Agenda item

REPORT OF THE SERVICE DIRECTOR – RESOURCES

 

To provide an update of the External Audit Backlog and to provide a detail schedule for this to be resolved.

RESOLVED: That the Finance, Audit and Risk Committee noted the report including the implications on the approval of the Statement of Accounts for 2022-23 onwards.

Audio recording 5 minutes 14 seconds

 

The Service Director – Resources presented the report entitled ‘Clearing the External Audit Backlog’ and highlighted that:

 

·       There was known backlog of external audits for Local Government. North Herts District Council had a backlog of one year.

·       On the 8 February 2024 the Department for Housing, Levelling Up and Communities (DHLUC) launched a consultation to address the audit backlog as stated in paragraph 8.1 of the report.

·       The consultation proposed that there would be a three phased action plan; Reset, Recovery and Reform.

·       There would be a back stop date of the 30 September 2024 to approve any 2022-23 accounts as part of the reset phase.

·       In the recovery phase the back stop date for audits to be approved would slowly move backwards towards Ultimately being November each year.

·       North Herts District Council were currently audited by Ernst & Young however, form the current year 2023-24 the Council had moved to KPMG.

·       A backstop date of 30 September 2024 had been set for the sign off of the 2022-23 external audit, the audit may not be fully completed but would have a disclaimed opinion and signed off on that basis.

·       The 2023-24 audit would therefore have had no audit of the opening balance and a catch up would commence.

·       A limited scope opinion was not a bad thing but was a necessity.

·       This was not an individual Council issue but a general Local Government issue.

·       There were concerns regarding the proposed backstop deadline of 31 May 2025 for the 2023-24 accounts which had been highlighted through the consultation process.

·       The backstop date for the Finance, Audit and Risk (FAR) Committee to sign off the 2023-24 account was noted as the 31 May 2025, there were concerns that this would be a big responsibility for a newly formed FAR Committee and close to Annual Council.

 

 

Debbie Hanson, Ernst & Young stated that:

 

·       The 2021-22 Audit and opinion was completed in September 2023. This was behind their ideal schedule for a normal year.

·       In July 2023 after the announcement of ministers to review the local audit system they took a decision to align a strategy to the announcements and a focus was placed on completing audits that were substantially complete including the 2021-22 North Herts audit.

·       A further focus was placed on updating and completing value for money (VFM) and auditing pension funds.

·       The 2022-23 value for money audit was substantially complete with the intention to present this to the next FAR Committee meeting as an interim report. This would be an interim report as the audit can not be fully concluded until the issue of an opinion.

·       Ernst & Young had taken the decision to issue a disclaim opinion to be completed by the backstop date, this would be reviewed again once the consultation was reviewed.

·       Normally a disclaim opinion would be issued when there was insufficient evidence to enable an audit opinion to be issued and may have a negative effect on a Council, this would not be the case in this instance. The disclaim opinion would be issued as it would not be possible to complete the audit before the backstop date.

·       A disclaim opinion would be issued by the 30 September 2024 or earlier if the VFM and audit work on 2022-23 was concluded.

·       The disclaim opinion would have an impact on at least two years financial statement as no opening balance or comparative figures would be available.

·       The DHLUC consultation would give a consistence approach for subsequent years and an understanding of what the disclaimer meant.

·       There was a May deadline for audits to be completed in future years, with the aim to get this established as soon as possible.

·       There had been recent issues with capacity and skills and this had impacted other audits with delays and resourcing issues.

·       The backstop would stop audits from continuing over many years and would get the system back on to a timely basis.

·       These were unprecedented times and as this had not happened before would be challenging.

 

The Service Director – Resources updated the Committee with a statement from KPMG and stated that:

 

·       Discussions were ongoing and it was unknown what impact the disclaim opinion would have on future audit opinions.

·       Although this was at consultation stage it was assumed that this would happen.

·       The technical disclaimer would mean that KPMG would not have assurance over all opening balances, balance sheet and movement in reserves.

·       The expected impact was for a limitation in scope for KPMGs opinion regarding the impacted balance in future years.

·       Currently the duration of the disclaimer opinion would vary between entities depending on the volume of outstanding audit years.

·       KPMG would adopt a consistent approach across all the entities impacted by this consultation.

·       KPMG would require Ernst & Young to complete their work and issue an audit opinion before KPMG could commence any audit work.

·       KPMG were currently building relationship with North Herts, learning their systems and had commenced some work on the VFM for 2023-24, but not any substantial testing.

·       Work on the audit was expected to commence in October 2024.

·       They were committed to getting on track with audits, but there may be some adjustment time.

·       They are unable to commence audit work until the 2022-23 audit was completed.

 

The following Members asked questions:

 

·       Councillor Terry Hone

·       Councillor Tamsin Thomas

·       Independent Person John Cannon

·       Councillor Tom Plater

 

In response to questions the Service Director – Resources advised that:

 

·       There would be some impact with the switch to a new external auditor however, some of these changes had already started especially, the building of new relationships and exploring the new financial system.

·       The change was positive and what was needed.

·       It was most likely that the audit for 2026-27 would be the first audit using the new guideline and have an non disclaimer opinion, although there was a possibility that the audit for 2025-26 could be on schedule.

·       The first year of KPMG accounts would be using the existing financial system. The new financial system would be implemented by August and affect the 2024-25 audit accounts however all data from the 1 April 2024 would be moved to the new system.

·       KPMG had already commenced a working relationship with the Council with detailed auditing work due to commence in October 2024.

·       There would be a consistence approach to disclaim opinions, and this would bring all Local Authorities up to date.

·       There would be an impact on fees to reflect the amount of work completed in each year. It was likely that these maybe be less than the general scale fees for the current year.

·       KPMG would need to complete more work in future years to get back on track, so overall it could be the same cost but split between years and auditors.

·       The scale fees for this year and going forward were much higher, and this is in line with the requirements of the auditors, more work equalled more fees.

·       The Government had provided grants in recent years but, it was unclear if this would continue.

·       It was hoped that the changes in the reform phase would reduce the audit worked required and that this may in future years lead to a reduction in audit fees.

 

In response to questions Ernst & Young advised that:

 

·       The PSA were conducting ongoing analysis of audit firms fees.

·       Once VFM had been substantiated the appropriate fees for the disclaim opinion could be reviewed.

·       The PSA would determine the appropriate fees for the disclaim years opinions.

·       The going concern assessment covered a period of 12 month from the date of the audit report. The assessment which took place in September 2023 covered the Council until September 2024 and stated that the Council had sufficient reserves.

·       The work Ernst & Young were completing on VFM took into account the Councils arrangements for financial resilience.

 

Councillor Chris Lucas proposed and Councillor Tamsin Thomas seconded and, following a vote, it was:

 

RESOLVED: That the Committee noted this report including the implications on the approval of the Statement of Accounts for 2022-23 onwards.

22-23 onwards.