Agenda item

The Head of Finance and Investment provided the Audit Committee with an update on Backstop Progress on the 2021-2022 and 2022-2023 Statement of Accounts (SOA).

As previously notified, the external audits of the Council’s 2021/22 and 2021/22 draft SOA, had been delayed for some time pending government direction on how to address the national backlog.  This applied to over 1,000 sets of unsigned local authority accounts across the country, with many local authorities being in a similar position to Middlesbrough of having more than one set of accounts not being audited.

The government had now set out and laid the legislation (9 September 2024) in relation to the statutory backstop dates.   These were the dates by which an external audit for a particular financial year needed to be finalised.

The first backstop date (13 December 2024) would clear the backlog of unaudited accounts up to and including 2022/23.   Where auditors had been unable to complete audits, they would issue a ‘disclaimed’ or ‘modified’ audit opinion.  Auditors were likely to issue hundreds of ‘disclaimed’ audit opinions and needed to make clear that this is not the fault of the organisation involved but of issues with the local audit system itself.

The five further backstop dates up to and including financial year 2027/28 allowed full assurance on external financial reporting to be rebuilt over several audit cycles.   It was the aspiration of the Government and key local audit system partners that, in the public interest, local audit recovered as early in this five-year period as possible.  This meant disclaimed opinions driven by backstop dates should, in most cases, be limited to the next two years (up to and including the 2024/25 - backstop date of 27 February 2026), with only a small number of exceptional cases, continuing thereafter.

While there would be modified or disclaimed opinions in relation to the external audit of financial statements, auditors’ other statutory duties – including to report on Value for Money (VfM) arrangements, to make statutory recommendations, and to issue Public Interest Reports – remained a high priority.

For Middlesbrough Council, the 2021/22 accounts audit was partially undertaken by Ernst & Young (EY) between July 2022 and March 2023.  At that point the audit was paused, given the Council’s finance team had to close down and prepare the 2022/23 accounts.  The audit should have restarted by July 2023 but did not, due to central government considering what to do about the backlog position nationally and there being uncertainty for external auditors about how to continue.

No further work had been carried out on the Council’s financial statements for 2021/22 since March 2023, except for a specific piece of work requested by the S151 Officer in relation to the collection fund bad debt provision.  EY had however continued their work on the Value for Money assessment and on the Teesside Pension Fund.  Both audits were progressing to a conclusion and the issue of the appropriate audit opinion.

Since the issue of the government legislation, EY had indicated that they could not give formal assurance on the 2021/22 council financial statements given the amount of work undertaken to date.   As a result of this, the audit opinion on these statements would be ‘disclaimed’.

In relation to the 2022/23 external audit process, the position was very similar to 2021/22.   The work on the Value for Money assessment and the Teesside Pension Fund, would be completed and reported to Members.  Work on the audit of the Council financial statements had not started given the delay on the 2021/22 accounts.  As a result, those financial statements would also be disclaimed in line with 2021/22.

The Value for Money interim results for 2021/22 and 2022/23 had been reported to the Audit Committee on 25 July 2024.  The results of the Teesside Pension Fund work for these years (including a finalised audit opinion) would be reported to a future meeting of the Audit Committee.

EY had provided further details on the process for disclaiming the financial statements audits for 2021/22 and 2022/23.  Given the number of potential disclaimed opinions needing to be issued, this work was being undertaken by a central disclaimer hub rather than the local EY team.  The information required would be submitted by the Council as soon as possible.

In terms of the 2021/22 and 2022/23 years, the financial statements and notes had been updated following of the conclusion of EY’s work on the revision to the bad debt provision on council tax and business rates.   Since these were material adjustments to the accounts, it was necessary for the responsible officer to re-certify the statement of responsibilities within the SOA document.  This was actioned by the Director of Finance on Tuesday 24 September 2024 and updated versions of these accounts would be published on the Council website.  These restatements were important since they influenced the opening balances for the 2023/24 accounts.

Once the legacy statements of accounts for 2021/22 and 2022/23 had been

reviewed by the EY disclaimer hub, disclaimed opinions would be issued by the external auditor to finalise the audit process for these financial years. These would accompany the value for money opinion and the true and fair view on the Teesside Pension Fund accounts.  The approval process for the audited accounts would then follow the normal process under the Accounts and Audit Regulations 2015.

The External Auditor, EY, commented that whilst the opinion on the financial statements was expected to be disclaimed there were still certain actions to be completed, including obtaining representations from management, in order to ensure compliance with the legislation.  Whilst there had been a slight delay in obtaining some of the information, the Auditor was confident that the reports on the disclaimer and Teesside Pension Fund accounts would be finalised for reporting to the next Audit Committee meeting.

A Member asked whether the Covid-19 pandemic had impacted on the audit process.  The Head of Finance and Investment stated that the pandemic had only caused a minor hold-up.  The reason for delay was mainly due to complexity in the local audit and financial markets which had got progressively worse over a period of time and was a national issue.  In terms of future, the finance team were very confident that the Council would meet the deadlines in terms of preparation.  The statutory dates had moved from the end of May to the end of June.  Additional investment had been made into the finance team to ensure there was sufficient capacity.

A Member asked whether the bad debt provision took account of the outstanding business rates.  It was explained that the Council had a methodology to state the amount of debt within a financial year and how that would be provided for.  A fair provision for the level of debt outstanding was included in the accounts and the auditors would examine that provision to check it was fair.  An active team continued to pursue debts from current and previous years and they would only be written off when it was no longer viable to chase them.

The Chair asked whether there would be any saving on audit fees.  The External Auditor stated that the Council and taxpayers would not be charged for audit work that had not taken place.    Dialogue would take place with the Auditors and the Public Sector Audit Appointments (PSAA) and the views of the Chief Executive and Section 151 Officer would be included in discussion.

AGREED that the position on the 2021/22 and 2022/23 external audit processes, and the subsequent steps required to finalise and approve the accounts for these years before the statutory backstop date of 13 December 2024, was noted by the Audit Committee.