Agenda item

A report of the Interim Director of Finance (Section 151 Officer) was presented to update the Audit Committee on the audit of the Council’s Statement of Accounts and provide new information on action proposed by the Department for Levelling Up Homes and Communities (DLUHC) to address the current audit backlog.

 

The report provided an update on the outstanding audit of the Council’s Statement of Accounts for 2021/22.   In addition, the Council draft accounts for 2022/23 had yet to be finalised for publication although the statutory date for doing this was 31 May 2023.   There was also an update from DLUHC in relation to the national backlog of audits currently outstanding within the local government sector and initial proposals on how to address this.

 

The completion of the external audit of the Council’s last two years financial statements and value for money assessment took significantly longer to finalise than in previous years:

 

•           For 2019/20, this was completed on 2 March 2021 (the statutory date for these audited accounts was 30 November 2020).

•           For 2020/21, this was completed on 29 April 2023 (the statutory date for these audited accounts was 30 September 2021).

 

In previous years to these, the statutory deadlines had been achieved.

 

Reasons for the delays had been reported to the Corporate Affairs and Audit Committee several times before and were grouped into three main categories:

 

1.         Onerous regulatory requirements for external auditors, mainly from the National Audit Office and the Financial Reporting Council. This had required extensive additional work to be undertaken and evidence to be gathered by auditors as part of their examination of the Council’s financial statements and transactions. This had been in response to a high number of corporate failures in the private sector.

 

2.         A significant amount of additional work had been required on the value for money assessment, mainly in relation to the Ofsted judgement on the quality of Children’s Services being delivered by the Council, and the governance issues within the Council which had recently led to a set of statutory recommendations being issued.

 

3.         Extra work, evidence and focus on the Going Concern Assessment, given the well-publicised issues on local authorities and their financial sustainability.

 

In addition, there had been resource constraints and recruitment issues within both the Council’s financial team and for Ernst & Young (EY), the external auditors, over most of this period.  The Head of Finance and Investment confirmed that the Council had brought in additional resources to assist with completion of the accounts and provide better resilience.  

 

The deadline for publication of the draft accounts for 2022/23 was consulted on by DLUHC during April 2023 due to some concerns as to whether this could return to normal following the pandemic. The outcome of this was announced on 3 April 2023 and the deadline returned to 31 May date. There was no penalty for failing to meet the statutory deadlines. However, it was important for local authorities and their stakeholders to have assurance of the Council’s financial position and therefore timely reporting and audit was an essential aspect of robust financial management.

 

The percentage of Councils that met the deadlines in 2021/22 was 9% of English local authorities for the draft accounts and for the audited accounts was 12%.

 

Despite the obvious difficulty for local authorities to meet the less stringent deadlines of the past 3 years, the revised deadline had been reduced by 2 months for the financial year 2022/2023 to reinstate the original statutory deadline of 31 May.  The Council had not yet issued the draft statutory accounts due to the need to take account of audit amendments that were likely to flow from the 2021/22 audit.

 

The National Audit Office (NAO) and DLUHC intended to set a series of statutory deadlines for accounts preparers and auditors to clear the backlog of delayed audits for financial years 2015/16 to present.  Achieving these deadlines, might result in qualifications and disclaimers of opinions on statutory accounts in the short term for a number of local bodies.  The NAO was considering whether to develop a revised Code of Audit Practice to give effect to the changes.  Legislative change might also be needed to address any knock-on effects of the proposals which might impact the audit of opening balances within the accounts for future years.  Under these proposals, Section 151 officers would be expected to work with Audit Committee Members to approve the final accounts by the statutory deadline for the audit opinion to be issued at the same time.

 

The External Auditor commented that in terms of the Government consultation, audit firms were awaiting further guidance.  EY were working through the implications of the current proposals.   The purpose of the proposals was to try and get the 2023/2024 accounts back onto a reasonable timetable.  The deadlines did not apply to Pension Fund audits and they would go ahead through to completion.

 

The draft Statement of Accounts for 2021/22 was authorised for issue by the former Director of Finance on 8 August 2022.  EY had been working on the 2021/22 audit of accounts with the internal finance team since the start of September 2022.  There was a period of concentrated work on this audit between early September 2022 and the end of March 2023.  At that point, the audit was paused to allow the finance team to focus on the closure of accounts process for 2022/23 and to prepare a draft Statement of Accounts for the latest financial year.

 

One area that EY had been working on related to the Collection Fund Bad Debt provision.  The debt on both council tax and business rates was around £50m in total, so any judgement on the level of bad debt provision was significant. The Council reviewed its bad debt provision formula in 2021/22 because of comments made on the previous year’s audit and a general recognition that the existing provision was overstated in comparison to neighbouring authorities.

 

Given recent changes in relation to IAS 37 on provisions and contingent liabilities, the accounting standard that informed the local authority accounting code in this area, a stronger link was needed between the provision being held in the accounts and the actual collection of council, tax, and business rates debts from within the local community.  The final bad debt provision included within the 2021/22 accounts was around £36m.   This included the element of a new formula and a buffer for future collection issues, following the pandemic. Officers were in discussion with the external

auditor in relation to this change which could result in a material adjustment to the 2021/22 accounts and would need to be fed through the 2022/23 draft accounts. 

 

As a result of this potential audit adjustment and any possible changes needed for opening balances for the 2022/23 accounts, plus the delay in restarting the 2021/22 audit whilst awaiting further details from DLUHC, the Director of Finance had decided that the 2022/23 accounts would be published once the adjustment had been determined to enable her to be satisfied that the accounts presented a true and fair view of the Council’s financial position at 31 March 2023.  It was anticipated that the 2022/23 draft pre-audited accounts would be signed and issued before the end of this calendar year to enable the audit to commence subject to EY’s planned approach.  The accounts would be brought to the Audit Committee for consideration at the earliest opportunity thereafter.

 

A Member commented that the Council had recently been criticised in the press regarding the outstanding accounts but noted that Middlesbrough was different to other local authorities due to the current governance issues and government intervention.  The Head of Finance and Investment confirmed that there were some issues in the earlier years’ accounts that could impact the starting point for the 2022/2023 accounts and therefore needed to be resolved. 

 

AGREED that the information provided was received and noted.