Agenda item

Report by the Chief Finance Officer.

8.1       Marcus Ward from Grant Thornton, the Council’s External Auditors, introduced report. The key findings from the audit are outlined in the Audit Findings report. The Auditors propose to issue an unqualified audit opinion on the Council’s accounts and Value for Money (VFM) statement. There are no adjustments that affect bottom line and there are two management recommendations that are detailed in the report. It is evident from the audit of the accounts that the Council has its finances under control.

Audit Findings - Other Issues and Key judgements and estimates

8.2       Other findings reported on as part of the audit include:

• The McCloud Judgement is likely to have an impact on pension liabilities and should be accounted for as part of Pension Fund liabilities, but does not have a material impact on the accounts. The Auditors are comfortable with position management have taken on this and it will be dealt with as part of the triennial pension fund valuation.
• Valuation of Property, Plant and Equipment. The audit has examined this and the valuation of investment properties to check how they have been valued. The Auditors do not foresee there being any material issues in respect of these valuations.
• Net Pension Liability. The audit has examined the assumptions used for the valuation of the Pension Fund liability and the Auditors conclude that they are fair and accurate. They are therefore comfortable with the valuation and the valuation of the ‘difficult to value’ investments.
• Going Concern. It is evident that Council has its finances under control in relation to the ‘Going Concern’ judgement contained in the audit.

Value for Money (VFM)

8.3       This is the part of the audit where the Auditors examine the financial sustainability of the Council. The Auditors are satisfied that the Council has got the processes and procedures in place for the key risks, the Medium Term Financial Plan (MTFP) and the key assumptions that underlie this. The Auditors have highlighted some of their work in this area in the report, which took an in depth look at the Council’s financial planning arrangements.

8.4       In terms of reserves, ESCC is in a good financial position in relation to other local authorities as illustrated by the graph on page 17 of the Audit Findings report, which shows the level of reserves held as a percentage of net revenue expenditure. The Value for Money assessment focused on two specific areas: Joint Working with Health and Brexit. The report finds arrangements for work with NHS on social care are proactive in moving issues forward. In terms of Brexit, what the Council has put in place seems a reasonable and sensible analysis of the potential scenarios.

8.5       The Auditors have no issues to report in terms of fraud or other issues. Overall they reflected that these are a good set of accounts, with only a small number of presentational changes required to the draft accounts made public on 31 May 2019. Grant Thornton confirmed their independence as auditors.

Action Plan

8.6       The two management recommendations made by the Auditors are:

• Access to client maintenance functionalities (SCC4) in SAP. When the Auditors looked at IT arrangements a small number of users have access to change a wide range of items in the financial management system (SAP). The recommendation is that these access arrangements are reviewed to make sure management is happy with the level of access. The Chief Finance Officer outlined that an initial review of access has been undertaken and the focus of work is on how access and changes are monitored. The IT&D department have been asked to look at this issue and draft a response.

• Journals with no description. During their review of journals, the Auditors found a number of journals that had no description. Journals are manual changes to the general ledger (e.g. moving items around) and there is a risk that these can be used to override management controls or hide transactions. It is important to be able to scrutinise all journals and the documentation that supports them to lessen the potential for fraud. Having a journal description is best practice and helps keep an audit trail in place. The Chief Finance Officer outlined that there is a spreadsheet with the details of journals with no narrative, including the member of staff who actioned the journal. All staff will be reminded that journal narrative is best practice. Management will also investigate if the description can be made a mandatory field when inputting journals on the SAP system.

8.7       The Committee discussed the External Auditors Audit Findings report and the key points are summarised below.

8.8       SAP system access. It was clarified that users with access to full system rights can access financial and non-financial information such as that contained in the Human Resources module of SAP. The use of the system by the seven users who have full access rights is monitored. Grant Thornton clarified that it was the oversight of the access and the changes that are being made that is the important issue. It was agreed that the Chief Finance Officer will bring an update report on the oversight arrangements to the next Audit Committee meeting.

8.9       The Committee questioned whether the statement in the second paragraph under the heading ‘Financial governance - savings plans’ (in the second column on page 16 of the Audit Findings report) was correct when it states “The temporary shortfall in year was compensated by £7.3m of additional one-off savings….”. The Chief Finance Officer responded that this may be a typographical error and this point may refer to the use of one-off funding opportunities to mitigate the approved slippage of savings. The Chief Finance Officer will discuss with Grant Thornton outside of the meeting and will report back to the Committee. Darren Wells, of Grant Thornton commented that this will not alter the overall opinion of the audit findings, and that it is appropriate to reflect the one-off nature of this funding/saving in the report. (Post meeting note: The Chief Finance Officer has confirmed that the Auditors report does not use the correct terminology, and the Auditors will change the report to replace “additional one-off savings” with “one-off funding” and the Governance Committee has been informed).

8.10     The Committee noted that the graph illustrating the level of reserves held shows the percentage in relation to the net revenue budget of the Council, rather than the absolute quantity held. The Chief Finance Officer advised that further details of the level of reserve balances held is available in appendix 2 of the State of County report.

8.11     The Committee discussed the impact of the McCloud Judgement and the actuarial re-valuation of the pension fund. The Auditors confirmed that they will review the position regarding the impact on pension fund liabilities each year, and it will be included in next year’s report. They will flag this item in their report, especially if provision for this item has not been accounted for or becomes material.

8.12     As the Government has been refused permission to appeal the McCloud Judgement, the advice from the Auditors is that the Council should reflect this obligation in the accounts. That is why they have suggested the Council amend the accounts, but because it is not material, they are happy to accept the management approach taken to this issue. The Chief Finance Officer outlined that an allowance for the impact of the judgment may be included, by the actuaries, in the contingency factors for triennial valuation of the pension fund.

8.13     The Committee RESOLVED to:

1) Note the report and did not have any issues that it wished to bring to the attention of the Governance Committee; and

2) Request an update report is brought to the next meeting on the financial management system (SAP) access oversight arrangements.