LONDON BOROUGH OF ENFIELD

Transcription

1 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER Audit for the year ended 31 March 2016

2 2 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER EXECUTIVE SUMMARY Purpose of the letter This Annual Audit Letter summarises the key issues arising from the work that we have carried out in respect of the financial year ended 2015/16. It is addressed to the Council but is also intended to communicate the key findings we have identified to key external stakeholders and members of the public. It will be published on the website of Public Sector Audit Appointments Limited. Responsibilities of auditors and the Council It is the responsibility of the Council to ensure that proper arrangements are in place for the conduct of its business and that public money is safeguarded and properly accounted for. Our responsibility is to plan and carry out an audit that meets the requirements of the National Audit Office s Code of Audit Practice (the Code), and to review and report on: The Council and pension fund financial statements whether the Council has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. We are also required to report where we have exercised our statutory powers under the Local Audit and Accountability Act 2014 in any matter and our grant claims and returns certification work. We recognise the value of your co-operation and support and would like to take this opportunity to express our appreciation for the assistance and cooperation provided during the audit. BDO LLP 20 October 2016 Audit conclusions FINANCIAL STATEMENTS We issued unqualified true and fair opinions on the Council and pension fund financial statements on 30 September We reported our detailed findings to the Audit and Risk Management Committee on 29 September. The majority of audit differences identified were corrected in the final published financial statements and the remaining misstatements did not have a material impact on our audit opinion. USE OF RESOURCES We issued an unqualified conclusion on the Council s arrangements for securing economy, efficiency and effectiveness in its use of resources on 30 September Whilst there are uncertainties around future grant funding, demographics and demand pressures the Council s future planning and assumptions appear to be adequate. We concluded that the Council understands the financial challenges that it faces and had adequate arrangements in 2015/16 for sustainable resource deployment. EXERCISE OF STATUTORY POWERS We have received objections in respect of the purchase of land at Meridian Water, the purchase of land at Chase Farm Hospital and the management of car parking at Palace Gardens. Our work remains ongoing although we were satisfied that this does not materially impact on the financial statements or our value for money conclusion. GRANT CLAIMS AND RETURNS CERTIFICATION Our review of grant claims and returns is in progress and the results will be reported upon completion of this work.

3 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 3 FINANCIAL STATEMENTS OPINION We issued unqualified true and fair opinions on the on the Council and pension fund financial statements on 30 September Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that they are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Council s and pension fund s circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates, and the overall presentation of the financial statements. Our assessment of risks of material misstatement Our audit was scoped by obtaining an understanding of the Council and the pension fund and its environment, including the system of internal control, and assessing the risks of material misstatement in the financial statements. We set out below the risks that had the greatest effect on our audit strategy, the allocation of resources in the audit, and directing of the efforts of the audit team. MANAGEMENT OVERRIDE RESPONSE FINDINGS Auditing standards presume that a risk of management override of controls is present in all entities. By its nature, there are no controls in place to mitigate the risk of management override. We reviewed the appropriateness of journal entries and other adjustments to the financial statements. We also reviewed accounting estimates for evidence of possible bias. Significant work was required to obtain a dataset in a format that enabled us to undertake the data analysis to extract the appropriate information. Once this was achieved we were able to perform our work on journal entries and concluded that these were appropriate for the preparation of the financial statements. Our work on accounting estimates has not identified any evidence of bias.

4 4 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER FINANCIAL STATEMENTS Continued REVENUE RECOGNITION RESPONSE FINDINGS Risks of fraud in revenue recognition may arise from the use of inappropriate accounting policies, failure to apply the Council s stated accounting policies or from an inappropriate use of estimates in calculating revenue. Our review of revenue recognition focused on testing completeness and existence of fees, charges and property rental income and whether any conditions attached to grants have been met. We identified no errors over existence in our testing of income. However we found errors in respect of year end cut off. Three were in respect of transactions that related to 2014/15 but were reported in 2015/16 as they had not been accrued for. One was in respect of a 2015/16 transaction that has been recognised in the 2016/17 financial year. We assessed the potential impact that could arise from further cut off errors and this indicated that there will not be a material misstatement in the financial statements. REVENUE RECOGNITION IN THE PENSION FUND RESPONSE FINDINGS For the pension fund this included contributions income from employees and employers. Our work included a detailed analytics comparing movement in employer and employee normal contributions based on changes in active members and member grade bandings, and a sample of contributions during the year were also vouched to member payroll records. Testing to ensure the correct level of contributions are being paid identified one issue in relation to contributions from employees. The effect of the difference, caused by the payroll system using incorrect parameters for calculating annual pay for contribution purposes for term time employees, has been assessed to be trivial to the financial statements. No further errors were noted over contributions.

5 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 5 PROPERTY, PLANT AND EQUIPMENT (PPE) VALUATIONS RESPONSE FINDINGS FINANCIAL STATEMENTS Continued Councils are required to undertake additional work to ensure that the carrying value of property, plant and equipment (PPE) is not materially different to the current value (or fair values for surplus assets) at the balance sheet date. In order to address this, the Council obtained year end reviews of the movement in its property values from its valuers, GVA. We reviewed management s use of this information and compared it to expected movements using other available information to 31 March 2016, particularly the Gerald Eve report commissioned by the NAO. We assessed GVA s competence, independence and objectivity and we reviewed the valuations provided and the valuation methodology applied. The Council accounted for the asset revaluations provided by GVA as at 1 April However the balance sheet reporting point is 31 March 2016 and the year-end update valuation by GVA, using external indexation information, indicated that asset values had also increased during the year by a material amount. Therefore the financial statements have been amended to reflect the position at 31 March 2016 by posting an increase to Other Land and Buildings of 67.9 million. This increases the value of the Council s PPE, with an equivalent increase in the Council s revaluation reserve. WRITING OUT OF DEPRECIATION RESPONSE FINDINGS Councils are required to write out accumulated depreciation when as asset is revalued, and then to use the revised valuation to calculate the depreciation charges from that point. We tested the value of accumulated depreciation and found that the Council s asset register module does not write out and re-set depreciation when an asset is revalued. As a result, the accumulated depreciation reported in the notes to the draft accounts was overstated, as was the opening gross cost of the asset, by an equal amount. There was no overall effect on the net book value of the assets reported in the draft financial statements, but the components had been misstated by a significant amount. Management reviewed the impact of this error and identified that accumulated depreciation was overstated by an estimated 27.2 million and therefore adjusted the final version of the financial statements to reflect this.

6 6 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER FINANCIAL STATEMENTS Continued NON-ENHANCING CAPITAL EXPENDITURE RESPONSE FINDINGS An additional risk was raised over the Council s balance for the write-off of Non-enhancing expenditure as there is scope for this balance to contain write-offs of additions which were not originally capital in nature. Therefore, we took a sample of items that had been written off to determine why they had been written off, as well as to confirm that they were originally valid capital expenditure on acquisition. Our testing confirmed that the expenditure was capital in nature and that the Council had correctly accounted for it as additions to the value of its assets. However, as the valuer had assessed that the expenditure had not increased the value of the asset, the Council was writing this out to the cost of services as non-enhancing expenditure, in the Other movements in cost or valuation row of note 11. The more appropriate accounting treatment is to report in the Revaluation decreases recognised in the I&E row of note 11. Management have agreed that the proposed change to the reporting of note 11 is more appropriate, and have amended the accounts to move 68.9 million from the Other movements in cost or valuation row in note 11 to the Revaluation decrease recognised in the in the I&E row. FAIR VALUE OF INVESTMENTS (INFRASTRUCTURE AND PRIVATE EQUITY) IN THE PENSION FUND RESPONSE FINDINGS The investment portfolio includes unquoted infrastructure and private equity holdings valued by the General Partner or fund manager using valuations provided by the underlying partnerships. The valuation of these assets may be subject to significant levels of assumption and estimation, and valuations may not be based on observable market data. In some cases, the valuations were provided at dates that are not coterminous with the pension fund s year end and need to be updated to reflect cash transactions (additional contributions or distributions received) since the latest available valuations. We obtained direct confirmation of investment valuations from the fund manager in order to vouch investment valuations at the year end. Where the financial statement date supporting the valuation is not conterminous with the pension fund s year end, we confirmed that appropriate adjustments had been made to the valuations in respect of additional contributions and distributions with the funds. Confirmations received from fund managers were agreed to the valuations disclosed within the financial statements. Investment valuations were found to be conterminous with the year end and as such no material adjustments were necessary. Investment were found to be valued in accordance with relevant accounting policies.

7 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 7 FINANCIAL STATEMENTS Continued Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonably knowledgeable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. The materiality for the Council s financial statements as a whole was set at 21.0 million. This was determined with reference to a benchmark of gross expenditure (of which it represents 1.75 per cent) which we consider to be one of the principal considerations for the Council in assessing the financial performance. The materiality for the pension fund s financial statements as a whole was set at 9.0 million. This was determined with reference to a benchmark of net assets (of which it represents 1 per cent) which we consider to be one of the principal considerations for the pension fund in assessing the financial performance. We agreed with the Audit and Risk Management Committee that we would report all individual audit differences in excess of 420,000 for the Council and 180,000 for the pension fund. Audit differences Council The audit differences corrected in the final published financial statements, as reported earlier in the letter, did not change the overall reported financial position for the year. The following audit differences were not corrected that impact on the reported surplus in the Comprehensive Income and Expenditure Statement: Adjustments impacting on the deficit for the year: million inaccurate provision for accumulated absences earned by teachers at year end ( 2.1) million 2016/17 expenditure reported in 2015/16 This would result in the deficit for the year decreasing by 2.0 million (to 44.8 million) and net assets increasing by 2.1 million (to 1,049.6 million), as the adjustment in respect of the accumulated absences provision would be reversed through the accumulated absences reserve. Audit differences pension fund All audit differences were corrected in the final published financial statements. This had no impact on the net assets of the fund, as it was in respect of the netting off of changes in market value with investment management fees.

8 8 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER FINANCIAL STATEMENTS Continued Other matters we report on Annual governance statement We are satisfied that the Annual Governance Statement is not misleading or inconsistent with other information we were aware of from our audit. Narrative reporting Local authorities are required to include a narrative report in the Statement of Accounts to offer interested parties an effective guide to the most significant matters reported in the accounts. The narrative report should be fair, balanced and understandable for the users of the financial statements. We are satisfied that the information given in the narrative report for the financial year for which the financial statements are prepared is consistent with the financial statements. Internal controls We did not find any significant deficiencies in internal controls during the course of our audit. A number of other areas for improvement were identified which we have discussed with management. Whole of Government Accounts Auditors are required to review Whole of Government Account (WGA) information prepared by component bodies that are over the prescribed threshold of 350 million in any of: assets (excluding certain non current assets); liabilities (excluding pension liabilities); income or expenditure. We have completed our review in accordance with the Group Audit Instructions issued by the National Audit Office. This requires that we compare the information in your Data Collection Tool (DCT) submission with the audited financial statements, undertake testing of completeness and accuracy of WGA counter party transactions and balances, and provide an assurance statement to the National Audit Office. The DCT was amended as a result of the audit and our assurance statement was submitted on 21 October 2016, in accordance with NAO s requirements. Following the amendments made to the DCT we were able to conclude that the DCT was consistent with the audited statutory accounts and the only issue we were required to report was that there were two counter party transaction balances that the Council had not fully analysed against the counter party identifiers in the DCT.

9 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 9 USE OF RESOURCES CONCLUSION We issued an unqualified conclusion on the Council s arrangements for securing economy, efficiency and effectiveness in its use of resources on 30 September Scope of the audit of use of resources We are required to be satisfied that proper arrangements have been made to secure economy, efficiency and effectiveness in the use of resources based on the following reporting criterion: In all significant respects, the audited body had proper arrangements to ensure it took properly informed decisions and deployed resources to achieve planned and sustainable outcomes for taxpayers and local people. As part of reaching our overall conclusion we consider the following sub criteria in our work: informed decision making, sustainable resource deployment, and working with partners and other third parties. Our assessment of significant risks Our audit was scoped by our knowledge obtained from your previous auditor, relevant findings from work undertaken in support of the opinion on financial statements, reports from the Corporation including internal audit, information disclosed or available to support the governance statement and annual report, and information available from the risk registers and supporting arrangements. We set out below the risks that had the greatest effect on our audit strategy, the allocation of resources in the audit, and directing of the efforts of the audit team.

10 10 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER USE OF RESOURCES Continued SUSTAINABLE FINANCES RESPONSE FINDINGS In our audit plan we identified that there was a risk over the sustainability of the Council s financial position due to the reductions is government funding and inflationary and pay pressures. Delivery of services in 2015/16 was overall in line with the revised budget. However this involved the use of 19.8 million of general revenue reserves and 3.5 million of HRA reserves. Whilst the Council held a good level of general revenue reserves at 31 March 2016 of 55.5 million and HRA reserves of 34.6 million, this level of reserves usage is clearly not sustainable. Whilst the 2016/17 budget set is balanced, this is dependent on the delivery of 16.8 million of savings that have been identified, but need to be delivered. We reviewed the medium term financial strategy (MTFS) and the planning processes that underpin it. We found that the Council develop a four year medium term financial strategy that is adjusted annually to reflect changes in circumstances such as statutory requirements, inflation, wages, demographics, demand for services. Enfield s expectations around demographics (increasing and aging population) are similar to those being faced by other councils. The MTFS identified 48million of savings to be achieved in the period to from 2016/17 to 2019/20. The Council has already made significant savings since 2010 and are conscious further savings will be challenging, especially in the demand-led areas. Given the uncertainty around future grant funding, demographics and demand pressures Enfield Council s future planning and assumptions appear to be adequate. The Council is looking ahead and has ambitious capital programmes with the aim of regenerating the borough, to improve the circumstances of the population with the added benefit of bringing additional income in future years. The Council has undertaken a budget consultation process and impact assessments to inform the decisions The MTFS is challenging, but provides the Council with a plan for the next four years against which it can measure it s progress to achieving a sustainable financial position. The scale of the challenge is well understood and savings plans are in place as part of the MTFS, although this needs to be continuously closely monitored to ensure delivery is line with expectations, so that the finances of the Council can remain on track. The Council is currently working on producing an updated MTFS that will cover the period from 2017/18 to 2020/21 that will be approved by the Cabinet and Council as part of the 2017/18 budget setting process in February Overall, the Council need to continue to monitor the control of costs incurred in the demand-led services, the delivery of the savings necessary to meet the MTFS and the impact of the changes being implemented on the delivery of services, to ensure that there are no unanticipated detrimental outcomes. Although the challenges are significant, the Council is well aware of this and is working to address them, therefore there is no impact on our use of resources conclusion.

11 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 11 USE OF RESOURCES Continued ENFIELD 2017 RESPONSE FINDINGS The Council has undertaken a significant restructuring and business re-engineering programme aimed at improving efficiency of the delivery of services to help address the financial challenges that the Council is facing. This programme represents a radical change to the operations of the Council and there was a significant risk that the changes being implemented would cause disruption to the delivery of services if the changes were not successfully managed. We reviewed the programme and project management arrangements instigated by management to govern the implementation of the change process. The programme was developed following a review by PwC examining how customers accessed the Council compared to how the services were structured, utilising a number of design principles that guided the solutions developed. The new structure for delivery is based on a hub model with a single point of contact for customers. Front line delivery teams no longer have their own support teams, but request support from the relevant hub who assign resources appropriately. These hubs will be supported by a new digital platform that has been slightly delayed compared to the implementation of the people changes, but because the Council were committed to achieving the savings from reductions in headcount progress with this needed to be made. The realisation of the full anticipated benefits are important to the delivery of the medium term financial plan. The cash savings required as part of the transformation programme are currently being realised through the reduction in staff numbers. In total 31.6 million of savings were sought during 2015/16, although these were not fully delivered in year, resulting in the need to utilise reserves. However the savings monitoring process indicates that the 2015/16 savings will be delivered in full during 2016/17. The transformation programme has been pushed through rapidly and it has been confirmed that it was a conscious decision for the Council to disrupt the organisation and reconstruct it, to achieve the step change that was required. The next step is to fully embed the new ways of working so that this becomes business as usual and the services fully understand and properly engage with the new hub model. The Council has delivered most of what was planned for the Enfield 2017 project and is working to address the remaining issues, therefore there is no impact on our use of resources conclusion.

12 12 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER USE OF RESOURCES Continued MERIDIAN WATER RESPONSE FINDINGS The Council is undertaking this large scale regeneration project aimed at increasing the capacity of the Borough to provide housing and employment by delivering 10,000 new homes, 6,500 new jobs and a brand new train station. This project represents significant investment by the Council and there is a significant risk that the public money being invested does not deliver value for money if the projects are not successfully managed. We reviewed the programme and project management arrangements instigated by management to govern the delivery of the project and ensure that the anticipated benefits are realised. This is a highly complex project and therefore the Council has appointed a range of external advisors to advise the Council in respect of various aspects of the scheme. This has enabled the Council to develop a contract that safeguards the Council s investment whilst also bringing in additional capital receipts. The contract has mechanisms in place for the council to receive the applicable land value at the time each stage is released to the developer, with the consideration being either in cash payments or assets. The commercial units developed will remain the property of the Council and will provide a source of income into the future. The full contract close is expected to be achieved by the end of This regeneration project is highly complex and will remain ongoing for a number of years. The Council is progressing the delivery of the project and we will continue to monitor this progress as further developments are made. There is no impact on our use of resources conclusion.

13 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 13 EXERCISE OF STATUTORY POWERS REPORT BY EXCEPTION We have received objections in respect of: i. The purchase of land at Meridian Water ii. The purchase of land at Chase Farm Hospital iii. Management of car parking at Palace Gardens Our work remains ongoing although we were satisfied that this does not materially impact on the financial statements or our value for money conclusion. We will be unable to provide our certificate of closure of the audit until these issues have been satisfactorily resolved. Use of statutory powers We have not exercised our statutory powers and have no matters to report. Audit certificate We will be unable to provide our certificate of closure of the audit until the objections in respect of 2015/16 and earlier years have been satisfactorily resolved.

14 14 LONDON BOROUGH OF ENFIELD ANNUAL AUDIT LETTER GRANT CLAIMS AND CERTIFICATION CERTIFICATION WORK Our review of grant claims and returns for 2015/16 is in progress and the results will be reported upon completion of this work. Housing benefit subsidy claim Public Sector Audit Appointments Ltd has a statutory duty to make arrangements for certification by the appointed auditor of the annual housing benefit subsidy claim. The audit of the 2014/15 housing benefits subsidy claim, completed by your predecessor auditor, found a number of errors in relation to the calculation of benefit entitlement. Our work on the 2015/16 housing benefits subsidy claim is currently in progress and will be completed ahead of the submission deadline of 30 November We will report on the key findings in our Grants Report once the work has been completed.

15 ANNUAL AUDIT LETTER LONDON BOROUGH OF ENFIELD 15 APPENDIX Reports issued We have issued the following reports since in respect of the audit for the year ended 31 March REPORT DATE Audit Plan Council 3 March 2016 Audit Plan pension fund 4 July 2016 Final audit report Council 29 September 2016 Final audit report pension fund 29 September 2016 Annual Audit Letter 20 October 2016

16 The matters raised in our report prepared in connection with the audit are those we believe should be brought to the attention of the organisation. They do not purport to be a complete record of all matters arising.. No responsibility to any third party is accepted. BDO LLP is a corporate establishment under the Limited Liability Partnership Act 2000 and a UK Member Firm of BDO International. BDO Northern Ireland, a separate partnership, operates under a licence agreement. BDO LLP and BDO Northern Ireland are both separately authorised and regulated by the Financial Conduct Authority to conduct investment business. Copyright 2016 BDO LLP. All rights reserved. DAVID EAGLES Engagement Lead T: E: david.eagles@bdo.co.uk ANDREW BARNES Audit Manager T: E: andrew.barnes@bdo.co.uk