Agenda item

To consider the report of KPMG (enclosed).

Consideration was given to the External Auditor's Year End Audit Progress Report for South Holland District Council 2024/25 provided by KPMG.

The Director (KPMG) and the Manager (KPMG) attended for this item and provided members with the following report summary:

• That the audit was substantially complete, and that the Council was in a positive position compared to the prior year. A modified opinion would be issued pertaining to the opening balances of the prior year disclaimed audit opinion. No issues had been identified in the 2024/25 audit which would result in a modification to the audit opinion;
• That the disclaimer in the previous year’s opinion was being addressed through additional assurance work, with the aim of removing it by the 2025/26 audit at the latest, subject to risk assessment and capacity;

• The audit opinion would be issued well before the backstop date of February 2026 and that no material issues had been identified that would impact the audit opinion;
• The following significant risks had been considered:
  • Valuation of land and buildings: testing of land and building valuations showed improvement from the prior year, although eight of forty assets lacked formal floor plans, representing £1.1m in value. While not material, this was flagged for management action. The risk relating to investment property valuation had been removed following a review of methodology and assumptions;
  • Management override of controls; and
  • Valuation of pension obligations: pension liability assumptions were assessed as balanced and within acceptable ranges;
• Seven non-significant control deficiencies were identified with progress made on prior-year recommendations; and
• The report included three uncorrected misstatements, none of which were material, and one corrected misstatement relating to gains and losses presentation. Various disclosure amendments had also been made.

Members considered the report and made the following comments:

• Members welcomed the improved position and commended officers for progress since the previous year.

• Members referred to page 13 of the report and sought clarification on the pension deficit trend and whether the triennial valuation indicated improvement.
  • The Head of Finance Delivery – Technical and Corporate (PSPS) confirmed that the draft valuation results showed a favourable position, with a reduction in employer contribution rates anticipated.

·         Members referred to the recommendation on the efficiency programme on page 24 of the report which was noted as ‘not implemented’, and queried the proposed actions to address this.

o    The Audit Manager (LCC) responded that:

§  The area would be revisited in Quarter 4 2025/26 and that a new audit was scheduled for that period; and

§  With reference to the controls, the following explanation was given:

§  First line controls: Management assurance;

§  Second line controls: External or peer reviews and governance oversight;

§  Third line controls: Internal or external audit functions.

·         Members referred to page 31 of the report in respect of corrected audit misstatements and sought clarification on the adjustments made.

o    The Head of Finance Delivery – Technical and Corporate (PSPS) responded that:

§  That the issue noted related to gains and losses being shown as a total rather than broken down per asset. This had been corrected following analysis of individual assets. The error was presentational and did not affect the ledger, but adjustments were made to ensure accurate disclosure;

§  Other corrected misstatements included:

·         Related party disclosures: additional information had been added and corrections made;

·         Remuneration report: a single incident error had been identified and corrected:

·         Housing stock: minor discrepancies had been corrected;

·         Cash flow statement and Group cash flow: a  presentational error for each had been corrected.

·         Members referred to page 33 of the report regarding the management response on payments to suppliers and queried how often payments were authorised without a corresponding purchase order.

o    The Head of Finance Delivery – Technical and Corporate (PSPS) confirmed that:

§  The Council had implemented a ‘No Purchase Order, No Pay’ policy. Although figures were not available at the meeting, it was reported that there had been a significant increase in the number of purchase orders raised since the initiative was launched. Where invoices were received without a purchase order, the team had returned them to suppliers and requested that a valid purchase order be quoted before payment was processed.

• Members referred to page 35 of the report and queried the outstanding related party declarations.
  • The Assistant Director – Governance responded that three councillor forms remained outstanding and had been escalated to Group Leaders;
  • The Director (KPMG) added that alternative checks had been undertaken for one officer who had left the organisation.

• Members referred to page 38 of the draft report in respect of ‘Control Deficiencies’ and noted this included a recommendation relating to the valuation of buildings under depreciated replacement cost (DRC) where management had not accepted the recommendation. It was observed that, ordinarily, an explanation would be provided when recommendations were not accepted.
  • Director (KPMG) explained that, as the report was in draft form, management would be given time to provide a full response in the final version. Where recommendations had not been accepted, this was often due to differing professional opinions on valuation requirements. Extensive discussions had taken place and the points raised largely related to the audit trail supporting certain valuation decisions. Additional wording would be included in the final report to clarify the issue.

• Members referred to page 42 of the report queried whether the absence of floor plans posed a risk to valuation accuracy.
  • The Director (KPMG) confirmed that mitigating procedures had been applied and that management intended to complete the exercise by 2025/26.
    • Members acknowledged the national challenges around asset valuations and agreed that further improvements were required to reduce audit complexity.

·         Members queried whether the Council ensured that sufficient conditions were attached when disposing of land to protect future interests and whether planning permission could be sought on garage plots to attract a higher sale value.

o    The Director of Finance (Section 151 Officer) advised that:

§  Each disposal was considered on its individual merits. Whilst covenants were not routinely applied, the Council would expect to secure value either through the sale price or by attaching conditions, as appropriate, where land had significant value; and

§  Merit was given to the suggestion to seek planning permission prior to disposal of garage plots.

• Members queried actions undertaken to strengthen accrual processes as noted at page 44 of the report.
  • The Head of Finance Delivery – Technical and Corporate (PSPS) advised that training had been delivered and would be repeated before year-end.

·         Members referred to page 50 of the report and queried whether the £10,000 threshold referenced represented the total amount involved or multiple transactions below that value.

o    The Head of Finance Delivery – Technical and Corporate (PSPS) clarified that the figure related to individual transaction values and therefore any transactions under £10,000 were not disclosed as separate items.

Agreed:

That the draft External Auditor’s Year-End Audit Progress Report be noted.