Update report by Ernst Young (enclosed).
The Associate Partner (Ernst & Young) noted that it was unusual to present both the Audit Plan and Audit Results report on the same agenda. Due to the unusual circumstances of the year caused by the Covid pandemic, this was the first opportunity for presentation of the Audit Plan. The Audit Plan set out the Audit risks to be addressed, and were equally shown in the Audit Results report, and it was therefore agreed that the two reports be presented and discussed together.
There had been a number of constraints, with the Council’s budget being prepared by Council officers during lockdown, and the whole audit process had been undertaken remotely. There had also been additional financial reporting requirements involving additional procedures, as a result of Covid-19, around property, plant and equipment valuations, pension valuations and the going-concern concept. Auditors were working to a materiality level of £921,000 for the Council.
The following Audit Risks were explained, and were set out in both the 2019/20 Audit Plan and the Audit Results Report:
· Fraud risks- The risk could be that management could override controls and financially mis-report the position of the Council as at 31 March, and through the incorrect capitalisation of revenue expenditure. Auditors had found no evidence of this, and this was a key assurance for the Committee to note.
· Property, plant and equipment valuation– this would be a key risk in any normal audit year, but was heightened this year by the Covid pandemic, and the fact that the balance sheet date of 31 March 2020 was in the middle of the first lockdown period. This was key for assets valued at fair value. The Council had a relatively high level of investment property valued at fair value and the assets therefore had to be considered specifically, and the valuations tested upon which they were set within the financial statements. Auditors were awaiting sample documentation to complete procedures in this area and would expect some additional disclosures to be made in the set of accounts as a result.
· Pension liability on the balance sheet – There were two audit-related issues being focussed on: 1) National remedy to the McCloud issue (an employment equalisation of pay issue last year) – there had been a remedy in July this year, and this remedy had changed some of the assumptions built into the actuarial model behind the liability; 2) Value of investments assets in the Lincolnshire Pension Fund and how these were valued within the actuarial model – assurances had been received from the Pension Fund auditor, which showed that the fund was understated by £12million at 31 March. SHDC’s share of this was only £330,000, but this would reduce the liability showing within the draft financial statements. As a result of these two issues, officers had requested an updated actuarial valuation in order to assess the impact on the Council’s liability, and to reflect this appropriately in the revised accounts. Ernst and Young were awaiting this updated report.
· Non-domestic rate appeal provision – This was a key estimate, with key judgement and was complex in its nature. Fluctuations had been seen in past years, giving rise to audit risk however, the auditors had completed procedures and there were no issues highlighted.
· Going concern – This was key for a number of reasons: 1) This was a new audit standard, driving auditors to pay more attention to this area; 2) Covid 19 and the impact it had on the Council’s finances. This was especially true as the going concern concept was for a period of 12 months from the date of approval of financial statements. This covered 2 municipal years, the second of which, 2021/22 did not yet have a Local Government Settlement behind it and many Councils across the country were facing additional costs and loss of income as a result of the pandemic and were having to assess their reserve positions. A going-concern assessment had been requested from managers – when received this would have to be reviewed, stress-tested, and consideration given to how this would affect the future liquidity and reserve position of the Council over the 12 month period.
Audit differences (Section 4 of the report) – To date, there were no adjusted numerical differences. Only one un-adjusted error had been found, based on the audit sample extrapolation, which was for a total of only £158,000. Although this technically breached the reporting threshold, it was not considered material in view of the £921,000 threshold, and there was therefore no need for adjustment in terms of materiality.
The report set out areas of work to be completed. The amount of time available meant that Ernst Young would not achieve the publication date of 30 November 2020 for the Audit Report, but a notice could be published on the SHDC website adhering to requirements of Audit and Accounts Regulations. The Associate Partner (Ernst and Young) and the Strategic Finance and Compliance Manager would agree on a date to close out procedures to issue an audit opinion as soon as possible.
The following issues were raised:
· Members asked that their thanks be noted for the work officers at SHDC and Ernst Young had undertaken in bringing the audit to the point it was at currently.
· Within the Audit Plan, the auditors requested that the Governance and Audit Committee confirm its understanding of, and agreement to the materiality and reporting levels. The Committee confirmed that this was the case.
· The Audit Plan stated that the auditors met regularly with the Head of Internal Audit to review internal audit plans, and the results of their work – had this happened as planned or had the Covid pandemic made this difficult?
· The Audit Plan stated how Ernst Young were working to support the Authority. However, the audit was behind schedule, and although the Covid pandemic had clearly affected it this year, the audit had also been behind schedule last year. How was the work progressing, and had there been any learning points taken on board?
· Could the auditor provide an estimate for sign off?
· Within the Audit Plan, specialists used were listed – with regard to valuers for land and buildings, did auditors consider how long a valuer had been used, and whether they could remain objective if this had been for a long time?
· The fee amount was high and had increased greatly. Whilst there was some appreciation that there had been extra work due to the Covid pandemic, had the amount of fees been agreed, and was the amount for additional work in addition to the original quotation?
· In view of the fact that the accounts had been late in the last year, and would be this year, how long was the contract, when would it be reviewed, and was the Council getting value for money, especially in view of the large increase in fees?
· Members responded that the Committee should monitor the contract with Ernst and Young and also stated that the Covid pandemic could not always be a reason for delay.
· The Approval of Financial statements 2019/20 stated that supporting documents regarding sample testing were still outstanding – was there any further information regarding this?
· Had the delay in the audit for SHDC been replicated with other authorities? Had the Covid pandemic been a contributing factor in delays for all authorities and how did SHDC compare?
That both the 2019/20 Audit Plan, and the Audit Results Report be noted.