Agenda item

Ms Dawson attended the Committee to answer any questions Members had regarding the External Audit Plan for 2018-2019.

Members were asked to note the External Auditor’s arrangements for the Audit Plan for 2018—2019. Members were also being asked to note and agree the materiality and reporting levels that were detailed in the Plan. Members were also being asked to note the significant risks outlined in the Plan, along with the Value for Money (VFM) arrangements that had been set out. It was noted that Ernst & Young LLP were also responsible for developing a similar plan for the Pension Fund which would follow. 

Ms Dawson referred the Committee to page 5 of Ernst & Young’s Audit Planning Report for the year ending 31^st March 2019. She highlighted and explained the four main areas of risk that had been identified:

·  Misstatements due to fraud or error—especially associated with the possibility of management overriding controls

·  Risk of fraud in revenue and expenditure recognition, through the inappropriate capitalisation of revenue expenditure

·  Inherent risk associated with Asset Valuations

·  ISA 19 valuations relating to pensions liabilities

(ISA refers to the ‘International Standards on Auditing’ and are auditing guidelines from the Financial Reporting Council).

The Committee heard that risks associated with pensions were complex and so actuaries would need to be involved in the risk assessment process.

Ms Dawson explained that in addition to the risks mentioned above, two areas of audit focus had been identified.

·  Spring Capital Loan

·  New Accounting Standards—IFRS 9 & IFRS 15

Members were briefed concerning the Materiality limits which were as follows:

·  Planning Materiality--£9.59m

·  Performance Materiality--£7.19m

·  Audit Differences set at--£479,500

Ms Dawson highlighted the figures and asked if the Committee could confirm whether or not they agreed with them. The Committee was happy to agree with the proposed Materiality limits and the Audit Differences figure. The Committee was pleased to note that there had been a reduction in the external audit fees. A discussion took place about the issue of ‘Independence’ and how important it was that the External Auditors were independent from both Members and officers.

Ms Dawson reported that there was still a Member who had not made an independence declaration. She asked if this could be followed up as a matter of urgency.

Post Meeting Note:

This matter was reported by the Committee Clerk to the Head of Democratic Services the following day. The Head of Democratic Services took immediate steps to clarify who the Member was, and to attempt to resolve the issue. 

Ms Dawson explained how Ernst & Young identified what they regarded as significant risks. A Member asked about the use of consultants. It was clarified that Ernst & Young used their own internal consultants and that Cushman and Wakefield acted as consultants for LBB. A discussion took place concerning the testing for capital and revenue expenditures.

The Chairman enquired why the Spring Capital Loan had been identified as an area of focus. Ms Dawson responded that the Spring Capital Loan had been highlighted previously by KPMG and it was now the case that Ernst & Young wanted to understand more about the transaction as it was an unusual one; for this reason it had been highlighted.

A Member asked about VFM and enquired if Ernst &Young based their VFM assumptions solely on the consideration of the LBB accounts, or whether they would also consider the practices of other local authorities. Ms Dawson answered that Ernst & Young had teams that worked across a variety of local authorities and that because of this they would be able to identify good and bad practice. Reporting could be influenced if any of these factors were deemed to be significant.

A Member asked how far would the external auditors ‘dig down’ into the accounts and financial statements of the Council. Ms Dawson stated that Ernst & Young would need to first gain an understanding of the Council’s Committee and Governance structure. They would need to make a judgement as to whether or not the system of controls was robust and reliable. They would also undertake an assessment of Internal Audit. Ernst & Young would only dig down further if they felt there was an issue or a risk. 

Mention was made of the LCIV (London Collective Investment Vehicle) and it was noted that the LCIV would also be subject to an external audit.

RESOLVED that:

1) The External Auditor’s arrangements for the Audit Plan for 2018 to 2019 are noted.

2) Members note and agree the Materiality and reporting levels as outlined in the report.