Agenda item

The Committee considered the Annual Statutory Financial Statements for the year ending 31 March 2016.

The Chief Financial Officer introduced the report and made the following comments:

·         He wished to thank Helen Lillington and her team from Grant Thornton for their work in helping to meet the deadline to publish the accounts by 31 July 2016

·         There were 2 key points relating to the Council's statement of accounts: the Council had broken even against its cash limited revenue budget; and there had been a decrease of £0.8 in the Council's useable reserves

·         In overall terms, revenue spending was in line with the Council's budget of £325 million. General balances at the end of the 2015/16 financial year would remain at £13 million, which was consistent with the Medium Term Financial Plan approved by Full Council in February 2016

·         Although there was an accounting deficit of £24.8m, there was no cash change in the balances

·         In relation to earmarked reserves, school balances had increased by £1.3m to £18.1m and key discussions would need to take place with schools about how these funds would be spent. Directorate reserves had decreased by £1.0m to £8.7m. Insurance reserves had decreased by £0.6m to £7.3m. PFI grant reserves had decreased by £3.9m to £14.7m

·         The Council remained a significant capital investor with the Energy from Waste (EfW) plant at Hartlebury being the largest capital project

·         The Council's external borrowing had increased by £77.4 million to £338.7 million largely due to the EfW plant however the arrangements with Mercia and the low cost of borrowing had proved beneficial to the Council

·         In terms of long term investments, Malvern Hills Science Park was a key economic development for the future

·         The Council had a low level of other debtors and in particular trade debtors had reduced which had been enhanced by the commissioning of financial services to Liberata

·         Investments had reduced by £2.5 million to £45.0 million over the year. These investments were low rate low risk in nature

·         Creditors had reduced by £6.8 million to £98 million. Trade creditors as a percentage of total creditors increased from 56% to 59% (£57.8 million) however he did not consider this to be a matter of concern

·         In relation to the Pension Fund statement of accounts, there were 3 key messages: 1) the Fund had performed well this year; 2) different investment approaches had been used, for example investment in wind farms; and 3) The funding levels had remained the same.

Helen Lillington introduced the Audit Findings Report of the Council and the Pensions Fund and made the following points:

·         The key message was that she anticipated providing an unqualified audit opinion in respect of the financial statements for the Council and no adjustments to the accounts were proposed. There were a number of minor changes including one unadjusted misstatement but none were material or significant

·         The standard of the paperwork had improved from last year which enabled the signing off the accounts sooner. There was still room for improvement but she thanked the audit team for their work

·         Control issues had been identified in relation to the general IT control environment. No material weaknesses had been identified which were likely to adversely impact on the Council's financial statements, however some deficiencies had been identified

·         Changes to the Accounting Procedures meant that the public now only had a 30 day period in which to formally object to the Accounts. That period had now ended and no objections had been received

·         The overall materiality had been determined as £15.516m which meant that there was no overall change to materiality

·         No significant issues had been found in relation to the significant risks in relation to fraudulent transactions, management over-ride of controls and valuation of the pension fund net liability

·         In relation to significant risk associated with the valuation of property, plant and equipment, this was the first year that the Council had used PPL to value its assets, and there had been some teething problems in ensuring the correct information was provided in a timely manner. However she was confident that this was not a material issue 

·         A number of significant issues had been discussed with management including the quality of the information from Place Partnership,  Impairment Review, the quality of working papers and changes to the notice of audit

·         The Whole of Government Accounts (WGA) consolidation pack under WGA group audit instructions had not been received until very late in the process therefore it would not be possible to undertake this reconciliation work until September. This would not impact on the signing off of the Accounts but could delay the signing of the certificate to close the Accounts

·         Debtor and creditor balances had been overstated by £821k. This related to the funding arrangements around PPL, where the Council had agreed to pay for services in advance however it did not impact on the balance sheet

·         In relation to unadjusted misstatements, assets should be revalued before there was a change in classification as per the Code guidance notes. The Council was required to confirm that it was content with the change. The Chief Financial Officer confirmed that he was content that the identified error was not material and therefore it was appropriate for it to remain unadjusted in the final set of financial statements

·         A number of miscalculations and disclosure changes had been identified during the audit and these were set out in the report. Due to the timing of the writing the report, the implications of Brexit had not been considered. Discussions had been held with officers and a brief note to the accounts would be added to the final set of financial statements to highlight potential uncertainty

·         In relation to value for money, significant risks would be examined where they had been identified by the public, identified as key issue by the Council, or where the external auditor did not know much about

·         In relation to the VFM significant risk associated with Commissioning, she was confident that the Council's approach was wide-ranging, varied and supported the Corporate Plan

·         She was satisfied that the arrangements the Council had in place were sufficiently robust to tackle the VFM significant risk related to the financial challenges to Adult Services and Health    

·         No adjustments had been identified affecting the Pension Fund's reported financial position. The key messages were that: 1) there were no adjusted or unadjusted misstatements to report; 2) The quality of the working papers had improved; 3)  This year was the first year that the fund had invested in level 3 investments and more focus was needed to improve the disclosures

·         The same IT control issues had been identified for Pension Fund as for the Council's Accounts but again they had no significant impact on the statement of accounts

·         Level 3 investments were difficult to value, irregularly traded and more risky in nature. It was important to get a level of assurance on these investments but it was difficult to get an independent opinion therefore they had been identified as a significant risk

·         As a result of the change in investment strategy, it was recommended that additional disclosures be included within the final set of statements that more closely aligned to the disclosures set out in the CIPFA example accounts.

In the ensuing debate, the following principal points were raised:

·         There was little mention in the Statement of Accounts of the other capital funds that the Council had successfully bid for. The Chief Financial Officer indicated that work around capital expenditure would commence in September. He undertook to provide a training session on Capital Expenditure for Committee members 

·         In response to a query, the Chief Financial Officer explained that external borrowing of £338m was significantly below the borrowing threshold because the Council was using reserves which were lower than the market rate. He undertook to provide a training session on Treasury Management for Committee members

·         In response to a query, the Chief Financial Officer stated that no objection to Accounts had been received this year from the objectors to the EfW plant at Hartlebury

·         Would officers be reviewing the performance of the Pension Fund bearing in mind lower interest rates and the possible impact of Brexit? The Chief Financial Officer responded that it was more difficult to seek investment income when interest rates were low. It was too early to assess the impact of Brexit at this stage although he emphasised that investments were made on a long term basis 

·         In response to a query, Helen Lillington stated that there was no element of flexibility in relation to the 30 day time limit introduced by the Government to allow the public to raise objections to the accounts. This had the benefit of allowing a degree of certainty for the timescale for the publication of the accounts 

·         The external audit report referred to the trivial level of materiality in the accounts and yet to the public, the figure would appear to be high. In response Helen Lillington explained that there was a perception gap between how the public might view the figures and the how it reflected in the terms of accounting standards 

·         In response to a query, the representative of the Chief Financial Officer indicated that the SAP system would be replaced in April 2017 by a system entitled E5. As part of the implementation and improvement of the new system, lessons would learnt from the operation of the SAP system. The new system would be less expensive

·         In relation to a query about fraud, Garry Rollason commented that there had not been any recent changes to the regulations associated with fraud. The Chief Financial Officer added that he received assurances around fraud controls from Garry Rollason through the year. Work had been undertaken with district councils to strengthen control mechanisms around council tax collection

·         Given the lack of funding for local councils, would the external auditor anticipate issues going forward for this Council in relation to VFM? Helen Lillington commented that she was seeing more instances where Councils were struggling with the management of their funds. In response it was commented that it was testament to the Chief Financial Officer and his team that there were no significant VFM issues for this Council given the restricted financial envelope in which this council operated

·         In relation to the statement in the accounts relating to senior employee's remuneration for 2015/16, there appeared to be a lack of transparency about the payment to the interim Director of Children's Families and Communities Clarification was required as to whether he was self-employed or engaged as a consultant. Should there be an additional note in the accounts to reflect this? The Chief Financial Officer responded that this entry met the required accounting standards however he would review this entry   

·         What proportion of the Pension Fund's investments had been identified as Level 3 investments? Helen Lillington commented that approximately 8% of the Fund's investments had been Level 3 investments. This proportion of investment was not considered to be a material concern

·         Should there be a reference in the accounts to the pooling arrangements for Pension Fund? The Chief Financial Officer indicated that the submission for the LGPS Central Pool had not yet been approved by the Government and although the submission had been approved by the Pensions Committee, it was not at the stage where it could be reported in the accounts    

·         The Committee were reminded that they were required to authorise the Chief Financial Officer to sign the letters of representation.

RESOLVED that:

a)    the Final Accounts Pack including the Statement of Accounts for the financial year ending 31 March 2016 be approved; and

b)    the Chief Financial Officer be authorised to sign the Letters of Representation on behalf of the Council.