The Annual Audit Letter for Dudley Metropolitan Borough Council

Transcription

1 The Annual Audit Letter for Dudley Metropolitan Borough Council Year ended 31 March 2016 October 2016 James Cook Director T E james.a.cook@uk.gt.com Suzanne Joberns Manager T E suzanne.joberns@uk.gt.com Mary Wren In- charge T E mary.wren@uk.gt.com 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October 2016

2 Contents Section Page 1. Executive summary 3 2. Audit of the accounts 5 3. Value for Money conclusion 9 4. Other Statutory duties Working with the Council 13 Appendices A Reports issued and fees 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council 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 Dudley Metropolitan Borough Council (the Council) for the year ended 31 March This Letter is intended to provide a commentary on the results of our work to the Council and its 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 the Council's Audit and Standards Committee as those charged with governance in our Audit Findings Report on 20 th September 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 the Council's financial statements (section two) assess the Council's arrangements for securing economy, efficiency and effectiveness in its use of resources (the value for money conclusion) (section three). In our audit of the Council's 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 opinion on the Council's financial statements on 22nd September Value for Money We issued a qualified 'except for' value for money conclusion on 22 nd September We concluded that there are weaknesses in the Councils arrangements for: understanding and using appropriate and reliable financial and performance information including where relevant, information from regulatory/monitoring bodies to support informed decision making and performance management planning finances effectively to support the sustainable delivery of strategic priorities and maintain statutory functions. Whole of Government Accounts (WGA) We completed work on the Council's consolidation return following guidance issued by the NAO and issued an unqualified report on 19 th October 2016 Certificate We will certify that we have completed the audit of the accounts of Dudley Metropolitan Borough Council in accordance with the requirements of the Code on 31 st October Certification of grants We also carry out work to certify the Council's 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 the Audit and Standards Committee in our Annual Certification Letter Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

4 Other Statutory Powers We have a number of other statutory powers and duties under the Act. These include. consideration of a public interest report written recommendations that the Council has to respond to publically application to the courts for a declaration that an item of account is contrary to law issuing an advisory notice application for judicial review We have not exercised these powers during the audit. Working with the Council We are really pleased to have worked with you over the past year. We have established a positive and constructive relationship. The key area of focus has been the financial sustainability of the Council and ensuring that the you have received early and robust advice and support from us. We would like to record our appreciation for the assistance and co-operation provided to us during our audit by the Council's staff. Grant Thornton UK LLP October Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

5 Audit of the accounts Our audit approach Materiality In our audit of the Council's 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 the Council's accounts to be 10,499,000 which is 1.5% of the Council's gross revenue expenditure. We used this benchmark, as in our view, users of the Council's accounts are most interested in how it has spent the income it has raised from taxation and grants during the year. 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 the Council's 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. We also set a lower level of specific materiality for certain areas such as cash, senior officer remuneration, auditors remuneration and related parties. We did not set a separate materiality threshold, but undertook more extensive testing on these areas. 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: the Council's 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 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

6 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 The revenue cycle includes fraudulent transactions Under ISA (UK&I) 240 there is a presumed risk that revenue may be misstated due to the improper recognition of revenue. This presumption can be rebutted if the auditor concludes that there is no risk of material misstatement due to fraud relating to revenue recognition. Management over-ride of controls Under ISA (UK&I) 240 it is presumed that the risk of management over-ride of controls is present in all entities. How we responded to the risk Having considered the risk factors set out in ISA240 and the nature of the revenue streams at Dudley Metropolitan Borough Council, we have determined that the risk of fraud arising from revenue recognition can be rebutted, because: there is little incentive to manipulate revenue recognition opportunities to manipulate revenue recognition are very limited; and the culture and ethical frameworks of local authorities, including Dudley Metropolitan Borough Council, mean that all forms of fraud are seen as unacceptable. Our audit work has not identified any issues in respect of revenue recognition. Our work has included review of entity controls testing of journal entries review of accounting estimates, judgements and decisions made by management review of unusual significant transactions. Our audit work did not identify any significant issues in respect of journals. Valuation of property, plant and equipment The Council revalues its assets on a rolling basis over a five year period. The Code requires that the Council ensures that the carrying value at the balance sheet date is not materially different from current value. This represents a significant estimate by management in the financial statements. Our work included: Review of management's processes and assumptions for the calculation of the estimate 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 valuer about the basis on which the valuation is carried out and challenge of the key assumptions Review and challenge of the information used by the valuer to ensure it is robust and consistent with our understanding Testing of revaluations made during the year to ensure they are input correctly into the Council's asset register and financial statements Procedures to confirm the reasonableness of the proposed revaluations, including reference to national trends where appropriate 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

7 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 How we responded to the risk Valuation of PPE (continued) Evaluation of the assumptions made by management for those assets not revalued during the year and how management has satisfied themselves that these are not materially different to current value We identified two of issues in relation to PPE. Assets Under Construction (AUC) A review of the assets under construction identified 6.4m of capital spend in 2015/16 in relation to the Dudley Market Place. This asset had became operational and had already been revalued in line with the Code. Officers agreed to amend the financial statements to remove this from the AUC figure. Revaluation Reserve The Council should hold its revaluation reserve by individual asset and this should be fully reconciled to the fixed asset register. A review identified there was significant manual adjustments to the reserve which have not been updated within the fixed asset module. This led to the identification of 15m of balances within the revaluation reserve which could not be mapped to individual assets and have therefore been transferred to the capital adjustment account. Valuation of pension fund net liability The Council's pension fund asset and liability as reflected in its balance sheet represent significant estimates in the financial statements. We have completed the following: 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. Our audit work did not identify any issues in resect of the valuation and disclosure of the pension fund net liability Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

8 Audit of the accounts Audit opinion We gave an unqualified opinion on the Council's accounts on 22nd September 2016, in advance of the 30 September 2016 national deadline. We identified adjustments affecting the Council's reported financial position (details are recorded in section three of this report). The draft financial statements for the year ended 31 March 2016 recorded net expenditure on continuing operations of 199,358k and the audited financial statements show net expenditure of 205,799k. This change is driven by amendments made to the valuation and classification of property, plant and equipment assets. Specifically a review of the assets under construction identified 6.4m of capital spend in 2015/16 in relation to the Dudley Market Place that had already been brought into operational use and needed to be written off to the CIES. As this is a capital transaction there is no impact on general fund balances or council tax. The financial statements were received a month before the statutory deadline as part of the finance teams preparation for the statutory deadlines moving forward in 2018; Annual Governance Statement and Narrative Report We are also required to review the Council's Annual Governance Statement and Narrative Report. It published them on its website with the draft accounts in line with the national deadlines. The AGS was amended to better reflect the risks facing the Councils in relation to its finances. We also identified two further transactions that would also impact on the reported position, where management have not amended: Our testing of payments made April 2016 identified one payment that that should have been accounted for in 16/17. If this error was replicated across the whole population of April 2016 payments the potential error would increase the net expenditure by 3,061k; the Council did not include the housing benefit debtors collected from on going benefits, this would decrease the net expenditure by 1,637k. The other key messages arising from our audit of the Council's financial statements are: The accounts were prepared to a good standards together with appropriate working papers. We have made a number of minor adjustments to improve the presentation of the financial statements; 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

9 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. We identified that the key risks were The medium term financial strategy shows the full utilisation of the Council's general fund by the end of the financial year 2017/18 The Council is currently subject to a review of its children's services by OFSTED The key risks we identified and the work we performed are set out the table overleaf. Overall VfM conclusion Following our work we concluded that the arrangements the Council had in place were not sufficient to demonstrate it can make the transformational savings plans required to ensure it can continue to deliver its strategic priorities and maintain statutory functions. there were weaknesses in proper arrangement, during 2015/16, for understanding and using appropriate and reliable financial and performance information including where relevant, information from regulatory/monitoring bodies to support informed decision making and performance management. We were therefore satisfied that, in all significant respects, except for the matters we identified above, the Council had proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March Subsequent to our VfM conclusion, the Council has undertaken significant preparations for the budget, and both Members and officers have thought through a number of options for reducing the budget deficit. These positive steps need to be continued and followed through. Recommendation The Council should put in place more robust arrangements for the production of the budget, and medium term financial strategy, to ensure that it can deliver its strategic priorities and maintain statutory functions. In order to achieve this the Council should: Implement a programme of savings to achieve a balanced budget Ensure any additional spending pressures are fully funded Maintain an adequate level of General Fund reserves 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

10 Value for Money Key findings We set out below our key findings against the significant risks we identified through our initial risk assessment and further risks identified through our ongoing review of documents. Significant risk Medium Term Financial Strategy (MTFS) The medium term financial strategy shows the full utilisation of the Council's general fund by the end of the financial year 2017/18. Findings and conclusions The outturn position presented to cabinet in June 2016 shows an underspend of 4.6 m against a revised budget of a deficit of 2.4m The largest single variance was an additional special dividend of m arising from the Councils share in Birmingham Airport. This resulted in an increase in the general fund of 2.2m to 27.2m at the 31/3/16. The Councils MTFS has been regularly updated throughout the year, in line with the annual planning process. The updates include expected and known changes to government funding arrangements, spending pressures and identified savings plans. Throughout this process the Council takes a realistic assessment of the proposed savings plans and only puts forward those that will be achieved. We also found that the risks in relation to the financial position have been consistently communicated to Members by the Chief Officer (Finance and Legal) over a number of years. The Council 's savings plans for 2016/17 are 8m. Given the scale of the financial challenge the Council faces this is only a small proportion of the required savings. Over the following two years this will rise to 18m by 17/18 and 20.3m (cumulative savings). However these savings on their own will not be sufficient. The Council's 2016/17 budget shows a deficit and use of general fund reserves of 15.1 m. Deficits are also forecast in in 2017/18 and 2018/19 resulting in a deficit early in the financial year 2018/19 that cannot be met from general fund reserves. 2016/17 m 2017/18 m 2018/19 m Budget Cumulative Savings(already included in budget) Deficit in year General fund reserves c/fwd n/a 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

11 Value for Money Key findings We set out below our key findings against the significant risks we identified through our initial risk assessment and further risks identified through our ongoing review of documents. Significant risk Medium Term Financial Strategy The medium term financial strategy shows the full utilisation of the Council's general fund by the end of the financial year 2017/18. Findings and conclusions In addition there are significant risks to these forecasts that mean that the position may be worse and become unsustainable at an earlier date. The Council is fully aware of the implications of this and are committed to developing a range of savings schemes for consideration. Early initiatives include a zero based budgeting review, reviewing the adults end to care pathways and implementing a new digital customer service platform. However if savings are not made at an early stage the ability of the Council to affect change is reduced meaning a greater reliance on general fund balances. Given the challenges the Council faces we have considered carefully whether it had appropriate arrangements in place to plan its finances effectively to support the sustainable delivery of strategic priorities and maintain statutory functions. We specifically considered Inadequate level of savings plans in place Increases in unfunded spending Rapidly reducing level of reserves. We have concluded that the arrangements in place are not sufficient to demonstrate it can make the transformational savings plans required to ensure it can continue to deliver its strategic priorities and maintain statutory functions. Ofsted inspection of children's services The Council is currently subject to a review of its children's services by OFSTED. Until such time as Ofsted has confirmed that adequate arrangements are in place this remains a significant risk to the Council's arrangements. OFSTED published the results of their inspection on 5 th April They concluded that there were serious and widespread failures in the services provided to children and young people in Dudley. They were concerned that the Council had been aware of the deficits for some time, but has not taken sufficiently swift or robust remedial action to ensure that the most vulnerable children and young people were protected. Overall they rated the services as inadequate. At the 4 th July Cabinet meeting a clear action plan and additional resources to address the issues identified was agreed and the report from national commissioner for children s social care, Eleanor Brazil, says the council has brought rigour and thoroughness to improving children s services since being rated inadequate by Ofsted earlier in However this matter is evidence of weaknesses in proper arrangement, during 2015/16, for understanding and using appropriate and reliable financial and performance information including where relevant, information from regulatory/monitoring bodies to support informed decision making and performance management Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

12 Other Statutory Duties We also have additional powers and duties under the Local Audit and Accountability Act These require us to consider the whether we need to issue a public interest report, make recommendations requiring a public response, 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 the Council's accounts and to raise objections received in relation to the accounts. As a result of the issue in relation to the financial sustainability of the Council, set out on pages of this letter, we have considered whether it would be appropriate to issue a recommendation to the Council under section 24 of the Local Audit and Accountability Act 2014 (the Act). This would require the Council to: respond formally to our recommendation. consider the recommendation at a meeting held before the end of the period of one month beginning with the day on which it was sent to the Council. publicise both the meeting and its response on its website. However, since our VfM conclusion in September, the Council has taken significant steps to identify and plan for savings. Given this, we have decided not to take action under section 24 of the Local Audit and Accountability Act 2014 at this stage. We will keep this under review during our 2016/17 audit work Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

13 Working with the Council 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 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 financial statements audit that continues to finish ahead of schedule releasing your finance team for other important work. Improved financial processes during the year we reviewed your financial systems and processes including employee remuneration, non- pay expenditure and property plant and equipment. We made comments to improve controls over journals and PPE. Sharing our insight we provided regular audit and standards committee updates covering best practice. Areas we covered included Knowing the Ropes Audit Committee and Effectiveness Review, Making devolution work, Reforging local government. We have also shared with you our insights on advanced closure of local authority accounts, in our publication "Transforming the financial reporting of local authority accounts" and will continue to provide you with our insights as you bring forward your production of your year-end accounts. Providing training we provided your teams with training on financial accounts and annual reporting. Providing information We provided your officers with access and insight into the issues and solutions impacting on wider local government and health communities. Early discussions we had early discussions on key issues in relation to the medium financial strategy and the impact on the financial statements, particularly around Going Concern and our respective statutory duties and powers Understanding your operational health through the value for money conclusion we provided you with assurance on your operational effectiveness. We reported our concerns around the financial sustainability of the Council to Audit Committee in December 2015 and again to Cabinet in February We also highlighted in April 2016 the impact the OFSTED inspection would have on our VFM conclusion 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

14 Working with the Council 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 the Council's 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 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. 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 the Council on the accounting, financial reporting and audit assurance implications arising from these changes. We will provide briefings during the coming year to update the Council 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 the Council to assess the progress it is making in this respect. We have had on-going discussions with officers regarding the changes to highways network assets in the 2016/17 financial statements. We are satisfied with the progress the Council is making but feel it would be beneficial for the Council to start reporting progress and the impact of changes through the audit and standards committee, given the significant impact on the financial statements for 2016/ Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

15 Working with the Council 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. Locally our focus will be on: An efficient audit continuing to deliver an efficient audit and working towards and earlier closedown in July Improved financial processes we will focus our work on the improving the processes for producing the PPE figures. In addition during 2016/17 the Council will be implementing a new payroll system and this will be a key figure. Understanding your operational health we will focus our value for money conclusion work on the financial sustainability and specifically balancing the 2017/18 budget. Support outside of the audit we will continue to provide support and advice as necessary Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

16 Appendix A: Fees, non audit services and independence We confirm below our final fees charged for the audit and confirm there were no fees for the provision of non audit services. Fees Planned Actual fees 2014/15 fees Statutory audit of the Council 134, , ,647 Housing Benefit Grant Certification 11,540 TBC* 17,540 Total fees (excluding VAT) 146,275 TBC 197,187 Grant certification Our fees for grant certification cover only housing benefit subsidy certification, which falls under the remit of Public Sector Audit Appointments Limited. The deadline for completion of this work is the end of November Fees for other services Service Fees Audit related services: Reasonable Assurance report for teachers pension return for 2014/15 Certification of the 2014/15 Pooling of Capital Receipts Return Non-audit services 0* 6,000 3,500 * We are currently finalising work on a review of phone charges to identify potential refunds due to the Council. The cost of this work is likely to be approximately 10k Fees in respect of other grant work, such as reasonable assurance reports, are shown under 'Fees for other services'. Reports issued Report Date issued Audit Plan March 2016 Audit Findings Report September 2016 Annual Audit Letter October Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October

17 2016 Grant Thornton UK LLP The Annual Audit Letter for Dudley Metropolitan Borough Council October 2016