Agenda item

This report  considers the issues raised in the Council’s External Auditor’s Annual Governance Report, which incorporates the findings following the 2015/16 audit of the Statement of Accounts.

Discussion:

Members considered a report regarding the issues raised in the Council’s External Auditor’s Annual Governance Report, which incorporated the findings following the 2015/16 audit of the Statement of Accounts.

The Chief Finance Officer highlighted that the accounts had been delivered a month earlier than usual and to a higher standard, with BDO recognising the significant improvements made in preparing and finalising the financial statements. Members thanked the finance team for what was a considerable achievement.

The Auditor had been unable to give an opinion on the accounts due to an objection which they had received. An addendum report set out two adjustments to the notes to the Council’s Statement of Accounts which, if agreed by the Committee, would enable the Auditor to issue an unqualified audit opinion.

BDO commented that the objection related to Lender Option, Borrower Option (LOBO) loans and as similar objections had been made across the country, the National Audit Office had issued advice on how to deal with this matter. Therefore if the Council was to agree the proposed amendments to the notes then the auditor would be able to issue an unqualified opinion. Work on resolving the objection to the accounts had not been completed and as a result the Auditor was unable to issue a certificate to close the audit. In response to a query about the impact of not being able to issue a certificate, BDO commented that there was no impact in practical terms but the audit could not be closed down until the objection was resolved. At this point it was not possible to say when this might happen.

In order to assist the Auditor in arriving at the unqualified opinion referred to in

the revised Independent Auditor’s Report, officers had made amendments to

notes 19 and 34 of the Statement of Accounts which concerned the treatment of the Council’s LOBO loans. In order to legitimise the adjustments made to these two notes, Council would need to review and amend the Treasury Management Strategy in terms of the proportions of loans permitted at fixed and variable rates respectively and the application of these limits in respect of LOBO loans.

A Member of the Committee commented that he had made the objection to the accounts referred to and asked if all other auditors for councils which had received the same objection were taking the same approach. He clarified that the objection was in relation to LOBO loans and not in any way related to the process by which the accounts had been finalised, which was to be commended. BDO commented that the other auditors would all have received the same advice from the National Audit Office but it was not possible to confirm that they had all definitely taken the same approach as BDO.

Another Member expressed disappointment that the objection had been made given that the LOBO loans had been taken out at lower interest rates than were on offer from the Public Works Loan Board at the time and therefore represented a good deal for Medway. In response, a Member made the point that asking questions about LOBO loans was justified and similar objections to the accounts of approximately another 20 councils had been made. He added that time would tell whether LOBO loans worked out as a better deal in the long term. There had been allegations in the media of some consultants receiving kickback payments for recommending LOBO loans and if that had happened in Medway that would be a concern.

A Member asked for clarification about where the £1.463m in school balances identified by BDO now sat. The Chief Finance Officer responded that this related to a school which had converted to academy status in January with an unusually large balance. The money was still in the Council’s accounts at 31 March but BDO had correctly identified that  this did not belong to the Council and had recommended that a process was put in place to identify any academy cash balances before the accounts were closed down. However, he did not expect another school to transfer to an academy with such a large balance.

With regard to progress in implementing the recommendation regarding HRA assets within fixed asset register and whether assets were being accurately valued, officers advised that there was a need to fully test the new fixed asset software before implementing this recommendation, which was expected to be done in time for the 2016/17 accounts. Asset valuations happened on a fairly frequent basis and were considered to be accurate

Decision:

The Committee:

a)     noted the issues raised and judgements made by the Auditor as presented in Appendix 1 to the report, and agreed the proposed response as set out at Appendix III to the External Auditor’s Annual Report to the Committee;

b)     agreed the amendments to notes 19 and 34 of the Statement of Accounts set out in appendix 2 to the supplementary report;

c)     noted the Auditor’s opinion on the Council’s financial statements,  as set out in appendix 1 to the supplementary report;

d)     approved the Statement of Accounts;

e)     agreed the Management Representations Letter, attached at Appendix VII of the External Auditor’s Annual Report to the Audit Committee.