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

The Annual Audit Letter for the Police and Crime Commissioner for Merseyside and the Chief Constable of Merseyside Police Year ended 31 March 2016 October 2016 Michael Thomas Director T 0161 214 6368 E mike.thomas@uk.gt.com Paul Basnett Manager T 0161 214 6398 E paul.s.basnett@uk.gt.com Dave Catherall Executive T 0161 214 6395 E dave.a.catherall@uk.gt.com 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police

Contents Section Page 1. Executive summary 3-4 2. Audit of the accounts 5 3. Value for Money conclusion 10 4. Working with the Police and Crime Commissioner and Chief Constable 12 Appendices A Reports issued and fees 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 2

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 the Police and Crime Commissioner for Merseyside (the PCC) and the Chief Constable of Merseyside Police for the year ended 31 March 2016. This letter is intended to provide a commentary on the results of our work to the PCC and Chief Constable and their 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 PCC and Chief Constable as those charged with governance in our Audit Findings Report on 22 September 2016. This was also reported to the Joint Audit Committee. 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 PCC's and Chief Constable's financial statements (section two); and assess the PCC's and Chief Constable's arrangements for securing economy, efficiency and effectiveness in their use of resources (the value for money conclusion) (section three). In our audit of the PCC's and Chief Constable'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 PCC's and Chief Constable's financial statements on 27 September 2016. A number of late changes were required to the financial statements. The most significant adjustment related to a change of 13.9m to the Group's property value because the desk top valuations were received from the Valuer two months after the preparation of the accounts. The amendments to the financial statements have been made by officers. Value for money conclusion We were satisfied that the PCC and Chief Constable put in place proper arrangements to ensure economy, efficiency and effectiveness in their use of resources during the year ended 31 March 2016. We reflected this in our audit opinion on 27 September 2016. In common with other Police Forces, Merseyside Police faces a significant challenge of working within a substantially reducing budget whilst continuing to deliver a vital public service. In response to the scale of the financial challenge, the PCC and Chief Constable have agreed a significant transformation of the operating model for the Police Force. The programme of work to implement the changes to the operating model has now begun while the transformation of the Estate will take shape over the next ten years. While it is clear that the Force faces a significant financial challenge, the overall approach of balancing a long-term, strategic cost saving programme with a planned use of available reserves to support the budget position and provide capital investment is well designed and considered. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 3

Certificate We certified that we had completed the audit of the accounts of the Police and Crime Commissioner for Merseyside and the Chief Constable of Merseyside Police in accordance with the requirements of the Code on 19 th October 2016. Other statutory powers and duties We have not identified any issues that have required us to apply our statutory powers and duties under the Act. Looking Forward The PCC and Chief Constable continue to face a challenging financial position. The PCC and Chief Constable have prepared a financial plan recording a balanced budget in 2016/17 and have identified that savings of 22.1m are required to be made by the end of 2020/21. A strategy to address the savings requirement has been developed. The key element of the strategy is the Community First programme. Much work has been done in preparing a business case for Phase 1 of the programme and the PCC and Chief Constable will want to maintain momentum in implementing the change proposals and ensure a safe transition to their vision for operational policing on Merseyside. Key to this will be strengthening partnerships and maintaining communication with stakeholders over the implementation of the changes.. Working with the PCC and Chief Constable We are really pleased to have worked with you over the past year. We have worked with you by: Providing an efficient audit we delivered the accounts audit before the 30 September deadline and in line with the timescale we agreed with you. We brought forward our detailed testing of high volume areas such as payroll and pensions and kept you informed of progress and provided prompt feedback to management. National research reports we have shared with you our publication on 'Reviewing the effectiveness of police accountability' and will continue to support you as you consider the transformation of the operating model for your service. Sharing our insight we provided independent external audit commentary and insight in your key issues through senior attendance at every Audit Committee. We have also shared with you our insights on various accounting issues including earlier closure timetables. Supporting development we ran our national Police Audit Committee conference in April 2016 for Joint Audit Committee members. As in previous years, we provided your team with training on financial accounts and disclosures. Our Chief Accountants Workshops were attended by members of the finance team. Acknowledgement We would like to record our appreciation for the assistance and co-operation provided to us during our audit by the PCC's and Chief Constable's staff. Grant Thornton UK LLP October 2016 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 4

Audit of the accounts Our audit approach Materiality In our audit of the PCC's and Chief Constable'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 PCC's and Chief Constable's accounts to be 7,260,000, which is 2% of the PCC Group's gross revenue expenditure. We used this benchmark, as in our view, users of the PCC's and Chief Constable's accounts are most interested in how they have spent the income that the PCC Group have received during the year. We also set a lower level of specific materiality for certain areas such as senior officer and auditors remuneration. This is due to the public interest in these disclosures and the statutory requirement for them to be made. We set a lower threshold of 363,000, above which we reported errors to the PCC and Chief Constable 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 that they are free from material misstatement, whether caused by fraud or error. This includes assessing whether: the PCC's and Chief Constable'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. We also read the narrative report and annual governance statement to check they are consistent with our understanding of the PCC and Chief Constable 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 the PCC's and Chief Constable'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. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 5

Audit of the accounts Police and Crime Commissioner and Chief Constable 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. 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 Chief Constable's pension fund asset and liability, as reflected in its balance sheet, represents a significant estimate in the accounts. The values of the pension fund net liability is estimated by specialist actuaries. How we responded to the risk Having considered the risk factors set out in ISA240 and the nature of the revenue streams at the PCC and Chief Constable, we have determined that the risk of fraud arising from revenue recognition could 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 the police service including Merseyside Police, means that all forms of fraud are seen as unacceptable. Our audit work did not identify any issues in respect of revenue recognition within the financial statements. As part of our audit work we have : reviewed the journal control environment and not identified any significant control weaknesses; tested key journal entries and not found any items which impacted on our opinion; reviewed the accounting estimates, judgements and decisions made by management; and reviewed any unusual, significant transactions and not identified anything which would impact on our opinion. Our audit work did not identify any evidence of management over-riding controls. In particular, the findings of our review of journal controls and testing of journal entries did not identify any significant issues. As part of our audit work we have: documented and walked through the key controls put in place by the Chief Constable to ensure they were designed as expected; reviewed whether the experts used by the Chief Constable were sufficiently knowledgeable and independent for us to rely on their work. We 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; and reviewed the consistency of the pension fund asset and liability and disclosures in notes to the financial statements with the actuarial report from the actuary. We agreed an amendment of 12.6m to reflect the actuarial loss arising from the GAD v Milne case. We were satisfied from our testing of the pension fund net liability that this was fairly stated. Our audit work did not identify any issues in respect of the pensions liability. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 6

Audit of the accounts Police and Crime Commissioner and Chief Constable 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 The Group revalues its assets on a rolling basis over a five year period, with a full valuation every fifth year and desk top valuations in the intervening periods. The valuation of such assets involves a degree of estimation uncertainty given the need to make assumptions and use significant judgements. How we responded to the risk As part of our audit work we have: reviewed management's processes and assumptions for the calculation of the valuation of property, plant and equipment. reviewed the competence, expertise and objectivity of the Valuer used by management. reviewed the instructions issued to the valuation experts and the scope of their work. discussed the basis on which the valuation was carried out, and challenged the key assumptions. tested the revaluations made to ensure they were input correctly into the 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 reported that the PCC and Chief Constable's Finance Team were advised of the desk top property valuations at a late stage in the audit and adjusted the accounts to reflect the change of around 13.9m in property values. This did not impact on the bottom line of the accounts when taken into account with other adjustments to the financial statements. Operating expenses Creditors understated or not recorded in the correct period (Operating expenses understated) As part of our audit work we have: documented and walked through the key controls over the operating expenses transaction cycle to ensure they were designed and operating as expected. tested the reconciliation of operating expenditure recorded in the general ledger to the subsidiary systems and interfaces. tested payments made after the year-end to identify potential unrecorded liabilities and gain assurance over the completeness of the payables balance in the accounts. substantively tested operating expenses including sample testing of expenditure, year end accruals and creditor balances. We did not identify any issues to report. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 7

Audit of the accounts Police and Crime Commissioner and Chief Constable 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 Employee remuneration Employee remuneration accruals understated (Remuneration expenses not correct) Police Pensions Benefits Payable Benefits improperly computed / Claims liability understated How we responded to the risk As part of our audit work we have: documented and walked through the key controls put in place to ensure they were designed and operating as expected. substantively tested a sample of staff and officer payroll payments, ensuring that payments are made in accordance with the individual's contract of employment. tested the reconciliation of payroll expenditure recorded in the general ledger. analysed trends to identify any anomalous areas for further investigation. tested to confirm the completeness of payroll transactions and appropriate cut-off. We did not identify any issues to report. As part of our audit work we have: documented and walked through the key controls over the pensions benefits payments transaction cycle to ensure they were designed and operating as expected. tested the reconciliation of pension benefit payments recorded in the general ledger. analysed trends and relationships to identify any anomalous areas for further investigation. substantively tested commutation and monthly pension benefit payments made in the year. We did not identify any issues to report. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 8

Audit of the accounts Audit opinion We gave an unqualified opinion on the PCC's and Chief Constable's accounts on 27 September 2016, in advance of the 30 September 2016 national deadline. We received draft financial statements at the start of the audit and our queries were dealt with promptly by officers. We worked with colleagues from the Finance Team to smooth audit delivery this year by bringing forward some of our detailed testing to the pre-year end period and providing earlier in the year the details of the ledger reports and data downloads required for the audit. Issues arising from the audit of the PCC's and Chief Constable's accounts We reported the key issues from our audit of the accounts to the PCC and Chief Constable and the Joint Audit Committee on 22 September 2016. The Chief Finance Officer and Director of Resources amended the Group, PCC, and Chief Constable accounts for the disclosure changes identified during the audit. These were primarily to correct the valuation of property, plant and equipment and to record the actuarial loss arising from the GAD v Milne case. The amendments made to the accounts increased the overall level of the Group's unusable reserves by around 13.9m. We reported both the errors and management's prompt response in our audit findings report. Annual Governance Statement and Narrative Report We are also required to review the PCC's and Chief Constable's Annual Governance Statement and Narrative Report. These were published on the website with the draft accounts in line with the national deadlines. Both documents were prepared in line with the relevant guidance and were consistent with the supporting evidence provided by the PCC and Chief Constable and with our knowledge of the PCC and Chief Constable. 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 the PCC's and Chief Constable's accounts and to raise objections received in relation to the accounts. We did not identify any issues that required us to apply our statutory powers and duties under the Act. The Whole of Government Accounts Return contained numerous mapping errors. Management corrected the errors quickly and we submitted the final version of the return to the WGA team on 19 October 2016 in advance of the deadline. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 9

Value for Money 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. Our first step in carrying out our work was to perform a risk assessment and identify the key risks where we concentrated our work. Key findings The key risks we identified and the work we performed are set out in the table below. Risk identified Work carried out Findings and conclusions Financial Strategy The MTFS forecasts a substantial savings challenge going forwards. The current financial plan to 2020/21 forecasts a gap of 22m.Failure to deliver savings and demonstrate achievement of operational performance targets will undermine the overall success of the organisation. Development of the Estates Strategy The PCC and Chief Constable have been ambitious in developing a capital programme of 130m to finance reconstruction projects for the Police Estate. Failure to ensure strong project management including managing the inherent risks will undermine the overall success of the strategy's objectives. We reviewed the PCC's progress in updating the Group financial position and forward strategy. We also reviewed the arrangements for putting together and agreeing the medium term financial plans and the identification of savings plans. The work included a review of the finance reports during the year and consideration of the out-turn position for 15/16 and the proposed areas for saving going forward for 2016/17. We reviewed the progress in updating the Estate Strategy in response to developments. We also updated our understanding of the overall vision and key decisions taken so far. The work included an understanding as to how the key risks are managed. The PCC set a balanced budget for 2016/17 for the Group on 22 February 2016. When the MTFS 2016/17to 2020/21 was produced it projected that while 2016/17 was in balance, as the savings targets had already been identified, the savings target required for 2017/18 to 2020/21 was forecast as 22 million depending on current assumptions regarding the police funding formula. A large part of the overall savings target is expected to come from the Community First initiative. The approach is well structured and a good example of how to approach this scale of change. Although this is a good start it will be key to ensure the transformation process works and the delivery of the service to the public matches expectations. On that basis we concluded that the risk was sufficiently mitigated and the PCC and Chief Constable has proper arrangements in place. The updated Estate Strategy sets out a programme for projects, identifies those buildings to be retained supporting development of the maintenance programmes and provides a schedule of required acquisitions and disposals. Progress to date on the implementation of the Strategy has been slow, as the Strategy had to be revised on the basis of the new operating model from Community First. The key to the success of the Strategy is to ensure that there is appropriate alignment between the operational model of the Police Force and the estate requirements. On that basis we concluded that the risk was sufficiently mitigated and the PCC and Chief Constable has proper arrangements in place. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 10

Value for Money conclusion Key findings Our main considerations in arriving at our vfm conclusion were the: sound basis of PCC Group's medium term financial position in meeting its savings requirements; latest findings of other inspectorates and review agencies, in particular Her Majesty's Inspectorate of Constabulary (HMIC) assessments; and collaborative developments underway and the link to future strategies. We reviewed relevant documents up to the date of giving our report, and did not identify any significant risks where we needed to perform further work. The PCC Group has general fund balances of 12.2 million and earmarked reserves of 24.2 million as at 31 March 2016 which appear adequate at the present time. Overall VfM conclusion We are satisfied that in all significant respects the PCC and Chief Constable put in place proper arrangements to secure economy, efficiency and effectiveness in the use of resources for the year ending 31 March 2016. The PCC set a balanced budget for 2016/17 which forms the first year of the Medium Term Financial Strategy (MTFS) for the 5 year period to 2020/21. The MTFS currently anticipates further savings and efficiency requirement of 22million over the MTFS period. The Chief Constable, working with the PCC, continues to respond effectively to meeting the challenges of on-going reductions in central government funding. The Chief Constable has maintained a focus on maintaining operational performance at the same time as making significant efficiency savings during 2015/16. We took assurance from the work of HMIC who commented in their PEEL Police efficiency report in 2015 that Merseyside Constabulary is well prepared to face its future financial challenges. Overall HMIC concluded that Merseyside Police was good at keeping people safe and reducing crime. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 11

Working with the Police and Crime Commissioner and Chief Constable 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. Working together, we have contributed to: An efficient audit we delivered the accounts audit by the 27 September 2016, in advance of the 30 September deadline and 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. We will continue to work with you to identify further efficiencies in the process to ensure a continued, smooth audit delivery. Improved financial processes during the year we reviewed your financial systems and processes including employee remuneration, nonpay expenditure and police pensions payments. Sharing our insight we provided independent external audit commentary and insight in your key issues through senior attendance at every Audit Committee. We have also shared with you our insights on various accounting issues including earlier closure timetables. Technical dialogue we have been involved in early discussions on a number of developments to ensure that appropriate accounting and audit implications are identified. Provided information - we provided regular audit committee updates covering best practice. Areas we covered included e.g. Examining the evidence 'Audit committee effectiveness in the police sector' and 'Power check' Reviewing the effectiveness of police accountability: insights for the second term'. Supporting development we ran our national Police Audit Committee conference in April 2016 for Joint Audit Committee members. Understanding your operational health through the value for money conclusion we examined your operational effectiveness. We tracked your financial budget position, medium term planning arrangements and strategic partnership working and considered this as part of our value for money assessment. 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 12

Appendix A: Reports issued and fees We confirm below our final fees charged for the audit and provision of non-audit services. Fees Planned Actual fees 2014/15 fees Statutory audit of the PCC 38,445 38,445 51,260 Statutory audit of the Chief Constable 18,750 18,750 25,000 Total fees (excluding VAT) 57,195 57,195 76,260 Fees for other services Service Fees Non-Audit related services: Provision of a Tax & VAT helpline 2,500 Tax and VAT consultancy 3,000 Vehicles disposal project consultancy 8,300 Fee variations are subject to approval by Public Sector Audit Appointments Ltd. Reports issued Report Date issued Audit Plan 5 May 2016 Audit Findings Report 22 September 2016 Annual Audit Letter October 2016 2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police 13

2016 Grant Thornton UK LLP The Annual Audit Letter for the Police and Crime Commissioner and Chief Constable of Merseyside Police