Agenda item

To receive an accounts and audit update.

Lizzie Watkin, Director of Finance and Deputy Section 151 Officer, presented the Accounts and Audit update.

 

The officer highlighted the brief covering report, which explained the reasons for the agenda item. Alongside the covering report there was an update report from the external auditors, and the management response to the issues raised in the report. The Committee had previously had sight of both the external auditors report and the management response, but in order to ensure full transparency they would be discussed at the meeting.

 

It was stated that the Committee had received many reports and progress updates on the status of the 2019/20 accounts. Everyone involved was disappointed in the progress made. 

 

On 1 March 2022, a report was brought to the Committee requesting delegation be given to the Section 151 Officer in conjunction with the Chairman of the Audit and Governance Committee to approve the final Statement of Accounts 2019/20 and the Letter of Representation for those accounts, following completion of the audit. At that time, it had been thought that there may be a few minor changes, however since then significant further work had been undertaken. Whilst all material issues had been addressed, there were significant technical accounting aspects, many of which went back to 2015/16 which had required unpicking. Many of the errors and misstatements identified related to asset and lease accounting, these did not affect cash flow, reserves, usable funds or the provision of services to the public. Wiltshire Council had set a balanced budget for the next three years and the latest Outturn report detailed a significant increase in the delivery of savings.

 

Wiltshire Council were not alone, nationally there was significant stress within the sector in fulfilling auditing requirements, with many audit opinions outstanding across councils.

 

The delays to the completion of audits and accounts did however have a cost to the taxpayer, as there was a significant amount of extra work for the Council, which had to be resourced and the costs for the external auditors would also increase. 

 

Details were given regarding a statement from Lee Rowley MP and the Department for Levelling Up, Housing and Communities plans to ‘reset’ the audit system to clear the backlog of outstanding audits and prevent a recurrence. The officer would provide a briefing note to the Committee which would summarise the aspects involved.

 

In terms of whether the situation was a strategic risk, as mentioned by Members earlier in the meeting, it was explained that usually companies had a set of accounts which people read and lenders looked at to see if they could borrow. However, as a local authority, the council tended to borrow from government backed schemes so that did not really apply. All borrowing was controlled by the Treasury Management Strategy, which was sound. As highlighted in the Annual Governance Statement (AGS) the Council were not complying with the timelines for publication of the accounts, however, details regarding the delays were publicly available.

 

The officer pondered the question of how to bring the outstanding accounts to a close. It may be that there would be changes to the work to be done and the opinions that were given. Consideration would also need to be given to how to draw things to a conclusion with a value for money approach.

 

Ian Howse, Deloitte, was in agreement with the officer in terms of there being a national issue. He had attended the meeting with Lee Rowley MP and agreed that there seemed to be little value in signing off accounts that were now two or three years old. There needed to be a solution to focus on more current accounts that were of interest to the reader. There was broad agreement on what had led to this point, however there was a gap between what they as the external auditors were looking for and to what the Council was used to providing, alongside questions as to what the Councils systems were capable of producing.

 

Local authority accounts were looked at using International Financial Reporting Standards (IFRS), which did not really align with how local authorities worked as they were not profit making organisations. Mr Howse felt that the current Enterprise Resource System (ERP) called SAP, was not fit for purpose.

 

Mr Howse also stated that the team at Wiltshire Council now contained experienced financial staff who were trying to put right many years of errors which was very difficult. Deloitte had undertaken sample testing, which contained many errors and when they tried to correct these, more errors became apparent. They were concerned that things might get missed. This was why Deloitte would like the Letter of Representation. At the present time, they would find it difficult to give an opinion under the IFRS, so this may result in a disclaimer opinion. This would mean that they could not give an opinion on the accounts. Mr Howse hoped that the accounts could be concluded prior to any government changes to the system, which could take a long time. There would be issues if they also had to disclaim on the 2020/21 and 2021/22 accounts. However, those were old sets of accounts. Deloitte also wanted to conclude matters with the least cost to the taxpayer and in a timely manner.

 

The Chairman, seconded by Cllr Pip Ridout proposed that the Audit and Governance Committee noted the update on the Accounts and Audit position for the outstanding accounts. The Committee then debated the matter.

 

Many Members stated their disappointment at the situation. Members queried identifying assets and registering them on the asset register, and what value there was in regurgitating information that was many years old. They also queried the replacement of the ERP system and whether the Committee could get an update on that.

 

Mr Howse explained that regarding the assets the values had been reconciled, however there was a very complex set of rules regarding how you account for changes in value. Those entries and how you moved them through the reserves was where the complexity and errors were occurring. You needed historical records of what had happened. In terms of recording value for the assets, it was the cost to replace them which was recorded, not the actual value of the asset. So, there was a lot of work to determine this for assets which would likely never be sold.

 

The officer explained that this area of work was heavily regulated, and the issues went back many years. It was the historical cumulative balances that caused the issues. It was stated that it would be lovely to start with a clean sheet, however they were not allowed to do that, which forced them into a complex space. Regulations changed over time, so you then may not have enough details regarding historical matters. They were trying to find a reasonable approach which gave true and fair accounts.

 

The officer stated that the ERP was critical to support the financial control environment. SWAP was involved in reviewing the programme management to replace the ERP (Evolve) to ensure that it was rigorous, and a scrutiny task group was also looking at the matter. Members could attend the scrutiny task group if interested. The Chairman also highlighted that the task group was reporting to the Overview and Management Scrutiny Committee the next day, so Members could attend that meeting if they wished.  

 

The officer explained that it was very difficult reporting from the asset management system which they had been using. There was a new system, the CIPFA asset management system, so all in year accounting was correct. The team had been upskilled, with advice and support from agency staff. The new ERP was also much more rigorous. Once the 2019/20 accounts were signed off, they would be in a much stronger position.

 

Members stated that they had a sense of déjà vu, with issues with the accounts rumbling on for many years and serious issues which needed to be addressed. They felt that there must be a way in which a line could be drawn under the situation so that the Council could proceed, so long as processes had been improved and we were not continuing to make the same mistakes. Some felt that we were going round and round the houses, with no light at the end of the tunnel, other than using a large amount of taxpayers money to recruit a large team to bring things to a close. Members felt that a way to resolve the situation must be found. Members also highlighted that the situation within the finance team had not been good, and it was not until Lizzie Watkin and Andy Brown, Corporate Director Resources, Deputy Chief Executive and Section 151 Officer, had been recruited that the situation started to stabilise. Great strides and improvements had been made under their watch.

 

The officer stated that the external auditors and officers had been having similar conversations regarding how we could bring these accounts to a close and ensure that the next ones were sound. It was stressed that we should have a set of 2019/20 accounts which were free from material errors, there was a judgement to be made in terms of materiality. The external auditors had to give an opinion. The 2019/20 accounts would be almost impossible for lay people to understand as they were so complex. The external auditors may need to issue a disclaimer opinion. That could mean that we needed to have opening balances audited as well as closing balances, which would be difficult practically.

 

Cllr Nick Botterill, Cabinet Member with responsibility for Finance, stated that he appreciated full accuracy and having accurate accounts, however this situation had to get to a stage where they could move on.

 

Members queried the Letter of Representation and if that could help resolve issues. The officer stated that a lot of work had been done towards that, but the external auditors were unsure if we could meet an assurance position to give the representations. Management however, felt that we were close to a point where we could give assurance. They had to be pragmatic to get all the outstanding accounts to a position where they could move forwards. The external auditors would change in the next round (2023/24), so the situation had to be resolved by then. It was explained that due to all the issues and extra work undertaken since the Committee had given delegation regarding signing off the 2019/20 accounts, that the delegation would not be used, and the Statement of Accounts 2019/20 would come back to the Committee.

 

Members highlighted the robustly challenging statements in Deloitte’s report, and questioned what Deloitte’s position was now. Mr Howse stated that he had been slightly surprised that Council would proceed to the Letter of Representation so they would need to consider that. If it was a robust and evidenced piece of work than they may not have to issue a disclaimer. That may create more work for everyone. However, the accounts would be qualified regardless due to the previous (2018/19) accounts qualification. Regarding last year’s Letter of Representation, Deloitte felt that more work could have been done to determine what leases existed. This made them slightly sceptical. Although not a legal expert, Mr Howse did not think there were any legal consequences for those that signed the Letter of Representation.

 

Members sought details on the impact of a disclaimer opinion, be it reputational, financial or other consequences.

 

Mr Howse explained that disclaimer opinions were rare. He highlighted another local authority which may get one, and that this had generated a lot of publicity. It would be reputationally damaging to the Council. However, there was no real penalty or financial consequences. In terms of officer and auditor time, if they could not give an opinion on the accounts, then how could you give assurance on the opening balances of the next set of accounts. So, there was usually about a three year impact of a disclaimer opinion.

 

The officer stated that these were aspects which needed to be considered. In terms of treasury work, they would need to disclose the opinion and it could have an adverse impact. However, the 2018/19 accounts had been qualified and that had not had any adverse impact, so it was not expected that there would be an adverse knock-on effect.

 

Members questioned what the next step was and when the Committee would know the decisions made.

 

Mr Howse highlighted that the backstop position was 31 December 2023 for the 2019/20 accounts. If they and the Council could not agree by that date, that would be the end point where intervention was made and they were told what to do. He hoped that would not happen. This may not be resolved by the September meeting of the Committee, but it was hoped it would be for the one after that. There may still be more work to do, even if a disclaimer opinion was issued.

 

The officer stated that the complexity was one of the drivers of the crisis. Officers hoped that the regulations would change. Otherwise, even when the backlog was cleared, they may end up in the same position again. The whole regulatory framework needed changing.

 

Members further debated the matter, points raised included whether the audit system had been properly maintained; whether there were enough people working on it; whether things had to be correct to the penny; where the line was to resolve the situation; general agreement that a line had to be drawn somewhere; the ongoing impact; and from some, a sense of horror at the situation.

 

Addressing these points, the officer stated that in terms of the adequacy of Council resources, the erosion of technical resource had been an issue which had now been addressed. External resources had also been brought in, dedicated resources assigned, and training been provided. This included career graded posts so that we could grow our own experts. It was quite a journey, and the Council were now starting to see significant progress and were developing the right culture.

 

The officer explained that in terms of materiality, there was about £18 - 19 million pounds on a billion-pound balance sheet, that is what made a difference in terms of decision making. Cash had to be correct to the penny. The right time needed to spent on the right things. Materially the accounts were sound. The Council had to make value for money based decisions. Asset accounting did not really make any difference, as no business decisions were made on the value of assets in the statement of accounts.

 

It was further explained that that each auditor always had a slightly different approach. It was hoped that all outstanding accounts, including the 2022/23 accounts could be completed with Deloitte and passed to the new auditor.

 

Members made further comments in defence of both our staff and the external auditors. They felt that the problem was being caused by central government in terms of the regulations. The level of detail required may be necessary for a private company but was inappropriate for a local authority. We knew how much money we had, we knew what our assets were, we were clear on our money balances and day to day accounts and therefore were financially sound as a council.

 

The officer responded that we were very different to the private sector as the Council were not about making a profit. We required resilience and the financial stability to deliver services to residents. Proportionate financial reporting was required. However, we did have to take responsibility for what had happened and had to correct errors.

 

Mr Howse stated that the IFRS was made for international private companies. Along with those regulations were hundreds of pages of CIPFA codes which were also very complicated. Trying to apply systems not designed for local government to local government accounts was very difficult. This situation had been brewing for a long time but had now come to a head.

 

Members discussed the situation further and also highlighted the section within the Deloitte report called looking ahead to the 2021/22 and 2022/23 audits, which contained a serious of statements and Members suggested a working group of the Committee could be created to look at those.

 

In response to the comments, the officer explained that they did not feel it was appropriate for internal audit to review the accounts or Statement of Accounts. The internal finance team now in place was adequate to address what needed to be undertaken now. There was support from Cabinet and they were overspending in this area to address the deficiency and weaknesses. Hopefully in a couple of years the agency resource would no longer be required. Those working on the technical accounting aspects would go on annual training. It was explained that there was a plan based upon the issues raised in Deloitte’s report and the majority of actions had already been undertaken. Officers were happy to report on the action plan to the Committee at regular intervals.

 

Members questioned Deloitte as to whether there was a disconnect with Wiltshire Council and if they were re-writing the report now, its contents would be different. In response Mr Howse stated that Deloitte recognised that additional resources had been put in place. Their concern was that the team may be able to deal with business as usual but they were unsure if they had the capacity to complete the extra work required to get the accounts completed quickly, which would also require Deloitte to deploy additional resources. They would be concerned if we tried to complete 3 sets of accounts in one year. However, that was his opinion and officers had a different professional view.

 

The officer stated that there was a slight disagreement in terms of resources. The Council may need extra capacity at peak times. However, they did not want to see significant change, as this could lead to a lack of control and give more room for errors. 

 

Members asked the Chairman if he felt a task group was required, to which he responded that at the moment he felt that regular reports on this matter should be added to the Forward Work Plan for the Committee, so that they could seek assurance.

 

At the conclusion of the debate, various Members suggested amendments to the motion proposed, all of which were accepted as friendly amendments by the proposer and seconder. It was,

 

Resolved:

 

·       To note the update on the Accounts and Audit position for the outstanding accounts.

·       To note the concerns expressed by the External Auditors in their submission and the detailed written and verbal response given by officers.

·       To request that regular updates were given to the Committee on the progress being made to alleviate the concerns and to draw to a conclusion all the outstanding accounts.