Agenda item

Audit Results Report 2020/21


The draft Audit Results Report for the Year Ended 31 March 2021 was presented for the Committee’s consideration.


The audit was designed to express an opinion on the 2020/21 financial statements and address current statutory and regulatory requirements.


The report contained the External Auditors’ findings related to the areas of audit emphasis, views on Middlesbrough Council’s accounting policies and judgements and material internal control findings. The report also included conclusions on the arrangements of Middlesbrough Council to secure value for money in its use of resources.


The Audit Planning Report presented at the 23 July 2021 Corporate Affairs and Audit Committee meeting provided an overview of the audit scope and approach for the audit of the financial statements.   The audit had been carried out in accordance with this plan, with the following exceptions:


           Changes in materiality: EY revisited the planning materiality assessment using the draft Statement of Accounts.  Based on the materiality measure of gross expenditure on provision of services, the overall materiality assessment was updated to £8.2 million (£7.9 million in the Audit Planning Report). This resulted in updated performance materiality at 75% of overall materiality of £6.1 million (£5.9 million in the Audit Planning Report).  The threshold for reporting misstatements of £0.4 million remained as reported in our Audit Planning Report.


           Value for Money: in the Audit Planning Report, one risk of significant

weakness was identified in the Council’s arrangements to secure value for money through economic, efficient and effective use of its   resources during 2020/21 relating to the provision of Children’s Services.  During the course of the audit, a second risk of significant weakness in the Council’s arrangements in respect of Member and senior officer relationships was identified.


EY’s audit work in respect of the Council was substantially complete.   The following items relating to the completion of audit procedures were outstanding:


           The Council had not yet produced an Annual Governance Statement that all signatories were comfortable signing.  Further revisions to the Annual Governance Statement were expected to fully articulate the risks of non-delivery of improvements and it would need to be reviewed by EY once it was agreed.


           Further guidance was awaited from CIPFA on modifications to the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2020/21 which was expected to introduce changes to the required presentation of infrastructure assets within the financial statements which management would need to action.


           Management signature of the Letter of Representation at the same time as the financial statements.


           Performance of final audit procedures, including a review for subsequent events which might impact or require disclosure within the financial statements, up to the date of the audit report.


Given that the audit process was still ongoing, EY would continue to challenge the remaining evidence provided and the final disclosures in the Statement of Accounts which could influence the final audit opinion, a current draft of which was provided in section 3 of the submitted report and confirmed that the financial statements:


           gave a true and fair view of the financial position of Middlesbrough Council as             at 31 March 2021 and of its expenditure and income for the year then ended;             and

           had been prepared properly in accordance with the CIPFA/LASAAC Code of             Practice on Local Authority Accounting in the United Kingdom 2020/21.


The key highlights in relation to the financial statements of the audit were presented and included:


           Audit differences: the total impact on the provision of services that would not             be corrected was £2.9 million. 

           Lease arrangements.

           Three instances of non-compliance –payments to a publicity company,             response to the inspection period and a query from a member of the public.

           Audit risks.

           Misstatements due to fraud and error.

           Value of Land and Buildings.

           Disclosure in respect of the Transporter Bridge.

           Pension Fund Liability.

           Going concern.

           Exit payments.


In respect of the Council’s arrangements to secure value for money, the Auditor concluded that there were significant weaknesses.


In relation to Children’s Services, the audit focussed on management of progress against the improvement plan and evidence of further inspections by independent parties.  EY was satisfied that satisfactory progress against the improvement plan was being made and the actions taken by the Council had been effective. 


In relation to Member and senior officer relationships, the volume of correspondence had been significant.  The evidence gathered led EY to conclude that arrangements at Middlesbrough Council were not as expected and were undermining good governance.  There were multiple instances where decisions had been taken without following procedures and process undermining the respective roles of Officers and Members.  These included, but were not limited to:


           Significant changes to the Boho X project occurring outside the framework. 

           Purchase of Covid tests outside of the required procurement process.

           Engagement of an individual to provide services that should have been provided by a Council employee.


In addition, EY’s observed a pervasive lack of trust within the Council between Officers and Elected Members, and between Elected Members, which was having a significant impact on the governance of the Council and was a contributing factor to the respective roles and responsibilities of Officers and Members not being adhered to.


In respect of the matters identified by the External Auditor, the following recommendations were made:


1.         The Council should develop a comprehensive Improvement Plan to address the cultural and relationship issues which existed within the Council as a matter of urgency.  It was the Auditor’s view that it was the responsibility of all Elected Members and Officers to work together to address these serious matters.  This would require the involvement of external specialists as the relationships within the Council had deteriorated to a point which the Council would not be able to remedy on its own.


2.         Refresher training should be provided to all of the Council’s Elected Members on the requirements of the Council’s Code of Conduct for Members, including the disclosure of pecuniary interests and the Seven Principles of Public Life (also known as the ‘Nolan Principles’), as set in the Council’s Constitution.


3.         Whilst it was recognised that the responsibility to declare actual or potential conflicts of interest sits with Members under both statute and the Council’s Code of Conduct, given the observations of the External Auditor, it was recommended that management implement additional assurance checks over Elected Member Declarations of Interest, for example by cross- referencing to Companies House records or declarations made by Elected Members to other public bodies, to provide additional comfort over their completeness.


4.         Management should undertake a review to establish whether there were any other arrangements at the Council which might have been entered into without following proper Council processes and, if so, review those arrangements to ensure that they were appropriate and represented value for money for the Council.


5.         Management should consider whether further assurance was required to establish whether the risks identified by the Council to date were complete and the actions taken to respond to those risks sufficient.


6.         Management should work with internal audit to ensure that where future pieces             of work identified evidence of wider risks which were not immediately followed-up on, those were reported, so that the Council’s Officers and the Corporate Affairs and Audit Committee could decide whether further investigation was appropriate.


7.         The Council should provide additional training to Members and Officers on the boundaries of respective responsibilities under the Council’s Constitution.  The Council should also seek to ensure that a culture of challenge, where those boundaries are not being adhered to, was understood by and expected from all parties as part of the wider Improvement Plan to address the cultural and relationship issues which exist within the Council.


The External Auditor commented that the most significant recommendations in the report would be highlighted in the audit opinion and would be followed up as part of the forthcoming annual audit.  Where the Auditor was not satisfied, he would consider whether to exercise any statutory powers.  The Auditor also extended his thanks to management for the assistance and excellent co-operation received under the circumstances.


Members of the Committee and other Councillors present at the meeting were given the opportunity to ask questions.  The External Auditor, Chief Executive and Director of Finance provided answers as appropriate. 


Questions posed in relation to the decisions highlighted in the report that were taken outside of Council processes could not be answered at this point in time due to potential conflicts of interest with other ongoing investigations or because they were outside the remit of the Committee and would be brought forward for consideration through the Standards process if necessary.


Members also discussed the Auditor’s recommendations and the Chief Executive confirmed that appropriate resources would be committed to funding the improvements required. 


AGREED as follows that the:

1.  information provided was received and noted.

2.  unadjusted audit differences were approved.      

3.  Auditor’s recommendations at 1-7 above in relation to addressing the

significant weaknesses in the Council’s arrangements to secure value for money were approved.

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