Agenda item

The Committee received an update from Mr Simon Luk of EY, the Council’s External Auditors, stating that the Auditors were working on the Council’s 2023 accounts having reviewed the various adjustments to date. The auditors were presently working on the adjustments in relation to Property, Plant and Equipment (PPE), noting that there had been difficulties in relation to PPE and that EY were working with Council officers to resolve these issues.

In addition, there were concerns regarding Rent-to-Mortgage Properties and Unallocated Capital Expenditure and EY was awaiting responses to these issues as well is responses to concerns regarding Lease Workings.

In response to questions by Members, Mr Luk, and Mrs Hannah Doney, Head of Finance, provided the following information.

a)    It was anticipated that the Draft Audit would be completed in time for submission to the December meeting of the Committee;

b)    That the auditors had come to an impasse about the South Oxhey Initiative and would be discussing ways forward with Council officers next week.

Mrs Doney stated that, originally, the South Oxhey Initiative (“the Initiative”) was accounted for as Investment Property (IP) with the Council acquiring parcels of land in 2014/15 which was accounted for as IP until 2017/18. At that time, the Council’s previous External Auditors expressed concerns and proposed that any acquisitions under the Initiative should be regarded as Inventory, which was not part of the Council’s fixed assets and, therefore, subject to a different accounting treatment. In 2019/20, the External Auditors stated that these acquisitions should not be classified as Inventory but as Surplus Assets until the point of disposal of the asset to Countryside, at which time it would become a Finance Lease Asset.

Accordingly, Council officers had completed a lot of work to reclassify the acquisitions as Surplus Assets and to produce the calculations for the Finance Lease Asset that was created when the parcels and phases of development were passed to Countryside. The first block was getting the valuations that were required to establish a fair value to create the Finance Lease Asset at the point of transfer. It took a long time to get the information from the valuers which was then passed to EY who had challenged the robustness of the valuation. This was an issue that could be resolved but was not one that was anticipated at the time of the last Committee meeting.

Because the assets had been reclassified as Surplus Assets, EY wanted to test the additions and the amount that was recognised as Surplus Assets. Therefore, they had asked the Council to provide third-party evidence of all the spend on additions back to 2014/15. In 2014/15, the Council had a different finance system and no longer had all the supporting third-party evidence that EY had requested. In addition, there were gaps in subsequent information held by the Council because the Council had based its record-keeping on a requirement to provide information on assets which were classified as Inventory and not as Surplus Assets. Consequently, because officers were now retrospectively applying a different accounting treatment without all the necessary information, EY had asked that Three Rivers District Council confirm that it was satisfied that the accounts presented a “fair and true view” at the end of 2019/20. Accordingly, the Council was now preparing a Position Statement. As the information the Council had provided was still not sufficient to meet the relevant accountancy standards, it was necessary to find a way through the present impasse.

In response to further questions on this issue, Mrs Doney provided the following information.

·       Valuations followed a framework that included subjective elements and, therefore, it was not unusual for valuation experts to disagree.

·       Consequently, an audit firm, during the audit process, may say that something was not within their acceptable range and, therefore, the [local authority] had to agree to amend its valuation, or report the item as an unadjusted difference.

·       In this case, there was a disagreement about how the lease premium paid at the beginning of the finance lease was treated in the calculation, these being 250-year finance leases with a small annual ground rent payable over the lifetime of the lease. Therefore, this was more complex than a standard valuation of a PPE asset.

·       It was unusual for there to be a fundamental shift in how an asset was classified and there was a greater risk of this happening when there was a change of external auditor. However, she was satisfied that the current classification, as determined by EY, was correct.

c)    EY, in accordance with their duty to ensure that the Council’s accounts were a “true and fair view,” was satisfied that the classification of the South Oxhey Initiative assets as Surplus Assets was correct. And, it was for this reason, that they had required that the assets be reclassified.

d)    Regarding record-keeping, even if the assets were classified as Inventory, there should still be a year-on-year reconsideration of the values.

e)    As part of the current exercise, there was a requirement to carry out a prior year adjustment. Accordingly, there would be a “Prior Year Adjustment” note in the accounts setting out the balance sheet and the impact on the CIES (Comprehensive Income/Expenditure Statement) which would reflect the differences if the subsequent changes in classification were considered.

f)     It was not acceptable that the Council was still in the process of reconciling its 2019/20 accounts. However, if the Council could not satisfy the requirements of its external auditors, it would be necessary to draw a line under the matter and trust that this would be acceptable to the Committee.

g)    It was good practice periodically to change auditors and EY had been the Council’s external auditors for the last 10 years. In addition, to maintain independence, there were regulations governing how long an audit partner could work with the same local authority.

h)    Areas of concern for EY included PPE; Unallocated Capital Expenditure; Rent and Lease Properties, which had been reclassified as Land & Buildings; and Lease Disclosure. However, the main area of concern was the South Oxhey Initiative.

i)      The File Review process conducted by EY had the potential to raise additional queries and samples, and it was these final checks that the Council was addressing. It was believed that it would be easy to provide EY with the information required in those areas that had been identified by EY as still being areas of concern.

In conclusion, the Chair thanked Mr Luk for his update.

RESOLVED: That the Committee note the report.