Audit Committee - Thursday 25 November 2010 at 10.00Am Item 4 - Response to Hertfordshire

RESPONSE TO AUDIT COMMISSION ANNUAL GOVERNANCE REPORT 2009/10

Report of the Director of Resources and Performance

[Author: Claire Cook, Assistant Director Strategic & Specialist Services

Tel: 01992 555737]

Executive Member: David Lloyd (Resources and Economic Wellbeing)

1.Purpose of the Report

1.1To provide the Committee with a recommended response to the Audit Commission’s Annual Governance Report presented to this meeting.

2.Response to the recommendations made under S11(3) Audit Commission Act 1998 Annual Governance Report

2.1The District Auditor has made formal recommendations under Section 11 of the Audit Commission Act 1998 on 1 November 2010. The District Auditor has also made 11 recommendations in his annual governance report. The recommended response to these is shown in the sections below, after each recommendation. Following the meeting officers will work with the Audit Commission to complete the action plan shown in Appendix 3 of the Audit Commission’s report.

2.2Recommendation made under S11(3) Audit Commission Act 1998 - The Council should put in place robust arrangements for the production of the 2010/11 financial statements which meet statutory requirements and professional accounting standards. In order to achieve this, the Council should:

• ensure sufficient resources with the requisite skills are available to support the accounts production;
• develop a comprehensive project plan which ensures:

- a) the entries in the accounts are supported by good quality working papers which are available at the start of the audit;

- b) the financial statements and working papers have been subject to robust quality assurance by officers prior to approval by the Audit Committee;

• provide additional training, where necessary, to ensure all staff involved in the accounts production process have the necessary skills and information; and
• monitor the production of the financial statements through regular reporting to senior officers and members

A revised structure for the Herts Finance service has been agreed and is being implemented. The revised structure, which provides clear accountabilities in terms of key deliverables, is set out in Appendix 1 of this report. An appointment to the Head of Accountancy Services position has been made with a start date of 29 November 2010. Permanent recruitment for other posts is underway; in the meantime all vacant posts in the Accountancy Services team are filled by internal secondments.

A Best Practice Accountancy Project (BPAP) team has been set up, sponsored by the Director, Resources & Performance. The outcomes of this project are intended to deliver:

• A simplified Statement of Accounts
• Automation of the Trial Balance and Notes/ Working Papers from SAP, rather than manual processes
• A quarterly trial balance, which will be built in to monitoring processes/ timetable
• Draft accounts to Audit Committee by 14 June 20

This will mean that the Statement of Accounts and working papers will be better integrated and will allow time for quality assurance of the accounts and working papers.

Training sessions on the accounts and related matters have already begun, and will continue through the year. The Audit Commission have agreed to assist in delivering appropriate training sessions.

The BPAP project is being sponsored by the Director, who will report regularly to the Chief Executive and Strategic Management Board. Progress will also be reported monthly to the Executive Member; and also regularly to the Policy & Resources Cabinet Panel and to the Audit Committee.

2.3Recommendation 1 – Undertake validation checks on council tax data provided by the districts before including it in the accounts. Where the figures subsequently change, quantify the impact before deciding whether to amend the accounting entries.

The Council cannot 'validate' Districts information as it is on their systems and ledgers. However, we will require certification of the data by the Districts’ S151 officers, with an agreement that they notify us if they make any subsequent amendments. We will quantify the impact of any such amendments and decide on action accordingly.

2.4Recommendation 2 -

Set up processes and controls for the new asset management system to ensure that:

• it is updated for asset additions, disposals, valuations and changes of use
• it holds data on component assets to comply with IFRS requirements
• data extracted from it for accounting purposes is in a suitable format to support the accounts; and
• entries in the accounts reconcile to the asset register.

All elements of this recommendation are agreed and are being addressed as part of the updating and refining of the integrated asset management system processes.

2.5Recommendation 3 - Review the format of assets registers for other fixed assets and ensure proper controls over their maintenance are in place.

We will review the format and control of the maintenance of the fixed asset registers for non-land & buildings assets.

2.6Recommendation 4 - Improve procedures for identifying and coding expenditure as capital.

Guidance has been produced and published on the identification of capital expenditure and its coding. This has been communicated to both finance staff and service managers, and the key messages will be reinforced with relevant budget holders and other officers, including Headteachers and Chairs of Governors.

2.7Recommendation 5 - Depreciate non-operational buildings. Charge two years’ depreciation in 2010/11 to correct for the non- charging in 2009/10

Charging of depreciation on non operational assets will be reviewed in 2010/11. Appropriate depreciation will be charged for both 2009/10 and 2010/11, so as to cover any 2009/10 omissions. The treatment will be disclosed in the Statement of Accounting Policies in the 2010/11 Statement of Accounts.

2.8Recommendation 6 - Improve controls over the general ledger by:

• reassessing access by roles and restricting access to appropriate officers;
• improving segregation of duties in respect of journals; and
• amending the structure of the ledger so that it can produce information in the form needed for the accounts.

Revised arrangements will be introduced to ensure that when moving jobs, an officer will automatically lose rights associated with the old role. A process will also be implemented for posting journals with any single line above £500k, to be authorised by an appropriate independent senior finance officer; this limit will be monitored and reviewed in the context of the 2010/11 closure process. The BPAP project will address the revision to the chart of accounts on SAP to enable the production of information in the form needed for the accounts.

2.9Recommendation 7- Improve segregation of duties over raising invoices in the accounts receivable system by removing 'super' user access

An exercise is being undertaken to review accounts receivable access to allow controls, in relation to parking / posting, to operate correctly.

2.10Recommendation 8 - Review all entries on the debtors holding code. Where entries are not valid debtors, transfer them to the correct account or write them off if no longer needed

This issue will be covered by the BPAP project. As part of the process to improve accountability, cross departmental debtors will be removed and replaced by service specific codes. To achieve this, existing balances will be reviewed and appropriate correcting action taken.

2.11Recommendation 9 - Review the treatment of all grant balances and grants received in 2009/10 as part of the introduction of IFRS to ensure that they are accounted for correctly

This is being dealt with as part of the BPAP project.

2.12Recommendation 10 - Comply with all relevant aspects of the 2010/11 IFRS accounting code.

This will also be covered by the BPAP project.

2.13Recommendation 11 - Support the cash flow statement with sufficient working papers to show the source of all the figures and remove the need for balancing amounts.

The Council is planning to use the CIPFA cash flow model for the 2010/11 accounts, which is IFRS compliant. Appropriate supporting working papers will be produced.

3.Letter of Representation

3.1Paragraph 57 of the Audit Commission’s report sets out the requirement for a further letter of representation and Appendix 2 of their report is the formal request from the auditors for it. As noted in the Audit Commission’s request, this is to be signed by the Chairman of the Audit Committee and the Chief Finance Officer. A draft is attached at Appendix 2 to this report for members to review. The final letter must then be signed within 14 days of the District Auditor issuing his opinion on the accounts.

4.Suggested Resolution

4.1The Committee is invited to approve the response to the recommendations of the Hertfordshire County Council Annual Governance Report 2009/10 and the Letter of Representation (at Appendix 2).

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Item 4 – Response to the Hertfordshire County Council AGR 2009/10

Herts Finance StructureAppendix 1

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Item 4 – Response to the Hertfordshire County Council AGR 2009/10

Appendix 2

Mr. M. Hodgson Hertfordshire County Council

District Auditor County Hall

Audit Commission Hertford SG13 8DP

Regus House

1010 Cambourne Business Park Fax : 01992 555505

Cambourne Telephone: 01992 555601

CambridgeE-mail:

CB23 6DP Minicom: 01992 556611

Contact: Mike Parsons

My Ref:

Your Ref:

Date: 25 November 2010

Dear Mr. Hodgson

Hertfordshire County Council (including the Firefighters’ Pension Fund) Audit of accounts 2009/10

I confirm to the best of my knowledge and belief, having made appropriate enquiries of officers of Hertfordshire County Council, the following representations in connection with your audit of the Council’s financial statements including the Firefighters’ Pension Fund for the year ended 31 March 2010.

Compliance with the statutory authorities

I acknowledge my responsibility under the relevant statutory authorities for preparing the financial statements in accordance with the Code of Practice for Local Authority Accounting in the United Kingdom: A Statement of Recommended Practice which give a true and fair view of the financial position and financial performance of the Council and the Firefighters’ Pension Fund and for making accurate representations to you.

Supporting records

All the accounting records, have been made available to you for the purpose of your audit and all the transactions undertaken by the Council and the Firefighters’ Pension Fund have been properly reflected and recorded in the accounting records. All other records and related information, including minutes of all Council and Committee meetings, have been made available to you.

Going Concern

I confirm that it is appropriate to adopt the going concern basis in the preparation of the Council’s financial statements

Irregularities

I acknowledge my responsibility for the design and implementation of internal control systems to prevent and detect fraud or error.

There have been no:

• irregularities involving management or employees who have significant roles in the system of internal accounting control;
• irregularities involving other employees that could have a material effect on the Council’s or the Firefighters’ Pension Fund financial statements; or
• communications from regulatory agencies concerning non-compliance with, or deficiencies on, financial reporting practices which could have a material effect on the Council’s or the Firefighters’ Pension Fund financial statements.

I also confirm that I have disclosed:

• my knowledge of fraud, or suspected fraud, involving either management, employees who have significant roles in internal control or others where fraud could have a material effect on the Council’s or the Firefighters’ Pension Fund financial statements; and
• my knowledge of any allegations of fraud, or suspected fraud, affecting the Council’s or the Firefighters’ Pension Fund financial statements communicated by employees, former employees, analysts, regulators or others.

Law, regulations, contractual arrangements and codes of practice

There are no instances of non-compliance with laws, regulations and codes of practice, likely to have a significant effect on the finances or operations of the Council or the Firefighters’ Pension Fund. The Council and the Firefighters’ Pension Fund have complied with all aspects of contractual arrangements that could have a material effect on the financial statements in the event of non-compliance. There has been no non-compliance with requirements of regulatory authorities that could have a material effect on the financial statements in the event of non-compliance.

Fair values

I confirm that the significant assumptions within the Council’s financial statements, covering investments, loans, depreciation and accruals assumptions, are reasonable. Specifically in relation to:

• the appropriateness of the measurement method;
• the completeness and appropriateness under the financial reporting framework; and
• whether subsequent events require adjustment to the fair value measurement.

Group entities

I confirm that the Council does not have any material interests in other entities that would require the preparation of group accounts.

Assets

I confirm that the following have been properly recorded and, where appropriate, adequately disclosed in the Council’s financial statements:

• losses arising from sale & purchase commitments;
• agreements & options to buy back assets previously sold; and
• assets pledged as collateral.

Compensating arrangements

I confirm that there are no formal or informal compensating balancing arrangements with any of the Council’s cash and investment accounts. Except as disclosed in Note 34 to the financial statements the Council has no other lines of credit arrangements.

Contingent liabilities

I confirm that there are no other contingent liabilities, other than those that have been properly recorded and disclosed in the Council’s and the Firefighters’ Pension Fund financial statements. In particular:

• there is no significant pending or threatened litigation, other than those already disclosed in the financial statements
• there are no material commitments or contractual issues, other than those already disclosed in the financial statements
• no financial guarantees have been given to third parties.

Related party transactions

I confirm the completeness of the information disclosed regarding the identification of related parties and that the Council’s registers of interest are complete and up to date in respect of Councillors and senior staff. The Council has ensured that all senior staff are aware of the requirement to declare all interests relevant to the Council, including interests of families, partners and entities controlled by them.

Post balance sheet events

I confirm that since the date of approval of the financial statements by the Audit Committee, no additional significant post balance sheet events have occurred which would require additional adjustment or disclosure in the Council’s or the Firefighters’ Pension Fund financial statements.

I confirm that the Council has no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements.

Long term investments

I confirm that the Council has the ability and the intention to continue to hold the investments classified in the balance sheet as long term for periods in excess of one year.

I confirm that this letter has been discussed and agreed by the Audit Committee on 25th November 2010.

Signed on behalf of Hertfordshire County Council in respect of the Council’s and the Firefighters’ Pension Fund financial statements

………………………………………………... …………………………………………….

Mike Parsons Councillor Seamus Quilty

Director of Resources and Performance Chairman of the Audit Committee

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Item 4 – Response to the Hertfordshire County Council AGR 2009/10