Agenda item

To receive an update on the progress in finalising the External Audit Findings Reports and Council’s Statement of Accounts for 2024-25.

The following reports have been attached for consideration:

11.1    External Audit Findings Report for the London Borough of Brent

11.2    External Audit Findings Report for Brent Pension Fund

11.3    Council & Pension Fund Statement of Accounts 2024-25

The Chair welcomed Sophia Brown (Key Audit Partner, Grant Thornton) and Sheena Phillips (Senior Audit Manager, Grant Thornton) to the meeting and in taking the opportunity to thank them and the finance team for their ongoing efforts on the audit invited them to introduce the report presenting the draft External Audit Findings Report 2024-25 to the Committee.  Consideration of the item was divided between the draft Audit Findings (ISA 260) report for the London Borough of Brent and Brent Pension Fund.

In introducing the Draft Audit Findings for the London Borough of Brent’s Statement of Accounts for year ended 31 March 2025 Sophia Brown highlighted the following key issues:

·            The headline section within the Audit Finding Report, which provided a summary of the process to date, ongoing challenges and work still to be completed.  Members noted that the accounts audit had commenced in July 2025 and remained ongoing, with completion planned towards the end of December 2025 and findings to date summarised on pages 19 to 53 of the report.  To date three adjustments to the financial statements had been identified as required resulting in a £3.6m adjustment to the Authority’s Comprehensive Income and Expenditure Statement, decreasing the financial position. These adjustments were not stated to affect the level of the Authority’s usable reserves.  Work had been completed on management override of controls and substantially completed on pension liability, with both having been identified as risk areas.

·            Whilst audit work was ongoing, no issues had yet been identified that would require modification of the external audit opinion, subject to completion of the following outstanding areas of work on which delays and challenges had been identified which included:

Ø   Plant, property and equipment: Members were advised that work on PPE valuation had started once the final valuer's report had been received in October 2025 although challenges, delays and issues had been identified in the quality and provision of subsequent information being sought from the Council’s valuer.  As a result, a number of matters remained outstanding with the valuer with significant work ongoing and required to complete this work with the challenges highlighted as including receipt of incorrect valuation reports, duplicate property valuations and difficulties in reconciling the fixed asset register with the valuer’s report.

Ø   IFRS 16 / Leases: Whilst the lease sample had been selected testing was currently on hold pending the receipt of updated leases note.  As an update, it was reported that these had now been received with lessor listings and disclosures also due to be provided by management.

Ø   Movement in Reserves: It was reported that work was now largely complete pending final review.

Ø   Cash and cash equivalents: It was reported that work remained ongoing.

Ø   Financial instruments: Finalised disclosures were awaited from management

Ø   Completion of all remaining audit testing: it was reported that samples were currently being reviewed by the audit team with other supporting information, once provided by management, to be reviewed in full once the revised financial statements had been completed.

·            The audit team continued to work closely with management with the aim in seeking to complete the audit by December 2025 with the significant work and effort of both the Finance and Audit Teams commended.

·            As an additional update, members were advised that it had now been possible to issue the audit certificate relating to the 2023-24 accounts following completion of the National Audit Office's work on the issues where further guidance had been required relating to the Whole of Government accounts.

Sheena Phillips was then invited to provide an update on the work undertaken in relation to the overview of audit risks, with the following issues highlighted:

·            In relation to work focussed around the management of override of controls (journals testing), work had been completed with three deficiencies identified, one classified as significant which related to the segregation of duties involving the posting and approval of journal payments.  Whilst highlighting concerns about potential management override in the journal process it was pointed out that the testing undertaken had identified an additional layer of approval outside of the system, providing assurance that the journals were subject to further scrutiny although the issue had remained flagged as a significant control deficiency.

The other two deficiencies identified had involved missing journal checklists and incomplete user listings

·            In terms of the valuation of net pension liability, work on this area had been completed with one disclosure error identified which would be corrected by management. The pension fund auditors also identified a £3.7m variance between the Fund Manager confirmations and figures recorded in the financial statements, which it was confirmed fell below performance materiality and would be included as an adjustment in the accounts.

·            Work in relation to the valuation of land and buildings and Council dwellings remained ongoing.  To date, a £9.5m overstatement in council dwellings had been identified alongside a £1.6m variance in land and buildings which had led to appropriate adjustments in the accounts.

·            IFRS 16 work to date had identified an error in the lease liability calculation, resulting in a £5.7m misstatement. This error would be adjusted by management and once reviewed it would (if appropriate) be added as an audit adjustment. Work had been completed on other risks including fraud in revenue recognition and fraudulent expenditure recognition, with no risk control issues identified for either.

The difficulties experienced by management in preparing the lessee disclosure, requiring the note to be rewritten after audit work had begun due to a significant volume of errors in the underlying data were also noted.

·            In terms of other findings, management had recorded three prior period adjustments for 2024-25.  Two of these related to PPE (incorrect classification and assets written off), and one related to capital commitments disclosure which remained ongoing pending management decision on how to progress.

·            Findings from the information technology audit relating to Oracle Fusion main ledger system had identified a risk arising from excessive system administrative permissions granted to business users without clear justification.  This had, however, been addressed in the journal testing process, with confirmation provided that none of those users had posted journals during the year, eliminating the risk of management override of controls.

·            Details were also provided on the audit adjustments identified, with adjusted misstatements listed in relation to PPE (land and buildings and council dwellings), and expenditure cut off.  In addition, a number of misclassification and disclosure changes had been identified which had subsequently been adjusted by managers.  Two unadjusted misstatements had also been identified which had not been included within the final statement of accounts.  These related to an error identified where Section 106 and Community Infrastructure Levy contributions were recorded as income but should have been credited to Capital Grants Unapplied creating an imbalance on the Movement in Reserves Statement.  The second related to the Pension Liability already referenced, which had not been identified as material.

·            Reference was also made to the Action Plan produced in response to the Financial Statements audit and nine control points identified, including one high level deficiency relating to management and control of the journal process. Five medium deficiencies were identified, including two relating to management capacity: insufficient capacity to work on capital commitments (resulting in errors when challenged), and similar issues for capital grants received in advance where no figure was provided in draft financial statements due to lack of capacity for year-end review.  Three low-level deficiencies had also been identified in relation to journals checklist which involved change in circumstances reports / retrospective payroll change reporting and the misclassification of reason for work hour changes, with the management responses provided also outlined within the report.

The Action Plan in relation to the IT audit had identified three deficiencies.  One of these had been high level relating to the assignment of system administration permissions to business users and two medium level deficiencies related to the revocation of system permissions and user access logging and monitoring with the management responses provided also noted.

In concluding, Sheela Phillips highlighted the follow-up from the prior year audit recommendations with three of the six recommendations shown as completed and the remaining three still in progress, all relating to PPE valuation, with updates included on action taken to date by management to address each issue.

Moving on, Matt Dean (Key Audit Partner for the Pension Fund audit, Grant Thornton) was then invited to introduce the Audit Findings Report relating to Brent Pension Fund.  A summary of the main headlines was provided, which included:

·            The main audit work had been completed during July to September 2025 with the findings summarised within pages 35 to 41 of the report.

·            The audit work had identified one disclosure adjustment to the notes to the financial statements which had resulted in a £45m adjustment to the Pension Fund’s Capital Commitments Disclosure Note. As this had been a disclosure amendment, it had no impact on the reported position of the Fund as at 31 March 2025.

·            £3.718 million of unadjusted differences had been identified in the valuation of the Fund’s investments disclosed in the financial statements at 31 March 2025 and the valuation statements received from the third-party investment managers.  In addition, an unadjusted classification error had been identified within the testing of Transfers Out. Two errors were noted in relation to amounts the pension fund had received in error and subsequently refunded to the relevant individuals. The sum of the errors was extrapolated over the absolute population for Transfers Out for which a projected misstatement of £1.214m was identified.

·            Members noted the reference to the audit adjustments and unadjusted differences listed within the Audit Findings Report as a result of the above issues with it reported that management was proposing not to amend the financial statements on the basis that the above differences were not material both quantitively and qualitatively which the Audit and Standards Committee advised they would be asked to confirm as part of approval of the Letter of Representation.

·            Details were also provided in relation to the overview of audit risks and other findings, including the IT audit (with similar issues identified to those under the Financial Statement audit process).  As a result of the audit work a number of recommendations had been raised for management which included high level action in relation to excessive System Administrative Permissions assigned to Business Users and medium level actions in relation to transfers in made in error and benefits payable on which the management actions identified in response had been provided within the report.

In concluding, Matt Dean also highlighted the follow-up from the prior year audit recommendations with it noted that the recommendation in relation to school employer contribution rates had once again been highlighted as an issue during 2024-25.  This involved a sample of schools being identified as having paid incorrect rate of employer contributions in 2023/24 due to not having updated the contribution rate.  As a result, this had been highlighted as an ongoing weakness in the control environment.  Whilst noting that management issued instructions to school/payroll providers the issue related to the work required with schools to ensure the correct contribution rates were checked and actioned at the beginning of the year.

Prior to moving on, the Committee noted that whilst work on the Pension Fund financial statements was complete, it would not be possible to issue the final audit opinion on the Pension Fund financial statements until the audit of the Administering Authority had also been completed.  The statutory deadline for the Pension Fund Annual Report to be published was 1 December 2025 but as the Administering Authority audit would not be finalised until after this date members were advised it would not be possible to issue the final audit opinion on the Pension Fund financial statements until that had been completed.

The Chair thanked Matt Dean for the summary provided on the Pension Fund Audit Findings Report and as the next stage in consideration of the item then invited Ben Ainsworth (Head of Finance) to provide an update on the work being undertaken to address the issues identified within the Financial Statement audit including progress on delivery of the Improvement Plan established to address the challenges identified during the previous year’s audit process.  Key issues highlighted were as follows:

·            As a key area of focus, the council had been working on an improvement plan to address the shortcomings of its records of assets since the completion of the audit of the 2023/24 Statement of Accounts. So far, this had been focused on improving the records of those areas with the most material assets and issues, especially Assets under Construction and recently completed capital schemes. A second phase of these works had now also commenced which planned to address the remaining issues, such as ensuring that all property assets had the correct Universal Property Reference Number, reconciling the list of the council’s assets back to the records held by the Land Registry on asset ownership, and ensuring that all areas of the council maintain adequate inventories of their assets as the council’s constitution requires. Alongside this, members were advised that, Internal Audit had also reviewed the Property department’s Asset register and associated processes given it contained most of the council’s non-housing assets, with recommendations due to be made known shortly.

·            In response to clarification which had been sought at the previous Committee meeting regarding the formula for calculating reserve levels, members were advised this was a decision which fell within the remit of the Corporate Director of Finance & Resources as part of the budget, with the current requirement for 5% of the Council's net expenditure to be set aside in unallocated general fund reserves. It was noted that there was no set level for earmarked reserves, school reserves or Housing Revenue Account reserves.

·            An update was also provided regarding the restatement of infrastructure assets, which had been identified as an issue following review of the Council's capital expenditure in recent years, involving the way certain capital expenditure was being misstated against infrastructure.  In outlining the management action taken in response, an assurance was provided that the issue had no material impact on the overall balance sheet.

Sawan Manji (Senior Finance Analyst) then provided a brief update on the action being taken to address the Financial Disclosure errors identified, involving the link between short-term debtors and financial instruments disclosures, which had involved a number of misclassifications being identified and needing to be corrected.  Whilst not having materially impacted on the accounts it was noted this had created additional delays in the audit process.

Details were also provided in relation to the ongoing work in support of IFRS 16 leases which had involved a range of new accounting policies having to be included in the financial statements along with additional disclosures relating to leases.  Whilst implementation had been recognised as presenting challenges for local authorities due to the scale and complexity of leasing arrangements, delays had also been experienced as a result of issues relating to the quality of data available and longer-term asset register issues.  Audit work in this area therefore remained ongoing with the testing to date having identified an error of £5.7m due to management using an incorrect Excel formula in calculating the lease liability using net present value and present value methods.

Ben Ainsworth then continued with reference to a further outstanding issue relating to the treatment of PFIs under IFRS 16 which had resulted in a £4m movement being identified, although this was noted not to be material in nature or to have had an impact on general fund or HRA reserves.  In addition, updates were provided on the Prior Period Adjustments (PPA) outlined within the Audit Findings report relating to PPE, which it was confirmed involved corrections being agreed in relation to errors identified in prior and current year PPE disclosures and further assurance being sought over the Fixed Asset Register cleansing exercise and PPA adjustment entries.

In terms of Capital Accruals, it was noted that as a result of the creditors and expenditure completeness testing, three errors had been identified arising from management not completing the year-end review of capital accruals which had resulted in the incorrect recording of expenditure and potential risk in terms of material misstatement in the financial statements.  Management had acknowledged the audit finding and agreed with the recommendation that an annual review of capital accruals be undertaken with a formal review to be incorporated into the year-end timetable to ensure completeness and accuracy of financial reporting.

On PPE valuations, officers acknowledged that work had been delayed increasing the risk that auditors would identify further errors, given the scale of valuations. The Council expected to update indexation of housing assets by approximately 2% (estimated at £17m), with statutory adjustments leading officers to believe that this would have no effect on bottom line or usable reserves.  Finally, it was noted that the Group Accounts would also need to be audited once the other audit items are complete which would be focused on whether the single entity accounts (once audited) been combined correctly.  At this stage it was not anticipated that this would lead to any material issues being identify.

In thanking Sophia Brown, Sheena Phillips & Matt Dean along with Finance Officers for the updates provided, David Ewart (as Chair) recognised the impact of the delays and challenges identified, including the additional complexity introduced as a result of the implementation of IFRS 16.  Prior to inviting comments, reference was also made to the report provided by the Corporate Director Finance & Resources providing an update from the Council perspective on work to complete the 2024-25 statement of accounts for both the Council and Pension Fund and process that would need to be followed in terms of their formal approval and sign off, including the Letter of Representation.  Given the ongoing work, members were advised that it was proposed to recommend to the Audit & Standards Committee that approval of the Letter of Representation be delegated to the Corporate Director of Finance & Resources with the Chair of the Audit and Standards Committee authorised to sign the final statement of accounts for 2024-25, subject to written assurances being provided that all outstanding matters and adjustments contained in the audit findings report had been made and with any material adjustments required as a result of the final audit findings report to be reported back to the Audit and Standards Advisory Committee and Audit and Standards Committee.

On the basis of the updates provided, the Chair then invited the Committee to raise any questions, with the issues highlighted summarised below:

·            Seeking further clarification around the issues identified in relation to PPE valuations members were keen to explore the basis of the challenges experienced.  In response, Sophia Brown advised that whilst fewer issues had been identified on the capital side compared to the previous year (reflecting the impact of ongoing process improvements) the main issues experienced had been in relation to the receipt of incorrect valuation reports, duplicate property valuations, difficulties in reconciling the fixed asset register with the valuer’s report and slow responses and limited engagement from the valuer.  Whilst causing delays in the audit timetable and requiring unplanned audit resource members were advised that to date this had not resulted in a significant impact on audit fees.

·            Moving on, questions were raised relating to the process of continuous improvement.  Whilst noting the additional complexity introduced as a result of IFRS 16, assurance was sought on the progress made in addressing the challenges and delivery of the improvements identified as a result of the previous audit, including the valuation process and selection and performance of the Council’s valuer.  In response, Sophia Brown felt it important to recognise that whilst progress had been made, many of the changes included within the Council’s Improvement Plan were still due to fully materialise due to the short timeframe between completing the 2023-24 audit and commencing the 2024-25 audit process leaving insufficient time to make desired progress and address all of the previous control points.  It was noted that one of the changes introduced had been to undertake valuation at year-end rather than beginning (as previously) which it was felt would provide more time for future improvement.

As an additional query, views were also sought on whether it was felt the issues identified in relation to financial controls around journals had worsened from previous year. Sophia Brown advised the specific issues highlighted had been raised as a high level deficiency previously and were not therefore felt to represent a widespread risk giving they only related to a limited number of individuals.

Concerns were, however, highlighted by members at the deficiencies identified, in relation to control of the journal process in relation to journal checklists and control of user permissions, which it was felt had the potential to generate a high likelihood of errors and risk of fraud noting that from an audit perspective the risks to financial controls were examined through procedures designed to mitigate identified risks and sample testing.

In terms of the process followed a total of 20 journals were sampled with the significant deficiency relating to segregation of duties found within nine of the tested journals.  Members were, however, reminded that in all nine cases, there was an additional layer of approval outside of the system, providing assurance that the journals were subject to further scrutiny.   The other two deficiencies identified (not classified as high) involved missing journal checklists (not considered to present a fraud or material misstatement risk) and incomplete user listing, which aligned with the IT audit findings around insufficient monitoring of system access.  Further clarification was provided from Hannah Sargent (Grant Thornton) in relation to the sample testing approach and split across journal transactions which it was pointed out had reflected a risk-based approach with confirmation provided the samples selected had been on the basis of the associated risk level identified.  Final concerns were raised about roles, responsibilities and security levels representing fraud risk. Officers confirmed this represented a risk with recommendations to be provided for management to review roles, responsibilities and security levels assigned to individuals regularly as appropriateness could change due to team structure or responsibility changes with the audit approach designed to ensure those individuals had not made changes outside their role to financial accounts or adjusted reconciliations.

·            Following on from the concerns previously highlighted, members sought additional clarification on the response and engagement of the Council’s appointed valuer in support of the audit process and whether this highlighted an issue in relation to data available or responsiveness and management arrangements. Questions were also raised concerning confidence in reconciliation of the Fixed Asset Register and how the depreciation of assets was treated. In response to the treatment of asset depreciation, Sheena Philips outlined the process undertaken with the complexity of the current system also reflecting the changes and improvements introduced as a result of the Council’s new asset register management strategy designed to deliver more accurate valuations and avoid single list submissions.  Regarding how the asset register, ongoing work was planned to focus on the most material assets on a staged basis, which it was confirmed would include garages.  Further planned processes included reconciliation of the asset register against Land Registry data, as this was the most robust data source and was expected to provide reasonable assurance regarding correctness and absence of significant missing assets.

·            In response to further details being sought on the selection process undertaken for the Council’s Valuers, confirmation was provided this had been based on a formal procurement process with the firm selected having offered the most cost-effective rate.  In terms of value for money (given the issues currently being experienced and potential impact on audit fees) members were advised that the contract had been in place several years with this being the first year of specific difficulty. The impact of delays and potential cost recovery would be addressed at process end before undertaking the next procurement.  As a result of the concerns and challenges identified the Committee requested that issues highlighted regarding the delay in response being provided on External Auditor queries in relation to valuations be formally raised on behalf of the Committee with Council Valuers following the meeting in an effort to enhance engagement.

·            In concluding the questions, further clarification was sought as to whether the reference to potential equal pay claims within the draft Letter of Representation reflected the same issue experienced by Birmingham City Council and any specific concerns relating to Brent.  In response, Sophia Brown advised this had been included as a general reference for all local authorities and did not represent a specific concern in relation to Brent.

As no further issues were raised, Members were then invited to consider the recommendations outlined in the report presented by the Corporate Director of Finance & Resources on the 2024-25 Statement of Accounts.  Having once again thanked Sophia Brown and the audit team at Grant Thornton along with the Council’s Finance Team for their efforts to progress completion of the audit and noted that the recommendations made regarding approval for sign off of the accounts would require formal approval by Audit & Standards Committee it was unanimously RESOLVED:

(1)       To recommend to the Audit & Standards Committee that approval of the draft letters of representation to Grant Thornton for the Council and Pension Fund be delegated to the Corporate Director of Finance & Resources, as set out in Appendices A & B of the report, which member noted was the standard template, subject to any significant changes or adjustments required as a result of the final audit findings report being issued to be reported back to members of the Audit and Standards Advisory Committee .

(2)    To recommend to the Audit & Standards Committee that approval to sign off the final statement of accounts for 2024-25 be delegated to the Chair of the Audit & Standards Committee, subject to written assurance being provided that all outstanding matters and adjustments contained in the Audit Findings report had been made, with any material adjustments required as a result of the final Audit Findings report being issued to be reported back to the Audit and Standards Committee and also notified to all members of the Audit & Standards Advisory Committee.

To recommend to the Audit & Standards Committee that the audit fees for 2024-25 be approved, as detailed in section 3.2.9 of the report subject to members of the Audit & Standards and Advisory Committee to be notified of any material adjustment or change