Agenda item

The report of the Chief Finance Officer informs Members of the Government’s most recent proposals to address the backlog of incomplete audits across local government in England. Grant Thornton’s accompanying report sets out their intended approach in response to the Government’s proposals, should these go ahead. The report also provides a summary update on the progress towards completing the audit of the 2021/22 statement of accounts.

The report of the Chief Finance Officer informed the Committee of the Government’s most recent proposals to address the backlog on incomplete audits across local government in England.

The Head of Finance provided the following information to the Committee as there had been developments to the item since the circulation of the papers to Committee:

On Friday 9^th February, the Government had issued a joint statement in conjunction with the National Audit Office, the Financial Reporting Council and various other interested bodies. It set out the proposal to bring the timescales for local authority audits back in line gradually over a 5-year period. Accompanying that statement there are to be two consultations, one on the Accounts Audit Regulations for Councils and one on the Code of Audit Practice which applies to auditors. There is due to be a third consultation from CIPFA which will make changes to the 2023/24 and 2024/25 accounts requirements for property valuations and pensions disclosures. The aim of which is to reduce the amount of time that is needed to be spent by both accountants and auditors on those areas over the next two years.

The draft Accounts and Audit Regulations introduce the expected backstop of 30^th September for councils to publish audited accounts for 2022/23 and any earlier years that are outstanding. They will also introduce over the following five years a series of backstops, starting with 31^st May 2025 backstop for the 2023/24 final audited accounts, and then gradually reducing those timescales over the following five years. The Government as part of that consultation are proposing to extend the deadline for local authority draft accounts for 2024/25 beyond the 31^st May, due to the coincidence of that backstop. There are no current proposals to extend the draft accounts for this year. However, they may not have appreciated that this year’s backstop is likely to have caused auditors to want to carry on audits during April and May this year. It was noted the Council will be addressing this in its response to the consultation. 

In terms of requirements for auditors there is a change in the Code of Audit Practice and auditors will be required to produce audit reports and audit opinion in sufficient time for councils to meet those backstops dates. Where the audit opinion has been modified or disclaimed as a result of the backstop there is guidance that auditors need to be clear in their audit opinion that, that is the case. The guidance also says if auditors are issuing a modified or qualified opinion for reasons other than the backstop, they are required to consider whether a Statutory Recommendation or Public Interest Report would be appropriate.

Grant Thornton presented their report providing the following information:

·  The report was a summary of where they are with the respective audit years that are still open.

·  The 2021/22 accounts audit was still ongoing. Two versions of the draft ISA 260 report had been presented to the Committee in the last 12 months. It was noted that work had continued on this audit since the meeting and was about 90% complete. They were now working through the remaining outstanding areas which were valuation of property, plant and equipment fixed assets and also some aspects of the ‘technical hot review’ that the 2021/22 accounts were subject to. The area of property, plant and equipment takes a lot of auditors, council officer and valuers time and this is what the consultation issued is trying to address. However, for the 2021/22 and 2022/23 audits it would remain a requirement.

·  Regular engagement is taking place between the auditors and the Chief Finance Officer and the Finance Team on a weekly basis to ensure that deadlines of the end of March are reached for 2021/22 audit. It was noted that all parties are committed to finalise by the end of March so that they can move forward into the 2022/23 audit.

·  It was acknowledged that whilst the accounts audit has two years ongoing the Value for Money audits are up to date for both 2021/22 and 2022/23.  The I.T. Controls Report for 2022/23 had also been reported to Committee.

·  The Consultation said that there will be a backstop date of the end of September 2024 for all account years.

·  Grant Thornton as a firm is taking a very clear line that anything not concluded by the end of March is likely to be backstopped, on the basis that their resources typically shift to their NHS clients in April, May and June. This would leave a tight timescale between July and the end of September to deliver a number of local authority audits, especially factoring in annual leave on both sides. It was noted that discussions had taken place between the auditor, the National Head of Public Sector Audit, and the National Head of Audit at Grant Thornton. The auditor had made a case for continuing with the 2022/23 accounts audit at Leeds as the Chief Finance Officer was keen for them to continue. It was noted that as long as 2021/22 could be concluded by end of March, the firm would immediately progress onto 2022/23 audit from the beginning of April through to the end of September. To do this they had set aside two of their more experienced auditors, who would not be taking part in the NHS audits.

·  It was acknowledged that there were risks and these had been set out in the paper.

·  Grant Thornton recognised that the Council was taking this seriously and the Chief Finance Officer had shared discussions at CLT on this issue. The Chief Executive had made a clear statement to colleagues to ensure that the Finance Team and external auditors get the required responses and input between now and the end of September.

·  The Committee were informed that the issue of the backstop would feed into the workshop that Grant Thornton was doing for the Members at the beginning of March.

Responding to questions from Members the Committee were provided with the following information:

·  Grant Thornton as a firm was looking at authorities where audit work has gone on significantly after the balance sheet date that the accounts relate to. If they got to the position of a Statutory Recommendation, it would be an elevation of previously reported issues for this Council. It was noted that in previous years as part of the Value for Money accounts there had been issues raised in relation to accounts for the previous three years, which the auditors had thought were not sufficiently addressed when they came to do the Value for Money audit in 2022/23 and they had elevated this in November, from an improvement level recommendation to a key level recommendation. Therefore, if the 2021/22 accounts cannot be signed off in March, then the view would be that since the key recommendation this would be a possible case for raising a formal Statutory Recommendation.

·  It was noted that out of the auditors own local government portfolio, Leeds was the only one which had not signed off its accounts for 2021/22 and 2022/23. However, as a firm they audit over 40% of the market, and there are a number of clients who have 2022/23 or earlier audits that are outstanding. Grant Thornton was of the view that there should be a backstop of 31^st March for the 2021/22 audit.

·  It was noted that when Leeds had received Value for Money opinions officers had not agreed with the recommendations. However, improvements had been made on the working papers and the timeliness etc. The Chief Finance Officer was of the view that the recommendation had only been put to the Council in November and therefore, had not had time to make the differences that Grant Thornton would be able to see, to enable issues to be resolved. It was noted that to make a Statutory Recommendation would mean that this would need to be put before full Council within two weeks of it being issued. An Action Plan must be created on how going to improve for discussion at full Council. However, if it is on a backstop date it would be difficult to be able to show improvement as the date would have already been missed. The Council was committed to work closely with Grant Thornton to ensure that the audits were progressed to meet the deadlines. The technical details and regulations that the Council must adhere has meant that the Council has had to spend time explaining them. The Council has also had ‘hot reviews’ and FRC reviews which have required a lot of additional resources. As the Section 151 Officer, she wanted it noting that she was of the view that if a Statutory Recommendation was issued this would be unfair and not justified.

·  Grant Thornton in their response said that the Section 151 Officer had said this to him in discussions and he takes her comments on board. The auditor reiterated the firms audit approach for Leeds was no different to any other local authority. However, both sides were committed to work closely together to get the 2021/22 audit concluded at the end of March.

·  Members were of the view that the report had been written using punishing terms of phrase. They had concerns that the way it was written would have an impact on staff wellbeing, especially at any point a single milestone was missed.

·  If Grant Thornton were unable to complete the audit as the backstop had not been met, the auditor said that the issue of the auditor’s fee would need to be resolved nationally.

·  The milestones had been proposed by Grant Thornton and needed to be finalised with the Finance Team before they could be agreed.

·  Grant Thornton do audit other core cities, but they were not in this auditor’s portfolio. However, his colleagues were facing similar conversations with other authorities in relation to the backstop date. It was noted that Leeds was the largest council that the Leeds office audits.

·  It was noted that in terms of understanding there was a lot of questioning and there is a prescribed approach to the level of public sector audits. There was a lot of granularities of audit work following requirements of the FRC. It was noted that four or five years previously the public sector files were not of a standard required by the FRC, and this was on detailed testing of areas of estimate and judgement. Therefore, there was more detailed work undertaken on valuation of assets and the West Yorkshire Pension Fund.

·  Members highlighted page 5 of the supplementary information, which said that if a milestone was missed Grant Thornton would revert to the backstop. Members were of the view that this was a tremendous pressure to put on staff. It was noted that if this situation arose there would be discussion with the Chief Finance Officer and the team to look at reasons why the milestones had not been met.

·  The Chief Finance Officer clarified that the 2022/23 audits would be done by Grant Thornton and as far as she was aware there would be no ‘hot reviews’, or audits by FRC. It was noted that the teams involved with the audit process are also working on other areas as well as bringing in a new financial system and they were under pressure. It was noted that CLT were supportive to provide additional resources to ensure that the Council meets deadlines to get the accounts audited. Grant Thornton confirmed that no ‘hot reviews’ or FRC reviews should happen in the coming months.

·  The Director of Strategy and Resources reiterated that the Chief Executive was fully committed to this. It was noted that all Managers had been written to emphasising the importance of getting information in relation to the audits to ensure that deadlines were met. A request was made that early conversations were had to address any concerns by the auditors, so officer time was used as effectively as possible. 

·  Members were of the view that the Council was in this position because of a national issue.

·  It was noted that over 900 local authority accounts across the country were outstanding, some dating back as far as 2016. There are roughly 480 local authorities, police bodies, national parks etc in any one year. So, some authorities within the 480 have multiple years outstanding. Numbers were confirmed by the Chief Finance Officer as; 25 had not published to 2021/22 accounts, 142 have not been completed, and 146 have completed audits for 2022/23, 64 councils had not published their accounts, 215 had not been audited, and 33 had completed their audits.

·  Should a Statutory Recommendation be proposed, there would be a consistency review and panel within Grant Thornton, this with the most senior public sector partners would be part of the process alongside the auditors and relevant senior management at the Council. Should it be that the accounts are captured by the backstop, the auditors would have to issue a modified audit opinion. However, the consequences of that were still to be confirmed, as there were a number of sets of accounts outstanding nationally. Normally if a disclaimer opinion is issued, this is significant and would require a significant level of audit resource on the following year’s set of accounts as there would not be any assurances over the opening position as the work would not have been completed on the previous year. However, due to the number of authorities likely to be captured by the backstop, it was the expectation that there would be a work around on the opening balances for local authorities that had not had a full audit. It was noted that the Council had produced accounts for 2022/23 but these may change as a result of anything that has significantly changed in 2021/22.

·  Members were informed that by the next meeting of the Committee on the 18^th March, it is expected that the accounts for 2021/22 would be virtually ready for signing off. It was clarified that Grant Thornton’s position for the deadline was the 31^st March for the 2021/22 accounts and to date the accounts were 90% complete.

·  Procurement for external audit had just finished. The Council is part of national group who procure for a number of authorities at the same. It was noted that the five-year contract starts with 2023/24 and Leeds has been allocated Grant Thornton. Members were informed there would be a different audit engagement lead.

·  It was noted that a proposed plan had been produced to address what is required for the audit and this was appended to the report. Members were advised that after the meeting the Finance Team were due to meet to consider the priorities for the work to be undertaken. Meetings would be held with staff to ensure that everyone knew what was required and when. There would also be an extra resource to support the Head of Finance in the programme management of the audit. Mapping is to be undertaken to ensure that the team know when queries are coming in, who has responded and when the response has been sent. The team have weekly meetings with Grant Thornton and the Chief Finance Officer has monthly meetings to ensure that the Council knows what is outstanding and what needs to be done.

·  It was still unclear how many authorities would receive a Statutory Recommendation. However, in the case of Leeds it was made clear that it would follow the due process by Grant Thornton.

·  Grant Thornton was of the view that it wished to keep the wording in the report as it was. They recognised that it was a stronger form of words than used previously, however, it emphasised the significance that the firm was interpreting the circumstances at Leeds, to ensure that the audits are completed by the end of September.

·  Grant Thornton confirmed that they have allocated the strongest people to the Leeds audits, particularly for the 2022/23 audits they have withheld two of the most experienced auditors from NHS work. These auditors would be supplemented with the firms most experienced trainees and part qualified members of staff who have worked on Leeds audits previously, so they have an understanding of the team and the systems and processes. It was also confirmed that this was the case for the remainder of the 2021/22 audit.

The Chair thanked Grant Thornton and the Leeds Finance Team for work on the audits, but especially to the Chief Finance Officer and her team for working so hard to meet the deadlines.

RESOLVED – To note the information provided in the report on the Government’s intention to introduce a backstop date, and to note Grant Thornton’s proposed course of action for the 2022/23 audit and their progress towards completing the 2021/22 audit.