To consider the audited accounts from the last financial year.

Andrew Vallance, Head of Finance, said that the draft accounts had been scrutinised by the Corporate Overview and Scrutiny Panel in July 2020. He apologised for the delay but there had been a number of objections to the accounts, the pandemic had caused some delays in the process and there had also been sickness amongst the auditors. There were some minor changes to the draft version that had been presented to Corporate Overview and Scrutiny. A paragraph had been added to the narrative report of the RBWM Property Company for materiality reasons. Two assets had been reclassified, from land and buildings to the surplus asset category because they were in the process of being sold and both assets had now been sold. Covid-19 grants had been moved to resources while some amendments had been made to officer remuneration figures as some of these figures were missing in the draft accounts.

 

On the pension accounts, there was an adjustment for the reduced value of net assets due to Covid and the timing of the valuation of assets of £31.5 million in the pension accounts, most of which has been charged to other bodies. The RBWM share of this was around £3 million. Andrew Vallance was pleased to confirm that there were no unadjusted misstatements in the accounts.

 

Mr Andrew Hill had registered to speak at the meeting as a member of the public. He said that Deloitte had not received the accounting papers on critical estimates and judgements when required and the accounts until 27^th January 2021, and therefore believed that it was premature to recommend that the accounts were delegated to be signed off by the Chairman of the Audit and Governance Committee once they were complete. Mr Hill noted that the auditors opinion was not published by 30^th November 2020. There was £34 million worth of overstatements in the pension fund accounts. Mr Hill had asked Deloitte at the time if this was materially significant and if it should therefore be reported to the pension regulator. This year, there was £30 million worth of misstatements where old valuations had been used. This had resulted in over £100 million of misstatements over the past two years. Mr Hill asked Deloitte if they considered this misstatement to be materially significant and reportable to the pensions regulator. There was an overnight loan made from the pension fund to RBWM in June 2019 of around £1 million which officers said they approved but there was no formal evidence of this transaction being made. Mr Hill asked why this transaction was made and the reasons why it was approved by the pension fund.

 

Jonathan Gooding, Deloitte, said that the audit was still in progress but a lot of work had been done since the last meeting. The report set out the work that had been carried out in key areas and also identified significant audit risks. The impact that Covid-19 had on the audit was also considered and Deloitte had ensured that this was checked against the balances in the accounts and whether there was a heightened risk of error as a result. One area of risk identified was the override of management of controls which was a presumed risk for all audits undertaken for local authorities. Some control elements had been identified and recommendations made, along with a control recommendation for improvement around documentation. The reference from Mr Hill on receiving the statement of accounts recently was something that could be improved and the documentation around accounting estimates and judgements was a common recommendation that Deloitte made to all councils. Receiving the accounts recently was very common particularly when minor changes needed to be made and this then needed to be checked by Deloitte.

 

Another significant audit risk was around the capitalisation of expenditure. Again, this was common across all local authorities. Deloitte tested an example of expenditure to see its connection with documentation and evidence. The work had not identified any issues other than the control improvements which had already been identified in the report.

 

The next risk Jonathan Gooding discussed was around the property valuation. This work was largely completed some time ago but some additional procedures had been completed in response to one of the objections. No material issues had been identified in this area and some potential improvements had been identified for next year on property valuation. There was a material uncertainty over property valuation due to the impact of the pandemic but again this was something that Deloitte had seen across a number of local authorities.

 

The pension fund liability was complete and no materially significant issues had been identified. As part of the audit, Deloitte had to undertake a full risk assessment to ensure that all arrangements provided by the authority were secure. Most of these risks would be common knowledge to officers and also the Committee.

 

Deloitte had received 22 potential objections to the accounts and these were currently being worked through. Answering some of Mr Hills questions, Jonathan Gooding said that there was £74 million worth of misstatements last year and an error of £31.5 million this year which was material to the accounts and had been adjusted. Consideration needed to be given to the valuations and with the added impact of Covid extra consideration needed to be given as there was significant movement. However, from the factors that Deloitte had considered in its work, it did not see them as something that needed to be reported to the pensions regulator.

 

David McConnell, Deloitte, set out the pension fund audit to the Committee. He explained that Covid-19 had an impact on the audit and the areas affected were explained in the report. The first significant area of risk in the pension fund was the management override of controls. This was an audit risk that needed to be considered by Deloitte under the audit standards and a number of journals had been tested.

 

The next risk to consider was around the longevity hedge, which was an instrument used to protect the fund against the risk of residents living longer than expected. The balance was revised by around £2 million while a control risk was also identified, which was similar to one raised in 2019.

 

For control weaknesses, there was a weakness identified around the key assumptions of the longevity swap. The assumptions were in line with the liability evaluation this year but there was no formal evidence of that control operating. The convertible bond was not in scope for the audit this year but there was rationale for the rate to remain fixed from last year’s accounts. On Deloitte’s recommendation the paper was prepared by the investment manager and it was advised that controls were in place to ensure that valuations were appropriately challenged.

 

David McConnell discussed the audited accounts for the private equity funds being difficult to obtain this year. This was something that the investment manager was struggling to receive from the investment managers that sat below them. Deloitte had noted that there may be an absence of control around the fund management. Conversations had taken place and there was now improved control of elements of the valuation of the pension fund.

 

Deloitte had noted that there was no formal review of the accounts before they came to audit and that the checklist had been completed. When testing journals, Deloitte found that there was no evidence for the months which had been requested. It had been recommend that control was implemented and these journals be reviewed.

 

Within the member data system of the pension fund, Deloitte discovered that super users could edit their own member records. There was no formal control in place to check this editing and it was noted that some users had edited their records. Deloitte believed that these edits had been taken in normal operations but they recommended that the system was updated and that any edits should be checked and authorised by a senior manager.

 

David McConnell moved on to the issue of the overnight loan which had been made by the pension fund to RBWM. There was no evidence presented to Deloitte during the audit that there had been business rationale for the loan to be made or that fund managers had authorised the loan being made in advance of the transaction taking place. It was recommended that business rationale was documented for transactions which were outside the normal course of business and that authorisation was granted in advance of the payment being made. Some of the costs taken by RBWM on behalf of the pension fund were not formally documented and Deloitte had recommended that any transactions were formally documented in future.

 

Councillor L Jones noted that this was the audit for the financial year 2019/20. There had been a lot of change in the finance team at RBWM since then and she asked how certain the new team were that areas of risk had been looked at and resolved. Councillor L Jones asked if there were any further areas of work that needed to be done.

 

Adele Taylor, Director of Resources, said that there had been a number of new personnel at the council over the past year. Certain areas had been picked up in the report by Deloitte and would be looked at. Issues around the system were hard to fix so a proxy was in place to ensure that changes could be made to the process. There had been an improvement in the pension fund and there was now an action plan on the governance arrangements of the fund.

 

Councillor L Jones asked if the recommendations which had been put before the Committee could be explained. Adele Taylor said that she would pick this up at the end of the item when the Committee would vote on the recommendation.

 

Councillor Bond said that there had been a number of surprises in the pension fund that he had not been expecting, for example the overnight loan from the pension fund to RBWM. He appreciated that there was still work to be done and asked if the Committee would get to see the final report once it was completed. Councillor Bond suggested that the Berkshire Pension Fund Committee should meet to discuss the accounts on the pension fund side. Regarding the longevity fund, there was talk of ‘challenging the assumptions’. Councillor Bond asked if this seemed reasonable to RBWM officers.

 

Adele Taylor said that the pension fund accounts responsibilities sat with the Audit and Governance Committee but it would be a good idea to share the accounts with the Berkshire Pension Fund Committee at an appropriate time. The overnight loan of £1.2 million which had been made was before Adele Taylor had joined the council so she was unable to comment whilst this was still being considered.

 

Jonathan Gooding said that different local authorities had different approaches but it would be good practise for the pension committee to see the report.

 

Councillor Baldwin noted that Mr Hill had asked a question about the overnight loan between the council and the pension fund and asked if anyone could directly answer his question, why the transaction took place and whether officers were involved.

 

Adele Taylor said that it was something that was still being reviewed as part of the audit and any recommendations or concerns would be part of the final report.

 

Councillor Price said that she was quite shocked at some of the things that had been revealed by the auditors. She questioned if there was enough attention being given to the pension fund over other areas like revenue and capital funds. Councillor Price believed that flaws kept happening year after year and asked how far did it have to go before it was reported to the pension regulator and also whether CIPFA were aware when they produced their report. Councillor Price was worried about the implications that this could have for RBWM.

 

Adele Taylor said that there were two separate sets of accounts – RBWM and the pension fund. The pandemic had wiped a significant amount off the valuation of the pension fund but work was being done to mitigate this in future. Ian Coleman had been brought in as expertise to make the relevant changes on the pension fund that had been identified as part of the governance review.

 

The Chairman asked if it was difficult to deal with the other Berkshire local authorities that were part of the pension fund.

 

Adele Taylor said that the Berkshire Pension Fund Committee was made up of exclusively RBWM members, while the advisory board had members from the other local authorities. There were implications across Berkshire which is why all authorities were represented but the decision making on the fund had to remain with RBWM as the accountable body.

 

Replying to Councillor Price’s points, Jonathan Gooding said that the responsibility to take things to the pension regulator lay with all those involved with the accounts, not just Deloitte. Material errors could be picked up but it depended on whether they were materially significant to the accounts. Controls needed to be put in place to assess valuation and avoid errors in future.

 

Councillor L Jones commented on the value for money opinion from the auditors and what actions needed to be taken as a Committee to ensure that this did not happen again.

 

Adele Taylor said that the value for money judgement described what the issues were. The auditors had not yet formed their opinion but they would use things like the CIPFA review on governance and accompanying action plan which showed the improvements that the council would be making.

 

Jonathan Gooding said that it was common for qualifications of this nature to last for a year.

 

Councillor Hilton, Lead Member for Finance and Ascot, said that the overnight loan of £1.2 million had happened in June 2019 which was around 4-8 weeks before he started the Lead Member role and therefore knew nothing about it. He believed that a lot had changed since then, in July 2019 CIPFA were called in and this started the ball rolling. Budget monitoring reports were now transparent, open and showed the direction of travel for RBWM. The CIPFA action plan would be followed and also things that had come out of the audit would be done too. Originally, no one in the council was able to monitor the pension fund effectively but now Ian Coleman had been brought in and his expertise had been added to the team. Councillor Hilton believed that RBWM was now getting to where it needed to be.

 

Councillor Price asked if there was sufficient resources available to officers to stay on top of everything that had come out of the audit. She also raised concerns about RBWM looking after the pension fund on behalf of Berkshire and if this was taking time and resource away from the RBWM accounts.

 

Adele Taylor said that she felt that there was the right level of resource available. Ian Coleman had been brought in so that the council had the skills and expertise in this area. There was the ability to gain extra resources if they were needed.

 

The Committee concluded the discussion on the item. Adele Taylor clarified that the recommendation being put forward was for the Audit and Governance Committee, rather than the Corporate Overview and Scrutiny Panel as originally stated in the report. The ISA260 report was to note rather than approve, due to it being the external auditors opinion. Adele Taylor advised Members that they would get sight of the final ISA260 once it was completed before the Chairman was delegated authority to sign off the accounts on behalf of the Committee.

 

Jonathan Gooding anticipated that the ISA260 would be completed in approximately three to four weeks. He suggested that the accounts could be delegated to the Chairman for approval provided there were no material changes.

 

A named vote was taken.

 

 

RESOLVED UNANIMOUSLY: That the Audit and Governance Committee noted the report and:

 

i)             Approved the delegation for the signing of the Statement of Accounts to the Chairman once the audit was fully completed, provided that there were no material changes to the accounts.

ii)            Noted the latest ISA260 for RBWM.

iii)           Noted the latest ISA260 for the Berkshire Pension Fund.