Audit Committee (ceased to operate 21/05/2019) Minutes

Monday, 5th December, 2011
04.00 p.m.
Second Floor Conference Room, Municipal Buildings, Chruch Road, Stockton on Tees, TS18 1LD
Please note: all Minutes are subject to approval at the next Meeting

Attendance Details

Cllr Barry Woodhouse (Chair); Cllr Derrick Brown, Cllr Phillip Dennis, Cllr Ben Houchen, Cllr Ross Patterson and Cllr David Wilburn.
J Bell, P Johnston, D MacDonald, P Saunders, S Winship (R); P K Bell (LD).
In Attendance:
C Andrew, M Kirkham (Audit Commission).
Apologies for absence:
Cllr Alan Lewis, Cllr Mrs Kath Nelson and Cllr Mrs Sylvia Walmsley.
Item Description Decision
There were no interests declared.
The minutes of the meeting held on 27th September 2011 were signed by the Chair as a correct record.
RESOLVED that the report be noted.
RESOLVED that the contents of the Audit Commission Annual Audit Letter be noted.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
RESOLVED that the update be noted.
RESOLVED that the Diary of Meetings and Work Programme for the Audit Committee for 2011/12 be noted.
4.00 p.m. - 6.00 p.m.


Consideration was given to a report that provided a summary of the progress on the Audit Commission's audit to date. The report also highlighted key emerging national issues and developments.

The Audit Commission had completed their 2010/11 audit and gave their opinion on the accounts and value for money conclusion in September 2011. The annual audit letter summarising the Audit Commission 2010/11 work was on the agenda for this meeting.

The Audit Commission would complete their audit of grant claims by the end of December and would bring the annual certification of claims and returns report to the February meeting.

The fee planning letter had been discussed with officers and the audit fee agreed with the Corporate Director of Resources. 2011/12 fees were a 10 per cent reduction compared to 2010/11. In July 2011 the Audit Commission wrote to all audited bodies confirming a further 8 per cent rebate on 2011/12 audit fees.

The Audit Commission would be revisiting their risk assessment and drafting their opinion audit plan. As in previous years, part of the risk assessments would involve asking those charged with governance and management about arrangements in place for:-

* preventing and detecting fraud;
* ensuring the legality of transactions and identifying potential litigation;
* adopting the going concern principal for the accounts;
* related party relationships and transactions; and
* accounting estimates

The Audit Commission would be writing to the Audit Committee Chair and the Corporate Director of Resources to confirm their understanding of the arrangements in place. The Audit Commission were planning to complete the interim systems work (walk through and control testing) by the end of February.

With regard the Value For Money (VFM) conclusion the Audit Commission had confirmed the two criteria to be assessed remain the same for 2011/12:-

* the organisation has proper arrangements in place for securing financial resilience; and
* the organisation has proper arrangements for challenging how it secures economy, efficiency and effectiveness.

In mid October 2011 the Audit Commission published further VFM guidance for 2011/12 audits and this would be taken into account for planning the VFM work.

The Audit Commission was consulting on fees for 2012/13. It was proposing that fees would be a 10 per cent reduction compared to 2011/12.

The Audit Commission had previously advised the Audit Committee on the procurement exercise to outsource the Audit Commission's in-house audit practice. Thirteen firms recently completed the pre - qualification stage and had been formally invited to tender for the work. These tenders needed to be submitted by 16 December 2011 and the Audit Commission's Board expected to approve the contract awards in the week commencing 20 February 2012.

In September 2011 NFI launched phase one of its real time data matching service designed to prevent fraud against financial institutions by identifying where an applicant had falsely declared they had a right to reside and or work in the UK.

For phase 2 the Commission would consult local public bodies and other key stakeholders on the extension of real time data matching to include payroll and housing benefit data.

On 11 October 2011 the Commission published its Audit Practice annual quality report. The 'Transparency Report 2011: Audit Practice' made public the results of the Audit Commissions internal quality monitoring programme and reviews by external inspectors.

On 10 November 2011 the Commission published Protecting the public purse 2011 Fighting Fraud Against Local Government. The latest report highlighted emerging fraud issues and reviews councils' progress in tackling the significant risks described in the Audit Commissions 2009 and 2010 protecting the public purse reports.
Consideration was given to a Audit Commission Annual Audit Letter 2010/11.

Representatives from the Commission were in attendance to introduce the report and answer any questions. The audit comprises two elements:-

* the audit of your financial statements; and
* the assessment of the Council's arrangements to achieve Value For Money in use of resources.

The report included only significant recommendations and the Council had accepted these recommendations.

The Audit Commission had issued an audit report including an unqualified opinion on the financial statements on 29 September 2011. This was an exceptional and challenging year for the Council. This year's financial statements were the first prepared under International Financial Reporting Standards (IFRS) which made major changes to accounting requirements, involving significant additional work. The Council also transferred its housing stock to a new registered social landlord in December 2010, requiring a series of complex accounting transactions.

The Council prepared well for the introduction of IFRS and produced the draft financial statements in time for the statutory deadline of 30 June. There were a large number of errors and inconsistencies in the statements, mainly because of IFRS adoption and stock transfer, including some material errors. The errors had now all been corrected.

The Audit Commission had issued an unqualified VFM conclusion, reporting that:-

* the Council has maintained arrangements to secure financial resilience despite ongoing reductions in grant funding; and
* the Council has maintained arrangements to secure economy, efficiency and effectiveness through its ongoing review of all services.

With regard to current and future challenges the economic climate was resulting in pressure on services and the Council's financial position.

The Council was facing emerging pressures in 2011/12 particularly around children's social care spending and income from planning and development applications, and these were being closely monitored as part of ongoing budgetary control.

In addition there were several other issues and developments that may impact on Council budgets going forward, including:-

* localisation of business rates;
* devolving responsibility for Council Tax Benefit to councils;
* capital and revenue school funding, including distribution of revenue funding to academies; and
* transfer of public health budgets from primary care trusts to councils.

The Council took prompt and effective action to achieve the £2.7 million revenue savings required in 2010/11 arising from cuts in funding in year. Further ongoing reductions of £3.8 million in 2011/12 increasing to £11.3 million in 2013/14 onwards had been built into the medium term financial plan and the ongoing efficiency, improvement and transformation programme set out how the Council would review services and deliver more savings in the future.

The Council had a history of strong financial management and was in a relatively strong position financially, with substantial reserves. It had earmarked almost £13 million in a transformation and implementation reserve to allow the impact of changes to be dealt with in a managed way. Finding further savings would become increasingly difficult. The Council needed to continue to monitor delivery of planned savings, taking forward planned reviews of services for further opportunities to reduce expenditure and increase income.

The Council's financial statements and annual governance statement were an important means by which the Council accounts for its stewardship of public funds.

The Audit Commission had issued an audit report including an unqualified opinion on the financial statements on 29 September. This was an exceptional and challenging year for the Council. This year's financial statements were the first prepared under IFRS, which made significant changes to accounting requirements and involved a lot of extra work. The Council also transferred its housing stock to a new registered social landlord in December 2010, requiring a series of complex transactions. The quality of the accounts and supporting working papers fell below the high standard of previous years with a large number of errors and inconsistencies, mostly because of IFRS adoption and stock transfer, including some material errors.

The net impact of correcting the errors:-

* reduced the usable reserves by £2.6 million;
* increased total expenditure by £22.5 million; and
* reduced net assets by £22.5 million.

The Audit Commission considered aspects of the Council's accounting practices, accounting policies, accounting estimates and financial statements disclosures. The level of errors and inconsistencies in the financial statements indicated a need to ensure there was sufficient capacity to produce the accounts and complete an effective internal review process before the accounts were presented for audit.

The Audit Commission had not identified any significant weaknesses in the Council's internal control arrangements.

The Audit Commission had considered whether the Council was managing and using its money, time and people to deliver Value For Money (VFM). The Audit Commission had assessed the Council's performance against the criteria specified by the Audit Commission and had reported the outcome as the VFM conclusion. The Audit Commission assessed the Council's arrangements to secure economy, efficiency and effectiveness in its use of resources against two criteria specified by the Audit Commission. The overall conclusion was the Council had adequate arrangements to secure, economy, efficiency and effectiveness in its use of resources. The findings on each of the two areas were:-

Financial resilience - The organisation has proper arrangements in place to secure financial resilience. Focus for 2010/11:-

"The organisation has robust systems and processes to manage effectively financial risks and opportunities, and to secure a stable financial position that enables it to continue to operate for the foreseeable future."

Securing economy efficiency and effectiveness - The organisation has proper arrangements for challenging how it secures economy, efficiency and effectiveness. Focus for 2010/11:-

"The organisation is prioritising its resources within tighter budgets, for example by achieving cost reductions and by improving efficiency and productivity."

The letter had been discussed and agreed with the Chief Executive and the Corporate Director of Resources. The letter would be presented to Cabinet on 12 January 2012 and copies would be provided to all Council members.

Further detailed findings, conclusions and recommendations in the areas covered by the audit were included in the reports issued to the Council during the year.

The Council had taken a positive and constructive approach to the audit and the Audit Commission thanked the Council staff for their support and co-operation during the audit.
Consideration was given to a report on the work carried out by the Internal Audit Section and the progress made during the quarter July to September 2011 against the annual audit plan.

Internal Audit was an independent appraisal function established by the Council to objectively examine, evaluate and report on the adequacy of internal controls. This role ensured that there was proper economic, efficient and effective use of resources. It also ensured that the Council had adequate accounting records and control systems.

Attached to the report were the details of the sections performance in the following areas:-

* Key Performance Indicators.

* Details of audits by Service Groupings

* List of audits completed this quarter and ongoing at end of Q2

With regard to the Security Services Audit Members requested further information about the progress in implementing the remaining the remaining seven outstanding recommendations. Members also requested further information on what prompted the investigation into the teacher at Harrow Gate Primary School. Chief Auditor reported that he would email all Members of the Audit Committee with a response to their queries.
Consideration was given to a report that provided an update of the practical implementation in year of the Treasury Management Strategy approved by Council in February 2010.

A considerable amount had happened in the short period since the last report to audit Committee in September. In October the Government announced it would no longer guarantee the bail out of UK financial institutions in the future. In keeping with the recent inconsistent trend of the rating agencies they reacted to this in different ways. Moody’s downgraded 12 institutions, Fitch 2, and Standard and Poor’s none. There was however one significant consequence of these changes. Although the latter two still rated Santander as AA one of Moody’s downgrades was to move Santander to an A rating. The rules of the Treasury Management Strategy meant that the Council must take the lowest rating of the three in determining the investment deployment.

This meant that the total the Council could invest with Santander had been reduced from £30 million to £15 million, and the time period of investment down from 3 years to 1 year. In reality the Council had not been making any placements beyond 12 months recently, and this was the time of year when cashflow tends to be outwards, restricting investments, in the main, to those maturing that were not required for cashflow. However if the rating continued to remain in place for some time it was likely to have an impact on the rate of return, as Santander had been providing one of the best rates of return for short term investments.

In terms of real facts November saw the publication of the third quarter financial results for the major banks in the UK. These were an improvement on the second quarter In addition to the three banks that were in profit in that quarter, HSBC, Barclays, Santander, RBS also reported a pre tax profit of £2 billion. Lloyd’s continued to make a loss, but this was a much reduced one, £607 million compared to the £3.2 billion loss at the half year point. Some of the banks also released some information on their exposure to the problems in the Eurozone. RBS said it had cut its holdings of sovereign debt from Portugal, Italy, Ireland, Greece and Spain from £4 billion at the start of the year to £772 million at the end of September. HSBC revealed it had £8.6 billion in direct exposure to troubled southern European economies, in comparison to reserves of £76.6 billion to deal with such defaults should they occur.

Given the facts above the only movement from the ratings agencies continued to be downwards. There was still undoubtedly a reversion to caution by the agencies since they were caught out so badly in the Icelandic crash. In these circumstances they were unlikely to change tack while there were so many doubts about the Eurozone, and the global economy overall recovery. The report in September identified that the biggest potential worry in Europe was Italy, and unfortunately since then, up until the preparation of the report in mid November, the situation there had worsened with the resulting resignation of Mr. Berlusconi.

The consequence of this uncertainty, and economic depression was that rates of return continue to be suppressed. When the Medium Term Financial Plan was finalised in February it was anticipated rates might start to rise at the end of 2011, and continue to do so from 2012 onwards. Subsequently the targets for investment return were set at £1.3 million in 11/12 and £2.1 million in 12/13. At this stage of this financial year it was anticipated that the Council would obtain somewhere between £1.6, to £1.7 million, in returns in 11/12. This would produce a surplus of some £300,000 to £400,000 to take forward into next year. If the same rates of return were to be achieved in 12/13 as 11/12 then the Council would be close to, if not hitting the target set. However the Council had a number of 3 year deals at higher rates maturing during that period, and with the loss of further short term deposits with Santander with their better short term rates, it was possible there would be a shortfall. A detailed evaluation of anticipated returns would take place as the MTFP for 12/13 was progressed, and Members would be made aware of any anticipated gap should it be predicted.
Consideration was given to a report on the Corporate Risk Register Progress Report 2010/11 Quarter 2 (2011/12) - Period Ending 30th September 2011.

Members were reminded that quarterly reports on the Corporate Risk Register were presented for the purpose of reviewing the key risks that had been identified as having the potential to deflect services from achieving their objectives over the next 12 months and beyond. They also set out the actions being taken to ensure that the risks, and possible adverse outcomes, are minimised.

Members had requested that, in the absence of substantial changes to the register, quarterly reporting should be confined to highlighting significant additions and amendments since the previous update, with a detailed report incorporating a review of the Council's risk management process being produced annually at the end of Quarter 4.

This interim report covered the period 1 July to 30 September 2011. All Service Groupings had been contacted subsequently and the returns indicated that there had been some changes to the Authority's risk profile over the months in question. These comprised the deletion of one risk from the register, revision and update of a number of existing entries and of the numbering sequence where necessary. Further details were attached to the report.

As one risk had been deleted and none added to the Corporate Risk Register, the total number of entries at the end of the current Quarter was reduced to 11.

For purposes of record, the changes referred to above had been incorporated in the latest version of the full Corporate Risk Register. This was available in the Member's Library and an electronic copy incorporating the supporting risk assessment.

Members discussed Risk no. 5 - Placements for adults and young people with complex needs - Growing demand pressures against finite capacity continues to place pressure on services given demographic changes and budgetary pressures. ASD Spectrum / LD will create additional pressure on services. Risks will be addressed to some extent through EIT reviews but remain high until outcomes of reviews are achieved.

A Member suggested that in the future it could be possible the Borough would see more academies being created and asked with this prospect in mind, was it likely that this would reduce the number of placements available for young people with complex needs and if so, what plan did the Council have to address the situation.

There was some general discussion around the issue and the consensus seemed to be that academies would not be able to readily exclude young people with special needs and therefore the situation would be little different to that which exists at present. The Corporate Risk and Insurance Manager said that he would seek a more definitive response from CESC on the matter and email the response to all Members of the Audit Committee.
Consideration was given to a report that detailed the services provided by the Council’s Health and Safety Unit to improve the health, safety and well-being control environment for the period 1st July to the 30th September 2011.

This report covered the significant activity of the Health and Safety Unit, including partner and stakeholder involvement -

1. Health and Safety Training
2. Health and Wellbeing Update
3. Accidents Reported
4. Physical Assaults Reported
5. Verbal Assaults Reported
6. Premises Audited
7. Construction (Design and Management) Regulations 2007 (CDM)
8. CDM-C Provision to External Clients
9. School's Educational Residential Visits
10. Employee Protection Register Activity
11. Tendering Contractor Health and Safety Policy appraisal
12. Public Events
13. Involvement with external organisations

Members discussed the physical assaults that had been reported to the Health and Safety Unit and what was being done to combat longer term trends. The Health and Safety Manger reported that a teachers consultative panel was looking at what schools are doing to help combat the issue.
Members discussed the contents of the Annual report of the Audit Committee 2011/12. The report would be presented to the next meeting of the Audit Committee.
Members were presented with the Diary of Meetings and Work Programme for the Audit Committee for 2011/12.

Members felt that the Employee Protection Register (EPR) should be brought to the next meeting for discussion.

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