The Annual Audit Letter for Dudley Metropolitan Borough Council

Transcription

1 The Annual Audit Letter for Dudley Metropolitan Borough Council Year ended 31 March 2017 September 2017 Richard Percival Engagement Lead T (0) E richard.d.percival@uk.gt.com Terry Tobin Senior Manager T (0) E terry.p.tobin@uk.gt.com Mary Wren Audit Senior T (0) E mary.wren@uk.gt.com 2017 Grant Thornton UK LLP The Annual Audit Letter September 2017

2 Contents Section Page 1. Executive summary 3 2. Audit of the accounts 5 3. Value for Money conclusion 10 Appendices A Reports issued and fees 2017 Grant Thornton UK LLP The Annual Audit Letter September

3 Executive summary Purpose of this letter Our Annual Audit Letter (Letter) summarises the key findings arising from the work we have carried out at Dudley Metropolitan Council (the Council ) for the year ended 31 March This Letter provides a commentary on the results of our work to the Council and its external stakeholders, and highlights issues 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 26 July 2017 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 28 July The 2016/17 financial statements were produced and the audit concluded much earlier than in previous years. There was only one significant adjustment to the accounts in relation to the valuation of council houses which is discussed in more detail on page 7. Value for money conclusion We qualified our value for money conclusion in our audit report on 28 July Except for the arrangements in place for financial sustainability and safeguarding children we were satisfied that the Council put in place proper arrangements to ensure economy, efficiency and effectiveness in its use of resources during the year ended 31 March In April 2016, Ofsted issued its report on the inspection of the Council's services for children in need of help and protection. The overall judgement was that children's services were rated as inadequate. Following a third follow up visit in June 2017, Ofsted concluded that the implementation of the Council s improvement plan is resulting in positive progress. They highlighted areas such as senior leaders and Members continuing to support the much needed improvements as well as some areas still requiring improvement The Council s outturn position shows an underspend of 1.8 million against a revised (in February 2017) budget of a deficit of 9.2 million following transfers to and from earmarked reserves. This resulted in an decrease in the General Fund of 7.4 million to 19.9 million at the 31 March Grant Thornton UK LLP The Annual Audit Letter September

4 Executive summary The Council's 2017/18 budget forecasts a deficit and use of General Fund reserves of 1.5 million. Deficits are also forecast in 2018/19 ( 5.9 million) and 2019/20 ( 8.0 million) resulting in a cumulative deficit early in the financial year 2020/21 that cannot be met from General Fund reserves. We recognise that the Council s medium term financial outlook has improved over the last 12 months and the risk in relation to the financial position has been consistently and clearly communicated to Members by the Chief Officer (Finance and Legal). However. the Council has been unable to identify and agree sufficient savings plans during the year to prevent the full utilisation of its General Fund by 2020/21. Other statutory powers and duties As a result of the issue in relation to the financial sustainability of the Council we considered whether to issue a recommendation to the Council under section 24 of the Act. This requires the Council to consider the recommendation at a public meeting within one month, and at that meeting to decide: whether to accept the recommendation; and what, if any, action to take in response to the recommendation. We decided not to issue a recommendation under Section 24 at this time, but will continue to keep this under review. Certificate We are currently unable to certify that we have completed the audit of the accounts of the Council as we have not yet completed the work required under the Code on the Council s Whole of Government Accounts. We anticipate completing this and issuing our completion certificate by 30 September 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. Working with the Council We are really pleased to have worked with you over the past year. We have sought to work alongside the Council helping it pursue its objectives. Examples include working alongside your finance team to provide an audit opinion two months ahead of the deadline freeing up your staff to do other things, liaising with officers on the accounting for the early pensions repayment accounting for 2017/18, providing training to officers and sharing insights, thought leadership and good practice. We would like to record our appreciation for the assistance and co-operation provided to us during our audit by the Council's staff. We have not exercised any other statutory powers or duties. [ Grant Thornton UK LLP September Grant Thornton UK LLP The Annual Audit Letter September

5 Audit of the accounts Our audit approach Materiality In our audit of the Council's accounts, we applied the concept of materiality to determine the nature, timing and extent of our work, and to evaluate 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 10m million, which is 1.5 per cent 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 the Council has spent the income it has raised from taxation and grants during the year. We also set a lower level of specific materiality for related parties and senior officer remuneration (both 20,000). We set a lower threshold of 100,420, above which we reported errors to the Audit and Standards Committee in our Audit Findings Report. The scope of our audit Our audit involves obtaining enough evidence about the amounts and disclosures in the financial statements to give reasonable assurance 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 the Chief Officer (Finance and Legal) 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 included in the Statement of Accounts on which we gave 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 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 Grant Thornton UK LLP The Annual Audit Letter September

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 How we responded to the risk Findings and conclusions 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. Valuation of pension fund net liability The Council's pension fund net liability, as reflected in its balance sheet,represents a significant estimate in the financial statements. We have undertaken the following work in relation to this risk: Reviewed entity controls reviewed journal entry process and selected unusual journal entries for testing back to supporting documentation reviewed accounting estimates, judgements and decisions made by management reviewed unusual significant transactions. We have undertaken the following work in relation to this risk: identified the controls put in place by management to ensure that the pension fund net liability is not materially misstated and assessed whether those controls were implemented as expected and whether they were sufficient to mitigate the risk of material misstatement reviewed the competence, expertise and objectivity of the actuary who carried out the Council's pension fund valuation gained 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 reviewed the consistency of the pension fund net liability disclosures in notes to the financial statements with the actuarial report from your actuary. Our audit work did not identify any evidence of management over-ride of controls. In particular the findings of our review of journal controls and testing of journal controls and testing of journal entries did not identify any significant issues. Our testing did identify some control issues on journals. This could lead to an increased risk of fraud although, no fraud was identified from our testing. A firm of consulting actuaries (Barnett Waddingham) is engaged to provide the Council with expert advice about the assumptions to be applied when valuing pension liabilities. These assumptions cover areas such as mortality rates, inflation and future increases in salaries and pensions. Our audit work did not identify any issues in respect of the controls in place to ensure the pension net liability is not materially misstated, the competence of the actuary and the basis of valuation. We reviewed the disclosures and suggested a number of amendments which have been made Grant Thornton UK LLP The Annual Audit Letter September

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 Findings and conclusions 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 the current value. This represents a significant estimate by management in the financial statements. We have undertaken the following work in relation to this risk: reviewed management's processes and assumptions for the calculation of the estimate reviewed the competence, expertise and objectivity of any management experts used. reviewed the instructions issued to valuation experts and the scope of their work discussed with the Council's valuer the basis on which the valuation was carried out, challenging the key assumptions reviewed and challenged the information used by the valuer to ensure it was robust and consistent with our understanding tested revaluations made during the year to ensure they were input correctly into the Council's asset register evaluated the assumptions made by management for those assets not revalued during the year and how management satisfied themselves that these were not materially different to current value. We sought further clarification on the assumptions made by management for those assets not revalued during the year and how management satisfied themselves that these were not materially different to current value. We identified a computational error in the 2016/17 Housing Stock valuation of million. This reduced the amount credited to the HRA and the overall surplus on provision of services reported in the CIES from million to million. This adjustment had no impact on the Council s usable reserves. We also identified that this computational error was made in the 2015/16 Housing Stock valuation. As this is a material item a prior period adjustment relating to this error of million was included in the final version of the accounts. There were no other matters relating to the valuation of property plant and equipment that we wish to bring to your attention Grant Thornton UK LLP The Annual Audit Letter September

8 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 Findings and conclusions Changes to the presentation of local authority financial statements CIPFA has been working on the Telling the Story project, with the aim of streamlining the financial statements and improving accessibility to the user. This has resulted in changes to the 2016/17 CIPFA Code of Practice. The changes affect the presentation of income and expenditure in the financial statements and associated disclosure notes. A prior period adjustment (PPA) to restate the 2015/16 comparative figures is also required. We have undertaken the following work in relation to this risk: documented and evaluated the process for the recording the required financial reporting changes to the 2016/17 financial statements reviewed the re-classification of the Comprehensive Income and Expenditure Statement (CIES) comparatives to ensure that they are in line with the Council s internal reporting structure reviewed the appropriateness of the revised grouping of entries within the Movement In Reserves Statement (MIRS) tested the classification of income and expenditure for 2016/17 recorded within the Cost of Services section of the CIES tested the completeness of income and expenditure by reviewing the reconciliation of the CIES to the general ledger tested the classification of income and expenditure reported within the new Expenditure and Funding Analysis (EFA) note to the financial statements reviewed the new segmental reporting disclosures within the 2016/17 financial statements to ensure compliance with the CIPFA Code of Practice. During the audit officers agreed to make some changes to the notes and disclosures in this area. We were satisfied that the revised financial statements meet the Code requirements Grant Thornton UK LLP The Annual Audit Letter September

9 Audit of the accounts Audit opinion We gave an unqualified opinion on the Council s accounts on 28 July 2017, well in advance of the 30 September 2017 national deadline. The deadline will be 31 July from 2018 and the Council is clearly well placed to achieve this. The draft accounts were available for audit in line with the agreed timetable, and officers provided a good set of working papers to support them. Delivery was earlier than in previous years as a dry run for the revised submission and audit timetable from The Finance team responded promptly and efficiently to our queries during the course of the audit. Annual Governance Statement and Narrative Report We are required to review the Council s Annual Governance Statement and Narrative Report. The Council published its both its draft and audited accounts (including the Annual Governance Statement and Narrative Report) on its website. Both documents were prepared in line with the relevant guidance and were consistent with the supporting evidence provided by the Council and with our knowledge of the Council. Issues arising from the audit of the accounts We reported the key issues from our audit of the accounts of the Council to the Council s Audit and Standards Committee on 26 July In addition to the key audit risks reported above, we identified several improvements to the disclosures in the accounts Grant Thornton UK LLP The Annual Audit Letter September

10 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 2016 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. Overall VfM conclusion Our overall conclusion was that we were satisfied that the Council put in place proper arrangements to ensure economy, efficiency and effectiveness in its use of resources during the year ended 31 March 2017 except for arrangements in place for financial sustainability and safeguarding children. We therefore qualified our value for money conclusion in our audit report on 28 July 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. In summary these were: the outcome of the Ofsted inspection of Children s Services in 2015/16; and The impact of the Medium Term Financial Plan on the Council s overall finances The key risks we identified and the work we performed are set out in table 2 overleaf. As part of our Audit Findings report presented to the Audit and Standards Committee in July 2017, we included agreed recommendations to address our findings Grant Thornton UK LLP The Annual Audit Letter September

11 Value for Money Table 2: Value for money risks Risk identified Work carried out Findings and conclusions Ofsted inspection of children's services Ofsted issued a report on the Council's children's services in 2015/16 which rated these as 'inadequate' and the Council is currently subject to follow up review. Until such time as Ofsted has confirmed that adequate arrangements are in place this remains a significant risk to the Council's arrangements We reviewed update reports from Ofsted took these into account in forming our conclusion. We have concluded that not withstanding the improvements in children s services this matter is evidence of weaknesses in proper 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. OFSTED published the results of their inspection on 5 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 July 2016 Cabinet meeting a clear action plan and additional resources to address the issues identified was agreed. Following a third follow-up visit in June 2017 Ofsted concluded that the implementation of the Council s improvement plan was resulting in positive progress. They highlighted many positive areas such as senior leaders and Members continuing to support the much needed improvements as well as some areas still requiring improvement. We concluded that there were weaknesses in the Council's arrangements for managing risks effectively and maintaining a sound system of internal control, demonstrating and applying the principles and values of good governance, and planning, organising and developing the workforce effectively to deliver strategic priorities Grant Thornton UK LLP The Annual Audit Letter September

12 Value for Money Table 2: Value for money risks Risk identified Work carried out Findings and conclusions Medium Term Financial Strategy The medium term financial strategy shows the full utilisation of the Council's General Fund reserves just after the end of the financial year 2019/20 We reviewed the plans the Council has to identify the required savings plans. We have concluded that not withstanding the improvements in the Council s medium term financial outlook this matter is evidence of weaknesses in proper arrangements for planning finances effectively to support the sustainable delivery of strategic priorities and maintain statutory functions. The Council s outturn position shows an underspend of 1.8 million against a revised (in February 2017) budget of a deficit of 9.2 million following transfers to and from earmarked reserves. This resulted in an decrease in the General Fund of 7.4 million to 19.9 million at the 31 March The Council s Medium Term Financial Strategy 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 found that the Council s medium term financial outlook has improved over the last 12 months. We also found that the risks in relation to the financial position have been consistently and clearly communicated to Members by the Chief Officer (Finance and Legal). The Council 's savings plans for 2017/18 total 19.4 million.. However these savings on their own will not be sufficient to deliver a balanced position. The Council's 2017/18 budget forecasts a deficit and use of General Fund reserves of 1.5 million. Deficits are also forecast in 2018/19 ( 5.9 million) and 2019/20 ( 8 million) resulting in a deficit early in the financial year 2020/21 that cannot be met from General Fund reserves Grant Thornton UK LLP The Annual Audit Letter September

13 Appendix A: Reports issued and fees We confirm below our final fees charged for the audit and provision of non-audit services. Fees The proposed fees for the year were in line with the scale fee set by Public Sector Audit Appointments Ltd (PSAA) Reports issued Report Date issued Audit Plan March 2017 Audit Findings Report July 2017 Proposed fee Annual Audit Letter September 2017 Final fee Council audit 134, ,735 Grant certification (Housing Benefit Subsidy) 11,520 TBC Total audit fees (excluding VAT) 146,255 TBC Fees for other services Service Fees Audit related services Pooling of capital receipts Teachers Pensions Homes and Communities Agency Non-audit services 3,500 4,500 4,500 Cost assurance work 6,791 Non- audit services For the purposes of our audit we have made enquiries of all Grant Thornton UK LLP teams providing services to the Council. The table above summarises all other services which were identified. We have considered whether other services might be perceived as a threat to our independence as the Council s auditor and have ensured that appropriate safeguards are put in place, as reported in our Audit Findings Report. The above non-audit services are consistent with the Council s policy on the allotment of non-audit work to your auditor and have been approved by the Audit and Standards Committee Grant Thornton UK LLP The Annual Audit Letter September

14 2017 Grant Thornton UK LLP. All rights served. 'Grant Thornton' refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International LTD (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. 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. grant-thornton.co.uk 2017 Grant Thornton UK LLP The Annual Audit Letter September 2017