Redmond Review questions

Spelthorne Borough Council Response

Q1. Who, in your opinion, are the primary users of or main audience for local authority accounts?

Local councils spend money and raise taxes on behalf of local residents, who have a legitimate interest in the accounts. Councillors are elected to represent residents and they must be accountable for the financial arrangements of the council. The accounts need to be understandable to lay members who have received a level of induction training and who are prepared to make some effort at familiarisation with basic financial terminology and conventions.

The increasing length and complexity of accounts in recent years have not helped the understandability of the documents. In practice it is the external auditors who review and scrutinise the accounts most closely.

Q2. Who are the other users of local authority accounts? Are any of these other users of accounts particularly important?

Other stakeholders include lobby groups such as Taxpayers Alliance who focus on very specific parts of the Accounts, such as chief officers remuneration.

Internal chief officers are another group of users of the accounts.

Indirectly there is potential to convey the accounts to local residents through summaries published in local bulletins etc.

Q3. What level of financial literacy or familiarity with accounts and audit is it reasonable to expect the primary users of accounts to have and what implications does this have for the information presented in accounts and or the information that should be subject to external audit?

Whilst it is important that professional accountants make efforts to present the financial information in as simple a way as possible, councillors have an obligation to get up to speed with a mandatory minimum level of understanding. Audit Committee members should be expected to have an above average level of understanding, which should be supported by officer and 3rd party training. It is important that the Audit committee members are in a position to ask appropriate challenging questions of both officers and external auditors.

Not all people are comfortable with numbers and so consideration should be given to alternative presentations. In particular there is a need to understand trends and changes from prior years. This highlights the particular importance of the narrative foreword. Consideration should be given to defining standardised visualisations of key information e.g. income and expenditure. These might be supported by provision of comparisons or reference to averages or relevant norms. This could be similar to the comparisons used for schools and educational attainment.

Q4. Does the external audit process cover the right things given the interests of the primary users of the accounts and is the scope of the opinions wide enough?

We believe that the accounts provide the relevant information, but the format is inaccessible. The financial accounting needs must be met, but this does not prevent presentation in more meaningful formats. To assist primary users understanding of the accounts it would assist if councils could look at how they align more closely their treatment and accounting of issues such as pensions costs in management reporting to the treatment required for financial accounting. However, there will always be timing issues with adjustments flowing through the actuaries IAS19 reports.

We are not sure whether increasingly technical validations such as pension and asset valuations are necessarily going to produce any more meaningful information to the users of accounts. Surely what is required is a rather more general assurance that the overall financial health and governance arrangements of an audited body are sound and that the resources have been used efficiently and effectively in service delivery and that this can be easily demonstrated to stakeholders

Q5. Is the going concern opinion meaningful when assessing local authority resilience? If not, what should replace it?

All councillors should be very interested in whether the Council is financial solvent and likely to be able to continue with its operations. It is not easy to extract this information from the current presentation, which appears to be a technical view to satisfy accounting standards.

As the report indicates, the accounts of councils will always be treated as meeting the going concern, so issuing a going concern statement is meaningless and adds nothing to the understanding of how financially resilient a council is.

Q6. In your opinion, what should an external audit of a set of local authority financial statements cover?

A lot of time and focus of the external audit regime is on the end of year reporting, however, there is equally an argument that more scrutiny should be placed on the budget process to ensure that is robust and helping to ensure a sustainable financial position for councils. This would also link with the emphasis set out in the new CIPFA Financial Management Code on assessing financial resilience.

Accounts of local authorities rightly should cover the same core statements as other entities' accounts do, plus where relevant the additional statutory statements around Collection Fund, HRA, Pension Fund.

Q7. In your opinion, what should the scope of the external auditor's value for money opinion be?

We would prefer to see a number of VFM observations rather than a single binary statement. That the external auditor feels the need to issue an adverse VFM statement for the Council is far less important than understanding areas of weakness and then following a positive course of action to resolve them. It is equally important that VM opinions are issued on as timely a basis as possible to maximise the potential to influence future actions undertaken by the Council, the report indeed highlights the Spelthorne example whereby the time the opinion was issued several further transactions had been completed and potentially any lessons from the VFM opinion could have been applied. The VFM observations should not been seen as something that the Council is expected to defend or refute, but as a stimulus for improvement.

Q8. What is your view on the scope of an external audit engagement as described in Chapters 1 and 2 of this Call for Views?  If it is different from your expectations, does this have implications for the reliance you place on external audit work?

We would like to see closer collaboration with Internal Audit. Where the IA function has undertaken a relevant investigation, the external auditors should take this into account. Internal Audit have regular liaison meetings with the current external auditors, providing an opportunity to highlight significant control weaknesses identified from internal audit reviews as well as give reference to suspected fraud investigations underway/improvement actions required to enhance the control environment.

We would like to see external auditors informing the future plans of the internal auditors ie being able to suggest areas or activities that might benefit from internal audit consideration. A close working relationship (but still at arms-length) between external and internal auditors can be beneficial to both and provide additional assurance to members. . However, it should be recognised that Internal Audit are better placed to inform future plans of internal audit activity. This is because being internal to the organisation enables greater insight into current and emerging risks facing the Council and their relative significance, thereby informing work plans. We do believe that there are benefits of a close working relationship between internal and external Audit in terms of provision of assurance to the Council.

Q9. Should the external audit engagement be extended? If so, which additional areas or matters are most important for external auditors to look at? What would be the cost implications of extending the engagement to the areas or matters you consider to be most important be?

As per 6 above budget process.

Q10. Should the scope of the vfm opinion be expanded to explicitly require assessment of the systems in place to support the preparation of some or all of the reports that statute requires to be presented to full Council? If you do, which reports should be within scope of the external audit vfm engagement? If not, should these be assessed through another form of external engagement? If you believe that the vfm opinion should be extended to cover these reports will there be implications for the timing of audit work or auditor reporting?

No. We do not see the benefit of this. However, as stated above perhaps VFM could focus more on the budgeting process.

Q11. Should external auditors be required to engage with Inspectorates looking at aspects of a local authority's service delivery? If you believe that this engagement should happen, how frequent should such engagement be, and what would be the end purpose of doing so?

No more comment as this has more relevance to upper tier authorities.

Q12. Does the current procurement process for local authority audit drive the right balance between cost reduction, quality of work, volume of external audit hours and mix of staff undertaking audit engagements?

No, since abolition of Audit Commission and creation of PSAA too much focus has been on driving down audit fees at the expense of quality of work and having right mix of staff appropriate to undertake audits. The procurement process must ensure proper quality of audit or the whole process is pointless. If there is any evidence that downward price pressure is having this effect, then the process is not working to the benefits of Councils and their residents.

There is a suspicion that the reduction in the basic fee has increased a perverse incentive for firms to find reasons for claiming for additional work, for example with respect to pension issues this year.

Equally would query the decision to reduce the target deadlines for producing draft accounts and particularly completion of audits as this compressed the work of audit firms, when there is a noticeable demand from stakeholders other than government for faster audited accounts. Has resulted in this year in 40% of external audits missing the July 31 deadline

Q13. How should regulators ensure that audit firms and responsible individuals have the skills, experience and knowledge to deliver high quality financial and vfm audits, whilst ensuring the barriers to entry do not get too high?

This is something that members should be able to assume for any successful bidder. Members must be able to rely on the standard of the audit work. If an external auditor raises concerns, members may have to choose between trusting the Council officers or accepting the external perspective. If there is any doubt about the experience or knowledge of the external audit team the members will inevitably trust the officers and this may be inappropriate.

There needs to be a clearer and more transparent process for councils to speedily raise concerns about quality of their external auditors' work.

Q14. What metrics should regulators use when assessing whether financial and vfm audits are delivered to an appropriate level of quality?

Feedback from councils.

Consistency of issues raised ie picking up when auditors change approach on interpretation of issues, are previously treating one way, when not in response to change in accounting standards or steer from regulators.

Length of time taken for draft VFM opinions to be issued.

Q15. Do you agree with the Independent Review of the Financial Reporting Council's findings and recommendations, and why do you agree or not agree? If you agree with the recommendations do you think the 'single regulatory body' should be the "successor body to the FRC" or a sector specific entity? If you do not agree with the recommendations are there any other changes you would make to the regulatory framework for local authority audit?

Audit Committee members want the assurance that all external audit work is being undertaken to a consistently high standard and that this is underpinned by regulation.

Q16. Do external audit firms have enough understanding of the local authority regulatory framework to focus audit work on the right areas? How do they or should they demonstrate this? Who should regulate this work?

Experience is variable. Some do not. PSAA or a successor body should have enhanced resources to monitor and address performance of firms.

Q17. Do audit standards have a positive impact on the quality of local authority financial audits?

Variable impact. Particularly for those standards which are brought forward to address largely private sector issues, which may then generate a lot of work around disclosure without adding much material understanding.

Q18. Do audit firms allocate sufficient resources to deliver high quality and timely audits? How is consistency and quality maintained in external audit work? To what extent is there consistency in audit teams year on year? What more can be done to ensure consistency between firms?

No as a result of fee reductions, insufficient resources are allocated and not always of a sufficient quality. Members must be able to rely on the quality of audits

There is often inconsistency between approach of teams from same firm when there is a change of partners or managers involved in the audit.

Q20. Should external auditors consider financial resilience as a key factor when designing their vfm work programme? If so, what factors do they or should they consider as indicative of a lack of financial resilience?

Yes, in the context of the dramatic funding reductions imposed on councils since the austerity period began this is a key concern and is a concern which is our government stakeholder does not appear to fully appreciate.

Factors such as trends in movement of reserves could be considered, but need to treated carefully to ensure there is an understanding of purpose of why specific reserves are held and reasons for draw down.

As the report notes VFM opinion is backwards looking. There should be a focus on the medium term financial planning projections of councils and probing of whether they are being overoptimistic about future funding, delivery of savings etc.

Q19. To what extent are senior audit staff, particularly the responsible individual signing the audit certificate, visibly involved in audit work? Who do senior audit staff meet with?

In our experience, limited visible involvement. Senior audit staff tend to meet S151/chief Accountant.

Q21. Does the Code of Audit Practice provide enough guidance on how much work needs to be done to support the vfm opinion? If not, what should it cover?

This is very difficult to be covered by guidance as it is quite subjective. The guidance should be expanded, but as long as the auditors have sufficient experience in the local authority sector and have a detailed understanding of the individual authority then they ought to be able to issue appropriate VFM judgements.

Q22. Do audit standards provide appropriate guidance on quality standards for vfm audits? If not, is guidance needed, and should it be included in the Code of Audit Practice or elsewhere?

We agree the guidance should be expanded and should be included in the Code. We welcome the proposals for the revision of the Code to move to a more narrative form of VFM opinion and away from a binary judgement.

Q23. What is the current relationship between external and internal audit? How should that relationship be developed to add most value to local authorities and local residents?

See response to Q8. As flagged, to some extent it was a backward step when external audit moved away from placing some reliance on work of internal audit. Where appropriate External Audit should give reference to Internal Audit recommendations (significant) on core financials/key governance areas in their reports and where External Audit make the same recommendation as a result of their 'systems work' this highlights a consistent message.

Q24. What should happen when a regulator finds that a local authority audit has not met quality standards? Where should the balance between ensuring effective enforcement action against auditors and maintaining participants in the audit market lie?

The regulator should oversee remediation of the shortfalls in the audit. All work and regulator costs should be borne by the external audit company. A proportion of the audit fee should be refunded. The regulator should publish information on actions required to address audit failings on an annual basis so that Councils are aware of which companies are falling short of the expected standard. Audit firm should be very jealous to guard their reputations.

Q25. Do you think that the format of the vfm audit opinion provides useful information? If not what would you like it to cover?

The Spelthorne VFM statements for 2016/17 and 2017/18 have been disputed and any value or assurance that they should have offered has been completely lost. The information in the VFM is now of no use at all. The 2016/17 draft VFM took so long to be issued that it diminished its usefulness in impacting on subsequent actions of the Council. Whilst the circumstances are probably unique, the idea that a VFM statement is late and then inaccurate/disputed demonstrates the need to change the process.

Q26. Do you think the vfm opinion should be qualified solely because a local authority has received an inadequate Ofsted opinion or a similar opinion from another inspectorate?

No comment, as more relevant for upper tier authorities.

Q27. Do you think that the vfm opinion is presented at the right point in a local authority's annual financial management and budgeting cycle? If not when do you think it would be most useful?

As eluded above might be better to move away from a single VFM statement, and have a budgetary focused statement ahead of the Budget being set. So agree there is potential to decouple from the Statement of Accounts timescales.

Q28. Where auditors have identified significant issues, audit certificates and reports have often been delayed? Why do you think this is and can changes be made to the framework to encourage earlier reporting of significant issues?

Any delay to reports undermines their value. External auditors should be obliged to present their findings in a timely fashion, and this should not be delayed by push-back or objections by the Council. The external auditor's reports should represent their views which they should be able to substantiate.

One suspects audit opinions are delayed partly because of overly cautious approaches by firms.

Q29. In your view, what sorts of issues should Public Interest Reports be used to highlight?

Public Interest Reports should be issued if the local authority has found to have acted illegally or fraudulently.

Q30. Statistics demonstrate that very few Public Interest Reports and Statutory Recommendations have been issued. Why do you think this is? Does it indicate an issue with the framework or common behaviours? If you think this is an issue, what can be done to incentivise more frequent and timely reporting of significant issues?

May indicate that largely councils are making appropriate arrangements to deliver VFM. It could be that major issues are not arising that require Public Interest Reports or Statutory Recommendations. Unless many issues suddenly appear, it would seem that authorities are working within statutory regulations.

Q31. Does a publication summarising the results of local authority audits add value? If so who should publish it and what information would they need to have access to perform this function effectively?

This should be part of the role of the regulator. In practice has limited impact.

Q32. To whom should external auditors present audit reports and findings, is it the audit committee, to full council or equivalent or another committee?

If findings are not presented to full council or equivalent what information (if any) should full council or equivalent receive? Accounts should be presented to the Audit Committee in the first instance who should undertake scrutiny on behalf of the Council members. Further presentation to the full Council by the Chairperson of the Audit Committee is required to make sure that members cannot avoid their responsibilities in respect of financial management.

Q33. In your authority, what is the membership of the audit committee, number of members, how many are independent etc, and which officers typically attend?

Currently 7 councillors on a party proportional basis. No independent members - Council will potentially consider exploring options for enhancing by bringing in one or two independent members possibly by combining its Audit and Standards Committees.

Q34. How should local authorities track implementation of recommendations made by internal audit, external audit and relevant statutory inspectorates? What should the external auditors do if recommendations are not being implemented?

External auditors should comment, as felt necessary, on any internal audit work that considered areas included in the scope of the external audit. Any issues or concerns, including failure to implement recommendations, should be highlighted. Any action is the responsibility of the Council. Audit Committees should receive regular updates from officers on progress in addressing internal and external audit recommendations.

Q35. Should there be a role for an external body in tracking action taken in response to modified audit opinions and or statutory recommendations and public interest reports? If so should that responsibility sit with MHCLG, the sector specific oversight body recommended by the Independent Review of the Financial Reporting Council or another body?

This should be considered within any regulators' role. Ideally this would be the case and would be a sector specific body. In reality the resources required to provide this effectively could make this unfeasible, and would have to wonder what else this would add to the scrutiny provided by each authorities own scrutiny committees. Also, would the body's remit be to just track, or to enforce sanctions if the remedial action was not taken?

Q36. Do local authority accounts allow the user to understand an authority's financial performance and its financial resilience? If not, how could they be revised to be more understandable? What information could be presented to enable users of the accounts to understand whether the financial position of a specific LA is getting better or worse?

Covered elsewhere.

Q37. The UK Government is committed to maintaining IFRS based accounting for the UK public sector. Given this, how would you recommend resolving the mismatch between the accruals and funding basis to improve the understandability of local authority accounts?

As commented above may be potential for Councils to expand their Budget setting statements to translate from the funding basis to the accruals' basis to enable subsequent easier comparison of outturn against budget.

Q38. Do you think that summary financial information should be reported in the annual report section of the accounts? If so, on what basis, and should this information be covered by the financial audit opinion?

Yes. Agree should be covered by the financial audit opinion. A brief summary showing how the local authority has performed should be a proscribed part of the annual report/narrative statement section. Ideally this would explain the management accounts outturn vs accounting position in a simplified way. The auditors should be able to track these numbers back to the main statements and notes. This would tell the story in a much clearer way to users of the accounts without a finance background. Most users reading the accounts would not be differentiating between the narrative report being an unaudited document, and the statements and notes being audited - they would assume the audit opinion would cover the whole document.

Q39. If you think that summary financial information should be reported in the annual report section of the accounts, should it be presented with performance information? If so, what performance information would be of most interest to stakeholders?

Yes. A summary comparison of outturn against original budget ie how has the Council performed against what they said they would spend in order to deliver services. Summary of Balance Sheet movements year on year.

Q40. For larger authorities, does the inspection and objection regime allow local residents to hold their council to account in an effective manner? If not, how should the regime be modified?

This seems to be sufficient, as requests for inspection are not common, and objections even rarer. This may need to be reviewed in future if further funding reductions require the reduction of services, which could lead to a larger number of objections. See previous comments about usefulness of accounts. One possibility is to align the inspection process with the Freedom of Information requirements.

Q41. Is more guidance needed to help auditors assess the impact of significant changes to common business models? If so is this guidance needed to support the financial audit, the vfm audit or both?

Yes for both. In our experience auditors do not always understand the due diligence methodologies appropriate for newer areas of commercial activity.

Q42. Is the financial reporting and audit framework for larger category 2 authorities appropriate? If not, what additional information should be subject to audit and assurance, and what would be the cost implications of this?

At the current time local government accounts are only useful to residents who are either qualified accountants or have enough time to gain an understanding. Information provided by Council publicity is always at a very summarised state and offers no genuine opportunity to question expenditure and financial direction.

When assessing the quality of schools, parents have the chance to see the latest OFSTED report and the national KPIs and comparators. If this type of objective information was provided, residents would be much better able to understand how well the Council was managing public money. All such datasets are flawed, but they do enable lay people to start to engage with the finances of the Council.

Q43. For smaller authorities, does the inspection and objection regime allow local residents to hold their council to account in an effective manner and is the cost of processing and responding to objections proportionate?

If not, how should the regime be modified? No comment