Agenda item

The Audit and Standards Committee has responsibility for considering issues raised by the external auditors as part of the process of approving the annual statement of accounts.

Please note that the following appendices have been attached to this item:

Ø  Draft External Audit Report 2017/18 (ISA260)

Ø  Draft Letter of Representation

The Chair provided background to the reason why the publication of the Draft Statement of Accounts 2017/18 had been delayed. He reminded Members that this was the first year when the Council’s accounts had to be completed by 31 July (the previous deadline had been 30 September). A Draft Statement of Accounts had been published on the Council’s website in late May and updated versions had been circulated on Friday 20 July 2018 and Thursday 26 July 2018. The draft ISA260 report had also been circulated on Friday 20 July 2018.

Benjamin Ainsworth (Head of Finance at Brent Council) introduced the Draft Statement of Accounts 2017/18 and the External Auditors Report to those charged with governance (the ISA260 report). Referring to the ISA260 report he said that it set out the anticipated results of the audit as per paragraph 3.3 of the Cover Report (page 186 of the Agenda pack). Furthermore, the version of the report included in the Second Supplementary Agenda pack explained the difference between the previous version of the Draft Statement of Accounts and the one published on the day of the meeting (changes to the previous version of the ISA260 report had been highlighted in red). Mr Ainsworth informed Members that the Draft Statement of Accounts had been considered by Cabinet on 16 July 2018 and it was expected that it would be signed by the statutory deadline of 31 July 2018. He explained that the Council and one of its wholly owned companies – i4b Holdings Ltd – were audited by KPMG, while the other wholly owned company – First Wave Housing Ltd (FWH) – was audited by PricewaterhouseCoopers (PwC) which meant that PwC had to sign off the FWH accounts before KPMG could sign the Group Accounts for the Council and the companies.

Conrad Hall (the Council’s Chief Finance Officer) notified the Committee of a complication that had arisen – PwC had been provided with a Statement of Accounts which had the wrong date on it. Guy Flynn (Director, PwC – External Audit, FWH) explained that although the mistake had been rectified, the statutory auditor, authorised to sign the accounts on behalf of PwC, was out of the country with no access to internet. Members expressed their discontent with the situation, pointing out that this left KPMG a very short period of time to consider the group accounts. Mr Flynn clarified that no changes had been made to the FWH accounts apart from the date on which they had been signed. Mr Hall stated it had been the Council’s error that the accounts had not been dated correctly and by the time this was identified, the statutory auditor had left the country. Andy Sayers (Partner, KPMG – External Audit) said that if PwC made the necessary arrangements to deliver the signed FWH accounts to KPMG on the morning of 30 July 2018, KPMG’s team would be able to examine the document and finalise the Council’s Statement of Accounts by 31 July 2018.    

It was RESOLVED that PwC would make the necessary arrangements to deliver scanned copies of the signed FWH 2017/18 Draft Accounts to KPMG and Brent’s Chief Finance Officer who would provide an update to the Committee.

Mr Sayers referred to the ISA260 report and said that the materiality for both the Authority’s accounts and the Pension Fund had been set at £12 million, which represented 1.1% of gross expenditure and 1.5% of gross assets respectively. He confirmed that KPMG had received the updated Statement of Accounts and were conducting final checks, but no significant issues were expected to be identified. Mr Sayers said that since the accounts had been first issued in May 2018 there was one minor unadjusted audit difference and six adjusted audit differences to the Authority’s accounts and one adjusted audit difference to the Pension Fund (for details, please see Appendix 2 to the ISA260 report (page 425 of the Agenda pack). Nevertheless, Mr Sayers expected KPMG to issue unqualified opinions on the Authority’s financial statements and to the Pension Fund’s financial statements.

The unadjusted audit difference related to the National Non-Domestic Rates Return (NNDR) provision for appeals of £5.1 million which had been classified in long-term provisions when a proportion should have been classified as short-term provisions. Officers had decided not to adjust for this as there was no impact on the income and expenditure account and it only effected the split between short- and long-term provisions. In relation to adjusted audit differences, Mr Sayers said that they fell into three principal areas – property, plant and equipment. The Social Discount Factor for Council dwellings had not been taken account of in relation to £30 million of additions which had resulted in an adjustment being required reducing the value of Council dwellings by £22.5 million. Furthermore, properties worth £2.4 million that had been transferred to i4BHoldings Ltd (i4B), but this would not have impacted the Group Accounts. Some of the other adjustments included – for example, the soft loan between the Council and i4B had been accounted for in different ways when it should have been accounted for on a consistent basis in both entities and the profit on the disposal of properties sold to i4B during the year had not been removed. Members heard that the overall number of adjustments in the current year was not higher than in previous years which was a positive indicator, especially when the shorter deadline for completing the accounts had been taken into account.

Mr Sayers referred to the Lender Option Borrower Option (LOBO) loans and said that the National Audit Office had issued guidance on how LOBOs should be accounted for which had been implemented (for details, please see page 413 of the Agenda pack). In addition, all control recommendations had been accepted by the Council’s management and recommendations from previous years had been implemented.

Members of the Committee questioned why the level of prudence of property, plant and equipment had been reduced. Steve Lucas (Senior Manager, KPMG - External Audit) explained that the Council had used external property experts to determine the appropriate change in value of Council dwellings in Brent which had been determined to be 0.5% (£6 million). This materially meant there had not been movement and the value for the year had not been increased. In addition, responding to a question about short term creditors, Mr Lucas said that the level of accruals had been calculated using purchase orders, long term contracts and invoices. As there had been variances, it had been necessary to make estimations to ensure that the accounts would be completed on time.

Mr Sayers did not comment on a question whether the Local Authority had a sufficient level of reserves, but explained that the bigger reserves were, the greater risks could be taken by the Council, therefore the appropriate risk governance procedures had to be in place. However, although he did not have concerns regarding Brent’s position, Mr Sayers said that it was important for the Local Authority to focus on delivering its budget and on monitoring contracts. Moreover, KPMG had been satisfied with the budget-setting process and Mr Sayers advised that the Chief Finance Officer determined the minimum levels of reserves required. Mr Hall reiterated that financial controls had been very strong and the Council had not overspent in the last five years which provided confidence that it could continue to manage expenditure in an effective way.

The Committee directed its attention to the letter of representation and requested KPMG to highlight any areas Members should be aware of. Mr Sayers said that KPMG expected a confirmation that there had not been changes to the public finance initiative and agreed to send the exact wording to reflect this to Conrad Hall.

Mr Sayers pointed out that depending on the outcome of the LOBO objection, this could have been the last meeting attended by him and Mr Lucas.  

RESOLVED that:

(i)            The contents of the Statement of Account 2017/18 and External Auditor’s Report, be noted; and

(ii)          The Audit and Standards Committee be recommended to:

·         Approve the statement of accounts

·         Approve the letter of representation to KPMG

(iii)         The Letter of Representation be amended to include the wording on the public finance initiative provided by KPMG;

(iv)         The Statement of Accounts 2017/18 be circulated to Members once it had been finalised and the Chair of the Audit and Standards Committee had signed it; and

(v)          The Committee’s appreciation of the work of KPMG in the last five years be formally recorded;