Agenda item

Hannah Lill, Senior Manager with Ernst and Young, attended to present the report and answer questions. She was supported by Mr. David Dobbs (LBB Head of Corporate Finance and Accounting—CEX). The Committee was informed that this report had previously been presented to the General Purposes and Licencing Committee and that modifications and changes to the report had been highlighted in blue. Ms Lill directed Members to the objections to the accounts. It was noted that with respect to the 2018-2019 accounts an acceptance decision letter had been sent to the objector and that matters relating to the closure of these accounts were progressing. Members noted that due to the outstanding objections on the 2017/18 and 2018/2019 audits, Ernst and Young had been unable to conclude on the value for money arrangements for the 2018/19 and 2019/20 accounts.

Ms Lill referred the Committee to page 9 of the Ernst and Young report which stated that E&Y had completed the audit of LBB’s financial statements for the year ended the 31st of March 2020 and they had performed the procedures that were outlined in their audit planning report. Ms Lill reminded Members that E&Y had previously reported to the July 2021 committee meeting where they had highlighted a potential qualification on property, plant and equipment which had resulted from errors identified in furniture and equipment valuations. The Council had since suggested an alternative approach which addressed the matter and which would result in a Prior Period Adjustment; so this work was now substantially complete.

Ms Lill said that due to the significant amendments required to the draft audited accounts, Ernst and Young had envisaged that they would work through the revised statements with officers during February and March 2023; they would then report to the 8th of March committee with a view to signing the financial statements later in March 2023. This would include the signing of the separate opinion on the London Borough of Bromley’s Pension Fund and the 2019/20 statement of accounts.

Page 10 of the report provided a further summary of risk areas. These were summarised as follows:

·  Management Override--misstatements due to fraud or error

·  Incorrect capitalization of revenue expenditure

·  Valuation of land and buildings

·  IAS 19 valuations

Ms Lill said that Ernst and Young had concluded their work on management override and had found no indication of any mis-management involving the override of controls.

Ernst and Young had concluded their work on incorrect capitalization of revenue expenditure and a separate report had been drafted concerning this.

Ms Lill stated that as a result of material issues identified with ‘furniture and equipment’ and also with the depreciation of revalued assets, the Council had corrected these using Prior Period Adjustments.

Ernst and Young had agreed the LBB’s pension liability disclosures to the actuarial report. They had noted an unadjusted misstatement on IAS 19 in respect of the Goodwin case. They had reviewed the roll forward of liabilities under ISA 540 estimates and the E&Y pension specialist had confirmed that the liabilities were within an expected range.

Another area of significant risk that had been audited by the external auditors was the possibility of the incorrect capitalization of revenue expenditure which could pose a risk of fraud. Two errors had been identified:

·  The Council had inappropriately classified additions to assets under construction; the external auditors had extrapolated this error and the resulting projective error was £915k.

·  The Council had also inappropriately capitalised VAT within certain additions, causing an immaterial error in the value of the additions.

Ms Lill stated that E&Y had challenged management assessments of the classification of expenditure as ‘REFCUS’. The external auditors testing in this area was now complete and they had noted an adjustment of £3.65m in respect of IT transformation which was reclassified as PPE additions.

The next area of significant risk that the Committee was briefed concerning was the risk of error in the valuation of land and buildings. Revised valuations had been obtained for car parks and had been agreed by EY valuers as reasonable. Additionally, a number of assets had been revalued due to incorrect floor size. Revised valuations had been received and were agreed as being reasonable by EY valuers. EY had challenged officers on the valuation of assets not revalued in year and their assessment did not highlight any material issues.

The work of the auditors with respect to the risk of error in the valuation of the pension liability had been completed previously and there was nothing further to add.

It was noted that regarding the Council’s ‘Going Concern’ disclosure, EY had taken part in discussions with senior officers. As a result of this, a request had been sent through for supporting documentation which would corroborate the Council’s going concern assertion. Ernst and Young's assessment of going concern would need to consider any revised going concern disclosures--these should show their latest financial position and also the future financial projections for the Council; these disclosures should also include full consideration of the ongoing impact of COVID-19. It was noted that this work was well progressed.

Ms Lill explained that a material error existed with respect to furniture and fittings. This was because the Council had not historically maintained a register of assets, furniture and fittings. The Council had instead made an estimate of the value of expenditure on property in year and recorded this as the asset value for this class of assets. Members were informed that these errors had been corrected through a Prior Period Adjustment (PPA). It was noted that going forward the Council had changed its accounting policy so that now any expenditure on furniture and equipment would be expensed in year.

Ms Lill drew the Committee’s attention to factual Mis-Statements as follows:

·  Depreciation had not been charged on assets revalued in year. This was corrected through a PPA.

·  Car park valuations had been re-valued as a result of challenge on the original methodology applied by the external valuer.

·  RESCUS reclassification to ‘additions’ resulted in an adjustment of £3.655m.

·  EY’s internal valuation specialists completed a review of 14 assets across a number of different asset classes. Revaluation had been made to the Churchill Theatre and the Central Library. The Churchill Theatre had been re-valued at £19.23m from a previous valuation of £5.76m. Central Library had been revalued at £10.65m, from a previous valuation of £3.51 million.

The Committee’s attention was drawn to page 54 of the EY report which dealt with two recommendations from the external auditors. With respect to the 2019/ 2020 accounts, it was recommended that the Council should set out a clear timeline when queries would be responded to and escalated if required.

With respect to 2021 and beyond, the Council should ensure that they had plans in place to address the backlog of work which would include a resourcing plan and a task allocation plan. The Council should have a clear timetable for closing down the 2020/21 accounts. The Council should develop a sustainable resource strategy with appropriate skills and capacity.

The Chairman highlighted that the report stated that the contents were for the attention of committee members and relevant officers only. The Chairman queried this on the basis that the reports had been published on the Council website with the aim of transparency. Ms Lill responded that EY were aware of this, but the main concern was that the reports should not be relied upon in terms of assurance by third parties.

A discussion took place concerning the definition of ‘materiality’ and of the ‘pervasive errors’ that were referred to in the EY reports. It was hoped that the financial statements could be signed off by the end of March 2023. A discussion also took place regarding the difference in valuations for the Central Library and the Churchill Theatre.

A Member  expressed concern regarding a lack of resource in the Finance Team. The Head of Corporate Finance and Accounting provided assurance that additional resources had been allocated to the LBB Finance Team to help clear the backlog. Ms Lill said that she was aware of additional resource that had been allocated to the Finance Team and that this had speeded up the finalisation of the Pension Fund accounts. She commented that the real test would come with respect to the finalisation of the 2021 audit.

A Member asked Ms Lill what other local authorities were doing differently  with respect to the processing of their accounts and what Bromley could do better and improve. Ms Lill responded that LBB required a fully resourced finance team that could resolve and close down queries quickly. It was the case that the LBB Audit was large and complex. Members of the LBB Finance Team needed expertise and the willingness to work as a team.

It was queried if there were other local authorities in a similar position to Bromley. Ms Lill responded and said that there were three other local authorities who were late in their submissions. Delays had been caused across the board because of the valuation of infrastructure assets.

A Member asked for an update regarding the ‘going concern statement’. The Head of Corporate Finance and Accounting answered this question, commenting that a submission had been sent to EY concerning the Council's various financial projections. The Council was satisfied that there were no going concern issues and no financial risk. The statement was normally shared directly with the external auditors and not to the Committee, but it could be shared with the Committee if required.

RESOLVED that the LBB Draft Audit Results Report (Year ended 31^st March 2020) be noted.