Company NameClackmannanshire Council
Report on the 2006-07 Accounts Audit
27 September 2007
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Clackmannanshire Council - Report on the 2006-07 Accounts AuditContents
Contents
Section Page
Executive Summary 3
Detailed Findings 4
Appendix A – Action Plan 11
Appendix B - Summary of Accounting Adjustments 15
Grant Thornton UK LLP
Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
Executive Summary
Introduction
We have audited the financial statements of Clackmannanshire Council (the Council) for the year ending 31 March 2007. This report sets out our key findings and discharges our responsibilities under ISA260 - reporting matters arising from our audit to those charged with governance.
Key findings
We expect to give an unqualified opinion on the financial statements of the Council for 2006-07.
Our audit identified a number of adjustments to the Council's draft accounts. The combined impact of these adjustments is to reduce the reported deficit in the Council's draft accounts from £11.688 million to £10.721 million in the revised accounts.
The key recommendations arising from our financial statements audit are that the Council should:
· improve its financial management and planning arrangements to ensure it has sufficient resources to meet both unforeseen circumstances and the significant long term financial commitments associated with the implementation of the Three Schools PPP Project, Scottish Housing Quality Standard, and single status and equal pay settlements;
· ensure all planned income and expenditure is incorporated within the Council's annual budget presented to members for approval;
· develop a policy for managing future consultancy and advisory costs to ensure an adequate balance of risk is achieved between the supplier and the Council;
· seek authorisation from the Scottish Government to apply capital receipts to the Three Schools PPP Project before proceeding to implement its financing model; and
· develop a policy for approving and submitting its draft accounts to the Accounts Commission, and for ensuring appropriate scrutiny arrangements are in place prior to the accounts being signed and published.
Status of our Report
This report is part of a continuing dialogue between the Council and Grant Thornton UK LLP and is not, therefore, intended to cover every matter which came to our attention. Our procedures are designed to support our audit opinion and they cannot be expected to identify all weaknesses or inefficiencies in the Council’s systems and work practices.
The report is not intended for use by third parties and we do not accept responsibility for any reliance that third parties may place upon it.
Acknowledgements
We would like to take this opportunity to thank the Head of Finance, the Accounting and Budgeting Manager and other staff who have been involved in this audit for their assistance and co-operation.
16
Grant Thornton UK LLPClackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
Detailed Findings
Introduction
In accordance with the Code of Audit Practice (the Code) we are required to audit the financial statements of the Council for the year ended 31 March 2007. In auditing the financial statements, we give an opinion on whether:
· they present fairly the Council's financial position as at 31 March 2007 in accordance with Part VII of the Local Government (Scotland) Act 1973 (the Act) and the CIPFA 2006 Statement of Recommended Practice (2006 SORP); and
· the Statement on the System of Internal Financial Control is consistent with the information we obtain through our audit.
The 2006 SORP
The 2006 SORP introduced wide ranging changes to the presentation of local government accounts. These changes are intended to improve the presentation and understanding of the accounts. Key changes include:
· the replacement of the Consolidated Revenue Account with an Income and Expenditure account that reports actual financial performance for the year;
· appropriations to and from reserves are omitted from the Income and Expenditure account and are shown separately in the Statement of Movement on the General Fund Balance;
· the order of the financial statements has been amended, primarily to group together the primary statements, including the Income and Expenditure account, balance sheet and cash flow statement.
In preparing the 2006-07 accounts in accordance with the new SORP, the Council has restated its 2005-06 accounts. This has resulted in the Council’s reported financial position for that year changing from a surplus of £3.881 million to a deficit of £13.002 million. The increase in the deficit has been caused by implementation of the 2006 SORP, but statutory adjustments ensure there is no overall impact on the Council's general fund position.
Matters Arising
Under ISA260, we are required to communicate certain matters arising from the audit to those charged with governance. This function is discharged by the Council's scrutiny committee who have received a copy of this report. The areas considered are summarised in the table below:
Area / Key MessagesIndependence and objectivity of the audit team / We are able to confirm our independence and objectivity as auditors and note the following:
· we are independently appointed by Audit Scotland;
· we comply with the Auditing Practices Board's Ethical Standards; and
· we have not performed any non Code or advisory work during the year.
Quality of the Accounts / The draft financial statements were presented for audit on 29 June 2007 in line with the agreed timetable. The accounts and supporting working papers were of a good standard.
The Council had good arrangements in place to deal with implementation of the significant changes introduced by the 2006 SORP.
Approach to the audit / Our approach to the audit was set out in our 2006-07 audit plan. We have planned our audit in accordance with International Auditing Standards and the Code.
We have considered the materiality of items in the financial statements both in determining the audit approach and in determining the impact of any errors.
During the 2006-07 audit, we reviewed the core financial systems in operation at the Council for the purpose of relying on controls for our accounts opinion. Our interim report has identified some improvement actions to strengthen internal controls, but no material internal control weaknesses have been identified.
Accounting policies and practices / We consider that the Head of Finance has adopted appropriate accounting policies in the areas covered by our testing, in accordance with the 2006 SORP.
The accounts record a large pensions deficit of £42 million which will be funded from ongoing revenue expenditure. The Head of Finance has considered and confirmed that the Council remains a going concern and will confirm this in the Letter of Representation.
Material risks and exposures / The Council has considered and confirmed that it has no material risks and exposures which should be reflected in the financial statements and the Head of Finance will confirm this in the Letter of Representation.
Audit adjustments and unadjusted errors / We have identified several disclosure amendments and reclassifications to improve the presentation of the accounts.
The total value of revenue adjustments made to the accounts was £1.5 million. The net impact of these adjustments is to increase the General Fund balance by £0.54 million. There are no unadjusted differences to report.
A full summary of adjusted and unadjusted differences is included at Appendix 2.
The key matters arising from the audit are:
Financial position
The Council's Income and Expenditure account records a deficit for the financial year of £10.6 million (£13 million deficit in 2005-06). At the financial year end, the Council held usable revenue reserves of £10.7 million (£10.5 million 2005-06) representing 11% of net operating expenditure. The Council has earmarked £2.8 million of its £3.8 million general fund balance for specific purposes, leaving only £1 million available to fund unanticipated expenditure. The Council's reserves policy is to retain a minimum revenue balance of £1.8 million for unplanned expenditure and unforeseen events, and the current low level of reserves, therefore, presents a significant risk that financial plans will not be achievable.
Refer action plan point 1
Financial Management and Budgetary Control
The Council's accounts record a decrease in the general fund balance of £0.1 million which broadly meets its budgeted expectation that the general fund would decrease by £69,000 over the financial year. This outcome was only achieved following a number of audit adjustments to the draft accounts, without which the Council's overspend would have been significantly higher than reported.
The Council did not include £1 million of advisors fees relating to the Three Schools PPP Project in the budget in its 2006-07 budget and Council departments overspent their budgets by £0.5 million. These increased costs were offset by £0.8 million of interest earned on revenue balances. This Council's overspend would have been significantly higher had interest rate and market movements not delivered this windfall.
The exclusion of PPP advisor fees from the Council's budget represents a significant weakness in the Council's governance and financial reporting arrangements. All planned costs should be transparently reported to members, especially those relating to significant and complex projects.
Refer action plan point 2
The Council had difficulty controlling the overall cost for financial advice for the PPP Project and the contract was awarded on the basis of open ended day rates. This meant that the Council bore the majority of the contractual risk should the project be delayed or negotiations become more complex than anticipated.
Refer action plan point 3
Three Schools PPP Project
In response to the Council's request for our comments on the reasonableness of its provisional view on the proposed accounting treatment of the Three Schools PPP Project (the Project), we confirmed on 6 March 2007, that we were not minded to challenge the view that, in applying the Treasury Task Force guidance, the newly created assets should be accounted for as off the Council’s balance sheet. This means that Project transactions will be accounted for as revenue expenditure in the Council's accounts following construction of the schools.
The Council plan to make a significant capital contribution of £16m to the Project funded from capital receipts, once the initial construction phase has been completed. This contribution will be made in exchange for a lower unitary charge over the life of the Project and is non refundable.
The 2006 SORP, which sets out proper accounting practice, requires capital receipts to be credited to the usable capital receipts reserve which is operated under powers provided by Schedule 3 of the Local Government (Scotland) Act 1975 (which provides for a capital fund). The capital fund can only be used to fund capital expenditure or loans fund repayments.
Under current local government financing regulations, the Council cannot apply capital receipts to a revenue purpose. We have, therefore, recommended that the Council seek formal authorisation from the Scottish Government to apply capital receipts to the Project before proceeding to implement its existing financing model.
In addition, the Project is planned to be part funded from above inflation increases in council tax over the life of the project. The Scottish Government has recently announced an intention to replace council tax with a form of local income tax and is seeking agreement from councils not to increase council tax levels for 2007-08. This approach, if implemented, may have significant funding consequences for the Council.
Refer action plan points 4 & 5
Scottish Housing Quality Standard
The accumulated balance on the Housing Revenue Account (HRA) was £6.4 million at the year end. The Council has been increasing its HRA reserve balances in recent years following its decision on 8 December 2005 to retain all housing stock and meet or exceed the requirements of the Scottish Housing Quality Standard (SHQS) by 2015 from its own resources.
The Council has undergone a detailed process to assess how it will meet SHQS, but has not yet approved its business plan to formalise how it will achieve this policy objective. This increases the risk that the Council will not have sufficient resources available to fully upgrade its housing stock by the 2015 deadline set by SHQS.
Refer action plan point 6
Devolved School Management
Under the terms of the scheme of devolved management to schools and services within education, the Council has earmarked a portion of general fund reserves, representing the devolved budget carried forward each year. The balance at 31 March 2007 is £1.2 million following net increases to the fund since 1 April 2003 when the reserve balance was £0.5 million.
The Council should bring forward spending plans to ensure that this fund is used for the purposes intended and for the benefit of local education services.
Refer action plan point 7
Trading Operations
The Council's trading operations have all met their financial target to break even over a rolling 3 year period as shown in the Table below:
Trading Operation
/Annual Target Surplus
£'000
/2006-07 Surplus
£'000
/3-Year Surplus
£'000
Property Contracts
/250
/82
/447
Environmental and Engineering Contracts
/80
/212
/379
Overall Position
/330
/294
/826
The Property Contracts trading operation has a target to achieve a surplus of £0.25 million annually, but has not achieved this target for each of the last 3 years. The Council should review its performance expectations in light of the recent financial performance of this trading operation.
Refer action plan point 8
Council Tax Debtors
The Council records significant council tax debtors of £8.7 million in its accounts with approximately half of this balance relating to debts which have been outstanding for over 5 years. The Council has provided for £5.5 million of this debt, calculated on the basis of 3.5% or 3% of income for each year. The methodology used by the Council has not, however, been based on a recent assessment of the pattern of collection for council tax debts or of likely recoverability, and does not take account of the age of the debt.