Annual audit letter

Executive summary

Purpose

Our Annual Audit Letter (Letter) summarises the key findings arising from the work that we have carried out at Blackburn with Darwen Borough Council (the Council) for the year ended 31 March 2018.

This Letter is intended to provide a commentary on the results of our work to the Council and external stakeholders, and to highlight issues that we wish to draw to the attention of the public. In preparing this Letter, we have followed the National Audit Office (NAO)'s Code of Audit Practice and Auditor Guidance Note (AGN) 07 – 'Auditor Reporting'. We reported the detailed findings from our audit work to the Council's Audit and Governance Committee as those charged with governance in our Audit Findings Report on 24 July 2018.

Respective responsibilities

We have carried out our audit in accordance with the NAO's Code of Audit Practice, which reflects the requirements of the Local Audit and Accountability Act 2014 (the Act). Our key responsibilities are to:

  • give an opinion on the Council's financial statements (section two)
  • assess the Council's arrangements for securing economy, efficiency and effectiveness in its use of resources (the value for money conclusion) (section three).

In our audit of the Council’s financial statements, we comply with International Standards on Auditing (UK) (ISAs) and other guidance issued by the NAO.

Our work

  • Materiality: We determined materiality for the audit of the Council's financial statements to be £7,988,000, which is 2% of the Council’s gross revenue expenditure.
  • Financial Statements opinion : We gave an unqualified opinion on the Council's financial statements on 31 July 2018.
  • Whole of Government Accounts (WGA): We completed work on the Council’s consolidation return following guidance issued by the NAO.
  • Use of statutory powers: We did not identify any matters which required us to exercise our additional statutory powers.
  • Value for Money arrangements: We were satisfied that the Council put in place proper arrangements to ensure economy, efficiency and effectiveness in its use of resources. We reflected this in our audit report to the Audit and Governance Committee on 31 July 2018.
  • Certification of Grants: We also carry out work to certify the Council's Housing Benefit subsidy claim on behalf of the Department for Work and Pensions. Our work on this claim is not yet complete and will be finalised by 30 November 2018. We will report the results of this work to the Audit and Governance Committee in our Annual Certification Letter.
  • Certificate: We certified that we have completed the 2017/18 audit of Blackburn with Darwen Borough Council in accordance with the requirements of the Code of Audit Practice on 3 August 2018.

Working with the Council

During the year we have delivered a number of successful outcomes with you. Some of them were:

  • Conducting an efficient audit: we managed and delivered an efficient audit with your co-operation. Considering the changes to your financial ledger in 2017/18 and shorter audit deadline compared to previous years, working efficiently with your finance staff to achieve shared goals.
  • Sharing our insight : we provided regular updates to the Audit and Governance Committee, covering best practice and sector updates. We conducted regular liaison meetings with your senior management on matters that are important to the Council and us as your external auditor.
  • Providing training: we provided your finance teams with training on financial accounts and annual reporting to better prepare for the 2017/18 accounts closedown

We would like to record our appreciation for the assistance and co-operation provided to us during our audit by the Council's staff.

Grant Thornton UK LLP August 2018

Audit of the accounts

Our audit approach

Materiality

In our audit of the Council's financial statements, we use the concept of materiality to determine the nature, timing and extent of our work, and in evaluating the results of our work. We define materiality as the size of the misstatement in the financial statements that would lead a reasonably knowledgeable person to change or influence their economic decisions by reading the financial statements.

We determined materiality for the audit of the Council's accounts to be £7,988,000 which is 2% of the Council's gross revenue expenditure. We used this benchmark as, in our view, users of Council's financial statements are most interested in where the Council has spent its income in the year.

We also set lower level of specific materialities for senior officer remuneration and related party transactions of £25,000 and £100,000 respectively.

We set a lower threshold of £395,000, above which we reported errors to the Audit and Governance Committee in our Audit Findings Report.

The scope of our audit

Our audit involves obtaining sufficient evidence about the amounts and disclosures in the financial statements to give reasonable assurance that they are free from material misstatement, whether caused by fraud or error. This includes assessing whether:

  • the accounting policies are appropriate, have been consistently applied and adequately disclosed;
  • the significant accounting estimates made by management are reasonable; and
  • the overall presentation of the financial statements gives a true and fair view.

We also read the remainder of the Statement of Accounts and the narrative report, annual governance statement published alongside the Statement of Accounts to check they are consistent with our understanding of the Council and with the financial statements included in the Statement of Accounts on which we gave our opinion.

We carry out our audit in accordance with ISAs (UK) and the NAO Code of Audit Practice. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Our audit approach is based on a thorough understanding of the Council's activities and is risk based.

We identified key risks and set out overleaf the work we performed in response to these risks and the results of this work.

Risks
Risks identified in our audit plan How we responded to the risk Findings and conclusions
Valuation of land and buildings

The Council revalues its land and buildings using a five year rolling programme to ensure that carrying value is not materially different from current value. This represents a significant estimate by management in the financial statements. We identified the valuation of land and buildings revaluations and impairments as a risk requiring special audit consideration
In addressing the valuation risk, we:
  • evaluated management's processes and assumptions for the calculation of the estimate, including consideration of the instructions issued to the external valuer and how the scope of the valuer’s work has been determined
  • assessed the competency, experience and objectivity of the external valuer
  • met with the valuer to discuss the basis on which valuations have been carried out and confirmed this is consistent with our expectation based on the provisions of the CIPFA Code of Practice and relevant accounting standards
  • identified the data provided to and/or obtained by the valuer to inform the valuation process and confirmed the appropriateness of the data used
  • tested revaluations provided during the year to confirm these are accurately reflected in the asset register and that the associated accounting entries have been posted to reflect movements in asset values
  • inspected management’s process for obtaining assurance in relation to those assets not subject to formal valuation during the year to confirm the process is sufficiently robust to mitigate the risk that the value of assets not revalued might be materially misstated (either at the level of individual assets or in aggregate).
Our audit work did not identify any material matters in relation to the valuation of land and buildings. We identified some areas that the Council could further improve its processes in relation to valuation and reporting of land and buildings and reported these areas in our Audit Finding Report which was presented to the Audit and Governance Committee on 24 July 2018.
Valuation of pension fund net liability

The Council's pension fund asset and liability as reflected in its balance sheet represent a significant estimate in the financial statements. We identified the valuation of the pension fund net liability as a risk requiring special audit consideration
In addressing the pension fund net liability valuation risk, we:
  • identified the controls put in place by management and the controls established by the Lancashire Pension Fund to ensure that the pension fund liability is not materially misstated. We also assessed whether these controls were implemented as expected
  • evaluated the competence, expertise and objectivity of the actuary who carried out your pension fund valuation. On behalf of external audit suppliers to local government, the National Audit Office has commissioned an auditor’s expert to undertake a review of the actuaries engaged by local government pension funds, including the Lancashire Pension Fund. We also considered the expert’s findings and followed-up on any implications for our audit
  • undertook procedures to confirm the reasonableness of the actuarial assumptions made, particularly if these are specific to Blackburn with Darwen Borough Council
  • checked the consistency of the pension fund asset and liability and disclosures in notes to the financial statements with the actuarial report from your actuary
  • assessed the advance payment made to the pension fund during the year including the accounting treatment and related disclosures around this payment.
Our audit work did not identify any material issues in relation to valuation of pension fund net liability.

These are the significant risks which had the greatest impact on our overall strategy and where we focused more of our work.

Risks
Risks identified in our audit plan How we responded to the risk Findings and conclusions
Implementation of a new General Ledger system

The Council implemented a new General Ledger system, Civica from 1 April 2017. The Civica system is in use at many local authorities similar in size and scale to Blackburn with Darwen Borough Council. The General Ledger is at the heart of an organisation’s accounting process and directly associated with preparation of financial statements. Local Authority accounting transactions can be complex and are typically significant in volume. For instance, there were over 1.3 million transactions recorded in the Council’s ledger in the previous year. Interfaces operate between the Council’s ledger and a number of subsidiary systems used by the Council.

These subsidiary systems process a range of transactions, most notably payroll, housing benefits, council tax and business rates. Accuracy and completeness of data migration from an old to a new system is paramount for transparent financial reporting. There is a inherent risk of error in data migration due to human and technological errors in such data transfers. We identified the implementation of a new General Ledger system as a risk requiring special audit consideration.
In addressing the implementation of the new General Ledger system risk, we:
  • discussed with management and understood the processes and controls in place to ensure successful migration of data relevant to the production of the financial statements from the old ledger to the new Civica financial ledger system as at 1 April 2017
  • evaluated the general IT controls around such transfers with the support of our IT specialists
  • examined and agreed the accuracy of the opening balances as at 1 April 2017 against 31 March 2017 audited accounts to confirm these had been completely and accurately brought forward to the new Civica ledger system.
Our audit work did not identified any issues relating to accuracy and completeness of data transfer from the old to new ledger system.

These are the significant risks which had the greatest impact on our overall strategy and where we focused more of our work

Risks
Risks identified in our audit plan How we responded to the risk Findings and conclusions
Management override of controls

Under ISA (UK) 240 there is a non-rebuttable presumed risk that the risk of management over-ride of controls is present in all entities. The Council faces external scrutiny of its spending, and this could potentially place management under undue pressure in terms of how they report performance.

Management over-ride of controls is a risk requiring special audit consideration.
In addressing the management override of controls risk, we:
  • gained an understanding of the accounting estimates, judgements applied and decisions made by management and considered their reasonableness
  • obtained a full listing of journal entries during the year, and identified and tested high risk journal entries for appropriateness and correct treatment
  • evaluated the rationale for any changes in accounting policies or significant unusual transactions.
Our audit work did not identify any issues regarding management override of controls.

Audit opinion

We gave an unqualified opinion on the Council's financial statements on 31 July 2018, in advance of the national deadline.

Preparation of the accounts

The Council presented us with draft accounts in accordance with the national deadline, and provided a good set of working papers to support them. The finance team responded promptly and efficiently to our queries during the course of the audit.

Issues arising from the audit of the accounts

We reported the key issues from our audit to the Council's Audit and Governance Committee on 24 July 2018. There were no adjustments to the financial statements impacting on the Statement of Comprehensive Income and Expenditure and the Balance Sheet.

In addition to the key audit risks reported on pages 6 to 9, we made a small number of recommendations to support the Council in strengthening its internal controls.

Management agreed to action our recommendations and we will follow this up during our 2018/19 audit of the Council.

Annual Governance Statement and Narrative Report

We are required to review the Council’s Annual Governance Statement and Narrative Report. The Council published them on its website alongside the Statement of Accounts in line with the national deadlines.

Both documents were prepared in line with the CIPFA Code and relevant supporting guidance. We were satisfied that both documents were consistent with the financial statements we audited and in line with our knowledge of the Council obtained during the course of our audit.

Whole of Government Accounts (WGA)

We carried out work on the Council’s Data Collection Tool in line with group audit instructions provided by the NAO. We issued an assurance statement to the NAO which confirmed the Council was below the audit threshold. There were no other matters to report to the NAO in connection with group audit instructions.

Other statutory powers

We also have additional powers and duties under the Act, including powers to issue a public interest report, make written recommendations, apply to the Court for a declaration that an item of account is contrary to law, and to give electors the opportunity to raise questions about the Council's accounts and to raise objections in relation to the accounts.

We did not need to exercise any of our additional statutory powers or duties during the course of our audit.

Certificate of closure of the audit

We are also required to certify that we have completed the audit of the accounts of Blackburn with Darwen Borough Council in accordance with the requirements of the Code of Audit Practice and applicable law.
On 3 August 2018, we certified that we have completed the audit of the financial statements of the Council in accordance with the requirements of the Local Audit and Accountability Act 2014 and the Code of Audit Practice issued by the National Audit Office on behalf of the Comptroller and Auditor General.

Value for money conclusion

Background

We carried out our review in accordance with the NAO Code of Audit Practice, following the guidance issued by the NAO in November 2017 which specified the criterion for auditors to evaluate:

In all significant respects, the audited body takes properly informed decisions and deploys resources to achieve planned and sustainable outcomes for taxpayers and local people.

Key findings

Our first step in carrying out our work was to perform a risk assessment and identify the key risks where we concentrated our work.

We identified one significant risk as part of this assessment. Our continuing risk assessment during the course of the audit did not identify any further significant risks.

Work we performed and our findings are summarised on page 12 of this Letter.

Overall Value for Money conclusion

We are satisfied that in all significant respects the Council put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2018.

Key findings

Risks
Significant risk Findings Conclusion
The Council has a strong record of containing expenditure within budget estimates. However, in common with many local authorities, the Council is experiencing increasing demand for adult and children's services, and rising costs. This could increase the financial pressures faced by other services within the Council. Existing savings programme may be insufficient as the cost of delivering statutory services continues to rise.

The Council is currently updating its Medium Term Financial Strategy to cover the period to 2020/21. We need to evaluate the Council's arrangements to accurately forecast future net expenditure given the expected overspends in children's services and adult social care in 2017/18 and the progress made by the Council to identify and implement the savings plans required to bridge any financial gaps identified.

Our work was focused around :
  1. Detailed review of updated Medium Term Financial Strategy (MTFS) including an evaluation of the realism of the assumptions underpinning the Council's projections of anticipated future expenditure over the forecast period.
  2. Assessment of the progress made by the Council in realising the targets set in its savings programmes.
  3. Consideration of contingency planning implemented by management and elected members to address the risk of shortfalls or slippage against the agreed savings targets.
  • The Council’s Finance Committee obtained approval of the Budget strategy and proposals for the revenue budget 2018/19 together with a MTFS (2018/19 – 20/21) in February 2018. Whilst a balanced budget was set for 2018/19 with a net expenditure of £131.5 million, 2019/20 and 2020/21 budgets have funding gaps of £4.9m and £13.2m respectively without the implementation of the savings programmes currently under review.
  • The Council is planning to achieve savings through thematic reviews across specific areas including digital change, alternative service delivery models, income, commercialisation and traded services. In relation to Council Tax income, it is reviewing the processes and policies in respect of claims for single person discount and charges for empty homes. Whilst these areas have been identified and agreed, the business cases and programmes to underpin each are currently in development and not yet finalised.
  • The actual net revenue expenditure for the year ended 31st March 2018 was £133.9 million, compared to an original budget of £124.3 million. The extra £9.6m expenditure was mainly funded through £3.59m, additional improved Better Care Funding, achievement of savings plans around £2.5m and utilisation of approximately £3.5m of reserves held for discretionary use by the Council.
  • Total earmarked reserves stand at £13.1 million at 31st March 2018, comprising discretionary reserves for use by the Council of £11 million and reserves that are non- discretionary and specified for specific purposes of £2.1 million
  • The Council continued to work on contingency planning
in 2017/18 under challenging service demands and financial pressures.
Auditor view
  • The Council has a track record of managing expenditure within budget. However with increasing funding cuts from central government and increasing service demands such as adult social care and children’s services, the Council is facing significant challenges in balancing service pressures with available resources. This is no different to many local authorities in the country.
  • Using reserves to fund the budget gap is not a sustainable position over the medium to longer term, and the Council needs to continue its work to identify realistic savings plans and monitor the achievement of plans against actual performance on a regular basis.
  • We understand that by October 2018 the Council will have completed its thematic review and identified savings plans, individual business cases and programmes to underpin each plan.
  • As part of the thematic review, the Council should further consider contingency planning if things do not go to plan, including delivery of savings.

Appendix A: Reports issued and fees

We confirm below our final reports issued fees charged for the audit and provision of non-audit services

Reports issued

Reports issued
Report Date issued
Audit Plan 8 April 2018
Audit Findings Report 24 July 2018
Annual Audit Letter 31 August 2018

Fees

Reports issued
Planned £ Actual fees £ 2016/17 fees £
Statutory Council audit 102,839 106,839 102,839
Housing Benefit Grant Certification 15,413 TBC* 14,910
Total fees 118,252 TBC* 117,749

As reported in our Audit Finding Report to the Audit and Governance committee on 24 July 2018, the final fee for the Council Audit was increased by £4,000 due to the new enhanced audit report requirements for 2017/18. This is due to the Council being a ‘Public Interest Entity’ (PIE). The Council has listed debt of approximately £250,000 on the London Stock Exchange. An entity with listed debt is a ‘PIE’, which has enhanced audit reporting requirements under ISA (UK) 700. We reported the key changes impacting the auditor’s report and additional disclosures on PIE entities audit reports in our 2017/18 Audit Plan issued in April 2018.

* Our work on Housing Benefit Grant Certification is still on going and the reporting deadline for this is 30 November 2018. Therefore we are unable to confirm the actual fees for this work in the Annual Audit Letter.

Fees for non-audit services

Fees for non-audit services
Service Fees £
Audit related services: Certification of Teacher’s pension return 4,200
Non-Audit related services: Chief Finance Officer Insights and Place Analytics subscription 23,000
Total audit-related and non-audit fees 27,200

Non- audit services

  • For the purposes of our audit we have made enquiries of all Grant Thornton UK LLP teams providing services to the Council. The table above summarises all non-audit services which were identified.
  • We have considered whether non-audit services might be perceived as a threat to our independence as the Council’s auditor and have ensured that appropriate safeguards are put in place.

The above non-audit services are consistent with the Council’s policy on the allotment of non-audit work to your auditor.