REPORT OF THE AUDITOR TO THOSE CHARGED WITH GOVERNANCE (REPORT 5)
The Audit Commission have issued a Code of Audit Practice 2005, which sets out specific guidance for auditors on reporting to their audited bodies. The Code incorporates the relevant professional auditing standards that cover the ‘Communication of Audit Matters with Those Charged with Governance’ and specifically requires the presentation of this report in which the external auditor (PKF) presents any issues arising from the audit of the accounts before giving his audit opinion on the Council’s financial statements. These arrangements are intended to encourage greater openness and accountability. PKF will be attending the Committee to present their report and answer any questions Members may have.
Report of the Director of Finance and Corporate Services attached.
Report of the external auditor attached.
The report be noted.
[The Committee heard a short presentation from Leigh Lloyd-Thomas of the Council’s external auditors (PKF). He explained the Statement of Accounts was never totally accurate, given they were partly based on estimation, for example, how much income due in the period would be collected. There was always a degree of judgement to be made and Mr Lloyd-Thomas was happy to declare the accounts free of material error. He thanked finance officers for what they had presented and all their help with the audit and resolution of queries and issues. He commended the timely presentation and content of the supporting working papers for the accounts as being very good. Together with the actual Statement of Accounts, they were amongst the best public sector accounts he had audited this year.
The Director of Finance and Corporate Services stated as this was the first set of accounts that PKF had audited for the Council, the process had been completed extremely well. This was due to the quality of the audit and manner in which the auditors did their work and particularly their approach to dealing with queries and issues.
There were areas for improvement, such as how Section 106 receipts and the PFI balance were accounted for. The adequacy of the Council’s insurance reserve needed to be reviewed, as the last valuation was approximately five years ago.
There was an issue regarding when depreciation should be calculated for assets acquired or enhanced. The Council’s policy was to start depreciation from the start of the year following either acquisition or enhancement rather than in proportion to the period in the year from when expenditure on the asset was incurred. The result was a less accurate charge for depreciation in the year of expenditure. The amount was not material and as the reasons for adopting this treatment were beneficial to timely closedown of the accounts; it conformed with recommended practice.
The external auditors were required to present their findings on the Council’s use of resources and scored it as a three (performing well) out of four. Given the reasonably positive comments from PKF, officers were confident this would improve.
The Committee briefly discussed the draft letter of representation set out in appendix D of the report. Councillors agreed with the representations made and were content for the Director of Finance and Corporate Services to sign it on the Council’s behalf.
Some Members questioned the position around Section 106 receipts. It was noted the balance at the end of March was approximately £4 million. The effect of the proposed change in accounting treatment would be to switch the balance from being a provision to a reserve, but the Section 106 reserve would still be ring-fenced to the specific purpose required in the individual agreements.
The Committee asked about the need to review the insurance reserve and whether this meant the current level was too low and if further contributions would need to be made to bring it up to a satisfactory level to meet potential claims. Officers confirmed the review was done around every five years, was now due, and had been commissioned earlier in the year. The results were expected early in 2007. Whilst the valuation was a detailed professional matter on which officers could not forecast the result, it was felt generally, based on discussions with the Council’s insurers, the level of the overall insurance fund was relatively high rather than low.
Regarding Richmond Theatre, Members questioned how the expenditure incurred could be treated as capital expenditure on the basis it was creating a physical asset, given a building was already there. Officers explained the major refurbishment that had required the original guarantee was correctly treated as capital expenditure because it was an enhancement to the existing asset both adding to its value and prolonging its economic life. The external auditors had looked at this point specifically and accepted this established treatment.]