Meeting of SCC Audit Committee on Tuesday, 30th July, 2019, 10.00 am

To consider these reports.

This report was introduced by Mr Barber of Grant Thornton the Council’s External Auditors, and he directed attention to the Audit Findings report and he provided an overview of the findings regarding the Council’s financial statements for the year ended 31 March 2019. He noted he had issued a short addendum since the agenda had been published and this had been circulated to Members.

Mr Barber explained that no material errors had been identified and in the opinion of the External Auditors, the financial statements prepared by the Council:

· give a true and fair view of the financial position of the Authority as at 31 March 2019 and of its expenditure and income for the year then ended;

· have been prepared properly in accordance with the CIPFA/LASAAC code of practice on local authority accounting in the United Kingdom 2018/19; and

· have been prepared in accordance with the requirements of the Local Audit and Accountability Act 2014.

The findings of External Auditors were summarised on pages 5 to 11 of their report and it was noted that the overall audit opinion on this was of a ‘Going Concern’ with no material uncertainties. Members were informed that the Council could meet its liabilities for the next 12 months and continue to deliver its services and that it had a programme of continued financial intervention in place to deliver the identified savings required.

The Interim Director of Finance introduced her covering report and noted that statutory deadlines were adhered to and some minor changes had been made to the accounts and an updated Annex 1 of the report had been tabled, and this listed a few minor amendments that had arisen since the draft accounts were issued and publication of the agenda.

During the consideration of the report, issues/concerns were raised, questions asked/answered and further information was provided on:

· The Schools land valuations matter, as this was the most significant unadjusted misstatement, and it was noted that the auditors disagreed with the application of a generic downward 24% valuation to the schools’ land that had not been subject to formal valuation in 2018/19. However, the application was applied from informed opinions of the professional internal valuer and this should be considered a matter of differing professional opinions and not an error. It was further explained that Officers accepted that 24% was not specific to any individual asset, however it fairly represented the assets across the entire portfolio on the balance sheet; a ‘do nothing’ approach was not felt appropriate;

· On the judgement of ‘going concern’ it was explained how assets were valued on the balance sheet, and if the Council was judged to be a ‘going concern’ those assets could be valued differently, and the auditors were assured the Council would be able to meet its obligations for the next 12 months;

· Regarding the McCloud ruling and the adjustment that had been made to reflect that and it was explained that the auditors had liaised with the Pension Fund’s actuaries, and had been based on a series of reasonable assumptions;

· There was a brief discussion about cashflow and the Council’s Service Manager – Investments noted that it was carefully controlled in accordance with the Council’s Treasury Management Strategy;

· Concerning reduced central government funding for local government, as part of what was known as ‘austerity’, it was noted that there was a section about national context and the impact of austerity in the report.

The Chair invited Mr Barber to provide an overview of the external auditors’ Value For Money (VFM) assessment and he welcomed the good progress made against his VFM recommendations of last year and he noted there remained further scope to strengthen arrangements. He stated that in the opinion of the external auditors the risk of future overspends was a particular risk for County Councils like Somerset given their limited ability to raise additional income but also given that a significant and generally increasing percentage of their total spend was taken up funding social care which continued to be under increasing pressure.

Mr Barber explained that before issuing his VFM conclusion for 2018/19, he wanted to gain more confidence over the robustness of the Council’s budget setting process (MTFP) and the deliverability of the Children Services and Adults Services budgets through to 2021/22. In that regard he had asked colleagues from Grant Thornton’s Public Sector Advisory team to act as ‘auditor’s experts’ and provide a further assessment of the robustness and realism of the Children’s and Adult Social Care annual budgets within the Council’s MTFP, including consideration of the robustness of savings plans.

As a result of this proposed additional work he stated the external auditors were unable to conclude the VFM conclusion by 31 July 2019 but he envisaged this additional work would be completed by the end of August 2019 and be used to inform his final VFM conclusion for 2018/19 that he would present to the Committee’s September meeting.

The Chair of the Committee invited the Chief Executive to respond and he began by thanking the external auditors for their efforts and interest, and he hailed the Council’s financial turnaround as being impressive, achieved through maintaining an absolute grip to live within its means. The Interim Director of Finance noted that despite a reduced spend performance had not dipped over the last year and had improved in some areas, noting the ‘vfm tracker’ was now considered at each meeting and a new tracker would be developed once the opinion was received.

The Chair noted that the member of the public, Mr Nigel Behan, who had submitted questions about the external auditor’s value for money assessment was not present, however his questions were considered in his absence.

Question 1 Relates to Preliminary Findings (p16) where it states: "Elements of this total underspend were as a result of a combination of: nonrecurring; one-off; technical savings (e.g. minimum revenue provision totalling £4.2m benefit in 2018/19); additional use of the capital flexibilities (which was budgeted at £2.6 million but £8.6 million used), and; unplanned additional central government income (including £2.5 million extra adult social care funding)." If in the current (and future) years the nonrecurring; one-off: technical savings ……unplanned additional central government income, etc. are not available (as they were in 2018/19) how does this impact on the risks of unbalanced budgets and the depletion of reserves?

In response the Interim Director of Finance stated that there had been significant work carried out on service budgets during 2018/19 to ensure that budget estimates were robust, as confirmed in the statement of accounts at the year end. At the same time opportunities were taken to increase the level of reserves – adding over £20m across the year. A balanced budget for 2019/20 budget had been agreed by the Council last February. This included plans to further increase reserves and had made no assumptions about one-off or non-recurring funding being received.

Question 2 Level of Reserves- Comparison across County Councils (Source: individual councils’ unaudited financial statements for 2018/19 from individual council websites P17) According to the chart for 2018/19 SCC appears to be still hold a low position of reserves in relation to the other County Councils and is only higher than overspending (children’s services being one of the main areas responsible) "Troubled Northamptonshire CC" (The MJ 11th July 2019). What is the likelihood of increasing the general and earmarked reserves (and removing negative reserves) without adverse consequences on service provision?

In response the Interim Director of Finance noted the Council took opportunities during 2018/19 to eliminate most of its negative reserves. The largest remaining, linked to Dedicated School Grant pressures, was a nationally recognised issue and the Council, along with other Councils, had submitted a deficit recovery plan to Government last month. Reports to the Cabinet last June and July, had detailed how the financial turnaround in 2018/19 had been achieved at the same time as sustaining good performance across services.

Question 3 Relates to p16 -18 where it is stated (by the external auditors): "In order to arrive at the appropriate VFM (Value For Money) conclusion for 2018/19 we are now seeking more assurances over the embeddedness of the improvement arrangements. We recognise the good progress that has been made over the last 10 months but also note that reserves and balances, despite the increases in year, provide limited resilience should significant overspends emerge in the future. This risk of future overspends, in our experience, is a particular risk at county councils given their limited ability to raise additional income but also given that a significant and generally increasing percentage of their total spend is take up funding social care which continues to be under increasing pressure due to demand and unit cost increases. We therefore want to, before issuing our VFM conclusion for 2018/19, gain more confidence over the robustness of the Council’s MTFP and in particular the deliverability of the Children Services and Adults Services budgets through to 2021/22. We have therefore asked our social care colleagues from our Public Sector Advisory team to act as ‘auditor’s experts’ and provide us with their assessment of the robustness and realism of the Children’s and Adult Social Care annual budgets within the Council’s MTFP. The review to include consideration of the robustness of savings plans. As a result of this proposed additional work we are unable to conclude our VFM conclusion by 31 July 2019. Our auditors expert are aiming to complete this work by the end of August 2019 and we proposed to use their findings to inform our final VFM conclusion for 2018/19 that will be reported to the Audit Committee at their September 2019 meeting."

What are the potential consequences if the ‘auditor’s experts’ concludes that the "Children’s and Adult Social Care annual budgets within the Council’s MTFP" are discovered (assessed) to be not robust and realistic (recalling that the Children’s Services net budget was rebased in 2018/19 from approximately £66m to approximately £85m)?

In response the Chief Executive replied that both the external auditors and officers were not concerned about the social care budgets being robust for the current financial year (2019/20) following the full re-basing exercise undertaken during 2018/19 to ensure that the services budgets were based on latest information. The first budget monitoring report (seen by Cabinet in July) had confirmed this, and the second report, to be published in the next few days, continued this positive trajectory. The additional work to be carried out sought to assess the level of confidence in the budgets into 2020/21 and beyond. As is usual practice, the Council was working on its medium-term financial plan where all assumptions including around funding, savings and costs pressures were being reviewed and updated based upon the latest information. He confirmed that any audit conclusions would be reflected in this forward planning.

During the consideration of the report, issues/concerns were raised, questions asked/answered and further information was provided on:

· On the subject of reserves, there was a brief discussion of a bar graph in the external auditor’s report and it was noted that Councils varied in how they recorded/treated reserves, including the dedicated schools grant (DSG) and any comparison was therefore an art not a science;

· Concern was expressed that the external auditors couldn’t provide a VFM conclusion and Mr Barber noted that he was considering an improved rating, but he couldn’t conclude his work and provide his opinion yet;

· It was asked if the auditors would recommend the costs/funding allocations of various services through the MTFP, and Mr Barber noted it was for the Council to make decisions about funding, but he could advise about risks;

· It was asked what the Council had to do to get to a ‘Northamptonshire level’ and in response Mr Barber noted that if he had concerns about the Council’s viability, and in his opinion nothing was being done to address it, he could make a statutory recommendation;

· There was a question about the work of the external auditors looking at general issues or those more specific to Somerset and comparing how other Councils dealt with the same issues and in response it was stated the auditors looked at factors specific to Somerset whilst also being mindful of wider pressures and general impacts;

· On the Council’s Minimum Revenue Provision (MRP) it was noted that Officers had been engaged with the external auditors since last November on the change of MRP approach and it was recognised as not a one off an adjustment and that would bring benefits over several years, including budget setting preparations;

· There was a question about how the Council was planning for the UK’s withdrawal from the European Union, known as ‘Brexit’ and if there were plans for a no-deal Brexit. In response it was noted that the Council was planning to mitigate the potential impacts of ‘Brexit’ such as looking at its workforce and suppliers;

· There was a proposal for the Committee to receive an update report at its next meeting on the Council’s planning for a no-deal ‘Brexit’ and the Chair suggested the proposal be considered during the workplan agenda item.

Following consideration of the reports, the Committee agreed unanimously, to approve:

· The audited Statement of Accounts for 2018/19 (Appendix A);

· The Letter of Representation for 2018/19 (Appendix B);

· The updated Annual Governance Statement as included within the Statement of Accounts (section 6).