2018-09-26 annual audit letter - derbyshire...2018/09/26 · this annual audit letter summarises...

Public

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Agenda Item No.5 (a)

DERBYSHIRE COUNTY COUNCIL

AUDIT COMMITTEE

26 September 2018

Report of the Director of Finance & ICT

ANNUAL AUDIT LETTER 2017-18

1 Purpose of the Report

To provide Members with details of the external auditors’ Annual Audit Letter for 2017-18.

2 Information and Analysis

The Council’s external auditors, KPMG, are required to present an Annual Audit Letter to Members and officers of the Council. The letter describes the scope of the audit work for the financial year and reports on matters of significance arising from that work. It is a summary of their conclusions and provides an external assessment of the Council’s overall financial position.

The letter is a means by which KPMG, as appointed auditors, fulfils its statutory requirements, which are derived from the Audit Commission Act 1998 and the Audit Commission’s Code of Audit Practice. KPMG are required to provide an opinion on the Council’s financial statements and a conclusion on the Council’s arrangements for securing economy, efficiency and effectiveness in its use of resources. The issuing of the letter, along with an audit certificate, marks the end of the audit process for 2017-18. The Council has published on its website that the audit has been concluded in accordance with the Accounts and Audit Regulations 2015. A copy of the letter is shown at Appendix One. The details contained within the letter have been reported to the Committee previously.

3 Considerations

In preparing this report the relevance of the following factors has been considered:- financial, human resources, legal and human rights, equality of opportunity, health, environmental, transport, property, crime and disorder and social value considerations.

Public

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4 Background Papers Papers held in Technical Section, Finance & ICT Division, Room 137.

5 Officer's Recommendation

That Audit Committee notes the details of the Annual Audit Letter 2017-18.

PETER HANDFORD

Director of Finance & ICT

Annual Audit Letter 2017/18

Derbyshire County Council & Derbyshire Pension Fund

August 2018

Summary for Audit Committee

Section one

© 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

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Summary for Audit Committee

Audit opinion

We issued an unqualified opinion on the Authority’s financial statements on 30 July 2018. This means that we believe the financial statements give a true and fair view of the financial position of the Authority and of its expenditure and income for the year.

Financial statements audit

Our audit procedures are designed to identify misstatements which are material to our opinion on the financial statements as a whole . Materiality for the Authority’s accounts was set at £16 million which equates to just under one percent of gross expenditure. We design our procedures to detect errors in specific accounts at a lower level of precision. Materiality for the Pension Fund was set at £36 million which equates to just under one percent of total assets.

We report to the Audit Committee any misstatements of lesser amounts, other than those that are “clearly trivial”, to the extent that these are identified by our audit work. In the context of the Authority, an individual difference is considered to be clearly trivial if it is less than £0.8 million for the Authority (£1.8 million for the Pension Fund).

Material amendments were required to the 2017/18 financial statements because indexation was not correctly applied by the Authority in its 2017/18 valuation work. This resulted in one major property value adjustment with a total value of £126 million. This increased fixed assets by £126 million and there were associated amendments relating to the impact on the Authority’s reserves. These have some impact on revenue. The adjustments involved resulted in a net increase of £6.2 million in reported expenditure in the Comprehensive Income and Expenditure Statement. However, there was no impact on the general fund balance because of technical accounting adjustments neutralising effect on council tax. As a result of our work in this area we raised a high priority recommendation in relation to the controls in place in regard to the valuation process. This recommendation is detailed in Appendix 1 together with the action plan agreed by management.

The working papers provided this year have been of a good standard and were available at the start of the audit visit. The finance team responded promptly to any requests for additional information or explanation and were available throughout the audit visit. We thank the finance team for their co-operation throughout the visit which allowed the audit to progress within the allocated timeframe.

Our audit work was designed to specifically address the following significant risks:

• Management Override of Controls – our audit methodology incorporates the risk of management override as a default significant risk. We did not identify any specific additional risks of management override relating to the audit.

• Valuation of PPE – the Authority has adopted a rolling revaluation model which sees all land and buildings revalued over a five year cycle. This creates a risk that the carrying value of those assets not revalued in-year differs materially from the year end fair value. Indexation was not correctly applied in the 2017/18 valuation work leading to the material amendment of £126 million to the 2017/18 accounts.


This Annual Audit Letter summarises the outcome from our audit work at Derbyshire County Council (‘the Authority’) and Derbyshire Pension Fund in relation to the 2017/18 audit year.

Although it is addressed to Members of the Authority, it is also intended to communicate these key messages to external stakeholders, including members of the public, and will be placed on the Authority’s website.

This is KPMG’s last Annual Audit Letter to the Authority. We would like to take this opportunity to thank the Authority’s officers and the members of the Audit Committee for their support throughout the six years of our audit appointment.

Section one:



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Summary for Audit and Risk Scrutiny Committee (cont.)Financial statements audit (cont.)

• Pensions Liabilities – the net pension liability represents a material element of the Authority’s balance sheet. There is a risk that the assumptions and methodology used in the actuarial valuation of the Authority’s pension obligation are not reasonable which could have a material impact on the net pension liability accounted for in the financial statements. Our work on pension liabilities did not identify any significant matters which we need to draw to your attention.

Apart from the indexation issue outlined on the previous page, we did not identify any evidence of material misstatement as a result of our audit work on these significant risk areas.

Other information accompanying the financial statements

Whilst not explicitly covered by our audit opinion, we review other information that accompanies the financial statements to consider its material consistency with the audited accounts. This year we reviewed the Annual Governance Statement and Narrative Report. We concluded that they were consistent with our understanding and did not identify any significant issues.

Pension fund audit

There were no significant issues arising from our audit of the pension fund and we issued an unqualified opinion on the pension fund financial statements as part of our audit report. Our audit work was designed to specifically address the following significant risk relating to the pension fund:

• Valuation of hard to price investments - the pricing of complex investment assets may be susceptible to pricing variances given the number of assumptions underlying the valuation. Our work on the valuation of hard to price investments did not identify any significant matters which we need to draw to your attention.

Whole of Government Accounts

We will review the consolidation pack which the Authority is preparing in August 2018 to support the production of Whole of Government Accounts by HM Treasury. From our initial work we envisage reporting that the Authority’s pack is consistent with the audited financial statements.

Value for Money conclusion

We issued an unqualified conclusion on the Authority’s arrangements to secure value for money (VFM conclusion) for 2017/18 on 30 July 2018. This means we are satisfied that during the year the Authority had appropriate arrangements for securing economy, efficiency and effectiveness in the use of its resources. To arrive at our conclusion we looked at the Authority’s arrangements to make informed decisions, undertake sustainable resource deployment and work with partners and third parties.

Value for Money risk areas

We undertook a risk assessment as part of our VFM audit work to identify the key areas impacting on our VFM conclusion and considered the arrangements you have put in place to mitigate these risks. Our work identified the following significant risk:

• Delivery of Budgets - As a result of reductions in central government funding, and other pressures, the Authority continues to face similar financial pressures and uncertainties to those experienced by others in the local government sector. The Authority needs to have effective arrangements in place for managing its annual budget, generating income and identifying and implementing any savings required to balance its medium term financial plan. As part of our additional risk based work, we reviewed the arrangements the Authority has in place in these areas and for ensuring its continuing financial resilience.

We were satisfied that there were adequate arrangements in place during 2017/18 and there were no significant matters relating to these risk areas which prevented us from giving an unqualified VFM conclusion.


Section one:



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Summary for Audit and Risk Scrutiny Committee (cont.)High priority recommendations

We raised one high priority recommendation in relation to the controls in place in regard to the valuation process as a result of our 2017/18 work. This recommendation is detailed in Appendix 1 together with the action plan agreed by management.

Certificate

We cannot formally conclude the audit and issue an audit certificate until we have completed the work necessary to issue our assurance statement in respect of the Authority’s Whole of Government Accounts consolidation pack. We are satisfied that this work does not have a material effect on the financial statements or on our value for money conclusion.

Audit fee

The scale fee set by Public Sector Audit Appointments Limited (PSAA) for the 2017/18 audit is £125,356 plus VAT. The PSAA scale fee for 2016/17 was £125,356 plus VAT.

Our fee for the audit of the Pension Fund is £28,672 plus VAT (2016/17: £28,672 plus VAT).

Further detail is contained in Appendix 3.

Exercising of audit powers

We have a duty to consider whether to issue a report in the public interest about something we believe the Authority should consider, or if the public should know about.

We have not identified any matters that would require us to issue a public interest report.

In addition, we have not had to exercise any other audit powers under the Local Audit & Accountability Act 2014.


Section one:

Appendices



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This appendix summarises the high risk recommendations raised as a result of our audit.

High risk recommendations are defined as those issues that are fundamental and material to your system of internal control. We believe that these issues might mean that you do not meet a system objective or reduce (mitigate) a risk.

Details of lower risk recommendations can be found in our ISA260 Report 2017-18.

No. Risk Issue & Recommendation Management Response

1 1

Controls in place in regard to the valuation process

Risk

As documented earlier in this report the Authority failed to apply indexation in undertaking its 2017/18 valuation work. This issue resulted from an oversight in the preparation of the valuation working papers and was identified by internal audit work after the pre-audit statement of accounts had been issued. This resulted in an audit misstatement amounting to £126 million.

Last year we recommended that management should obtain sufficient assurance as to the valuation of its asset base in advance of the final accounts audit and against this backdrop we are making a similar recommendation this year that management should resolve the issues encountered in the valuation process.

Recommendation

Ensure that valuation work is completed and appropriately checked on a timely basis to enable accurate entries to be made in the pre-audit statement of accounts.

The full year impact of additional staffing resources aligned with an earlier start date for the valuation work compared to 2017-18 will ensure that the property valuations are completed in a timely manner.

Alongside additional validation checks it is expected that the resulting data will be of the right quality for the accounts in line with the requirements set out in the terms of engagement agreed between the Property and Finance & ICT Divisions.

These processes will be documented in the Valuations Procedure Manual.

Responsible Officer

Sarah Morris

Implementation Deadline

December 2018

High risk recommendationsAppendix 1:

Follow up of previous recommendations

As part of our audit work we followed up on the Authority’s progress against the previous high risk audit recommendation we made last year about the controls in place in regard to the valuation process. Progress has been made in relation to capacity issues, terms of reference, AMP1 forms and other detailed issues. However, valuation work is still not being carried out on a timely basis that allows for appropriate checking to ensure accurate entries are made in the pre-audit statement of accounts. We have therefore reiterated this recommendation.



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This appendix summarises the reports we issued since our last Annual Audit Letter. 2018

January

October

September

August

July

June

May

April

March

February

External Audit Plan

The External Audit Plan set out our approach to the audit of the Authority’s financial statements and to support the VFM conclusion.

Report to Those Charged with Governance

The Report to Those Charged with Governance summarised the results of our audit work for 2017/18 including key issues and recommendations raised as a result of our observations.

We also provided the mandatory declarations required under auditing standards as part of this report.

Auditor’s Report

The Auditor’s Report included our audit opinion on the financial statements along with our VFM conclusion.

Annual Audit Letter

This Annual Audit Letter provides a summary of the results of our audit for 2017/18.

Summary of reports issuedAppendix 2:



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External audit

The scale fee set by Public Sector Audit Appointments Limited (PSAA) for the 2017/18 audit is £125,356 plus VAT. The PSAA scale fee for 2016/17 was £125,356 plus VAT and we agreed an additional 2016/17 fee of £18,298 plus VAT in relation to PPE work and delays. Our fee for the audit of the Pension Fund is £28,672 plus VAT (2016/17: £28,672 plus VAT).

We were appointed by the Authority to audit Derbyshire Developments Ltd. Our fee for the audit of Derbyshire Developments Ltd is £4,000 plus VAT (2016/17: £5,000 plus VAT).

We envisage an additional 2017/18 fee relating to our work on the valuation issue encountered. We will discuss the impact of this issue on our work with the Section 151 officer. Any additional fee will be subject to PSAA approval.

Other services

We charged £26,000 to undertake an appraisal of the contract options available to the Council under the Waste PPP Contract signed in December 2009. The work is not yet complete and the fees for the work are to be split 70% Derbyshire County Council and 30% Derby City Council (as per the Inter Authority Agreement the Councils have under the partnership). Therefore, the proportion of fees charged to date that fall to be met by the County Council are £18,200

We charged £3,500 for the independent assurance report on the 2016/17 Teachers’ Pensions Return and envisage charging a similar amount for this work for the 2017/18 Teachers’ Pensions Return. This work is not related to our responsibilities under the Code of Audit Practice and was agreed through a separate Engagement Letter.

This appendix provides information on our final fees for the 2017/18 audit.

External audit fees 2016/17 (£’000)

Audit fee Pension Fund

audit fee

Audit-related services

Non-audit work

Planned 2017-18 Fees

Audit feesAppendix 3:


This report is addressed to the Authority and has been prepared for the sole use of the Authority. We take no responsibility to any member of staff acting in their individual capacities, or to third parties. We draw your attention to the Statement of Responsibilities of auditors and audited bodies, which is available on Public Sector Audit Appointment’s website (www.psaa.co.uk).

External auditors do not act as a substitute for the audited body’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.

We are committed to providing you with a high quality service. If you have any concerns or are dissatisfied with any part of KPMG’s work, in the first instance you should contact John Cornett, the engagement lead to the Authority, who will try to resolve your complaint. If you are dissatisfied with your response please contact the national lead partner for all of KPMG’s work under our contract with Public Sector Audit Appointments Limited, Andrew Sayers, by email to [email protected]. After this, if you are still dissatisfied with how your complaint has been handled you can access PSAA’s complaints procedure by emailing [email protected] by telephoning 020 7072 7445 or by writing to Public Sector Audit Appointments Limited, 3rd Floor, Local Government House, Smith Square, London, SW1P 3HZ.


The KPMG name and logo are registered trademarks or trademarks of KPMG International.

CREATE: CRT086281A

kpmg.com/uk

The key contacts in relation to our audit are:

John CornettDirector

T: 0746 8749927E: [email protected]

John PressleyAssistant Manager


Richard WaltonSenior Manager


2018-09-26 annual audit letter - derbyshire...2018/09/26 · this annual audit letter summarises...

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