Agenda item

1)     Middlesbrough Council

2)     Teesside Pension Fund

 

The provisional audit results report for Middlesbrough Council for 2019/2020 was presented.

 

The impact of the Covid-19 pandemic had caused significant additional work given the increase in the risk profile across all Local Authority audits. Key areas of the impact on risk assessment were in relation to property, plant and equipment, work around key judgements in respect of pensions and judgemental balances, and disclosures around going concern and whether their ought to be any material uncertainties around the financial position disclosed within Local Authority Financial Statements.

 

Subject to concluding outstanding matters listed in the submitted report, the External Auditor, Ernst Young, (EY) expected to issue an unqualified audit opinion on the financial statements. As previously advised, the value for money opinion would be modified in respect of the provision of Children's Services following the OFSTED inspection findings published in January 2020.

 

Section 4 of the submitted report identified the audit differences and they were also set out in the covering paper to the Financial Statements prepared by management. EY had confirmed their independence as required, together with other matters that had to be reported under auditing standards, in the appendices to the submitted report. EY were in discussion with management with a view to agreeing fees for 2019/2020 and any additional elements of impact in relation to 2019/2020 for the reasons outlined.

 

The auditor commented that there continued to be good working relationships between auditors and Council Officers and all had worked well to navigate through the challenges of the Financial Statement preparation process and the audit process, with a focus on quality as well as the wellbeing of the finance and audit teams. The auditor thanked the finance team for the support provided to EY in allowing them to make good progress in the discharge of their responsibilities.

 

Key aspects in terms of the findings were highlighted as follows:

 

●    Risk of fraud in revenue and expenditure recognition.

 

Testing had not identified any misstatements arising from fraud in revenue and expenditure, or other matters relating to this risk to bring to the Committee's attention.

 

●    Valuation of land and buildings.

 

It was previously reported in the Audit Plan Addendum that the Council's valuation this year was provided on the basis of material valuation uncertainty and the accounts disclosed that fact. The audit focussed on the Council's three main commercial assets: the two Centre Square buildings and the Tees Advanced Manufacturing Park (TAMP), since they were most likely to be impacted by the Covid-19 pandemic. EY's property experts agreed with the Council's valuation and noted that the valuations in the accounts were towards the bottom end of what was expected, but within a reasonable range. The Centre Square assets were recognised in-year as a finance lease, and came onto the balance sheet during the year with matching entries to the liabilities and were re-valued at the year-end. In the original draft accounts there was an impairment on those assets and Officers were now working through an updated lease calculation. This would not change the end value of the assets in the accounts and the net impact would be a reduction to the expenditure for the year due to a lower impairment charge and a lower liability on the Balance Sheet. The final numbers would be confirmed at a later date.

 

●    Valuation of defined benefit pension liabilities.

 

The audit of the Teesside Pension Fund identified misstatement within the asset values provided to the Authority's Actuary to inform the preparation of the Authority's IAS 19 report. Council Officers had assessed the impact on the Authority's allocated share of the Pension Fund's assets and quantified an overstatement of the Authority's pension assets of £4.7 million. This amount had been adjusted for in the Authority's Financial Statements.

 

The Ministry for Housing, Communities and Local Government (MHCLG) had published proposed remedies for removing age discrimination from the Local Government Pension Scheme (LGPS) as a result of the McCloud case. The valuation of scheme liabilities as at 31 March 2020 did not include the impact of remedies affecting deferred and pensioner members. EY did not expect these liabilities to be material, but were engaging with their pensions specialists to confirm this. This was noted as an outstanding matter in Appendix D to the submitted report.

 

●    Going concern and associated disclosures.

 

The Auditor confirmed that the Council had sufficient liquidity, including from planned borrowing, to support management's forecast cash flows over the period to 31 March 2021. EY had requested further cash flow forecasts for the period beyond 31 March 2021 to allow auditors to assess the required period of at least 12 months from the date of the auditor's report.

 

EY noted that the Council approved the transfer of the £4.9 million balance on the Authority's Investment Fund Contingency Reserve into the General Fund to cover the estimated £4.4 million impact of the Covid-19 pandemic on the Authority's 2020/2021 budget. The 2021/2022 budget would need to allow for the full impact of Covid-19, as the reserve transfer was a one-off that could not be repeated every year.

 

The cash flows for the period after 31 March 2021 and the going concern disclosures were noted as outstanding items in Appendix D to the submitted report.

 

●    Value for Money Risk.

 

EY's intention to qualify the Value for Money opinion in response to the OFSTED Inspection findings on Children's Services had been previously reported to the Committee. The reports of the appointed Commissioner for Children's Services in Middlesbrough and the Ofsted monitoring visit supported that the Council had since put in place appropriate governance structures to respond to the Ofsted findings. The majority of these structures however, were implemented very late in, or after, the period under audit. Accordingly, the auditor confirmed the intention to modify the value for money opinion for 2019/20 with regards to the provision of children's social care services.

 

Responding to a Member's question in relation to the overspend in Children's Service over a several years, the Director of Finance confirmed that under the Council's budgetary framework, individual Directors had delegated responsibility for their own budgets. It was pointed out that there were demand-led provisions within children's social care and statutory responsibilities that had to be met by the Council. The Director of Finance outlined measures that would be taken going forward to ensure that overspends did not continue. The £6.7 million forecast for the overspend in the current year was the headline overspend against the budget that was set for Children's Services at the start of the year. Included in the budget for 2020/21 was a £3 million demand provision in Central Services that could be offset against the £6.7 million leaving a net £3.7 million forecast overspend. A number of initiatives were being implemented through the work around the improvement journey and the improvement practice that would allow more timely and higher quality interventions for children and would cost less. A key part of future budget setting would be to ensure appropriate provision in light of financial sustainability. The Director of Finance commented that Children's Services had improved their effectiveness and there was a better understanding of demands which would enable better budget forecasting than in previous years.

 

The Executive Member for Finance and Governance informed the Committee that a Members' Briefing would be arranged in the near future to provide an update Children's Services.

 

It was noted that the Value for Money judgement for 2020/2021 by the auditor would be made over the full period and would depend on how much progress had been made by 31 March 2021 as well as the opinions of OFSTED, the Department For Education (DfE) and their Commissioners.

 

In relation to the Teesside Pension Fund (TPF) audit, the auditor acknowledged the support and assistance of Council Officers during a difficult year. EY had substantially completed the audit of Teesside Pension Fund for the year ended 31 March 2020. Subject to concluding the outstanding matters listed in the submitted report, the auditor confirmed that EY expected to issue an unqualified audit opinion on the financial statements. The audit opinion would include additional narrative to highlight financial statement disclosures that the valuations of directly held property had been prepared on the basis of a ‘material valuation uncertainty'. These matters did not constitute a qualification of the audit opinion.

 

The auditor highlighted the following key points of the report:

 

●    Misstatements due to fraud or error.

 

No material weaknesses had been identified in controls or evidence of management override.

 

●    Valuation of unquoted pooled investment vehicles and Valuation of directly held property.

 

A lot of investments in the Pension Fund were Level 3 investments that were not valued in reference to public information and this made them more difficult to value. The Covid-19 pandemic had had a significant impact on markets and investments in the Pension Fund and resulted in a reduction in the value of the Fund relative to the prior year. Following discussions with Officers and Investment Managers, the Auditor was confident that the impact of Covid-19 had been reflected on the Financial Statements.

 

A number of misstatements within the information used to prepare the accounts had been identified and these were listed at page 15 of the submitted report. The auditor commented on two items relating to inaccurate information received from the Custodian, and a balance of £13.9 million for which there was insufficient supporting evidence to justify its recognition as an asset of the Fund. The auditor had provided recommendations in relation to resolving these issues in next year's accounts.

 

The other aspect of Level 3 investments was property. All of the assets in the Pension Fund tended to be more commercial and income generating in purpose. EY's experts had looked at a range of assets across different categories, focussing in particular on retail and assets that were at higher risk of misstatement due to the Covid-19 pandemic. It was highlighted that the valuations were at the upper end of the range.

AGREED as follows:
1. the Middlesbrough Council Audit Results Report for the Year Ended 31 March 2020 was received and noted.
2. the Teesside Pension Fund Audit Results Report for the Year Ended 31 March 2019 was received and noted.