Setting the record straight

On 18 January 2019 the Sunday Times published an article about Spelthorne Borough Council's property investments.  This story might have raised concerns with residents as it can only be described as erroneous and sensationalist.  The Council would like to set the record straight. 

The Council was contacted on Friday 18 January, being advised that an article was going to be published, asking specific questions and inviting general comments.  The full thrust of the article was not communicated to us. If it had been, we would have made additional points to correct the obvious errors in the report.

Selective comments have been taken from an Audit report from July 2018 which was made publically available and reported through our Audit Committee.  The full set of documents for that Audit Committee are on our website

Nowhere in the report do KPMG criticise the Council or suggest that investment properties are actually overvalued.  In fact it states that the Council's approach is "balanced". 

The report states:

  • The Authority has purchased a number of investment properties during the 2017/18 financial year, in addition to the BP Campus which was purchased in 2016/17. There is a risk that such assets, which are outside the Authority's core operations are overvalued and not accounted for correctly within the financial statements. We will review the approach that the Authority has adopted to assess the risk that the valuation of investment assets are not materially misstated and consider the robustness of that approach. We will assess the valuer's qualifications, objectivity and independence to carry out such valuations and review the methodology used (including testing the underlying data and assumptions). We will review the accounting entries to understand whether the purchase of the properties has been recorded correctly in the accounts. We will understand and challenge management around whether there any indicators of impairment. We have set out our view of the assumptions used in valuing investment properties at page 16. Our work in this area is ongoing and is intrinsically linked to our work on our value for money conclusion

Page 16:

  • We have engaged a valuation specialist to review the valuation reports related to the investment properties purchased by the Authority. The Authority has engaged professional valuers to value the investment properties. This includes the property held by the subsidiary, Knowle Green Estates Ltd. Our assessment of the assumptions in relation to the valuation is ongoing, however, our work to date in this area indicates the judgements that underpin it to be balanced

The article confuses references from the previous year's KPMG report when there were some issues initially with the draft statement of accounts arising from the departure of the chief accountant and deputy chief accountant and the capacity of the interim team brought in at short notice to assist with the close of accounts process.  There were no comments directed specifically to the question of investment assets.   In contrast, in the 2017 report KPMG state that the quality of the draft statement "was significantly improved from the prior year". 

The article quotes a CIPFA spokesperson regarding the reliance of adults' and children's services on funding from investment assets.  This Council does not have responsibility for adults' or children's services, and this obvious point has been missed by the journalist.  We believe it is highly unlikely that this comment has been made by CIPFA and we will be following this up. 

The specific questions and answers which were returned to the Sunday Times on 18 January 2019 were:

We are running a story on Sunday about KPMG's pre-audit report released in July which makes the following points:

  • Spelthorne Borough Council has borrowed one billion in loans from the Treasury to pay for 12 investment properties. The loans were made from the public work loans board. The council pays roughly £26 million on interest from these borrowings
  • total return from the properties is around £40m a year. This includes the BP business park
  • KPMG said in July in a pre-audit report that there was a risk that the property investment assets - including the BP business park - carried a "risk that such assets are overvalued". They said the investments were not accounted for correctly with the local authority's financial statements
  • it states the council's accounts for 2017 "had not been adequately prepared or reviewed by an appropriate member of the authority's finance team." "We identified a significant volume of disclosure errors and material inconsistencies within the accounts"

1.         Could you please provide a general response to the above information?

Total annual rental income is £50m including BP Business Park.

2.         What is your response to the point that the investments - including BP business park - carries a risk that they are overvalued?

All our investment assets are independently valued by professional valuers on an annual basis.  Whilst we are not investing for capital growth, the value of the portfolio has risen by £11 million which will reassure residents that we have invested wisely.

3.         We understand the full KPMG report is due out in February? Is this correct? Will it be made available to the public?

We are anticipating KPMG reporting to our Audit Committee in February and this meeting will be in public.

4.         Why was the decision made to change auditors from KPMG to BDO? 

It wasn't our decision. For all local authorities this decision is made nationally by the Public Sector Auditor Appointments body. We have no say over the choice of external auditor.

5.         Do you believe there is a conflict of interest in the fact that you are BDO's landlords? 

Public Sector Auditor Appointments body appointed BDO prior to Spelthorne Council acquiring that particular asset. The fact that BDO is now a tenant in one of our recently acquired assets was considered by BDO's ethics partner and was reported to our Audit Committee as to whether this created a material conflict of interest. Both parties concluded it did not.

6.         When do BDO take over auditing services? 

BDO is responsible for auditing the accounts from 2018/19 ie for year ending 31/3/19.

7.         Is each property in the 12 invested in using Treasury loans providing a return greater than the interest payment on those loans? 

Yes, we would not be acquiring assets if the return did not cover financing costs, debt repayments and supervision costs and generate sufficient surplus to enable the Council to set aside into sinking funds to cover future liabilities (such as rent free periods), and still generate a significant surplus. This surplus contributes toward the provision of services for our residents and supports the delivery of much needed affordable housing. Spelthorne Council operate the same investment model as a prudent pension fund.

Our proven property investment strategy is significantly supporting the services we provide to our residents. Since the implementation of this strategy there have been no cuts to services or call on reserves, no disposal of capital assets or above inflation Council Tax increases.

Thank you for your interest in Spelthorne Borough Council. You may be interested to read our publically available .