Agenda item

Representatives from Ernst and Young (E&Y) attended to provide an update regarding the External Audit Plan for 2019-2020. These were Janet Dawson, Hannah Lill and Adrian Balmer.

Ms Dawson outlined the key areas of risk as assessed by E&Y. 

These were:

·  Misstatements due to fraud or error

·  Incorrect capitalisation of revenue expenditure

·  Asset valuations

·  Pensions valuations and disclosures.

The first two risks noted were common risks associated with local government generally. Asset valuations would need particular attention to detail, due to the historic problems with these valuations, and due to the effects of the pandemic. The IOCS (Institute of Chartered Surveyors) had issued a statement which said that they would expect their advisors to note an aspect of material uncertainty in their valuations because of the Covid pandemic,

The Committee noted that Pensions Valuations and Disclosures had also been classed as a significant risk. This was not to be taken as indicating that the external auditors saw anything wrong with the Pension Fund or its valuations, but rather that this was an area that was generally complex to value; it was also an area that would have been affected by the Covid 19 pandemic and the volatility of the financial markets.

Ms Dawson drew attention to another key area of risk which was identified as ‘Going Concern Compliance with ISA 570’. This was a new area of focus and essentially meant that it would increase the workload of auditors in the UK when they assessed whether or not councils were financially viable. Ms Dawson had therefore considered it necessary to draw the Committee’s attention to this fact.

The effects of the Covid 19 pandemic were listed as a separate risk factor. 

Ms Dawson drew attention to the section of the papers dealing with ‘Value for Money’ where it was noted that E&Y had to consider if LBB had put in place proper arrangements to secure economy, effectiveness and efficiency in the use of its resources.

Ms Dawson highlighted page 40 of the pack which explained the ‘Materiality’ reporting levels that would be adopted by E&Y. It was noted that ‘Planning Materiality’ for 2019/2020 had been set at £5.49m. This had been calculated as 1% of the Council’s gross expenditure for the previous year which was £549m. (‘Planning Materiality’ was the amount over which the external auditor felt that a mis-statement could influence the decisions of a user of the financial statements).

The Chairman asked Ms Dawson if LBB should expect a ‘qualification’ on the accounts, and the response to this was that this was not expected.

The Chairman asked if Ms Dawson could shed light on any proposed increase to LBB’s fees as a result of the extra work involved in the audit and the closer monitoring of external auditors by the Financial Reporting Council (FRC). Ms Dawson replied that she had been in general discussion with LBB’s Director of Finance concerning this matter and talks would continue going forward.

The Chairman referred to the Pensions Audit and specifically to the Triennial Valuation. He noted that another £5k had been added here for fees and enquired whether or not the £5k had been costed into the original external audit valuation. Ms Dawson responded that it had not.

A Member asked why the Pension Fund had been assessed as a red risk as it did not have a deficit and was a well-managed fund. The fund was currently valued at £1.17 billion, which meant that the fund was 109% funded. He disagreed with the red rating, and asked for an explanation as to why this was the case. He hoped that the red risk rating would not be one of the reasons why an increase in fees would be justified.  Ms Dawson clarified that the red risk rating applied in E&Y’s audit plan, had been applied purely from their audit perspective, and was not in any way a reflection on the management and viability of the fund itself. E&Y had to satisfy themselves regarding any risks to the fund, and this same methodology had been applied to all of E&Y’s clients. The term ‘deficit’ in this regard did not mean that the fund was not sufficiently funded, it just meant that from an audit perspective it was a liability on the balance sheet. 

The Member referred to the mention in the report of changes to the Finance Team, and that this was regarded as problematic by E&Y. He acknowledged that the team was small, but stated that they were qualified and efficient, and so he wanted to ask why this was an issue as far as E&Y were concerned.  Ms Dawson highlighted the fact that to produce a quality set of accounts, a significant amount of work was required. LBB had lost officers in the Finance Department that were very experienced, and who understood how the LBB systems worked. When they had left, corporate history and knowledge left with them. Given the fact that the current team was small and that corporate history had been lost, it was E&Y’s view that this was a risk factor that had to be highlighted to the Council. In their view, small teams could struggle to respond, particularly when resources had been stretched due to the pandemic.

The matter of whether or not LBB’s accounting systems supported data analytics well was discussed along with how LBB’s systems compared with those of other councils. Ms Dawson explained that when E&Y undertook audits, as part of their data analytics process they needed to download information from an organisation’s general ledger for the particular year under audit. This then enabled data to be manipulated into different categories and further drill downs were often required to extract data samples. She said that this was not fully possible with LBB’s general ledger as they were only able to drill down to one level. The process was further complicated by the fact that the pension information was on the same ledger and so these two factors combined to slow down their audit process. 

Mr Balmer commented on a case where E&Y were currently undertaking the audit of the accounts of a County Council. The audit had commenced roughly 5 weeks before, and E&Y were now just one week away (approximately) from completing the audit. The reason given for this was that the County Council’s general ledger systems were such that E&Y was able to drill down and extract the data required in a more efficient and faster manner. 

The Chairman thanked Ms Dawson and her colleagues for attending the meeting and for their presentation.

RESOLVED that

1) The External Auditor’s arrangements for the Audit Plans (2019-2020) are noted.

2) The materiality and reporting levels are agreed.