The Annual Audit Letter for London Borough of Richmond upon Thames

Transcription

1 The Annual Audit Letter for London Borough of Richmond upon Thames Year ended 31 March 2016 October 2016 Paul Grady Engagement Lead T E paul.d.grady@uk.gt.com Sarah Ironmonger Associate Director T E sarah.l.ironmonger@uk.gt.com Ellen Millington Executive T E ellen.millington@uk.gt.com 2016 Grant Thornton UK LLP The Annual Audit Letter for LBR October 2016

2 Contents Section Page 1. Executive summary 3 2. Audit of the accounts 4 3. Value for Money conclusion 8 4. Working with You 12 Appendices A Reports issued and fees Grant Thornton UK LLP The Annual Audit Letter for LBR October

3 Executive summary Purpose of this letter Our Annual Audit Letter (Letter) summarises the key findings arising from the work that we have carried out at London Borough of Richmond upon Thames (the Council ) for the year ended 31 March This Letter is intended to provide a commentary on the results of our work to you and your external stakeholders, and to highlight issues that we wish to draw to the attention of the public. In preparing this letter, we have followed the National Audit Office (NAO)'s Code of Audit Practice (the Code) and Auditor Guidance Note (AGN) 07 'Auditor Reporting'. We reported the detailed findings from our audit work to your Pension Fund Committee and Statutory Accounts Committee as those charged with governance in our Audit Findings Reports on 6 and 15 September 2016 respectively. Our responsibilities We have carried out our audit in accordance with the NAO's Code of Audit Practice, which reflects the requirements of the Local Audit and Accountability Act 2014 (the Act). Our key responsibilities are to: give an opinion on your financial statements (section two) assess your arrangements for securing economy, efficiency and effectiveness in its use of resources (the value for money conclusion) (section three). In our audit of your financial statements, we comply with International Standards on Auditing (UK and Ireland) (ISAs) and other guidance issued by the NAO. Our work Financial statements opinion We gave an unqualified opinions on your financial statements on 29 September Value for money conclusion We were satisfied that you put in place proper arrangements to ensure economy, efficiency and effectiveness in its use of resources during the year ended 31 March We reflected this in our audit opinion on 29 September Whole of government accounts We completed work on your return following guidance issued by the NAO and issued an unqualified report on 21 October Certificate We certified that we had completed the audit of the accounts in accordance with the requirements of the Code on 21 October Certification of grants We also carry out work to certify your Housing Benefit subsidy claim on behalf of the Department for Work and Pensions. Our work on this claim is not yet complete and will be finalised by 30 November We will report the results of this work to you in our Annual Certification Letter. Working with You We would like to record our appreciation for the assistance and co-operation provided to us during our audit by your staff. Grant Thornton UK LLP October Grant Thornton UK LLP The Annual Audit Letter for LBR October

4 Audit of the accounts Our audit approach Materiality In our audit of your accounts, we use the concept of materiality to determine the nature, timing and extent of our work, and in evaluating the results of our work. We define materiality as the size of the misstatement in the financial statements that would lead a reasonably knowledgeable person to change or influence their economic decisions. We determined materiality for our audit of your accounts to be 8,796k (being 2% of gross revenue expenditure ). We used this benchmark, as in our view, users of your accounts are most interested in how it has spent the income it has raised from taxation and grants during the year. We set a lower threshold of 439k, above which we reported errors to the Statutory Accounts Committee in our Audit Findings Report. Pension Fund For the audit of the London Borough of Richmond upon Thames Pension Fund accounts, we determined materiality to be 6,049k, which is 1% of the Fund's net assets. We used this benchmark, as in our view, users of the Pension Fund accounts are most interested in the value of assets available to fund pension benefits. We set a threshold of 303k above which we reported errors to the Pension Fund Committee. The scope of our audit Our audit involves obtaining enough evidence about the amounts and disclosures in the financial statements to give reasonable assurance that they are free from material misstatement, whether caused by fraud or error. This includes assessing whether: your accounting policies are appropriate, have been consistently applied and adequately disclosed; significant accounting estimates made by management are reasonable; and the overall presentation of the financial statements gives a true and fair view. We also read the narrative report and annual governance statement to check they are consistent with our understanding of the Council and with the accounts on which we give our opinion. We carry out our audit in line with ISAs (UK and Ireland) and the NAO Code of Audit Practice. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach was based on a thorough understanding of your business and is risk based. We identified key risks and set out overleaf the work we performed in response to these risks and the results of this work Grant Thornton UK LLP The Annual Audit Letter for LBR October

5 Audit of the accounts These are the risks which had the greatest impact on our overall strategy and where we focused more of our work. Risks identified in our audit plan Valuation of property, plant and equipment You revalue your assets on a rolling basis over a five year period. The Code requires that you ensure that the carrying value at the balance sheet date is not materially different from the current value. This represents a significant estimate by management in the financial statements. Valuation of pension fund net liability Valuation of the pension fund assets and liabilities have been incorrectly valued The values of the pension fund net liability is estimated by specialist actuaries. How we responded to the risk We have undertaken the following work in relation to this risk: Review of management's processes and assumptions for the calculation of the estimate of asset valuation. Review of the competence, expertise and objectivity of any management experts used. Review of the instructions issued to valuation experts and the scope of their work Discussions with your valuer about the basis on which the valuation was carried out, challenging the key assumptions. Review and challenge of the information used by the valuer to ensure it was robust and consistent with our understanding. Testing of revaluations made during the year to ensure they were input correctly into your asset register Evaluation of the assumptions made by management for those assets not revalued during the year and how management satisfied themselves that these were not carried at a value which was materially different to the fair value. We did not identify any material issues to report We have undertaken the following work in relation to this risk: Documentation of the key controls that were put in place by management to ensure that the pension fund liability was not materially misstated; Walkthrough of the key controls to assess whether they were implemented as expected and mitigate the risk of material misstatement in the financial statements; Review of the competence, expertise and objectivity of the actuary who carried out the Council's pension fund valuation; Gaining an understanding of the basis on which the IAS 19 valuation was carried out, undertaking procedures to confirm the reasonableness of the actuarial assumptions made; Review of the consistency of the pension fund asset and liability and disclosures in notes to the financial statements with the actuarial report from your actuary. We did not identify any material issues to report 2016 Grant Thornton UK LLP The Annual Audit Letter for LBR October

6 Audit of the accounts Pension Fund This is the risks which had the greatest impact on our overall strategy and where we focused more of our work on the audit of the pension fund. Risks identified in our audit plan Baille Gifford Diversified growth Fund The Baille Gifford Diversified Growth fund (value 78,611,000) was transferred into the London CIV on 15 February How we responded to the risk We have undertaken the following work in relation to this risk: We have gained an understanding of the transfer of Baille Gifford funds into London CIV. We have agreed the transfer to supporting confirmations from Baille Gifford and the London CIV. We have reviewed supporting documentation of the transfer of funds. We agreed the transfer of units to confirmations from Baille Gifford and the London CIV. We did not identify any material issues to report 2016 Grant Thornton UK LLP The Annual Audit Letter for LBR October

7 Audit of the accounts Audit opinion We gave an unqualified opinion on your accounts on 29 September 2016, in advance of the 30 September 2016 national deadline. From 2017/18, the accounts deadlines move forward and you will be required to produce your financial statements for 31 May. In preparation for this change we agreed with you that you would provide the draft financial statements for the start of June and we would commence our audit on 13 June. The draft statements were signed on 23 June. To meet the 31 May deadline you will need to re-engineer your closedown processes. You provided a good set of working papers to support them. Some delays were experienced in response to our audit queries and in the provision of support to evidence key judgements and balances. This was particularly the case where evidence was requested from third parties such as schools, the shared HR service with Royal Borough of Kingston upon Thames or the property valuer. Issues arising from the audit of the accounts We reported the key issues from our audit of the accounts of the Council to your Statutory Accounts Committee on 15 September In addition to the key audit risks reported above, we identified the following issues during our audit that your management have agreed to address for the next financial year: You should implement a formal programme to determine whether the conditions that gave rise to the operating leases for academy schools remain in place. Where the conditions do not remain in place, you should arrange for appropriate finance leases to be agreed and update the accounting treatment of those assets accordingly. You should ensure you have arrangements in place to obtain a professional assessment of whether there is a material difference from the valuation date and the balance sheet. This may require a larger proportion of your asset base to be valued each year. All pensioners should be regularly requested to confirm that they are still eligible for their pensions. Annual Governance Statement and Narrative Report We are also required to review your Annual Governance Statement and Narrative Report. Both documents were prepared in line with the relevant guidance and were consistent with the supporting evidence provided by you and with our knowledge of the Council. Whole of Government Accounts (WGA) We carried out work on your consolidation schedule in line with instructions provided by the NAO. We issued a group assurance certificate which did not identify any issues for the group auditor to consider. Other statutory duties We also have additional powers and duties under the Act, including powers to issue a public interest report, make written recommendations, apply to the Court for a declaration that an item of account is contrary to law, and to give electors the opportunity to raise questions about your accounts and to raise objections received in relation to the accounts. We have no matters to report Grant Thornton UK LLP The Annual Audit Letter for LBR October

8 Value for Money conclusion Background We carried out our review in accordance with the NAO Code of Audit Practice (the Code), following the guidance issued by the NAO in November 2015 which specified the criterion for auditors to evaluate: In all significant respects, the audited body takes properly informed decisions and deploys resources to achieve planned and sustainable outcomes for taxpayers and local people. Key findings Our first step in carrying out our work was to perform a risk assessment and identify the key risks where we concentrated our work. The key risks we identified and the work we performed are set out in table 2 overleaf. Overall VfM conclusion We are satisfied that in all significant respects you put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March Recommendations for improvement We discussed findings arising from our work with management and have agreed recommendations for improvement as follows: The scale of financial efficiencies already planned and the identified funding gap represent a significant challenge to you and you will need to continue to keep your assumptions and plans under review to be able address any slippage promptly; As your shared staffing arrangement progresses to assess service redesign options the project management will become more complex and the savings may be more difficult to identify and realise. You should consider whether your current project management team is a sufficient size and has appropriate project management documentation in place, and consider when more formalised business cases will be appropriate; and As you progress to the shared staffing arrangement there may be a challenge of blending two potentially different ways of working together. You should consider developing a formal plan for managing the staff and culture issues which will inevitably arise once staff start working together and in some instances are co-located Grant Thornton UK LLP The Annual Audit Letter for LBR October

9 Value for Money Table 2: Value for money risks Risk identified Work carried out Findings and conclusions Medium Term Financial Plan (MTFP) Following the settlement, your financial challenge is significantly worse than your original budget plan; you need to save 30m over the next four years. Your MTFP is predicated on projects and programmes delivering essential changes to the way in which services are delivered. 8m of savings have already been identified and the plan includes a number of key projects to make the funding gap more manageable. We have: reviewed your Medium Term Financial Strategy and examine the underlying assumptions and dependencies for robustness. examined in detail the savings plans aimed at reducing the funding gap. You updated your MTFP promptly following the worse than expected financial settlement. Your approach has considered appropriate assumptions and sets out the scale of your financial challenge clearly. Your model assumptions include previously agreed efficiencies, for example contract efficiencies from Achieving for Children and your arrangements with Wandsworth. The efficiencies plan to deliver more than 17 million of savings from 2017/18 to 2019/20. You have identified a funding gap of nearly 9 million from 2017/18 to 2019/20 based on a council tax strategy of annual increases of 3.99% to achieve financial balance. Options to address the funding gap are being developed and you will need to decide on the appropriate options as part of your budget setting process for 2017/18. The scale of efficiencies already planned and the identified funding gap represent a significant challenge to you and you will need to continue to keep your assumptions and plans under review to be able address any slippage promptly. On that basis we concluded that the risk was sufficiently mitigated and you have proper arrangements Grant Thornton UK LLP The Annual Audit Letter for LBR October

10 Value for Money Table 2: Value for money risks continued Risk identified Work carried out Findings and conclusions Operational merger with Wandsworth Council The plans for the shared staffing arrangements with Wandsworth Council are now underway. You are seeking to deliver an estimated 10m of savings through this proposed joint staffing structure. Working with a partner from a different organisation and cultural stance with potentially conflicting priorities, the project is complex and high profile. We have: reviewed the project management and risk assurance frameworks established by you to assess how you are identifying, managing and monitoring these risks. reviewed the full scope and business case for the merger, specifically evaluating the benefit profile. reviewed your internal process with the PMO against recognised good practice sought to gain a better understanding of any cultural and staff issues and how these are being managed. Your project management team is small and our review of the Project Board minutes, highlight reports and risk registers indicate that your team has maintained control over this project. Compared to other organisations your project management approach appears to be light touch: for example a small team and some of the typical documentation one would normally expect does not exist, for example project initiation documents, dependencies plan. However your light touch approach does not appear to have impacted on the delivery of the project to date as you have met milestone targets. This is a complex project and the achievement of milestones is noteworthy. Your Business Case appears to be robust with the staffing savings clearly identified in the financial model and well on track to meet the year 1 target of 4 million. Compared to other organisations we might expect a more formal business case; however at this stage where the savings are based on staff you appear to have appropriate arrangements. As this project progresses to assess service redesign options the project management will become more complex and the savings may be more difficult to identify and realise. You should consider whether your current project management team is a sufficient size and has appropriate project management documentation in place, and when more formalised business cases will be appropriate. To date the Communications/Engagement element of the project appears to have gone well. There was a structured approach which was delivered to staff in a 6- month consultation period and resulted in less than 50 appeals. Staff recruitment appears to be on track for the 1 October deadline. Your attention has focussed on getting the structure and resources in place. As you progress in to the shared staffing arrangement there may be a challenge of blending two potentially different ways of working together. You should consider developing a formal plan for managing the staff and culture issues which will inevitably arise once staff start working together and in some instances are co-located. On that basis we concluded that the risk was sufficiently mitigated and you have proper arrangements Grant Thornton UK LLP The Annual Audit Letter for LBR October

11 Value for Money Table 2: Value for money risks continued Risk identified Work carried out Findings and conclusions Achieving for Children (AfC) Achieving for Children (AfC) is forecasted to have an overspend for 2015/16 and looks to continue this trajectory in 2016/17. We have: assessed the planned savings from this joint venture against performance. reviewed the project management and risk assurance frameworks established by you, to establish how you are identifying, managing and monitoring these risks. You identified efficiencies for AfC to deliver and built these into the contracts. Your contract with AfC allows AfC to request additional funding from you where it cannot provide statutory targets. Recent cost pressures reported relate to an increase in demand for children's social care, an increase in the cost of placements and an increase in the related legal costs. The cost pressures for 2015/16 exceeded 2 million and will continue into 2016/17. In our experience, other local authorities are experiencing similar cost pressures. AfC's Business Plan for 2016/17 establishes six work streams which aim to deliver million of efficiencies. You have established a governance structure for AfC through the Joint Committee which has developed over time. The early meetings focussed on the set up of AfC and clarifying the arrangements for reviewing decisions. As AfC moves into its third year of operation, AfC's attention has turned to a proactive growth strategy. Clear reports have been presented to the Joint Committee enabling Members to challenge the assumptions and direction being proposed. As AfC is a Teckal company there are complex legal considerations and you, with Royal Borough of Kingston, have obtained legal advice on the implications of the options being considered. AfC has an ambitious Business Plan and Expansion Plan going forward into 2016/17. On that basis we concluded that the risk was sufficiently mitigated and you have proper arrangements Grant Thornton UK LLP The Annual Audit Letter for LBR October

12 Working with you Our work with you in 2015/16 We are really pleased to have worked with you over the past year. We have established a positive and constructive relationship. Together we have delivered some great outcomes. An efficient audit we delivered the accounts audit starting in August in line with the timescale we agreed with you. Our audit team are knowledgeable and experienced in your financial accounts and systems. Our relationship with your team provides you with a timely financial statements audit releasing your finance team for other important work. Improved processes during the year we reviewed your journal controls and proposed a recommendation for improvement that, if implemented, will strengthen your control environment. Through the Value for Money conclusion we provided you with assurance on your operational effectiveness of your significant risks. Sharing our insight we provided regular updates to you covering best practice. Areas we covered included our reports on Innovation in public financial management, Making devolution work, Reforging local government. We will continue to provide you with our insights. Providing information We provided you with access to CFO insights, our online analysis tool providing you with access to insight on the financial performance, socio-economy context and service outcomes of councils across the country. We will also continue to work with you and support you over the next financial year as you bring forward your production of your year-end accounts. From 2017/18 all councils in England will be required to publish their audited financial statements by 31st July (currently 30th September). To achieve the 2017/18 deadline, significant progress will need to be made to deliver the same volume of work in closing the accounts in a more intense shorter period. We have worked with many clients to successfully implement faster close and will continue to work with you during the coming year to provide support in achieving the earlier deadlines before the statutory deadlines are brought forward. We will continue to liaise closely with the senior finance team during 2016/17 on this important accounting development, with timely feedback on any emerging issues. The audit risks associated with this new development and the work we plan to carry out to address them will be reflected in our 2016/17 audit plan Grant Thornton UK LLP The Annual Audit Letter for LBR October

13 Working with you Working with you in 2016/17 Highways Network Asset The Code of Practice on Local Authority Accounting (the Code) requires authorities to account for Highways Network Asset (HNA) at depreciated replacement cost (DRC) from 1 April The Code sets out the key principles but also requires compliance with the requirements of the recently published Code of Practice on the Highways Network Asset (the HNA Code), which defines the assets or components that will comprise the HNA. This includes roads, footways, structures such as bridges, street lighting, street furniture and associated land. These assets should always have been recognised within Infrastructure Assets. The Code includes transitional arrangements for the change in asset classification and the basis of measurement from depreciated historic cost (DHC) to DRC under which these assets will be separated from other infrastructure assets, which will continue to be measured at DHC. This is expected to have a significant impact on your 2016/17 accounts, both in values and levels of disclosure, and may require considerable work to establish the opening inventory and condition of the HNA as at 1 April The nature of these changes means that Finance officers will need to work closely with colleagues in the highways department and potentially also to engage other specialists to support this work. Some of the calculations are likely to be complex and will involve the use of external models, a combination of national and locally generated rates and a number of significant estimates and assumptions. We have been working with you on the accounting, financial reporting and audit assurance implications arising from these changes. We have issued two Client Briefings which we have shared with Finance. We will issue further briefings during the coming year to update you on key developments and emerging issues. This significant accounting development is likely to be a significant risk for our 2016/17 audit, so we have already had some preliminary discussions with you to assess the progress it is making in this respect. Under the current basis of accounting values will only have been recorded against individual assets or components acquired after the inception of capital accounting for infrastructure assets by local authorities. Authorities may therefore have to develop new accounting records to support the change in classification and valuation of the HNA Grant Thornton UK LLP The Annual Audit Letter for LBR October

14 Appendix A: Reports issued and fees We confirm below our final fees charged for the audit and fees for the provision of non audit services. Fees The proposed fees for the your audit were in line with the scale fee set by Public Sector Audit Appointments Limited (PSAA). * Work still in progress completion due in November Fee variations are subject to approval by PSAA. Reports issued Report Per Audit plan Date issued Actual fees Council audit 92, Pension Fund audit 21,000 21,000 Grant certification on behalf of Public Sector Audit Appointments Limited (estimated) * Total audit fees 122,374 9,228 Work in progress Fees for other services Service Fees Audit related services: Tax compliance computation work in respect of the statutory accounts for Achieving for Children shared 50% with Royal Borough of Kingston upon Thames. Note: this is paid for by Achieving for Children Reasonable assurance engagement on the Teachers' Pension return (2014/15) Independence and ethics We confirm that there are no significant facts or matters that impact on our independence as auditors that we are required or wish to draw to your attention. We have complied with the Auditing Practices Board's Ethical Standards and therefore we confirm that we are independent and are able to express an objective opinion on the financial statements. We confirm that we have implemented policies and procedures to meet the requirements of the Auditing Practices Board's Ethical Standards. 2,500 3,900 Total fees for other services 6,400 Audit Plan April 2016 Audit Findings Report September 2016 Annual Audit Letter October Grant Thornton UK LLP The Annual Audit Letter for LBR October

15 2016 Grant Thornton UK LLP The Annual Audit Letter for LBR October 2016