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

Monday, 25th September, 2017
4.00 pm
Conference Room 2, Second Floor, Municipal Buildings, Church Road, Stockton on Tees
Please note: all Minutes are subject to approval at the next Meeting

Attendance Details

Cllr Barry Woodhouse(Chairman), Cllr Chris Barlow(Vice-Chairman), Cllr Stefan Houghton, Cllr Eileen Johnson, Cllr Barbara Inman (Sub Cllr Mrs Kathryn Nelson), Cllr Ross Patterson, Cllr Paul Rowling, Cllr Derrick Brown (Sub Cllr Mick Stoker), Cllr Laura Tunney
Andy Bryson, Paul Johnston, Andrew Barber, Martin Skipsey(F&BS), Sarah Whaley(DCE)
In Attendance:
Mark Kirkham, Gareth Roberts(Mazars)
Apologies for absence:
Cllr Mrs Kathryn Nelson, Cllr Mick Stoker
Item Description Decision
RESOLVED that the minutes be approved and signed by the Chair as a correct record.


1) the report be noted.

2) the Council strengthen the process to ensure all Councillors reply to the request for related party information so that it is readily available to finance staff in their preparation of the Related Party Transaction disclosure in the Financial Statements.
RESOLVED that the report be noted.
RESOLVED that the Annual Governance Statement for 2016/17 be approved.
RESOLVED that the Statement of Accounts for 2016/17 be approved and the Chairman of the Audit Committee sign the balance sheet.
RESOLVED that the report be noted and approved.
RESOLVED that the report be noted.
RESOLVED that the report be noted.
WORK PROGRAMME 2017 - 2018
RESOLVED that the Work Programme be noted.


The Evacuation Procedure was noted.
There were no declarations of interest.
Consideration was given to the minutes of the meeting which was held on the 26th June 2017 for approval and signature.
Members were presented with and asked to consider the External Audit - Audit Completion and Value for Money report for the year ending 31 March 2017. The purpose of the document was to summarise Mazars (the authorities’ external auditors), audit conclusions.

The Audit Completion Report set out the findings of Mazars audit of Stockton-On-Tees Borough Council (the Council) for the year ended 31 March 2017, and formed the basis for discussion at the Audit Committee meeting on 25 September 2017.

The detailed scope of Mazars work as Stockton-On-Tees Borough Councils appointed auditor for 2016/17 was set out in the National Audit Office’s (NAO) Code of Audit Practice.

Mazars responsibilities and powers were derived from the Local Audit and Accountability Act 2014 and included the matters outlined within the table contained within the main report.

Members were presented with an update letter as required by International Standards on Auditing (UK and Ireland), which detailed those matters that were marked as outstanding within Mazars Audit Completion Report dated 4 August 2017. Brief discussion took place around the conclusions contained within the letter

The outstanding matters and conclusions Mazars reached were detailed within the update report.

The main topics discussed were as follows:

- Materiality calculation which was based on the previous year’s accounts had been updated following receipt of the 2016-2017 accounts (subject to audit). The updated materiality figure was detailed within the executive summary of the main report. Mazars highlighted that it was important that they were open and transparent with the Authority on the materiality level Mazars used as it drove the depth and extent of the procedures in relation to Mazars work undertaken on the Statement of Accounts.

- Members attention was drawn to the two areas of significant risk that had been identified, these were the Management Override of Controls and Valuation of the defined benefit pension scheme and pensions estimates (IAS19). Mazars confirmed to the Committee that the assurances they had sought had been received and had not indicated any material issues / estimation error to bring to the Committees attention in relation to those risks.

- Mazars highlighted that the quality of the accounts and working papers overall were very good quality. Mazars took the opportunity to express their thanks to the Officers of Stockton Borough Council for their assistance during the course of Mazars audit.

- In terms of the Value for Money Conclusion Mazars were required to form a conclusion as to whether the Council had made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. Mazars confirmed that they had seen sufficient evidence of proper arrangements.

- Mazars highlighted the significant risks relating to the Value for Money Conclusion. It had been identified that Mazars needed to ensure their knowledge of the Council’s MTFP arrangements and monitoring of the planned delivery of savings remained up to date in order to ensure they gave the correct VFM conclusion. Mazars concluded that they were comfortable they had seen sufficient evidence of appropriate arrangements so the identified risk could be mitigated.

- Members attention was drawn to the unadjusted misstatements. It was outlined that the unadjusted misstatements recorded at Appendix A of the main report had been assessed as not being material, either individually or in aggregate to the financial statements, and therefore did not currently plan to adjust them. Members attention was then drawn to the adjusted misstatements where Mazars audit had identified disclosure matters that management had agreed to amend as detailed within the report.

- In relation to declarations of interest it was recommended by Mazars that the Council needed to strengthen the process to ensure all Councillors replied to the request for related party information so that it was readily available to finance staff in their preparation of the Related Party Transaction disclosure in the Financial Statements. Management agreed the process would be strengthened to ensure that all members completed the relevant forms.

- Brief discussion took place around the draft management representation letter, draft audit report and Mazars continued independence.

- Mazars explained that as soon as the accounts were ready and signed off by management they were ready to close off the audit for 2016-2017.

Members were given the opportunity to make comments/ask questions and these could be summarised as follows:

- Concerns were raised in relation to unadjusted misstatements.

- It was highlighted that after the great work carried out by Officers, it was disappointing that as a collective Members were failing to complete required documentation relating to declarations of interest and had therefore resulted in a formal recommendation from Mazars.

Officers were given the opportunity to respond to Members. Their comments could be summarised as follows:

- In terms of unadjusted misstatements, Officers explained this came down to materiality. Income and expenditure accounts were around £500 million, to exclude £1 million did not change the nature of what was being reported to any significant extent. The same applied to the unadjusted misstatements relating to assets.

- Officers explained that declarations of interest including those of family members were required for financial staff to prepare disclosures on Related Party transactions in the Financial Statements. The relevant forms were sent out April / May time each year with an expected 1 month turnaround period. The ones which were not returned were followed up, however there were still a small number of Councillors which failed to do so. There was a suggestion that going forward the form would be presented to Members at the March Council meeting where Members would be asked to complete the form there and then and 100% response was expected.
Members were presented with the Internal Audit Progress Report which provided the Committee with an update of the work carried out by the Internal Audit Section and the progress made against the Audit Plan 2017/18.

Internal Audit was an independent appraisal function established by the Council to objectively examine, evaluate and report on the adequacy of internal controls. The 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.

Committee Members were reminded that the list of audit assignments undertaken in the current year to date had been circulated to all Councillors prior to the meeting. The intention was to give Councillors the opportunity to raise questions on issues that affect their ward or other areas of responsibility and for answers to be provided at the meeting.

The attached update report showed the current position in respect of the progress against the 2017/18 audit plan and the results of the work that had been undertaken.

As reported at the last meeting significant time had been spent on training and team building. This had delayed the start of some of the audit work. The officer who was on maternity leave had now returned and the primary focus of the team was completing the audit plan.

Members were asked to recall an updated approach which included setting up a system of continuous audits. Significant progress had been made towards this with testing now being automated on a monthly basis in a number of areas.

The key topics discussed were as follows:

- Although the start of the year was slow in terms of audits carried out this was due to staff training and team building, all audits were now on track.

- 1 audit was complete, 3 were in draft and 27 in progress.

- The continuous auditing approach was continuing to go well, a number of these were set up and running automatically.

- It was highlighted that the completion of the Audit Plan was still on target however a review may be required later in the year as a member of staff had recently resigned.

- Questions were raised in relation to what impact the addition of the Tees Valley Combined Authority Audits had on the Service. Officers explained that there had been minimal impact as the additional audits had already been factored into the Audit Plan.
Members were asked to consider and approve the Annual Governance Statement Report 2016-2017.

The Accounts and Audit Regulations 2015 required all authorities in England to conduct a review at least once a year of the effectiveness of its governance framework and produce an Annual Governance Statement to accompany its Statement of Accounts. The deadline for completion of the Statement of Accounts for 2016/17 was 30 June 2017 at which point they were subject to the external audit process.

A further requirement of the regulations stated that the Statement should be signed by the Chief Executive and the leading Member of the Council, following approval by the Committee. A key objective of the signing off process was to secure corporate ownership of the statement’s contents.

The Annual Governance Statement included an acknowledgement of responsibility for ensuring that proper arrangements were in place around the governance of its affairs and an indication of the level of assurance that the system provided. The statement also included a description of the key elements forming the governance framework, a description of the process applied in reviewing the effectiveness of this framework, including the system of internal control, and an outline of the actions taken or, proposed to be taken, to deal with significant governance issues.

The Council’s Annual Governance Statement for 2016/17 was attached at Appendix A of the main report. At this time the Council had not identified any significant issues that were not being addressed within the Statement and associated action plan. Officers would be present at the meeting to report on the governance framework and control environment in place within the Council that enabled the detailed preparation of the statement. Mazars LLP, the Councils external auditors, had been consulted on the process and the identification of key governance issues.

The Accounts and Audit Regulations 2015 and Statutory Instrument 234/2015 required all English authorities to prepare an Annual Governance Statement and for it to accompany the Statement of Accounts.

The main topics discussed were as follows:

- Since the Draft Annual Governance Statement had been presented to the Audit Committee in June 2017 one comment had been received which was an out of date reference to the Audit Commission, which had subsequently been amended.
Members were asked to consider and approve the Statement of accounts 2016/17.

The accounts had been completed in accordance with the “Code of Practice on Local Authority Accounting in the United Kingdom 2016/17” which was prepared under International Financial Reporting Standards.

The Accounts and Audit Regulations (England) 2015 came in to effect on 1st April 2015. The regulations changed the arrangements for the approval and publication of the Statement of Accounts and the Annual Governance Statement. Under the regulations the Council must publish its audited Statement of Accounts and approved Annual Governance Statement by 30th September for the financial year 2016/17. Thereafter the publication date would become 31st July.

In preparation for the new earlier deadlines the accounts had again been completed one month early, by 26th May, and the external audit process started in early June.

The period in which electors had the right to examine the accounts, question the auditor and to make objections at audit was set. This was a period of 30 working days which, for 2016/17, included the first ten working days of July. In 2018 this would become the first ten working days of June. The inspection period for this year commenced on the 26th June and ended on 4th August 2016. The Council received two requests to inspect the accounts during this period and all information requested was provided.

The external audit report on the statement of accounts and value for money, the ‘Annual Completion’ report highlighted a small number of agreed changes to the draft accounts presented to the Audit Committee in June 2017. One misstatement was also reported however it was not adjusted as it was felt it did not materially impact on the content of the accounts.

The following key financial issues were included in the accounts:

Non-Current Assets amounted to £324 million; this was a decrease of £26 million over 2015/16. This reflected the sale of land and buildings, such as the Education Centre; the continuation of the Academy School programme, and the transfer of long term loans by TVU to the new Combined Authority.

Investments and Cash amounted to £54 million. This was a decrease of £38.5 million from the previous year. This was largely due to the funds that the Council was holding on behalf of the new Tees Valley Combined Authority at the end of 2015/16 and which had since been transferred.

The Council’s current Long and Short-Term Borrowings totalled £47.7 million which was a reduction of £0.6 million.

The Council’s earmarked reserves (excluding schools) stood at £73.1 million which was a decrease of £51.1 million from the previous year. This again reflected the transfer of funds to the new Combined Authority, and other planned use of reserves in support of the MTFP.

The level of General Fund balances at the 31st March stood at £8.5 million and School Reserves stood at £5.6 million.

The Council’s Pension Scheme deficit was £212.8m, a decrease of £15.7m. This resulted from the actuaries’ assessment of fund performance and the re-measurement of scheme assets and liabilities.

Regulation 9(1) of the Accounts and Audit Regulations 2015 required the Council’s Responsible Financial Officer (Deputy Chief Executive) to sign and date the statement of accounts, and certify that it presented a true and fair view of the financial position of the Council. Regulation 9(2) required the Statement of Accounts to be approved by members prior to publication. Regulation 10(1) required the publication of the approved, audited Statement of Accounts by 30th September in 2017 and by 31st July thereafter.

The main topics discussed were as follows:

- Brief discussion took place around the deficits identified within the main statements the most common theme was due to the transfer of funds to the Tees Valley Combined Authority.

Members were given the opportunity to make comments/ask questions and these could be summarised as follows:

- Clarity was sought as to why reserves were not identified within the accounts as earmarked due to the repeated question raised by members of the public asking why reserves could not be used to offset hikes in Council Tax.

- Questions were raised in relation to finance around academies and how this affected the authority.

- Members queried whether any interest was made from the funds which were held on behalf of the TVCA, and if so what happened to it.

- Clarity was sought as to what the audit process was for the TVCA.

Officers responded to the comments / questioned raised by Members, these could be summarised as follows:

Officers explained that the buildings that main stream schools operated from all had a value which were accounted for in the accounts. When a school transferred to academy status then the schools transferred to the Academy Trust and therefore those values were written out of the Councils accounts.

- Any interest generated from TVCA's funds was paid over to TVCA.

- Officers explained that the Audit process for the Audit Committee was very similar to the process used for this authority, although its membership differed in that it was made up of representatives from each of the Tees Valley authorities and an independent from Darlington Building Society. There was a difference however in that the Cabinet of TVCA decided not to delegate approval of the Combined Authorities accounts to its Audit Committee therefore the accounts would be approved by Cabinet.

The TVCA accounts were available to view on the TVCA website.
Members were asked to consider a report which informed the Committee of the performance against the treasury management and prudential indicators set in the Treasury Management Strategy approved by Council in February 2016.

The Council operated under the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2011 Edition (the CIPFA Code) which required the Council to approve a treasury management annual report after the end of each financial year.

The report fulfilled the Council’s legal obligation to have regard to the CIPFA Code.

The Council’s Treasury Management Strategy for 2016/17 was approved at a meeting of the Council on 24th February 2016. The Council had invested and previously borrowed substantial sums of money and was therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of risk were therefore central to the Council’s Treasury Management Strategy.

The main issues discussed were as follows:

- The net investments of the authority which stood at 14.4 million which represented a cash and cash equivalent and short term investment funds held at the 31st March 2017 and which were offset by long term borrowing.

- It was explained to the Committee that as at 31st March 2017, the Council held £47.7m of loans, a decrease of £0.2m on the previous year. The year-end borrowing position and the year-on-year change was detailed within the main report. It was also noted that the Council had not entered into any new borrowing.

- The Committee was informed that the Council held invested funds, representing income received in advance of expenditure plus balances and reserves. During 2016/17, the Council’s investment balance ranged between £165.5m (prior to the transfer of TVCA funds) and £62m due to timing differences between income and expenditure. The year-end investment position was detailed within the main report.

- The Council had generated an overall return of 0.39%, over the last year which generated £368,000. The Council had diversified its investment strategy to longer term investments and had invested £10 million in the CCLA which was the Local Authority Property Fund which was returning 4.3% to 4.4% interest.

- Brief discussion took place around the compliance report. All treasury management activities undertaken during 2016/17 complied fully with the CIPFA Code of Practice and the Council’s approved Treasury Management Strategy. Compliance with specific investment limits was detailed within the main report.

- Compliance with the authorised limit and operational boundary for external debt was detailed within the main report.

- Prudential Indicators, the report compared the approved indicators with the outturn position for 2016/17. Actual figures had been taken from or prepared on a basis consistent with, the Council’s statement of accounts. Total Capital expenditure was at £27.2 million which was an increase of £3.6 million. Total Capital Financing Requirement (CFR) was £108.8 million which was an increase of £2.2 million. Actual debt stood at 54.9 million which was an increase of £1 million. Members heard that the Council were under borrowed by £53.9 million. The Council had used internal funds to finance its capital expenditure requirement.

- Members attention was drawn to the ratio of financing costs to net revenue stream which was an indicator of affordability and highlighted the revenue implications of existing and proposed capital expenditure by identifying the proportion of the revenue budget required to meet financing costs, net of investment income.

Members were given the opportunity to make comments/ask questions and these could be summarised as follows:

- Questions were raised in relation to the decision to look to longer term investments with higher returns, and whether or not it was expected that interest rates would rise which could in turn increase the return on shorter term investments.

- Members requested that as soon as neighbouring authorities’ accounts were ready a comparison be made and distributed to Members of the actual ratio of financing costs to net revenue stream.

- Members asked if any work had been carried out in regards to funding to Local Authorities post Brexit.

Members thanked and congratulated officers on the presentation of the report.

Officers responded to the comments / questions raised by Members, these were summarised as follows:

- It was felt that even if interest rates did rise there was a long way to go before an increase from 0.39% would rise to anywhere near 4%. The property fund the Council had invested in had been around since 1972 and had approximately £800 to £900 million. Officers explained that earlier in the year the Authority had gone out to tender for their financial advice. Previously the Authority had gained there advice from CAPITA Asset Services however they were not offering any advice that the Authority weren’t already aware of. Officers felt that Arlingclose had a more innovative approach and were better placed to offer the advice the Authority needed and had suggested investing in the property fund to gain a higher return.

- Officers explained that there hadn't really been any specific work carried out post Brexit, however there was work being looked at nationally as to how the funding process would work when business rates became 100% retention with Local Authorities.

- Brief Discussion took place around Virgin Media's plan to appeal their business rate status as they wanted to be put on the National list and pay their business rates directly to the authority where their headquarters were and not to the 63 local authorities they currently do. This would have meant a loss of £6 million to this authority if they had won their appeal as it was be back dated to 2010. Stockton Borough Council had accounted for this and made provision however Virgin Media had since withdrawn their appeal and it seemed highly unlikely they would try to appeal again. This meant the authority could possibly be £3 million better off next year.
Members were asked to consider and note the Corporate Risk Register Progress Report Q1 2017-18.

The Committee was 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, were minimised.

As a reminder, risks were scored on a scale of one to five for both ‘impact’ and ‘likelihood’. The scores were multiplied to generate a total score and any risks with a score of 15 or above were included on the Corporate Risk Register. For information, any risks scored between 9 and 12 were included on Service Group Risk Registers.

The Committee 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.

Appendix A contained within the main report provided details of the high level strategic risk register and an initial risk score. The next stage of the process would be to document all controls and identify desired outcomes.

Appendix A also showed the detailed risk report for those risks scoring 15 and above. The reports were as yet incomplete they needed updating to show desired outcomes and action plan owners/implementation dates. Work would continue with relevant officers to identify and update these.

The main issues discussed were as follows:

- There were 7 risks which had scores of 15 or above and considered high risk. Action plans were being updated in relation to those risks identified. Progress was continuing to be made.
Members were presented with a report which detailed the regular non-responsive services provided by the Council’s Health and Safety Unit to monitor, improve and to ensure compliance of the health, safety and well-being control environment for the period 1st April 2017 - 30th June 2017.

The detail encapsulated the regular, non-responsive activity of the Health and Safety Unit, and accident and assault statistics:

1. Health and Safety Training
2. Health and Wellbeing Update
3. Premise Audit Findings
4. Construction (Design and Management) Regulations 2015
5. School’s Educational Residential Visits
6. Employee Protection Register Activity
7. Safety Warnings, Advice or Reminders Issued
8. Accidents Reported
9. Physical Assaults Reported
10. Verbal Assaults Reported

The main issues discussed were as follows:

The report was presented to the Committee with a brief overview of each area.

Clarity was sought in relation to designated first aiders, who they were and how they were signposted to staff. Officers explained that there would be one member of staff per building that would take responsibility for the management of health and safety which would include first aiders and making sure there was sufficient first aiders within that building. There would be signs in various locations stating who the first aiders were. It was important that first aiders were trained and continued to have refresher training and there was a programme in place to deliver that.

Questions were raised in relation to educational visits advice and whether the authority provided advice to academies as well as main stream. Officers explained that advice was given to academies who bought the advice from the authority and some academies sought advice themselves.
The Work Prpgmme was noted.

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