Agenda item

This report presents the Draft Statement of Accounts 2019/20 for Medway Council presented at Appendix 1 and provides an update on the ongoing audit by Grant Thornton with their Audit Findings Report, presented at Appendix 2.

The Accounts and Audit Regulations (Coronavirus) (Amendment) 2020 require that the Audit Committee consider the issues raised by the external auditors prior to approval of the Statement of Accounts.

Discussion:

This report provided details of the audited Statement of Accounts 2019/20 for Medway Council, as set out in Appendix 1 to the report. It also provided an update on the ongoing audit by Grant Thornton with their Audit Findings Report (AFR), as set out in Appendix 2 to the report. In addition, two addendum reports had been provided to Members on various matters.

The Finance Business Partner - Corporate Reporting highlighted a number of issues for Members’ attention including the fact that 91 Local Authorities still did not have their accounts for this period finalised (at the time of writing). He provided an update on the addendum reports including reference to some errors in the balance sheet which had now been corrected (although the net assets figure had been correctly stated).

The Key Audit Partner, Grant Thornton (GT), advised Members of the work undertaken with the Council since November 2020 and paid particular attention to the issue of capital additions, which had also impacted on prior years. He stated that this had been a complex audit and 16 recommendations had been made to the Council’s management which had been accepted and he thanked the Finance Team for their assistance and patience.

He referred to the issue of capitalisation of salary costs which did not follow accounting standards and that this had been a historic practice going back 6-10 years. GT had asked management to review this and estimate the costs for 2019/20 (and historically) by restating these costs in line with correct accounting standards. GT had reviewed this and determined it was not material for 2019/20 and previous years, therefore, these figures had not been adjusted in the AFR. He also referred to the schedule of errors as set out in the AFR. He concluded by stating that the process had almost been concluded and he advised the Committee that GT intended to issue an unqualified audit opinion, and this would include an emphasis of matter paragraph relating to property, plant and equipment values. He also referred to the management letter of representation which would highlight the issue of capital additions.

Members then raised a number of questions and comments which included:

Qualified conclusion (Children’s Social Care) – in response to a question to this reference (page 8 of Supplementary Agenda No. 1 refers), the Key Audit Partner, Grant Thornton, advised that the Auditor followed the National Audit Office’s code of audit practice which meant that the Auditor was obliged to take into consideration the findings of any relevant regulators which called into question the Council’s ability to provide efficient and effective services, therefore, on this occasion the Ofsted inspection was being referenced in this instance. This was set out in the Auditor’s report as an exception to the overall conclusion on the Authority’s arrangements for securing economy, efficiency and effectiveness in its use of resources.

Frequency of changing Auditors – in response to a question relating to how regularly a local authority should change its Auditor, with particular reference to the issue of capital additions, the Key Audit Partner, Grant Thornton, advised that whilst freshness did help, an audit did rely on sampling and sampling was often random. He explained that the issue of capital financing had not been discovered in GT’s first year, however, it had been picked up in 2019/20. The Chief Finance Officer agreed with the Key Audit Partner’s comments.

Protecting the public purse – in response to a question asking whether the Council was doing all it could to protect the public purse in challenging times, the Key Audit Partner, Grant Thornton advised that this was not an easy question to answer as he could not give the level of assurance being sought. However, the Auditor was reporting openly and honestly and any relevant matters had been reported accordingly. He stated that there were opportunities to make improvements and that dialogue with management was positive in this regard.

Reference to “well connected” – it was suggested that the reference to “well connected” (page 50 of the main agenda refers) should be reviewed in light of issues relating to the railway link in the HIF programme.

NNDR – clarity was sought on Note 11 (NNDR – page 106 of the main agenda refers) on the shift from £68M to £55M). The Chief Finance Officer advised that in 2018/19 the Council had been part of a pilot on 100% business rates retention, nevertheless, he would clarify the differential for the two financial years outside of the meeting.

Contingent Assets – clarity was sought on whether the negotiations around fire doors (page 182 of the main agenda refers) had been concluded. The Chief Finance Officer advised that he would look into this outside of the meeting.

Salaries – a comment was made around the level of increase in the Chief Executive’s salary in 2019/20 (page 109 refers).

Capitalisation of salaries – in response to a question on the issue of capitalisation of salaries and the likely impact of now following the correct standards, the Finance Business Partner - Corporate Reporting advised that IAS16 (property, plant and equipment) could not be used to charge general overheads to such costs, and this was being taken account of for 2020/21 and within the Medium Term Financial Strategy as well as income targets for the current year. Clear guidance was also being provided to the services setting out which costs could be charged to capital going forward. The Chief Finance Officer also provided some context to the charging of these costs to capital, however, he accepted the audit findings.

Acquisition of the Pentagon Centre – In response to a question regarding the risks relating to the acquisition of the Pentagon Centre (page 215 of the main agenda refers), the Chief Finance Officer stated that whilst he would not have supported the acquisition as a purely commercial investment, the acquisition had been made on regeneration grounds. He explained that the acquisition was expected to deliver a net return of £1M per year, however, the pandemic had affected all high streets, including Chatham. He also advised that the losses were not as significant as possibly anticipated given that the cost of borrowing was £1.3M and the budgeted income was £2.3M. There had been no significant write-off of debts thus far.

Education debtors – in response to a question on the significant increase in the value of the debtors (page 154 of the main agenda refers), the Finance Business Partner - Corporate Reporting advised that this related to long term loans for schools. The Chief Finance Officer undertook to provide a fuller response outside of the meeting.

Short term deposits with financial institutions – in response to a question relating to the significant increase of the latter (page 155 of the main agenda refers), the Chief Finance Officer referred to the grant funding received from the Government during the pandemic, including an initial sum of £39M.

Adjustments to flats – in response to a question (page 189 of the main agenda refers), the Finance Business Partner - Corporate Reporting explained that these related to the reconfiguration of some particular flats.

Contingent liabilities – Some comments were made around the possibility of arbitration in such cases.

Decision:

a)    The Committee noted the issues raised and judgements made by the Auditor, as presented at Appendix 2 to the report.

b)    The Committee approved the Statement of Accounts 2019/20 at Appendix 1 to the report, as amended by the revised balance sheet (page 88 of the main agenda refers), set out at Appendix 1 to Addendum
Report No.2.

c)    The Committee agreed the Management Representations letter, as
set out in Appendix E to the Audit Findings Report (Addendum Report).

d)    The Committee noted that there would be responses outside the meeting as highlighted above.