Warning: this preview contains plot spoilers. It’s been almost four months since the last Reading Borough Council (RBC) audit & governance committee in September; surely the 2016/17 accounts must be ready for the next meeting on 24 January?
The story so far…
On the face of it, the RBC statement of accounts for the year ended 31 March 2017 (2016/17)seemed to be on-track for sign-off by the statutory deadline of 30 September 2017 but, at the last minute, the accounts were not presented at the audit & governance committee on 28 September 2017. The then RBC director of finance, Peter Lewis, cited “significant challenges” as the reason for the delay.
This failure to deliver the accounts was not really a surprise. The previous year’s accounts had been late and the audit had not started on time.
The next make-or-break deadline was in advance of the RBC policy committee on 19 February 2018 when the budget for the forthcoming financial year (2018/19) was to be set. The Whitley Pump interviewed David Stevens, chair of the audit & governance committee, in December 2017:
No way would we [the Conservative group] go to the next council tax setting meeting in February  and approve an increase in council budget if the last year’s accounts haven’t been signed off… We must have the last year’s audited before we move forward for next year.
As things turned out, the February 2018 deadline came and went, as have others since then, which has caused knock-on delays to the accounts for the year ended 31 March 2018 (2017/18) as well.
2019 (stop reading now if you want to wait until 24 January to find out)
Sadly, the long-awaited accounts are still not ready to be signed-off, and the report going to the committee on 24 January talks about completion in February 2019.
In a new twist following the last committee meeting, external auditors Ernst & Young (EY) had raised concerns about the value of properties in RBC accounts. This meant that new professional valuations had to be carried out; these were not completed until December 2018.
On a positive note, agreement has now been reached between EY and RBC on how to account for Reading’s two public finance initiative (PFI) schemes.
Audit of the adjustments required to the accounts for valuation and PFI changes is ongoing and will not be completed until February.
The 2016/17 accounts may still not be signed off by 18 February 2019 when the budget and council tax for the next financial year (2019/20) should be set by the RBC policy committee. The 2017/18 accounts will definitely not be available by then.
Auditors EY have already indicated that they expect to qualify [give an opnion on] the accounts because they are unable to substantiate some debts [money owed to RBC] and credits [money owed by RBC] in them.
EY have not yet told RBC if they are uncertain about whether RBC owe or are owed the amount, or if the value included in the accounts is incorrect [ref 1].
Qualified accounts for a local authority are unusual. Public Sector Audit Appointments (PSAA) report every year on the results of local authority audits, and there were no qualified accounts for any councils for 2015/16, 2016/17 or 2017/18 up to their most recent report in October 2018. Some councils, including Reading, had still not finalised their accounts for those years.
But there is more…
Approval of RBC accounts and other annual audit matters are the responsibility of the audit & governance committee. These are set out in their terms of reference:
(21) To approve the annual statement of accounts. Specifically, to consider whether appropriate accounting policies have been followed and whether there are concerns arising from the financial statements or from the audit that need to be brought to the attention of the Council.
(22) To consider the external auditor’s report to those charged with governance on issues arising from the audit of the accounts.
(23) To review the financial statements, external auditor’s opinion and reports to members, and monitor management action in response to the issues raised by external audit.
Because the 2016/17 accounts are still not ready, the council’s audit and governance report contains a proposition to delegate the authority to sign- off council accounts to the chair of the committee in consultation with the S151 officer [chief financial officer], the director of resources Jackie Yates.
The report does not say why it recommends this exceptional break with procedure. In 2016, when the accounts were late and could not be signed-off at the September audit & governance committee, an additional meeting was scheduled for 17 November 2016 where signing-off the 2015/16 accounts was the only item of business.
An audit results report is expected at the meeting, but EY were still writing it at the time that papers for the meeting were published on the RBC website. This may give little time for councillors to consider the report in advance of the meeting.
And the final bill will be?
An audit fee of at least £400,000 is expected, on top of which £139,000 has been spent on asset revaluations for the 2016/17 and 2017/18 accounts.
Can RBC recover from this?
In February last year the Whitley Pump asked what Reading had in common with Derby and the Isles of Scilly; all three councils were late in producing accounts for the year ended 31 March 2017, had a problem with the accounts for the previous year and were issued with a statutory written recommendation by their auditors during the year [ref 2].
Derby City Council’s 2015/16 accounts were delayed until September 2017 “… due to significant uncertainty in the estimated valuation of its assets.” The published accounts explain the work required to assure auditors EY of these assets’ values and the adjustments required to previous year’s accounts.
Derby’s accounts for 2016/17 were only signed-off in December 2017, but in 2017/18 they were ready soon after the accelerated deadline of 31 July 2018.
Derby’s accounting experiences may be heartening, but Reading’s accounting problems appear to be more prevalent than solely fixed asset valuations. The delay is already 22 months after the year-end or 16 months beyond the statutory deadline.
The Isles of Scilly 2017 accounts were finalised in January 2018 and the 2018 accounts in December 2018.
- Audit & Governance Committee 24 January 2019 papers & webcast
- ‘Significant challenges’ in the production of Reading Borough Council’s annual accounts
- Woe, woe and thrice woe!
1. Categories of Adverse audit opinion
i. Qualified ‘except for’ opinion – limitation of scope
The financial statements give a true and fair view, except for the effect of a matter where the auditor was unable to obtain sufficient evidence. For example, the auditor considers the accounting records for a material transaction or balance in the accounts to be inadequate.
ii. Qualified ‘except for’ opinion – disagreement
The financial statements give a true and fair view, except for the effect of a matter where there was a material disagreement between the auditor and audited body about how the matter was treated in the financial statements.
iii. Adverse opinion
There was a disagreement that was so material, or pervasive, the financial statements as a whole were misleading or incomplete.
iv. Disclaimer of opinion
The auditor was not able to express an opinion, because they could not obtain evidence to such an extent that the financial statements as a whole could be misleading or incomplete.
2. Statutory written recommendation.
This is required under local government legislation if an auditor considers that a matter coming to their notice in the course of an audit should be brought to public attention. The written recommendation must be considered by a full council meeting and must also be sent to the Secretary of State for Housing, Communities and Local Government and the PSAA. For Reading the recommendation dated 2 February 2017 related to the council’s current and future forecast position.