended 31 March It is also used to report our audit findings to management and those charged with governance in accordance with the requirements of International Standard on Auditing 260 (ISA UK&I). Under the Audit Commission's Code of Audit Practice we are required to report whether, in our opinion, the PCC's and the Chief Constable's financial statements present a true and fair view of the financial position and their expenditure and income for the year and whether they have been properly prepared in accordance with the CIPFA Code of Practice on Local Authority Accounting. We issue separate audit opinions on the financial statements of the PCC and the Chief Constable. We are also required to reach a formal conclusion on whether the PCC and Chief Constable have put in place proper arrangements to secure economy, efficiency and effectiveness in their use of resources (the Value for Money conclusion). We issue separate conclusions for the PCC and the Chief Constable based on our assessment of the arrangements each has established. Introduction In the conduct of our audits we have not had to alter or change our planned audit approach, which we communicated to the Audit Committee on the 7 th May. Our audits are both substantially complete, although we are finalising our work in the following areas: review of the final version of the financial statements of both the PCC and Chief Constable; obtaining and reviewing the management letters of representation for both audits; review of final version of the Annual Governance Statement of the PCC and Chief Constable; updating our post balance sheet events review, to the date of signing the opinion for both audits, and Whole of Government Accounts review for the PCC Group. We received the draft financial statements and accompanying working papers for both the PCC and Chief Constable at the start of our audits, in accordance with the agreed timetable Grant Thornton UK LL 7 September

6 Executive summary Key messages audit of the Police and Crime Commissioner Financial statements opinion Subject to the satisfactory completion of the outstanding matters set out on page 5, we anticipate providing an unqualified opinion on the PCC's financial statements, including the group financial statements, which consolidate the financial activities of the Chief Constable. The key messages arising from our audit of the Group and PCC's financial statements are set out below. Our audit of the PCC's financial statements, including the PCC group accounts, did not identify the need to make any material changes to the primary statements. Changes were made to the supporting notes to improve presentation and consistency. No amendments that alter the reported financial performance were required. Finance staff provided high quality working papers at the start of the audit. Further working papers were produced as required during the audit. Finance staff were available throughout the audit to answer our questions promptly and provided additional information in a timely manner. We have included further details of our financial statements audit findings, including details of the adjustments referred to above, in section two of this report. Value for Money conclusion We are pleased to report that, based on our review of the PCC's arrangements to secure economy, efficiency and effectiveness in its use of resources, we propose to give an unqualified VFM conclusion. Overall our work highlighted that the PCC has satisfactory arrangements in place to secure financial resilience, and proper arrangements in place for challenging how it secures economy, efficiency and effectiveness. The PCC continues to show strong financial resilience and good financial planning and management, however the scale of the financial challenge remains significant. The medium term financial plan identifies a budget gap of 48m over the three years from 2016/17 to 2018/19. Having already delivered substantial financial savings, the PCC is working with the Chief Constable to address the budget gap by a transforming operational working arrangements. Further detail of our work on Value for Money is set out in section three of this report. Whole of Government Accounts (WGA) We will complete our work in respect of the PCC Whole of Government Accounts in accordance with the national timetable Grant Thornton UK LL 7 September

7 Executive summary Key messages audit of the Chief Constable Financial statements opinion Subject to the satisfactory completion of the outstanding matters set out on page 5, we anticipate providing an unqualified opinion on the Chief Constable's financial statements, including the Police Officer Pension Fund accounting statements. The key messages arising from our audit of the Chief Constable's financial statements are as follows: we have not identified any material adjustments to the Chief Constable's reported financial performance for the year; and we did identify minor adjustments relating to reclassifications and disclosure changes which the Chief Finance Officer agreed to amend. These did not alter the reported financial performance. We have included further details of our financial statements audit findings, including details of the reclassification and disclosure changes referred to above, in section two of this report. Value for Money conclusion We are pleased to report that, based on our review of the Chief Constable's arrangements to secure economy, efficiency and effectiveness in their use of resources, we propose to give an unqualified VFM conclusion. Overall our work highlighted that the Chief Constable has satisfactory arrangements in place to secure financial resilience, and proper arrangements in place for challenging how it secures economy, efficiency and effectiveness. In 2014/15 the Chief Constable has maintained a focus on improving operational performance at the same time as making further significant efficiency savings. Operational performance remains challenging with the level of recorded crime increasing in line with national trends and above the average for England and Wales. The Force continues to show a strong response in tackling crimes of violence and drug offences and are prioritising operational responses using indications of threat, harm and risk to deal with the challenges Grant Thornton UK LL 7 September

8 Executive summary Controls Roles and responsibilities The PCC and the Chief Constable are responsible for the identification, assessment, management and monitoring of risk, and for developing, operating and monitoring the system of internal control. Management has operated a common set of financial systems and controls to produce both sets of financial statements for 2014/15. Our work on the material financial systems used to prepare the financial statements has therefore supported our audits of both the PCC and the Chief Constable. Our audit is not designed to test all internal controls or identify all areas of control weakness. However, where, as part of our testing, we identify any control weaknesses, we report these to the PCC and to the Chief Constable. Findings Our work has not identified any control weaknesses which we wish to highlight for your attention. As part of our planned programme of work, we followed up our high level review of the general IT control environment completed last year. We are pleased to report that appropriate action has been taken and no residual issues remain. The way forward Matters arising from the financial statements audit and review of the arrangements for securing economy, efficiency and effectiveness in the use of resources have been discussed with the PCC's Chief Finance Officer and the Chief Constable's Director of Resources. Looking ahead, we will continue to discuss with officers the arrangements for bringing forward the accounts and audit completion period, including an earlier Audit Committee date, ahead of the changes to the national deadlines in 2017/18. Acknowledgment We would like to take this opportunity to record our appreciation for the assistance provided by finance staff and other officers in both the office of the PCC and the Police Force during our audits. Grant Thornton UK LLP August Grant Thornton UK LL 7 September

9 Section 2: Audit findings 01. Executive summary 02. Audit findings 03. Value for Money 04. Fees, non-audit services and independence 05. Communication of audit matters Our audit is substantially complete and went well. We are finalising our audit procedures in a small number of areas. We have not identified any material adjustments affecting the Police and Crime Commissioner's or the Chief Constable's financial position and we are expecting to issue an unqualified opinion on the financial statements Grant Thornton UK LL 7 September 2015

10 Audit findings Audit findings In this section we present our findings in respect of matters and risks identified at the planning stage of the audits and additional matters that arose during the course of our work. We set out on the following pages the work we have performed and the findings arising from our work in respect of the audit risks we identified in our audit plan, presented to the Joint Audit Committee on 7 th May. We also set out the adjustments to the financial statements arising from our audit work and our findings in respect of internal controls. Changes to Audit Plan We have not made any changes to our Audit Plan as previously communicated to you. Audit opinion We expect to issue an unqualified opinion on both the PCC's financial statements and the Chief Constable's financial statements. Our proposed audit opinions are set out in Appendices A and B Grant Thornton UK LL 7 September

11 Audit findings Audit findings against significant risks "Significant risks often relate to significant non-routine transactions and judgmental matters. Non-routine transactions are transactions that are unusual, either due to size or nature, and that therefore occur infrequently. Judgmental matters may include the development of accounting estimates for which there is significant measurement uncertainty" (ISA (UK&I) 315). In this section we detail our response to the significant risks of material misstatement which we identified in the Audit Plan. As we noted in our plan, there are two presumed significant risks which are applicable to all audits under auditing standards. Risks identified in our audit plan Relevant to? PCC/CC/Both Work completed Assurance gained and issues arising 1. Improper revenue recognition Under ISA (UK&I) 240 there is a presumed risk that revenue may be misstated due to improper recognition Both Risk has been rebutted, as set out opposite. PCC audit We have rebutted this presumed risk for the PCC because revenue is principally grant allocations from central government and council tax precepts. Chief Constable audit We have rebutted this presumed risk for the CC because: revenue is an inter group transfer from PCC; and revenue does not involve cash transactions. We therefore do not consider this to be a significant risk for either PCC or the CC. 2. Management override of controls Under ISA (UK&I) 240 there is a presumed risk of management over-ride of controls Both Both PCC and Chief Constable audits Review of accounting estimates, judgements and decisions made by management. Testing of journal entries. PCC audit Our audit work has not identified any evidence of management override of controls. In particular the findings of our review of journal controls and testing of journal entries has not identified any significant issues. We set out later in this section of the report our work and findings on key accounting estimates and judgments. Review of unusual significant transactions. Chief Constable audit Our audit work has not identified any evidence of management override of controls. In particular the findings of our review of journal controls and testing of journal entries has not identified any significant issues. We set out later in this section of the report our work and findings on key accounting estimates and judgments Grant Thornton UK LL 7 September

12 Audit findings Audit findings against other risks In this section we detail our response to the other risks of material misstatement which we identified in the Audit Plan. Transaction cycle Relevant to: PCC/CC/Both Description of risk Work completed Assurance gained & issues arising Operating expenses Both Creditors understated or not recorded in the correct period. PCC and Chief Constable audits We have undertaken the following work in relation to this risk: documented our understanding of processes and key controls over the transaction cycle; PCC audit Our audit work has not identified any significant issues in relation to the risk identified. Chief Constable audit undertaken walkthrough of the key controls to assess the whether those controls are designed effectively; Our audit work has not identified any significant issues in relation to the risk identified. Selected a sample of expenditure items and year end creditor balances for substantive testing; Tested payments made after the year-end to identify potential unrecorded liabilities and gain assurance over the completeness of the payables balance in the accounts; and Tested the reconciliation of operating expenditure recorded in the general ledger to the subsidiary systems and interfaces. Employee remuneration Both Employee remuneration and benefit obligations and expenses understated. PCC and Chief Constable audits We have undertaken the following work in relation to this risk: documented our understanding of processes and key controls over the transaction cycle and undertaken walkthrough of the key controls to assess the whether those controls were in line with our documented understanding; Completed substantive testing of staff and officer payroll payments, ensuring that payments are made in accordance with the individual's contract of employment; PCC audit Our audit work has not identified any significant issues in relation to the risk identified. Chief Constable audit Our audit work has not identified any significant issues in relation to the risk identified. undertook substantive testing of the completeness of year end payroll creditors and appropriate cut-off; Tested the reconciliation of payroll expenditure recorded in the general ledger to the subsidiary systems and interfaces; and Completed an analysis of trends to identify any anomalous areas for further investigation Grant Thornton UK LL 7 September

13 Audit findings Audit findings against other risks continued Transaction cycle Relevant to: PCC/CC/Both Description of risk Work completed Assurance gained & issues arising Pensions Benefits Payable Chief Constable Benefits improperly computed/ Claims liability understated. We have undertaken the following work in relation to this risk: documented our understanding of processes and key controls over the transaction cycle; Our audit work has not identified any significant issues in relation to the risk identified. undertaken walkthrough of the key controls to assess the whether those controls were in line with our documented understanding; substantive testing of pension payments; and completed an analysis of trends and relationships to identify any anomalous areas for further investigation Grant Thornton UK LL 7 September

14 Audit findings Accounting policies, estimates and judgments In this section we report on our consideration of accounting policies, in particular revenue recognition policies, and key estimates and judgments made and included in the financial statements. Relevant to? Accounting area Revenue recognition PCC / CC / Both Summary of policy Comments Assessment Both PCC The has two principal revenue streams: grant income is recognised in accordance with the terms of the grant, whether specific or non-specific; and income from fees/charges in the provision of services, which is recognised when the service has been provided or when title to goods has passed. All income is accounted for by the PCC and paid into the Police Fund. CC The CC is entirely funded by the PCC. Income is recognised in the CC Accounts, to reflect the simultaneous funding by the PCC, of the financial resources consumed by the CC. The CC financial statements therefore do not contain debtors or liabilities other than those relating to those required by IAS 19, as the PCC provides funding to meet those liabilities as they fall due. PCC audit The revenue recognition policies are appropriate and in accordance with the CIPFA Code and Financial Management Code issued by the Home Office. The PCC receives a top-up grant from the Government equal to the sum by which the amount payable for pensions from the Pension Fund exceeds the amounts receivable that are paid into the Pension Fund. The PCC has agreed to include a specific accounting policy for top-up grant in the accounting policies statement. CC audit The revenue recognition policy is appropriate. CIPFA issued guidance to accounting practitioners in December 2012 and March 2013 which identified that the incidence of employee costs in either set of accounts would influence the recognition of related pensions obligations including short term liabilities. The CC has recognised pension costs and both long term and short term liabilities in its accounts in full, in line with IAS19 (Employee Benefits), as they are accrued in respect of police officers and staff under the direction and control of the CC. Assessment Marginal accounting policy which could potentially attract attention from regulators Accounting policy appropriate and disclosures sufficient Accounting policy appropriate but scope for improved disclosure 2015 Grant Thornton UK LLP Audit Findings Report 2014/15 Date 14

15 Audit findings Accounting policies, estimates and judgments Accounting area Relevant to? PCC / CC / Both Summary of policy Comments Assessment Cost recognition Both PCC policy Expenditure is recognised on an accruals basis. PCC expenditure includes the cost of policing provided by the CC, this cost is recognised as intragroup funding. The cost of support services are apportioned to services in full in line with the CIPFA Service Reporting Code of Practice (SeRCoP) 2014/15. These costs are charged to relevant policing services in the CIES. PCC audit We are satisfied that expenditure recognition policies are appropriate and result in materially accurate recognition of costs in PCC's financial statements and those of the Group. We are also satisfied that the policy reflects the arrangements for the PCC to fund the Chief Constable's operations and that this does form the basis of the intragroup adjustment. CC policy Expenditure is recognised on an accruals basis in the CC financial statements. As noted above, this includes the cost of support services, including finance, property, IT and legal services, which are apportioned to services in line with the CIPFA Service Reporting Code of Practice (SeRCoP) 2014/15. CC audit We are satisfied that expenditure recognition policies are appropriate and result in materially accurate recognition of costs in CC financial statements. Assessment Marginal accounting policy which could potentially attract attention from regulators Accounting policy appropriate and disclosures sufficient Accounting policy appropriate but scope for improved disclosure 2015 Grant Thornton UK LLP Audit Findings Report 2014/15 Date 15

16 Audit findings Accounting policies, estimates and judgments (continued) Relevant to? Accounting area Other accounting policies PCC / CC / Both Summary of policy Comments Assessment Both PCC and CC We have reviewed the PCC and the CC accounting policies against the requirements of the CIPFA Code and International Financial Reporting Standards. Our review of accounting policies has not highlighted any issues which we wish to bring to your attention, for either the PCC or the CC. Going concern Both PCC and CC Both the PCC and the CC have a reasonable expectation that the services they provide will continue for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. PCC and the CC face significant financial challenges due to cuts in the grant they receive from the Home Office. To their credit, both organisations share a good understanding of the scale of this financial challenge over the medium-term. The PCC has approved a balanced budget for 2015/16 and a medium term financial plan for 2016/17 to 2018/19 which includes a savings target, some of which are still to be identified for 2016/17. We have assessed the reasonableness of the assumptions underlying this forecast, and the sensitivity of the forecasts to changes in those assumptions. We do not consider there to be a material uncertainty which could cast doubt either entity's ability to continue as a going concern. The PCC group holds 41 million of useable revenue reserves, approximately 30 million of which are held in cash and short-term investments. Based on this, we are satisfied that it remains appropriate for the PCC and CC to prepare accounts on a going concern basis as at 31 March Assessment Marginal accounting policy which could potentially attract attention from regulators Accounting policy appropriate and disclosures sufficient Accounting policy appropriate but scope for improved disclosure 2015 Grant Thornton UK LLP Audit Findings Report 2014/15 Date 16

17 Audit findings Accounting policies, estimates and judgments (continued) Relevant to? Accounting area Estimates and judgments land and building valuations PCC /CC / Both Summary of issue Comments Assessment PCC The CIPFA Code requires that authorities revalue their land and building assets on a regular basis. The PCC engages an independent chartered surveyor to provide land and building valuations for financial reporting purposes. For the Joint Command and Control centre leased by the PCC from Merseyside Fire and Rescue Authority the PCC engaged their own valuer to provide building valuations for financial reporting purposes rather than use the Fire Authority's valuer. An uncertainty has been raised through the JCC valuation process of the appropriate floor area to use for valuation of the JCC. We undertook a detailed review of the work performed by the PCC's Valuer to provide land and building valuations for financial reporting purposes. We were satisfied from our review of the valuation report, that the methods and assumptions used by the Valuer in valuing the PCC's land and property assets are considered to be reasonable and in accordance with the requirements of IFRS and the Code. The Valuer's approach to the JCC has been to estimate a market value of the entire site (original and new build) and then apportion this value based on floor space utilised by the police service. The original valuation of the JCC was 5m and the valuation was based on the initial assessment of the floor area provided by the Fire Service. Subsequent comparison by the Valuer of the floor area set out in the plans raised questions over the accuracy of the floor area figures being used and the Valuer produced an updated valuation of 4.5m based on the plan information. Management have chosen to retain the 5m valuation figure for 2014/15 and have agreed with the Valuer that a an accurate floor measurement exercise will be completed during 2015/16. The difference of 0.5m is not material and is an indication of the estimation uncertainty involved with this asset's valuation. The Valuer has acted appropriately in questioning the validity of the floor area estimation when it became clear that other sources of information provided inconsistent floor area information. We are satisfied that the resultant valuation included in the accounts is materially correct Grant Thornton UK LLP Audit Findings Report 2014/15 Date 17

18 Audit findings Accounting policies, estimates and judgments (continued) Relevant to? Accounting area Estimates and judgments land and building valuations PCC /CC / Both Summary of issue Comments Assessment PCC Page 59 of the accounts sets out the PCCs rolling programme of revaluations. This shows that full valuations were undertaken on twelve properties (valuation m) and a further thirty six properties were subject to a desktop review (valuation m). We are satisfied that the carrying amount of Property, Plant & Equipment (based on these valuations) does not differ materially from the fair value at 31 March The desk based valuation approach helps to provide assurance over the material accuracy of the balance at 31/3 of those assets which have not been subject to a full valuation. However its important to note that this valuation method does not meet the requirements of the Code which prescribes the full valuation method. We are not recommending a change to the valuation approach. In the last three years 80% of properties have been subject to a full inspection and valuation. Going forward the Finance Team needs to keep this issue under annual review to ensure there is a materially correct property valuation each year. The Land and Buildings balance at 31 March 2015 includes a small number of assets totalling 432k which are held at historical cost. Under the Code and the PCC's own accounting policy, all operational land and buildings are required to be valued at fair value under and not historical cost. The amounts are relatively minor and management have agreed to review these assets and ensure fair value valuations are completed for 2015/16. Given the nature of the assets involved we are satisfied that this is unlikely to have a material impact on the values as at 31/3/ Grant Thornton UK LLP Audit Findings Report 2014/15 Date 18

19 Audit findings Accounting policies, estimates and judgments (continued) Relevant to? Accounting area Estimates and judgments IAS 19 liabilities PCC / CC / Both Summary of issue Comments Assessment Both Local Government Pension Scheme (LGPS) for PCC staff and CC staff The LGPS is the pension scheme for PCC and police staff. This is a funded defined benefit scheme. The scheme is administered by Merseyside Pension Fund. The liability showing the underlying long term commitment to fund future retirement benefits is shown on the relevant PCC and CC balance sheet with a corresponding Pension Reserve. Police Officers The Chief Constable operates two pension schemes for police officers. The 2006 New Police Pension Scheme (NPPS) and the Police Pension Scheme (PPS), both of which are unfunded, defined benefit schemes. The financial liability for these schemes appears on the Chief Constable's Balance Sheet with a corresponding Pension Reserve. Changes in actuarial assumptions led to a 600million increase in the size of the liability, which stood at 4.7 billion at 31 March For LGPS and the two police officer pension schemes we undertook a review of the relevant actuary's (Mercer for LGPS and GAD for police schemes) work to satisfy ourselves that the pension liabilities are fairly stated in the financial statements. In doing so we engaged our own independent actuary to assess the methodology and assumptions used by the schemes actuary. For LGPS we have confirmed with the LGPS external auditor that the controls over membership data were operating as intended. For the two police schemes we have reviewed the information sent to the actuary ourselves and confirmed it was consistent with our expectations. The pension fund liabilities are most sensitive to changes in the following key assumptions: discount rate; mortality; inflation; and future salary increases. For both LGPS and the police officer pension schemes we have reviewed the assumptions used for each of these variables. Our own independent actuary has also confirmed that they are comfortable that the assumptions used by both Mercer and GAD are reasonable for the purpose of valuing the pension fund liabilities as at 31 March Grant Thornton UK LLP Audit Findings Report 2014/15 Date 19

20 Audit findings Other communication requirements We set out below details of other matters which we are required by auditing standards to communicate to those charged with governance via the Audit Committee. Issue Commentary 1. Matters in relation to fraud We have previously discussed the risk of fraud with the Audit Committee. We have not been made aware of any incidents in the period and no other issues have been identified during the course of our audit procedures. 2. Matters in relation to laws and regulations We are not aware of any significant incidences of non-compliance with relevant laws and regulations. 3. Written representations A standard letter of representation has been requested from the PCC and from the CC. 4. Disclosures Our review found no material omissions in the financial statements. However a number of disclosure changes have been agreed to improve compliance with Code, ensure internal consistency and provide greater clarity. 5. Matters in relation to related parties We are not aware of any related party transactions which have not been disclosed Grant Thornton UK LLP Audit Findings Report 9 September

21 Audit findings Internal controls The purpose of an audit is to express an opinion on the financial statements. Our audits included consideration of internal controls relevant to the preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. We considered and walked through the internal controls for Employee Remuneration, Operating Expenses and Benefits Payable. The controls were found to be operating effectively and we have no matters to report to the Audit Committee. As part of our planned programme of work, we followed up last year's high level review of the general IT control environment. The Director of Resources has responded to the issues in last year's action plan and we are satisfied that the issues have been appropriately addressed Grant Thornton UK LL 7 September

22 Audit findings Adjusted and Unadjusted misstatements Police and Crime Commissioner financial statements and Chief Constable financial statements There were no adjusted or unadjusted misstatement within the Group, PCC or Chief Constable's accounts Grant Thornton UK LL 7 September

23 Audit findings Misclassifications & disclosure changes Police and Crime Commissioner financial statements The table below provides details of misclassification and disclosure changes to the PCC's financial statements, including the group consolidation, identified during the audit which have been made in the final set of financial statements. Adjustment type Value '000 Account balance Impact on the financial statements 1 Disclosure 404,925 CIES There has been clarification this year on how the PCC should record intra group funding in the CIES (i.e. the funding provided by the PCC to the CC to fund services). National guidance now confirms that the PCC's funding of CC services should be shown above the line i.e. above net cost of services in the CIES and not placed below the line as part of the 'surplus/deficit on the provision of services' as in previous years. 2 Misclassification 1,197 Note 4.9 Creditors Note 4.9 provides an analysis of creditors by type of body. Testing has found that 1,197k creditors payable to Other local authorities (police bodies) is recorded in sundry creditors - bodies external to central government. Therefore, other local authorities creditor balance is understated by 1,197k and bodies external to general government balance is overstated by same amount. This is a classification issue and has no impact on the overall surplus or deficit. 3 Misclassification 1,076 Note 4.9 Creditors / Note 4.12 Provisions A creditor relating to a commuted sum for retired officers which had a value of 1,076, was moved from creditors to provisions. Audit testing has confirmed that the amounts in questions have been notified during 14/15 to the PCC and have been paid in the new year 15/16. Therefore this provision should be included in creditors. 4 Misclassification 355 Note 4.7 Debtors One transaction which had a value totalling 280,590 relating to driver safety courses income was found to be incorrectly classified as a local authority debtor - instead of a sundry debtor. In addition there were 5 Merseytravel invoices totalling 53,243 classified as 'sundry' instead of LA, and MOPAC invoices 21,909 classified as 'sundry' instead of LA Grant Thornton UK LL 7 September

24 Audit findings Misclassifications & disclosure changes Police and Crime Commissioner financial statements The table below provides details of misclassification and disclosure changes to the PCC's financial statements, including the group consolidation, identified during the audit which have been made in the final set of financial statements. Adjustment type Value '000 Account balance Impact on the financial statements 5 Disclosure 5,500 Note 3.11 Audit Costs Additional audit fee work was undertaken in relation to tax services with the PCC. These fees of 5.5k are currently not disclosed in the group accounts. 6 Disclosure n/a Note 3.5 Other Collaborations 7 Disclosure n/a Note 3.10 Termination Benefits 8 Disclosure n/a Note 1 Statement of Accounting Policies The note was amended to include the finance lease disclosures required by the Code. The termination benefits bandings were amended from "less than 20,000" to 0 to 20,000 and more than amended to 80,001 to 99,999. The Note was amended to include accounting polices on : prior period errors; intra group funding; pensions top up grant. 9 Disclosure n/a Various Minor changes were made to the notes on: Surplus on revaluation of noncurrent assets, Critical judgements; and Estimation uncertainty. 10 Disclosure n/a Contingent liability Additional note provided to describe the impact of the Pensions Ombudsmen Determination on commutation factors. 11 Disclosure n/a Note 3.6 Police officer and police staff remuneration bands Note 3.6 Police officer and police staff remuneration bands (Groups Accounts) - Audit testing identified that that the staff numbers reported in note 3.6 for the group did not include the PCC numbers. The staff numbers in the bandings were amended Grant Thornton UK LL 7 September

25 Audit findings Misclassifications & disclosure changes Chief Constable financial statements The table below provides details of misclassification and disclosure changes to the Chief Constable financial statements identified during the audit which have been made in the final set of financial statements. Adjustment type Value '000 Account balance 1 Disclosure n/a Note 3.5 Police officer and police staff remuneration bands Impact on the financial statements Note 3.5 Police officer and police staff remuneration bands (CC Accounts) - Audit testing identified that that the staff numbers reported in note 3.5 for the CC were understated. The staff numbers in the bandings were amended. 2 Disclosure n/a Note 6.2 Reconciliation of FAU Net Expenditure to Cost of Services in the Comprehensive Income and Expenditure Statement- 3 Disclosure n/a Note 3.7Termination Benefits 4 Disclosure n/a Note 3.6 Senior Officer Remuneration The figure of 344,086 for Net Expenditure in the FAU Analysis did not agree with Note 6.4 Reconciliation of FAU Net Expenditure to Subjective Analysis 2014/15 which showed 343,118. The figure of 3,692 for Amounts not reported in CIES did not agree with 6.4 Reconciliation of FAU Net Expenditure to Subjective Analysis 2014/15 which showed 4,640. The termination benefits bandings were amended from "less than 20,000" to 0 to 20,000 and more than amended to 80,001 to 99,999. The table of senior officer remuneration was amended to show the 12k honoraria payment to the Deputy Chief Constable separately Grant Thornton UK LL 7 September

26 Section 3: Value for Money 01. Executive summary 02. Audit findings We have completed our Value for Money work and intend to issue an unqualified Conclusion. 03. Value for Money 04. Fees, non-audit services and independence 05. Communication of audit matters 2015 Grant Thornton UK LL 7 September 2015

27 Value for Money Value for Money Value for money conclusion The Code of Audit Practice 2010 (the Code) describes the PCC's and the Chief Constable's responsibilities to put in place proper arrangements to: secure economy, efficiency and effectiveness in its use of resources; ensure proper stewardship and governance; and review regularly the adequacy and effectiveness of these arrangements. We are required to give our VfM conclusion based on two criteria specified by the Audit Commission which support our reporting responsibilities under the Code. These criteria are: The PCC and the Chief Constable each has proper arrangements in place for securing financial resilience - the PCC and the Chief Constable each has robust systems and processes to manage effectively financial risks and opportunities, and to secure a stable financial position that enables it to continue to operate for the foreseeable future. The PCC and the Chief Constable each has proper arrangements for challenging how it secures economy, efficiency and effectiveness - the PCC and the Chief Constable are each prioritising their resources within tighter budgets, for example by achieving cost reductions and by improving efficiency and productivity. Key findings - PCC Securing financial resilience We have undertaken a review which considered the PCC's arrangements against the three expected characteristics of proper arrangements as defined by the Audit Commission: Financial governance; Financial planning; and Financial control. The main matters to note from our work are: The PCC Group is considered to be in a sound financial position at this time. The PCC has general reserves of 10.5m, risk assessed earmarked reserves ( 31m) and a track record of delivering financial performance in line with budgets. The majority of the spending by the PCC is on providing funding to the Chief Constable. The savings programme has been successful over the past three years, which should enable the Chief Constable to deliver services in line with the Police and Crime Plan's objectives despite the significant cuts in funding. The PCC has shown strong financial resilience and good financial planning and management and continues to do so. The revenue budget underspend for the year was 6.8m of which the underspend attributable to the PCC was 0.142m. However the scale of the financial challenge remains significant. The PCC's MTFS was approved as part of the 2015/16 budget setting process and covers the period to 2018/19. The medium term forecast sets out that the PCC and the Force are potentially required to identify 20m of savings in 2016/17, with a further 14.1m in 2017/18 and 13.8m in 2018/19, giving an anticipated overall savings requirement of 48m over the MTFS period. The challenge is however becoming increasingly difficult to meet and whilst 2015/16 is budgeted to be delivered, the financial position will be increasingly challenging thereafter as significant changes to Home Office grant is likely to mean further efficiencies will then be needed in order to balance the budget Grant Thornton UK LL 7 September

28 Value for Money Value for Money Challenging economy, efficiency and effectiveness We have considered the Authority's arrangements to challenge economy, efficiency and effectiveness against the following themes: Prioritising resources. Improving efficiency & productivity. Overall our work highlighted: Overall VfM conclusion PCC On the basis of our work, and having regard to the guidance on the specified criteria published by the Audit Commission, we are satisfied that in all significant respects the PCC has put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March The PCC in conjunction with the CC have continued to develop the overall approach to prioritising resources and improving productivity. A key challenge for the PCC has been to address the condition of the Police Building Estate which is in need of substantial investment to bring properties up to modern standards as well as to improve operational efficiency. The PCC has made significant progress in developing its Estate Strategy. The PCC and CC have been ambitious in developing a significant capital programme of 130m to finance reconstruction projects for the Police Estate with capital investment from reserves and borrowing. After a period of extensive consultation by the PCC over the Estates Strategy the programme has been reviewed and will provide community police stations for each neighbourhood, fund a new serious and organised crime centre and save around 2.5m a year. The Estates Strategy has a 10 year implementation plan and changing financial factors in that time including the cost of borrowing, combined with changes in operational priorities will have an impact. Each element of the strategy is subject to a detailed options appraisal process and the PCC is continuing to update the financial modelling for its impact on the medium term financial plan as each project is agreed Grant Thornton UK LL 7 September

29 Value for Money Detailed findings Police and Crime Commissioner We set out below our detailed findings against six risk areas which have been used to assess the PCC's performance against the Audit Commission's criteria. We summarise our assessment of each risk area using a red, amber or green (RAG) rating, based on the following definitions: Amber Red Adequate arrangements Adequate arrangements, with areas for development Inadequate arrangements The table below and overleaf summarises our overall rating for each of the themes reviewed: Theme Summary findings RAG rating Key indicators of performance Strategic financial planning The key indicators of financial performance show that Merseyside has managed its finances well to date. Key financial ratio's are strong and confirms that the PCC has no liquidity problems. The organisation is in a strong financial position, it has delivered its budget again this year, and using in-year underspends to enhance reserves. The PCC has a strong cash position and clear plans for managing and using reserves. The PCC had 23m long term debt at 31/3/14 which reduced to 19m at 31/3/15. The PCC is considering further long term borrowing from 2015/16 to fund the capital programme. The proposed borrowing to finance the Estate Strategy will deliver significant savings. In 2015/16 the capital programme estimates that external borrowing of 11.3 m will be required followed by 42m (16/17), 19.7m (17/18) and 11.8m (18/19). Capital financing costs are forecast to increase to 1.735m per annum by 18/19. The Ratio of Financing Costs to Net Revenue Stream increases from 0.43% in 2014/15 to 2.25% in 18/19. Within the 2014/15 budget the Chief Constable and PCC identified savings of 13.5m which enable a balanced budget to be achieved in 2014/15. These substantial savings have again been achieved and the budget was underspent by 6.8m mainly due to reduction in officer numbers. The updated MTFS highlights the on-going significant financial challenges faced by the PCC. The MTFP shows that the budget deficit for 2015/16 of 8.983m has been balanced by a one-off contribution from reserves. Looking forward the MTFP shows that plans will be developed during 2015/16 to achieve the estimated savings requirements of 48m by 2018/19. The PCC has significant reserves ( m) and a track record of delivering financial performance in line with budgets. The level of reserves and planned use of reserves allows the PCC to invest in changes to improve productivity going forward. One of the most significant challenges going forwards is the uncertainty over the impact of changes being made nationally to the funding formula for PCC's Grant Thornton UK LL 7 September

30 Value for Money Detailed findings Police and Crime Commissioner We set out below our detailed findings against six risk areas which have been used to assess the PCC's performance against the Audit Commission's criteria. We summarise our assessment of each risk area using a red, amber or green (RAG) rating, based on the following definitions: Amber Red Adequate arrangements Adequate arrangements, with areas for development Inadequate arrangements The table below and overleaf summarises our overall rating for each of the themes reviewed: Theme Summary findings RAG rating Financial governance Financial control The PCC and CC have established effective scrutiny and governance arrangements. The governance arrangements are underpinned by the Corporate Governance Framework which includes new Scheme of Consents and Delegation, financial regulations and contract regulations. These have been developed in accordance with the Home Office Financial Management Code of Practice. The PCC and CC have established a joint independent audit committee as a key part of the framework. The Audit Committee has recently completed a review of its own effectiveness in line with the latest guidance. As part of the governance framework the PCC and CC have established new governance arrangements for investment decisions relating to the Estates Strategy. The PCC is currently undertaking a program of Estates transformation in order to address underutilisation and achieve efficiency savings across the building stock. Governance arrangements for this major programme have been developed and are underpinned by the work of the Estates Strategic Implementation Group and the Estate Strategy Steering Group as well as the role of the Audit Committee Champion. There is also a shared understanding of how best to progress the Estates Strategy and address these challenges to deliver savings of 3m to 4m a year as part of the savings target of 48m. The PCC has sound budget monitoring arrangements in place including periodic reports to the PCP meetings. High level reporting of expenditure against the budget is included within the financial position slides presented to Performance and Scrutiny Committee quarterly. The budget report for 2015/16 issued in Feb 2015 includes a section on the projected Out-turn Position 2014/15. The report analyses the overall out-turn position over four key elements:- Performance against budget for devolved and central budgets and progress against savings targets. Budget Monitoring shows an outturn of 6.8m underspend; Impact of pay and price increases against contingency for these items; and Variations in the levels of specific grants assumed in the original budget Grant Thornton UK LL 7 September