Agenda item

To receive the External Auditor’s draft report for the 2019/20 accounts.

The External Auditors, EY, presented their report to the Committee and made the following points:

·         Referred to the Executive Summary and advised that since the plan had been submitted in 2020 there had been big changes to the climate with Covid at the end the financial year 2019/20 and as a result there had been some updates to the plan.

·         With regard to the reporting timescales this had been delayed from 31 July 2020 to 30 November 2020.  Although both dates had past it was important this was highlighted the delay was due to Covid and also a number of misstatements identified in the course of the audit.

·         On the audit plans there had been changes in risk in a few areas, due to Covid, which included fixed assets valuations of land and buildings, operational land and buildings, investment properties and surplus assets and they had identified a number of issues around the valuations and classifications of PPE, IP and surplus assets.

·         The adoption of IFRS 16 by CIPFA/LASAAC as the basis for the preparation of Local Authority Financial Statements had been deferred until 1 April 2024.

·         Advised that the audit was substantially completed other than a few areas as highlighted in the executive summary with the most significant areas being adjustments to fixed assets, property and equipment, investment properties and assets and resolving accounting issues for the South Oxhey Initiative (SOI).  A summary of the differences were provided to the Committee and the work required to overcome these.

·         Details were provided on the audit focus on financial statements which had identified a number of issues on valuation of land and buildings and the valuation of the Pension Fund Assets and Liabilities and also in other areas of high value activity like the classification of the South Oxhey Leisure Centre.

·         The conclusions on the significant risks were provided on Page 14 of the draft report Points 1 to 9.  EY were currently working with the Council’s Management Team to resolve these points.

·         Noted the actuary had identified an error in the pooling assumptions on the pension fund and re-run the IAS 19 report.  This meant the Valuation of the Pension Asset and Liabilities figure would have an understatement of pension liability and re-measurement of pension liability. These misstatements had been adjusted by management.  EY had consulted with their pension’s team on the revisions made in the revised IAS 19 report and work was ongoing.

·         In relation to the South Oxhey Initiative the Council would be transferring land and properties to the developer on a 250 year financial lease.  The correct accounting treatment should be to continue to recognise the land as an investment property until the lease agreement is reached.  Then the land should be held as a surplus asset until the lease commences. The surplus asset is then derecognised, and a finance lease asset will be recognised instead. The land had been classified incorrectly as inventory and therefore had not been revalued by the external valuers over the previous years.   Management has requested the external valuer to provide a valuation for the South Oxhey Initiative, and will amend the accounting for this lease when the valuation is available.

·         Management had also previously recorded a long term debtor, and also Deferred Income based on “Phase Price” expected to be received for the lease (£14.389m net). EY consider this to be incorrect as the developer had an option to discontinue with further phases if there was a breach (e.g. failure of TRDC to acquire land).

·         Highlighted details on the Minimum Revenue Provision (MRP). No MRP had been provided for despite a positive Capital Financing Requirement. EY are currently working with management to determine a prudent MRP amount for FY19/20.

·         Provided details on financial controls the Council should look to implement.

·         Since the Head of Finance joined the Council had seen improvements in the processes.

·         Had no matters to report on Value for Money or any other reporting issues.

·         EY opinion on the financial statements was provided on Page 23 of the draft report.

·         Providing outstanding areas as detailed earlier are addressed they were expecting a clean audit opinion. 

A Member asked if the SOI was on time or was delayed.  The Head of Finance advised that it was not the role of the external auditors to consider whether the project delivers its outcomes.  In terms of the Value for Money assessment they had reported no issues.  Questions around budget management are within the remit of the P&R Committee.  The expenditure for the project had now been incurred and we are now receiving capital receipts for the development as the developer delivers and were almost at the point of finishing Phase 3.  The lease is a 250 year lease between TRDC and Countryside

A Member said that considering the SOI had been started in 2016 why was it only being picked up in 2019/20 accounts.  The Head of Finance advised that the accounting treatment was looked at in detail by the external auditors in 2017/18 and at that point they agreed the accounting treatment to treat it as an inventory asset but the view of the external auditors (EY) had changed.  The revised accounting treatment has been agreed with EY and management agreed that it better reflects the substance of the transaction.  The only change was how it appeared on the balance sheet.  The External Auditor advised they were happy with the new accounting treatment.

RESOLVED:

Acknowledged receipt of the External Auditors draft report.