Agenda item

·        To present the Statement of the Accounts 2017/18.

·        To present the report of External Audit on the Financial Statements.

8.1       The report of the Head of Function (Resources)/Section 151 Officer incorporating the Final Statement of Accounts for 2017/18 following audit was presented for the Committee’s consideration.

The Head of Function (Resources)/Section 151 Officer reported that the statutory deadline for the completion of the 2017/18 audited accounts has again been met. Improvements which the audit process identified last year have been made and are continuing. All issues that have arisen throughout the audit were dealt with promptly and in a satisfactory manner.

The Officer said that all amendments to the draft accounts which have been agreed as requiring restatement by Deloitte as the Council’s financial auditors have been processed and are contained within the Statement of Accounts. The significant amendments required to the draft statement have been largely confined to the following –

•           Incorrect reconciliation of overpaid Housing Benefits recorded on the Housing Benefits system to the Council’s ledger over the last three years, which resulted in an under recognition of revenue.

•           Incorrect percentages were initially used in the internal valuer’s report that led to an incorrect calculation of fixed asset revaluation amounts.

•           Following a review of the treatment of the earmarked reserve for the Penhesgyn Waste Landfill site, it was identified that this meets the criteria for a provision, therefore a provision has been charged to the Comprehensive Income and Expenditure Statement. The earmarked reserve has been released.

The Head of Function (Resources)/Section 151 Officer referred to the two misstatements which Management has decided not to correct as detailed in Appendix 3 to the External Auditor’s report, the one in relation to the treatment within the draft accounts of a contribution of £3.66m made by the Council to the Gwynedd Pension Fund to cover the fixed element of the employer contributions for the 3 year period 2017/18 to 2019/20 and the other in relation to the treatment of a refund of approximately £0.8m from HMRC for VAT paid on Leisure Services dating back to 2012.

The Officer said that the sum paid to the Gwynedd Pension Fund was treated as an advance payment but, after seeing how the Actuary in reviewing the Pension Fund had accounted for the payment, it became apparent that the Authority’s treatment was incorrect. The auditors having taken advice from the Wales Audit Office have concluded that the payment should be recognised in full in the year of payment i.e. 2017/18 and charged to the general fund. However, as this would have the effect of reducing the general fund balance, Management has decided not to take this course and instead a negative reserve has been created which has the effect of reducing the earmarked, instead of the general reserve balance. The difference in treatment being a difference in classification has no effect on the total useable reserves figure. The auditors have explained the different approaches in their report.

With regard to the second uncorrected misstatement the Authority has received a refund of approximately £800k from HMRC for VAT paid on leisure service fees dating back to 2012 as these are now classed as exempt supply instead of standard rated. Guidance on how to treat the refund was sought from the Council’s Executive, but as the Executive did not meet until 17 September it was too late to change the accounts to reflect the decision made. The refund has therefore not been accounted for in the 2017/18 accounts; instead the credit for the reimbursement will come in the 2018/19 accounts. Because the refund was for a period prior to 1 April, 2018 it is the auditors’ opinion that it should have been accounted for in the 2017/18 accounts. However, the figure is not so significant for its omission to have a material effect on the 2017/18 accounts.

The Auditors at the end of the audit of the Statement of Accounts have made 7 recommendations in relation to accounting and payroll control; 2 recommendations in relation to IT and 4 recommendations in relation to asset valuation.

8.2       The report of External Audit on the audit of the Financial Statements for 2017/18 (ISA 260 report) was presented for the Committee’s consideration.

Mr Ian Howse, Engagement Lead for the Financial Audit reported as follows –

•           The draft financial statements for the year ended 31 March, 2018 were received by the Auditors on 11 June, 2018 and the audit work thereon is now substantially complete. At the date of issue of the audit of financial statements report, the three matters set out in section 6 of the report were outstanding.

•           Subject to the satisfactory completion of outstanding work, it is the Auditor General’s intention to issue an unqualified audit report on the financial statements once the Authority has provided a Letter of Representation based on that set out in Appendix 1 to the report.

•           As regards significant issues arising from the audit, there are misstatements that have not been corrected by Management which the auditors consider should be drawn to those charged with governance due to their relevance to their responsibilities over the financial reporting process. These are set out with explanations in Appendix 3 to the report.

•           There are misstatements that have been corrected by Management which are drawn to the attention of those charged with governance due to their relevance to their responsibilities for the financial reporting process. These are also set out with explanations in Appendix 3.

•           The Financial Audit Plan provided information regarding the significant audit risks that were identified during the Auditors’ planning process. The table at section 12 of the report sets out the outcome of the Auditors’ audit procedures in respect of those risks. The audit was conducted in line with the Financial Audit Plan.

•           In the course of the audit, consideration is given to a number of matters both qualitative and quantitative relating to the accounts and any significant issues are reported to those charged with governance. No such issues arose this year.

•           The Auditors have no concerns about the qualitative aspects of the Council’s accounting practices and financial reporting. The Auditors concluded that accounting policies and estimates are appropriate and financial statement disclosures unbiased, fair and clear.

•           No significant issues were encountered during the audit.

•           There were no significant matters discussed and corresponded upon with Management which require reporting.

•           There are no other matters significant to the oversight of the financial reporting process that require reporting.

•           No material weaknesses in internal controls were identified although several areas in which it would be possible to improve controls have been identified and are reported in Appendix 4 to the report

•           There are no other matters specifically required by auditing standards to be communicated to those charged with governance.

•           The recommendations arising from the financial audit work are set out in Appendix 4 to the report. Management has responded to them and progress on their implementation will be followed up and reported during next year’s audit.

The Committee considered the information presented and made points as follows –

•           The Committee noted that the accounts have again been completed in accordance with the statutory timescale and that thanks are due to the staff of the Finance Service for their work in ensuring that the accounts’ deadline was met.

•           The Committee noted that the External Auditors are satisfied with the quality of the Council’s accounting practices and financial statements and that it is the Auditors’ view that the financial statements have been properly prepared and give a true and fair view of the Council’s financial position as at 31 March, 2018.

•           The Committee noted that no major issues arose during the course of the audit.

•           The Committee noted that there are two misstatements that Management has chosen not to correct. The Committee sought further clarification of why these misstatements might remain unadjusted and whether this is the right approach given that the accounts which are in any case complicated, need to be as clear and as transparent as possible for the benefit of those who read them.

The Head of Function (Resources)/Section 151 Officer clarified that accounting is not an exact science and that sometimes how an item is treated  is a matter of opinion as to  how the code of practice and the relevant regulations are interpreted. The opinion of Management and that of the External Auditor on how the two misstated items should be treated differ. However, Management has chosen not to make the suggested adjustments because the two items as they have been accounted for do not have any material effect on the accounts.

Mr Ian Howse said that it is the auditors’ task to assess whether the treatment of the two items in question makes a difference to how people read and interpret the accounts. The auditors work to a materiality of £5m meaning that if there was a difference of opinion over the treatment of an item/items the value of which exceeded £5m then that would have to be resolved on the grounds that it is the auditors’ opinion that this would influence the readers of the accounts’ view of what is going on. Items which are for less than £5m are not likely to significantly change readers‘  view of things in the general scheme of the Council’s overall assets and liabilities. The Officer said that the audit process is a very rigorous process and has been strengthened following the financial crisis. The corrections highlighted by the auditors are to do with judgements and moving items between lines in the balance sheet and ultimately, they do not affect the Council’s cash balances.

•           The Committee sought clarification of whether the payment to the Gwynedd Pension Fund should have been treated as an item of expenditure

The Head of Function (Resources)/Section 2151 Officer confirmed that the payment is an expenditure item but that in drafting the accounts one third pf the £3.66m payment was charged to the revenue account with the remaining two thirds being treated as a pre-payment for years 2 and 3 i.e. 2018/19 and 2019/20. The Actuary treated the contribution as expenditure in 2017/18 which makes the Authority’s treatment incorrect. Consequently, the full £3.66m has been charged to  the revenue account in 2017/18, but in order to mitigate the effect of this expenditure on the Council’s general fund balance  a negative reserve has been created from which £2.4m of the £3.6m has been funded which will be unwound over the next two years. The payment has therefore been treated as expenditure but in a way that lessens the impact on the general balances whilst not making any difference to the net reserves of the Council.

•           The Committee noted that the Balance Sheet shows that the Council’s current cash ratio is now less than 1. The Committee noted further that it has been the Council’s strategy because the return on investment is poor to use cash balances to fund part of its capital expenditure in order to avoid borrowing. The Committee noted also that cash balances have now reduced to an extent that it is likely the Council will have to borrow to meet its expenditure needs. The Committee sought clarification of whether this is prudent approach.

Mr Ian Howse said that the ways in which Councils can access funds e.g. through the Public Works Loans Board means that it is not difficult to borrow. Because funding is readily accessible, how the Council chooses to do so and the balance of how it uses those funds for capital and revenue does not cause undue concern because of the availability of funding.

The Head of Function (Resources)/Section 151 Office said that the Council borrows to replenish the cash it has used for capital purposes. The Council has been using cash balances to fund capital expenditure because with interest rates remaining low, using cash to avoid external borrowing provides a better return than cash on deposit.

•           The Committee noted that it is difficult to gain a picture of the Council’s financial performance from the Statement of the Accounts. The Committee sought clarification of whether it is possible to benchmark the Council’s performance against other local authorities of similar stature to obtain a better understanding of what might be expected of it in terms of financial performance.

The Head of Function (Resources) and Section 151 Officer said that due to a number of factors including size, location, and geography it would be difficult to find a comparable authority in order to be able to make a like for like comparison. Although councils in Wales operate within a common legislative and regulatory  framework they have different approaches to various issues depending on local needs and priorities e.g. outsourcing services, applying national pay, implementing Job Evaluation which bring about different results in each council. Although benchmarking is done for individual services, globally it is problematic because it is difficult to make a comparison that is meaningful enough to enable Management to make changes on that basis. 

It was resolved –

•           To accept and to note the Statement of the Accounts for 2017/18 and to recommend their acceptance to the Full Council.

•           To note External Audit’s Report on the Financial Statements for 2017/18.

•           To approve the Annual Governance Statement for 2017/18 and to refer the Statement to the Leader of the Council and the Chief Executive to be signed.

NO ADDITIONAL ACTION WAS PROPOSED