London Borough of Harrow. Statement of Accounts for the year ended 31 March Audit Summary Report. November 2004

Transcription

1 London Borough of Harrow Statement of Accounts for the year ended 31 March 2004 Audit Summary Report November 2004 This report has been prepared on the basis of the limitations set out on page 23. RL /AMAF

2 Contents Page 1. Key points 1 2. Status of our audit 3 3. Audit approach 4 4. Resolution of audit issues 5 5. Summary of potential unrecorded errors System weaknesses Confirmation of independence Statement of responsibility 23 Appendix 1 Management representation letter 24 Appendix 2 Independence policies and procedures 29 Appendix 3: Draft unqualified audit opinion 31 Appendix 4: General IT control environment 34 London Borough of Harrow

3 1. Key points 1.1. Introduction This report has been prepared for the Audit Committee for discussion at its meeting on 30 November 2004 and summarises the principal matters that have arisen from our audit of the Council s statement of accounts for the year ended 31 March This report includes information which has been provided by, or is based on, discussions with staff, management and directors. Statement of Auditing Standards (SAS 610) (Revised): Communication of audit matters to those charged with governance, sets out matters relating to the audit which the auditor is required to communicate to those charged with governance in the organisation. - The Audit Commission proposes that in the local government sector, the definition of those charged with governance, for the purpose of SAS 610, covers the Full Council or committee of the Council to which responsibility for the approval of the statement of accounts has been delegated. - The matters required to be communicated include a number of findings from the audit, including expected modifications to the auditors report, unadjusted misstatements, material weaknesses in the accounting and internal control systems, and the auditors views about the qualitative aspects of the body s accounting practices and financial reporting Findings from the audit Our fieldwork is substantially complete, although at the time of writing we are still evaluating a number of pieces of information and explanations which officers have very recently provided to us. A list of the audit work outstanding at the time of drafting this report is set out in section 2. We will update the Audit Committee orally on progress in clearing these items at the meeting and any matters arising from their clearance. At this stage, and subject to satisfactory resolution of the outstanding matters listed in section 2, we anticipate issuing an unqualified audit opinion. A copy of our draft audit opinion is attached at Appendix 3 for reference. London Borough of Harrow 1

4 We have reported unadjusted errors, including omission of disclosure items required under the Local Government Statement of Recommended Practice (the SORP ). Management have judged these items to be not material, both individually and in aggregate, and do not propose to process correcting journals or to include the required disclosures. We seek confirmation from the audit committee of this assessment. Weaknesses in the general IT control environment are discussed in Appendix 4. Weaknesses in other systems have been reported separately by internal audit. We have repeated the more significant issues in section 6. We confirm that we have adequate arrangements in place to maintain our independence of the Council. London Borough of Harrow 2

5 2. Status of our audit Our fieldwork is substantially complete. We provided a list of our information requirements to Officers in April. Whilst performance has improved on last year, a significant minority of the information we requested in April was not available at the start of our audit and some key pieces of information were outstanding until very late in the audit process. We understand there have been resource issues this year in the central finance team which should be resolved as soon as possible to facilitate improvements in the accounts and audit process for next year. As a result of significant delays in the receipt of information and explanations, we are still, at the time of finalising the draft of this report (26 November 2004), evaluating evidence received in the last few days, including a revised draft of the financial statements, and updating our internal review procedures in relation to this new evidence. At this stage, because of the late delivery of this information and the completeness and quality of some of the information we have received, we believe it may well not be possible for the Council to meet its obligations under the Accounts and Audit Regulations to publish the accounts by 30 November. The principal audit procedures outstanding at the timing of writing are: - Discussion with the Audit Committee of significant judgements at this meeting - Evaluating information and explanations in relation to a number of matters received over the last few days - Final internal review procedures - Management representation letter (see Appendix 1) - Update of post balance sheet event review. We will update the Committee orally at the meeting on progress on clearing these matters and on any matters arising from their clearance. London Borough of Harrow 3

6 3. Audit approach SAS 610 requires us to report to you a number of details relating to our audit approach. Our audit is conducted in accordance with Auditing Standards issued by the Auditing Practices Board We plan and perform our audit to be able to provide reasonable assurance that the financial statements are free from material misstatement and give a true and fair view. The assessment of what is material is a matter of professional judgement and includes consideration of both the amount (quantity) and the nature (quality) of misstatements. The assessment of materiality during audit planning assists in the determination of an efficient and effective audit approach. The level of materiality also determines the extent of work performed. The assessment of materiality during audit planning may differ from that at the time of evaluating the results of audit procedures. This may be because of a change in circumstances or a change in our knowledge as a result of the audit. We obtain an understanding of the accounting and the internal control systems in order to assess their adequacy as a basis for the preparation of the financial statements and to form an opinion whether proper accounting records have been maintained by the Council. Our understanding of the internal controls systems forms the basis of our audit approach. Internal controls comprise your control environment and the control procedures. The audit procedures we performed during our audit were a mix of control and substantive testing. The nature and extent of our procedures varied according to identification of areas of greater than normal risk of material misstatement and our assessment of the company's accounting system and, where we wished to place reliance on it, the internal control system and covered any aspect of the business operations that we considered appropriate. Where we identified a specific risk of a material misstatement which was more than normal we performed substantive testing directed at providing us with evidence that the risk has been addressed or performed tests of controls that focused on mitigating such risks. We liaised with internal audit to, where possible, avoid areas of duplication. Internal audit work provided us with audit evidence in relation to the satisfactory operation of key internal financial controls which we took account of in forming our audit opinion. London Borough of Harrow 4

7 4. Resolution of audit issues We set out in this section audit issues identified at the planning stage or during the course of our audit and how these have been resolved. Issue Recoverability of sundry debtors At October 2004, 0.7 million of income from Harrow PCT accrued at the year end had not been invoiced and had therefore not been collected. Harrow PCT have not provided clear confirmation of their intention to settle amounts which have not been invoiced as they have not received the invoices and had the opportunity to check them. Resolution Finance managers believe, based on discussions with the PCT, that the unprovided amount is recoverable in full. We have included a specific representation in the management representation letter relating to the recoverability of these amounts. We recommend in future that invoices are raised on a more timely basis, to improve cash flow and to enable both the Council and its partner organisation to close their books on a confirmed position. Amounts which are agreed through this process as being irrecoverable should be written out of the books on a timely basis. London Borough of Harrow 5

8 Issue Statement on internal control This is the first year in which the Council has been required to present a statement on internal control. The statement is required to include: An acknowledgement of responsibility for internal control A brief description of the purpose of the system of internal control A brief description of the key elements of the internal control environment A description of the process that has been applied in maintaining and reviewing the effectiveness of the system of control, including comments on the role of key parties A concise explanation of any identified significant weaknesses in the system of internal control and the actions undertaken or planned to address these. Our responsibility is to determine: Whether the statement contained all of the above points Whether there are any inconsistencies between the statement and the other information of which we are aware as part of our audit work. Resolution The draft statement on internal control included comments on the matters required to be covered. The statement originally submitted to the members for approval was a statement of full compliance. This was inconsistent with information we had from other work regarding the stage the Council had reached in establishing and embedding risk management processes at Harrow. As a consequence, we did not consider that the Council was in a position to obtain all of the necessary assurances to support a full statement. We have discussed changes in wording to the statement with the Director of Financial and Business Strategy and reviewed the revised wording. London Borough of Harrow 6

9 Issue Implementation of FRS 17: Retirement Benefits The principal change introduced by the 2003/4 Local Government Statement of Recommended Practice (the SORP ) was the full implementation of Financial Reporting Standard 17 ( FRS 17 ) which required for the first time recognition of pension liabilities on the Council s balance sheet and the Consolidated Revenue Account to reflect service costs, rather than just the contributions payable in the year. Adjustments are made to reverse the effect of these entries in the Consolidated Revenue Account so that the effect on amounts to be funded by Council Tax and Government Grants is neutral. The draft accounts presented to members for approval and to us for audit contained a number of errors in implementing these new accounting rules: The prior year comparatives in the balance sheet and the statement of total movements in reserves were not restated for the change in accounting policy The pension liability was presented in reserves whilst the pension reserve was presented in current assets. Together, this led to the overstatement of net assets by 191 million. The net return on pension assets and the transfer to pension reserve were presented in the incorrect sections of the Consolidated Revenue Account. Various disclosures relating to the change in accounting policy were omitted. CIPFA were unable to provide definitive guidance on the treatment of pension costs in the Housing Revenue Account, but specified a number of options reflecting different positions which authorities might have on the legal basis for recording such transactions. Resolution The accounts have been updated to reflect our comments on the accounting and presentation of pension costs and liabilities, except that certain disclosures required by the SORP in respect of the prior period adjustment have not been made (see below). The Council selected one of the possible options for accounting for pension costs in the HRA (i.e. making no FRS 17 entries). London Borough of Harrow 7

10 Issue Commuted car park gifts Included within contingent liabilities is an amount of 3.2 million relating to the Council s liability to provide resources to maintain the value, at present day prices, of gifts from developers in lieu of car parking provision which they were required to make under the terms of their planning provision. Interest earned on these gifts has historically been credited to the Consolidated Revenue Account. Last year we requested from management copies of the agreements and other documentation to clarify the nature of the obligations and to determine whether actual provision in the accounts is required. We received a copy of one agreement last year and were satisfied for this one agreement the accounting was satisfactory. We asked management to carry out a review of all agreements to confirm that their terms are similar to the agreement already provided. Resolution Officers initially indicated that they were not able to provide copies of further agreements, due to the elapse of time. We were concerned that funds were transferred to the Council under legal agreements which may contain terms placing obligations on the Council or restrictions over the use of those funds and that the Council does not appear to have a complete understanding of those terms or is able to locate copies of agreements. Subsequently, copies of two further agreements have been located, together with a log of other agreements, although it is not clear how these agreements might relate to the amount quoted in the agreements. We are satisfied on the basis of the agreements so far provided that there are no additional liabilities which need to be reflected in the accounts. The Council should investigate remaining agreements to determine whether there is any liability, whether actual or contingent, and amend the disclosure in the accounts next year accordingly. London Borough of Harrow 8

11 Issue Bad debt provision Bad debt provisions have been made against rent allowance overpayments ( 0.2 million), general provision ( 1.3 million) and social services debts ( 1.0 million). Officers have been unable to provide detailed calculations in support of the first two of these provisions, but have said that the provisions should be viewed in aggregate against the total exposure on a number of debtor accounts. Resolution Based on the officers own calculations, the bad debt provision is light by 0.7 million which we regard as an unrecorded misstatement. We have arrived at this assessment as follows. The housing finance team had prepared a detailed calculation which shows a provision of 1.6 million required against gross rent allowance overpayments receivable of 2.9 million. This amount and the approach to its calculation seem reasonable, but specific provision for this balance has not been made due to the housing team s uncertainty over whether provision had been made elsewhere within the Council s accounts for this amount. In addition, there is a difference between the rent allowance overpayments account and supporting listings by claimant of 0.3 million. Full provision against this amount of 0.3 million is also desirable. Full provision has been recommended by officers against Harrow PCT debt of 0.9 million (which forms most of the recorded provision of 1.0 million against social services debts), principally due to the lack of documentation to support invoices which are now long overdue. This provision again seems reasonable. The central finance team has made a general provision against balances recorded on the sundry debtors ledger. This shows a suggested provision of 0.4 million against gross debts of 3.9 million, excluding Harrow PCT debts considered above. This category of debt, mainly due from social services clients, is comparatively old ( 1.8 million over 180 days overdue). The general provision against older debts is small compared to the potential exposure, but is considered by officers to be adequate. These individual provisions total 3.2 million, compared to 2.5 million actually provided. We understand that officers are currently carrying out a detailed review of the ledger to determine the most appropriate level of provision. We recommend this type of review is carried out at least annually in the future and the findings reflected in the Council s statement of accounts. We also recommend that documentation to support London Borough of Harrow 9

12 invoices is assembled and reviewed at the time billing instructions are approved and that the documentation is retained in the event that the charge is subsequently challenged by the client. London Borough of Harrow 10

13 Issue Accounting for enhancement expenditure The statement of accounting policies states that all enhancement expenditure on fixed assets is capitalised. In practice, enhancement expenditure (i.e. expenditure which is on existing assets, rather than creation of new assets or extensions to existing assets) is generally written off in the year of the expenditure to the Fixed Asset Restatement Reserve without a full assessment of the extent to which the expenditure has increased the value the fixed assets. Where expenditure for capital purposes takes the form of an enhancement, it will not always be the case that the amount of expenditure incurred will match an increase in the value of the asset in most cases the increase in value will be less than the expenditure. The guidance notes to the SORP explain that the enhancement expenditure of a material value needs to be analysed carefully to identify differences between the amount of expenditure and value added. Expenditure should be initially expressed gross in the fixed asset note, with material differences between cost and value written off to the Fixed Asset Restatement Reserve as a downward revaluation. Enhancement expenditure written off direct to the Fixed Assets Restatement Reserve in the year was 16 million, although it is possible that the majority of this would not lead to an increase in value. The effect of any adjustment would be neutral on amounts to be met by Council Tax and Government Grants. Resolution A valuer will often need to be involved in making the analysis on the additional value derived from enhancement work. Harrow, in common with many authorities, believe that the benefit of carrying out this analysis and making entries on a basis consistent with the SORP outweighs the benefit of providing this information to the user and as a consequence write-off in full in the year that the expenditure is incurred without performing a detailed analysis. Any increase in value is picked up when the asset is next revalued. We have accepted on the basis that the amount is not qualitatively material and note that the approach is common practice in the sector but have said that (a) the accounting policy should be amended to reflect actual practice and (b) gross expenditure should be first reflected in the reconciliation of the movement on fixed assets rather than being written off direct to reserves. Some updating of the accounting policy note has been made in response, to our comments, but the drafting is currently contradictory. Enhancement expenditure is still shown as charged direct to the Fixed Asset Restatement Reserve in the latest version of the accounts. We have not yet been able to clarify officers position on these matters. London Borough of Harrow 11

14 Issue PFI accounting policy Harrow in the past has stated in its accounts that PFI schemes are treated for accounting purposes under the principles of FRS 5. In carrying our the assessment of the risks and rewards for elements of the contracts that involve property, an assessment is made of the substance of the transaction and whether the Council or the operator is exposed to the majority of the risks and rewards of ownership. In carrying out this assessment, the Council has applied HM Treasury Taskforce Guidance (Technical Note No 1) ( TTF Guidance ). The Local Government SORP requires the Council to apply Application Note F to FRS 5 Private Finance Initiative and Similar Contracts. CIPFA s Guidance Notes for Practitioners state that the TTF Guidance Note is influential but not mandatory in applying FRS 5, and accordingly where the two appear to conflict, the principles of FRS 5 should take precedence. Resolution The Council believes that it is more appropriate to account for PFI transactions by applying the TTF Guidance directly, which in the case of at least one scheme, leads to a different answer, as this reflects accepted practice in other local authorities with PFI contracts and enables comparability. We have accepted on the basis that full disclosure of the accounting policy and its basis has now been disclosed in the accounts. In future, we recommend that that this disclosure is made in the statement of accounting policies, rather than the notes to the accounts. London Borough of Harrow 12

15 Issue Reclassifications and other presentational matters Our work identified the following reclassifications and other presentational changes required under the Local Government SORP, in addition to matters discussed elsewhere: 1. Gross expenditure of 55 million on other operating expenditure and income has been presented within net cost of services. This caption does not exist within the standard expenditure analysis (SEA) in BVACOP. The SORP encourages use of the SEA, but does not require it in exceptional circumstances. It does, however, require other disclosures to be made in that instance. No disclosures had been made in the draft statement of accounts. 2. HRA transactions were originally disclosed separately within net cost of services, rather than consolidating with housing services and other captions. 3. We said last year that the pension scheme share of the bank balance ( 1.1 million) should be included in creditors but it was presented in cash in the original version of the draft statement of accounts presented to members for approval. 4. Gross expenditure shown in the Consolidated Revenue Account was 150 million higher than prior year. Resolution We have discussed these points with management. In respect of item 1, this category was included in the expenditure analysis presented in the Consolidated Revenue Account as a result of a misunderstanding. Officers plan to carry out a fundamental review of the coding which supports the expenditure analysis in 2005 in time for the preparation of the 2004/5 accounts. However, they do not believe it is practical to complete this review prior to finalising the 2003/4 accounts and are therefore unable to allocate income and expenditure recorded in the other caption to appropriate categories. We have accepted following the inclusion of disclosure of the departure from the SEA and the Council s plans for addressing this. In respect of items 2 and 3 appropriate amendments have been made to the accounts approved by members in July In respect of item 4, following investigation by officers, an adjustment has been processed in the latest version of the accounts presented to us for audit to reduce spend and income for education services by 84 million. We recommend in future that a full review of the accounts, including variance analysis to prior year, is carried out by officers before submission of the accounts for audit and member approval to confirm the reasonableness of reported amounts. London Borough of Harrow 13

16 Issue Disclosure items The Local Government SORP requires disclosure of various items. Our review of the draft Statement of Accounts submitted to members identified 18 separate disclosure items which had been omitted from that version. Whilst a disclosure checklist was completed by management, this was not fully completed until after the submission of the accounts to members for approval and our review identified a number of incorrect responses. Resolution We have discussed these points with management and the Statement of Accounts has been updated for some, but not all, of these disclosure items. The items which remain outstanding are as follows: o A brief note explaining the significance of any pensions liability or asset disclosed or recognised (explanatory forward) o Any significant change in accounting policies (i.e. FRS 17) with a note on the reason for the change and the effect on the accounts (explanatory forward) effect on balance sheet only explained o Summary of the authority s internal and external sources of funds available to meet capital expenditure and other financial commitments including PFI schemes o The effect of a prior period adjustment on the results of the preceding period (statement of accounting policies) o An indication of the effect of a prior period adjustment on the results of the current period (statement of accounting policies) o Effect of prior period adjustments on the outturn for the preceding period (notes to the accounts) o Details of the movement in the year for each class of provision total movement shown, but not analysis of movement o Total contributions receivable and benefits payable analysed between the administering authority and admitted bodies London Borough of Harrow 14

17 o Statement confirming where the statement of investing principles has been published. Officers have indicated that they do not propose to update the accounts to rectify these omissions. We ask the audit committee to confirm officers view that the omission of these disclosure items is not material to the reader of the accounts. We recommend that in future the disclosure checklist is fully completed prior to submission of the draft statement of accounts to us for audit and to the audit committee for approval. We also recommend that the completed checklist is subject to review by a senior finance officer. London Borough of Harrow 15

18 Issue Summary of other matters discussed with management 1. The bad debt provision in respect of Council Tax was 0.3 million higher than the calculated amount. We have not obtained an explanation for the difference. 2. Last year we said that the Council should review its accounting policy in relation to deferred charges carried on the balance sheet in respect of Housing Purchase Grants which was being amortised over a period of 50 years. The Grants were provided to former tenants to assist them in the purchase of their own accommodation with a view to freeing-up the Council s own stock. A balance of 8.2 million was included in the accounts presented to members in July The Council s insurances system contains live information and we understand it is not able to retrospectively generate a list of open claims at the year end. As a consequence, officers are unable to support the provision with a list of specific claims covered by the provision 4. Legal cases raise the possibility that local authorities may have wrongly charged for the provision of certain after care facilities under S117 of the Mental Health Act 1983 liabilities. Harrow has carried out a review and identified individual clients that would be effected by the rulings and earmarked a reserve of 0.7 million in its 2002/3 accounts for the repayment of past charges. Repayments of 0.1 million have been made in the year. The remaining balance of 0.6 million has been included within provisions. 5. Contribution to reserves shown in the Consolidated Revenue Account differs to the movements in reserves. 6. A valuation establishes a single carrying value for an asset at the date of valuation. It follows that any accumulated depreciation carried prior to the revaluation will be removed from the balance sheet. Where depreciation continues to be charged, it will again be removed at the date of the next valuation. Accumulated depreciation is not being removed on revaluation of assets. The total accumulated depreciation at 31 March 2004 is 13.8 million, although not all of this will have been charged subsequent to the prior to the last valuation date for the respective assets. 7. Approximately 600 former employees, identified as frozen, have been omitted from the pension scheme membership disclosure note. London Borough of Harrow 16

19 Resolution We have recorded item 1 as an unadjusted error in section 5. In respect of item 2, an adjustment has been made in the latest set of accounts to write-off this balance direct to the Capital Financing Reserve. We agree with the write-off of this amount. Deferred charges are normally expensed to the Consolidated Revenue Account with an equal belowthe-line appropriation to the Capital Financing Reserve. In processing the write-off, officers contention is that the balance should never have been carried on the balance sheet under the capital accounting system. The entry that would have been made on introduction of the capital accounting system would have been to write-off the charge direct to reserves i.e. consistent with the treatment adopted this year. On this basis, we are content this year. In respect of item 3, we have asked to see summary prints from the system showing the position at the year end and at a date in October and a detailed print in October and have satisfied ourselves on the basis of this information. We have again asked officers to ensure that the required information is captured at next year end in future. In respect of item 4, the Council should continue to ensure that payments are made in accordance with legal advice on the Council s obligations and that the classification in the balance sheet continues to reflect judgements on the probability of payment occurring. In respect of item 5, an explanation has been received. In future, the Council should ensure that the two are in agreement. In respect of item 6, officers do not propose to make amendments to the accounts this year, but will investigate and deal with this point in future years accounts. We have accepted this on the grounds of materiality but have recorded as an uncorrected misstatement in section 5. In respect of item 7, as a priority their status should be resolved so that accurate membership data can be included in the 2004/5 accounts. London Borough of Harrow 17

20 5. Summary of potential unrecorded errors Our materiality was assessed based on gross expenditure in the Consolidated Revenue Account with lower materiality thresholds set for the Housing Revenue Account, Collection Fund. A separate materiality was also set for the pension scheme accounts which are incorporated into the Council s Statement of Accounts. Our professional standards require us to communicate all unadjusted misstatements identified during our audit work to the Audit Committee, other than those which we believe are clearly trifling. We have defined trifling as less than 2% of relevant materiality threshold. The remaining unadjusted errors are as follows: Debit/(credit) General Fund Housing Revenue Account Consolidated Revenue Account Collection Fund Reserves Housing benefit receivable - difference between claimed amount and estimate used to close the accounts Increase bad debt provision (see section 4) Difference on debtors ledger control account reconciliation Additional income invoiced on finalisation of staff recharges to Harrow Consortium for 2003/4 (152) 0 (152) 0 (152) Council Tax provision - difference to calculated amount (see section 4) (276) (276) Take accumulated depreciation to the Fixed Asset Restatement Reserve on revaluation of fixed assets (see section 4) (1,200) Enhancement expenditure not carried in fixed assets (see section 4) Note 1 Reclassification of amount repayable in respect of Benefits subsidy from sundry creditors to central government creditors ( 1.1 million) Total debit/(credit) (276) (728) Note 1: Enhancement expenditure which should have been counted into fixed assets in the year cannot be determined without a detailed assessment, but is less than 16 million. Note 2. Other operating income and expenditure should be analysed out to headings included in the Standard Expenditure Analysis, but the adjustment cannot be quantified. London Borough of Harrow 18

21 The effect of unrecorded errors on the revenue accounts are less than our materiality, both individually and in aggregate and there are no other adjustments which we assess to be qualitatively material. We will update the Committee orally if changes are needed to the table as a result of clearing outstanding points and issues. We will be seeking a representation from the Council, which explains the reasons for not adjusting this misstatement brought to the committee s attention (see Appendix 1). London Borough of Harrow 19

22 6. System weaknesses Internal audit s work, which we reviewed, identified a number of key controls where operation of the control was either not documented or where documentation retained was only partial. In addition, their work identified a number of other areas for improvement. A significant number of recommendations made by Internal Audit were repeated from last year. We have raised this point with the Director of Financial and Business Strategy as we would not expect that any recommendations arising from a review of key controls within the Council s main financial systems would remain unactioned one year later. The Director of Financial and Business Strategy is putting in place a number of arrangements to raise the profile of Internal Audit recommendations and to monitor cases where recommendations are not actioned in accordance with agreed timescales. In particular, we discussed the following matters with the Director of Financial and Business Strategy: - The error rate for financial aspects of benefit claims was 4.2% compared to a target of 2.0%. This is based on a sample of claims examined by supervisors (1.7%). We are satisfied on the basis of discussions with officers that the above target error rate does not represent a material error in the Council s statement of accounts - Arrangements to periodically confirm that properties for which business rate payers were in receipt of empty property relief were unoccupied did not apply to all relevant properties through the year. We have performed alternative substantive audit procedures. - A number of issues were raised in relation to the processing of payments to suppliers, including maintenance of up-to-date authorised signatory lists, controls over additions and amendments to supplier masterfile data and segregation of duties in input and release of batches. For the purpose of the Council s statement of accounts, officers believe these controls are mitigated by the operation of budgetary control processes. London Borough of Harrow 20

23 - A number of issues were raised concerning reconciliation of the opening Council Tax and NNDR debits and subsequent reconciliation of property database control totals to independent information maintained by the Valuation Officer. Where needed we have performed tested mitigating controls or performed alternative substantive audit procedures. Weaknesses in general computer controls identified by our computer audit specialists have been summarised in Appendix 4. None of the issues raised caused us to modify our audit approach. London Borough of Harrow 21

24 7. Confirmation of independence In our professional judgement the policies and safeguards in place ensure that we are independent within the meaning of all regulatory and professional requirements and that the objectivity of the audit engagement partner and audit staff is not impaired. We have detailed important safeguards and procedures adopted by Deloitte & Touche LLP to counter threats or perceived threats to our objectivity at Appendix 2. London Borough of Harrow 22

25 8. Statement of responsibility We take responsibility for this report which is prepared on the basis of the limitations set out below. Deloitte & Touche LLP November 2004 Contact Persons: Nigel Johnson - Partner Angus Fish Senior Manager Vincent Marke Manager Phone: Fax: afish@deloitte.co.uk or nijohnson@deloitte.co.uk The matters raised in this report are only those which came to our attention during the course of our audit and are not necessarily a comprehensive statement of all the weaknesses that exist or all improvements that might be made. Recommendations for improvements should be assessed by you for their full commercial impact before they are implemented. This report has been prepared solely for your use as directors and should not be quoted in whole or in part without our prior written consent. No responsibility to any third party is accepted as the report has not been prepared, and is not intended, for any other purpose. London Borough of Harrow 23

26 Appendix 1 Management representation letter (Harrow Council s Letterhead) Deloitte & Touche LLP Station Way St Albans Hertfordshire AL1 5HE Date: [ ] November 2004 Dear Sirs We confirm to the best of our knowledge and belief, the following representations given to you in connection with your audit of the London Borough of Harrow s ( the Council ) financial statements for the year ended 31 March There have been no significant transactions with related parties, other than those disclosed in Note [ ] of the draft financial statements and we are not aware of any other such matters required to be disclosed in the financial statements whether under Financial Reporting Standard 8 or other requirements. We have confirmed this with all key managers and other individuals who are in a position to influence or are accountable for the stewardship of the company. 2. We are not aware of any actual or possible instances of non-compliance with laws and regulations, the effects of which should be considered when preparing financial statements. London Borough of Harrow 24

27 3. We have considered the uncorrected misstatements and omitted disclosure items detailed in the appendix to this letter. We believe that no adjustment is required to be made in respect of any of these items as they are individually and in aggregate immaterial having regard to the financial statements taken as a whole. 4. All minutes of member meetings during and since the financial year have been made available to you. 5. We confirm that we are of the opinion that the Council; is a going concern, that we have disclosed to you all relevant information of which we are aware and which relates to our opinion, and that all relevant facts are disclosed in the financial statements. 6. There have been no events since the balance sheet date which necessitate revision of the figures included in the financial statements or inclusion of a note thereto. Should further material events occur, which may necessitate revision of the figures included in the financial statements or inclusion of a note thereto, we will advise you accordingly. 7. We acknowledge our responsibilities for the accounting and internal control systems that are designed to prevent and detect fraud and error. 8. No legal claims have been received or are expected to be received except as set out in Note [ ]. 9. We are not aware of any fraudulent acts or other irregularities involving management or employees which could have a material effect on the financial statements. 10. We are not aware of events or changes in circumstances occurring during the period which indicate that the carrying amount of fixed assets may not be recoverable. 11. All known material liabilities have been properly included in the financial statements and all material contingent liabilities have been disclosed. 12. Based on discussions with Harrow Primary Care Trust we believe that amounts due from the Trust at 31 March 2004 will be recovered in full. 13. We confirm that: London Borough of Harrow 25

28 all retirement benefits and schemes, including UK, foreign, funded or unfunded, approved or unapproved, contractual or implicit have been identified and properly accounted for; all settlements and curtailments have been identified and properly accounted for; all events which relate to the determination of pension liabilities have been brought to the actuary s attention; the actuarial assumptions underlying the valuation of the scheme liabilities accord with the directors best estimates of the future events that will affect the cost of retirement benefits and are consistent with our knowledge of the business; the actuary s calculations have been based on complete and up to date member data as far as appropriate regarding the adopted methodology; the amounts included in the financial statements derived from the work of the actuary are appropriate. We confirm that the above representations are made on the basis of adequate enquiries of management and staff (and where appropriate, inspection of evidence) sufficient to satisfy ourselves that we can properly make each of the above representations to you. Yours faithfully Signed on behalf of the London Borough of Harrow London Borough of Harrow 26

29 APPENDIX: SCHEDULE OF UNCORRECTED MISSTATEMENTS AND OMITTED DISCLOSURE ITEMS Debit/(credit) General Fund Housing Revenue Account Consolidated Revenue Account Collection Fund Reserves Housing benefit receivable - difference between claimed amount and estimate used to close the accounts Increase bad debt provision (see section 4) Difference on debtors ledger control account reconciliation Additional income invoiced on finalisation of staff recharges to Harrow Consortium for 2003/4 (152) 0 (152) 0 (152) Council Tax provision - difference to calculated amount (see section 4) (276) (276) Take accumulated depreciation to the Fixed Asset Restatement Reserve on revaluation of fixed assets (see section 4) (1,200) Enhancement expenditure not carried in fixed assets (see section 4) Note 1 Reclassification of amount repayable in respect of Benefits subsidy from sundry creditors to central government creditors ( 1.1 million) Total debit/(credit) (276) (728) Note 1: Enhancement expenditure which should have been counted into fixed assets in the year cannot be determined without a detailed assessment, but is less than 16 million. Note 2. Other operating income and expenditure should be analysed out to headings included in the Standard Expenditure Analysis, but the adjustment cannot be quantified. Omitted disclosure items A brief note explaining the significance of any pensions liability or asset disclosed or recognised (explanatory forward) Any significant change in accounting policies (i.e. FRS 17) with a note on the reason for the change and the effect on the accounts (explanatory forward) effect on balance sheet only explained London Borough of Harrow 27

30 Summary of the authority s internal and external sources of funds available to meet capital expenditure and other financial commitments including PFI schemes The effect of a prior period adjustment on the results of the preceding period (statement of accounting policies) An indication of the effect of a prior period adjustment on the results of the current period (statement of accounting policies) Effect of prior period adjustments on the outturn for the preceding period (notes to the accounts) Details of the movement in the year for each class of provision total movement shown, but not analysis of movement Total contributions receivable and benefits payable analysed between the administering authority and admitted bodies Statement confirming where the statement of investing principles has been published. London Borough of Harrow 28

31 Appendix 2 Independence policies and procedures Important safeguards and procedures developed by Deloitte & Touche LLP to counter threats or perceived threats to our objectivity are set out below. Every opinion (not just statutory audit opinions) issued by Deloitte & Touche LLP is subject to hot technical review by a member of our independent Professional Standards Review unit. We report annually to the Audit Committee our assessment of objectivity and independence. This report includes a summary of non-audit services provided together with fees receivable. There is formal consideration and review of the appropriateness of continuing the audit engagement before accepting reappointment. Periodic rotation takes place of the audit engagement partner and key audit principles in accordance with our policies and professional and regulatory requirements. There is an assessment of the level of threat to objectivity and potential safeguards to combat these threats prior to acceptance of any non-audit engagement. This would include particular focus on threats arising from self-interest, self-review, advocacy and over-familiarity. Our detailed ethical policies standards and independence policies are issued to all partners and employees who are required to confirm their compliance annually. We are also required to comply with the policies of other relevant professional and regulatory bodies. Amongst other things, these policies: - state that no Deloitte partner (or any closely related persons) is allowed to hold a financial interest in any of our UK audit clients; - require that professional staff (or any closely related persons) may not work on assignments if they have a financial interest in the client or a party to the transaction or if they have a beneficial interest in a trust holding a financial position in the client; London Borough of Harrow 29

32 - prohibit any professional employee from obtaining products or services from clients at prices below those generally available to others; and - provide safeguards against potential conflicts of interest. Audit partners are expected to be responsive to the needs of clients where under ethical rules it is appropriate to do so. Partners are evaluated on roles they take within the firm including their technical ability and their ability to manage the risks which the firm faces. London Borough of Harrow 30

33 Appendix 3: Draft unqualified audit opinion Independent Auditors Report to London Borough of Harrow We have audited the financial statements which comprise the Consolidated Revenue Account, Consolidated Balance Sheet, Collection Fund, Housing Revenue Account and associated notes which have been prepared in accordance with the accounting policies applicable to local authorities as set out on therein and the Pension Fund accounts and associated notes which have been prepared in accordance with the accounting policies applicable to pension funds set out therein. This report is made solely to the London Borough of Harrow in accordance with Part II of the Audit Commission Act 1998 and for no other purpose, as set out in paragraph 54 of the Statement of Responsibilities of Auditors and of Audited Bodies, prepared by the Audit Commission. To the fullest extent permitted by law, we do not accept or assume any responsibility to anyone other than the Council for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of the Chief Financial Officer and Auditor/Auditors As described on page [x] the Chief Financial Officer is responsible for the preparation of the statement of accounts in accordance with the Statement of Recommended Practice on Local Authority Accounting in the United Kingdom Our responsibilities, as independent auditors, are established by statute, the Code of Audit Practice issued by the Audit Commission and my/our profession s ethical guidance. We report to you my/our opinion as to whether the statement of accounts present fairly: the financial position of the Council and its income and expenditure for the year, the financial transactions of its Pension Fund during the year and the amount and disposition of the Fund s assets and liabilities, other than liabilities to pay pensions and benefits after the end of the scheme year. We review whether the statement on internal control on page x reflects compliance with CIPFA s guidance The Statement on Internal Control in Local Government: Meeting the Requirements of the Accounts and Audit Regulations 2003 published on 2 April We report if it does not comply with proper practices specified by CIPFA or if the statement is misleading London Borough of Harrow 31

34 or inconsistent with other information we are aware of from our audit of the financial statements. We are not required to consider, nor have we considered whether the statement on internal control covers all risks and controls. We are also not required to form an opinion on the effectiveness of the authority s corporate governance procedures or its risk and control procedures. Our review was not performed for any purpose connected with any specific transaction and should not be relied upon for any such purpose. We read the other information published with the statement of accounts and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the statement of accounts. Basis of audit opinion We conducted our audit in accordance with the Audit Commission Act 1998 and the Code of Audit Practice issued by the Audit Commission, which requires compliance with relevant auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the council in the preparation of the financial statements, and of whether the accounting policies are appropriate to the council's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the statement of accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we evaluated the overall adequacy of the presentation of the information in the financial statements. Opinion In our opinion the statement of accounts present fairly the financial position of Harrow Council as at 31 March 2004 and its income and expenditure for the year then ended. London Borough of Harrow 32