Agenda item

Janet Dawson from Ernst & Young attended the meeting to provide the update regarding the Annual Audit Letter from the external auditors.

The Committee noted that the Council’s external auditors were required to issue an annual audit letter to the Council following completion of their audit procedures for the year ended the 31st of March 2019.

Ms Dawson referred to Ernst and Young's Annual Audit Letter and the relevant key points contained therein and explained that this related to the audit undertaken for year ending 31st of March 2019. The letter outlined the work that had been undertaken and the key points and issues raised. The main findings of the audit had been reported back to the General Purposes & Licencing Committee .

The Chairman referred to page 22 of the agenda which was Ernst and Young's executive summary. This highlighted issues that could impact on Ernst & Young’s risk assessment--being defined as ‘disclosures on going concern.’ The commentary indicated that financial plans for 2020/21 and medium-term financial plans would need revision because of the impact of COVID-19. Ernst and Young considered that the unpredictability of the current environment could give rise to a risk that the Council would not appropriately disclose the key factors relating to ‘going concern’. The Chairman asked for more clarity on what this meant. Ms Dawson explained that Ernst & Young were reporting on the accounts ending in March 2019, but approval for those accounts was not signed off until August 2020. Ms Dawson said that as the accounts had been signed off late, then they had to note a possible impact that Covid 19 may have had on the Council’s accounts and financial position.

The Chairman enquired, (with respect to the matter of ‘going concern’), if Ernst & Young would treat the Council differently from a private sector company, as the Council may have access to funds that would not be available to a private company. Ms Dawson responded that the requirements for auditors were set out in the International Auditing Standards—they applied equally to the Council as they would to a corporate entity. The Government had issued guidance known as ‘practice note 10’ which outlined the fact that councils should be treated as going concerns unless there were any planned legislative changes that could alter that position by ceasing the existence of a Council within the next 12 months.

Ms Dawson stated that the auditors were obligated to examine a council's financial resilience and cash flow position to assess if they were still able to undertake the various services that they were expected to undertake. The auditors also had to satisfy themselves that councils had sufficient financial resilience and cash flow to satisfy and fulfil their various financial obligations without having to borrow money or take out any loans.

The Vice Chairman referred to the problems highlighted by E&Y with the valuation of Strategic Property. He asked Ms Dawson what the situation was regarding the valuations undertaken in the previous audit by KPMG.

Ms Dawson answered that she did not know in any detail, but confirmed that E&Y had reviewed their files to understand the levels of assurance that had been noted. When E&Y looked at the information that had been supplied to support the valuations, then it became clear that the valuations were not sufficiently robust.

The Vice Chairman referred to page 37 of the agenda documents which was the section relating to value for money. He highlighted the statement that had been made by Ernst and Young in the report, which said that E&Y were unable to conclude whether the council had put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending the 31st of March 2019, until they had concluded their work on the objection to the financial statements.

The Vice Chairman pointed out that the objections raised were a relatively small part of the Council's operation and he asked why Ernst & Young (on that basis), could not offer a qualified statement. He asked for an update on the current position. Ms Dawson explained that objections had been received for 16/17 and 17/18 which were being dealt with by the previous auditor. E&Y had received objections for 18/19. E&Y needed information from KPMG to assess whether there was any particular governance or management information issue that may need dealing with. It was therefore difficult for E&Y to give assurance with respect to value for money until the response from KPMG had been received. The fact that KPMG had not concluded their audit was now holding up the audit work of Ernst and Young. Ernst and Young did not wish to duplicate any work that had already been undertaken by KPMG.

The Vice Chairman raised the issue of whether or not there would be an additional fee for extra work that had been undertaken or would need to be undertaken with respect to dealing with the objections. Ms Dawson answered in the affirmative and explained that additional fees were normally applicable to councils across the board when extra work was required to deal with objections; this would be agreed by the PSAA (Public Sector Audit Appointments) if this could not be agreed by the Council and the Auditor. 

A Member enquired about the mention in the report concerning an upgrade to the Council’s financial system that was being considered. He asked Ms Dawson if she was confident that Bromley would have this in place by March 2022. Ms Dawson responded that this would be a question better directed to the relevant officers.

The Chairman referred to page 45 of the report which was in respect of the additional fee of £127k. He asked if Ms Dawson could remind the Committee of the correlation between fees and the Council’s current financial system. Ms Dawson responded that E&Y had applications which required access to the full suite of data in the general ledger. This data needed to be pulled securely into E&Y’s systems. E&Y would then drill down and analyse the data; Ms Dawson said that the Bromley system made this difficult. Resultantly, much manual drilling down and reconciliation was required along with the need to access manual records. This meant it took E & Y longer to access the data than would otherwise be the case. 

The Chairman said that he did not think that the particular financial system used by Bromley was bespoke to Bromley, but that it was also used by other local authorities. He inquired if Ernst & Young had experienced similar problems when auditing other local authorities. Ms Dawson answered that the financial system used by the Council had not been updated for several years, and was not in the latest format as used by most other councils. It was for this reason that the Council was aiming to upgrade their financial system by March 2022. The Chairman pointed out that the Bromley financial systems had been the same for several years, and that Ernst and Young would have been aware of this when they quoted originally for the work. 

Ms Dawson explained that there was a disconnect in the market, and  that both E&Y and the PSAA had been working off incomplete information when the fees were originally agreed.

The Chairman enquired regarding the breakdown of the £127k in fees and asked how much of this was resultant from the extra work undertaken because of the problems with the valuation of strategic property. Ms Dawson confirmed that the extra work caused by the valuation issues had made up a significant proportion of the extra charges, but she was not aware of the precise breakdown on the night—however it was at least 50%. This was a matter that was being discussed with the PSAA and the Director of Finance.

The Head of Audit and Assurance briefed the Committee that the report regarding the new financial system would be going for scrutiny in November, and then to Full Council in December. He was optimistic that the new system would be implemented in a timely fashion.

RESOLVED that the Annual Audit Letter be noted.