Audit 2008-2009

Annual Audit

Letter

North East Lincolnshire Council

Audit 2008-2009

December 2009

Status of out reports

The Statement of Responsibilities of Auditors and Audited Bodies issued by the Audit

Commission explains the respective responsibilities of auditors and of the audited body.

Reports prepared by appointed auditors are addressed to non-executive directors/

members or officers. They are prepared for the sole use of the audited body. Auditors

accept no responsibility to:

• any director/member or officer in their individual capacity; or

• any third party.

Contents

Key messages 3

Financial statements 5

Use of resources 7

Closing remarks 10

Key messages

3 North East Lincolnshire Council

Key messages

This report summarises the findings from my 2008/09 audit. It includes

messages arising from the audit of your financial statements and the results of

the work I have undertaken to assess your arrangements to secure value for

money in your use of resources.

Financial statements

1 I issued an unqualified opinion on your financial statements on

30 September 2009.

2 The quality of your financial statements and supporting working papers were

improved in 2008/09 compared to 2007/08 and your draft accounts were free

from material error. I identified some non material errors and made a number of

recommendations in relation to the qualitative aspects of financial reporting which

were reported in my annual governance report.

Use of resources

3 My assessment of how you manage resources has been adversely affected

primarily by shortcomings in treasury management and the delivery of the capital

programme.

• Failings in treasury management highlighted by investments in Icelandic

banks led to a Public Interest Report that highlighted serious deficiencies in

your internal control arrangements. My use of resources work identified

concerns about the way your finances have been managed.

• There was a lack of realism in your approved capital programme which again

had to be subject of significant re-profiling early in the year and yet was still

underspent.

4 Other aspects of your use of resources are more positive. In particular, the way in

which you manage your assets continues to be a strength. Data quality is a

relatively strong area as are your arrangements for improving the use of natural

resources.

Value for Money

5 I issued a qualified conclusion stating that you had adequate arrangements to

secure economy, efficiency and effectiveness in your use of resources, except for

arrangements for:

• planning your finances effectively to deliver strategic priorities and secure

sound financial health; and

• managing risk and maintaining a sound system of internal control.

Key messages

North East Lincolnshire Council 4

Comprehensive Area Assessment and Organisational Assessment

6 The Audit Commission introduced a new assessment regime during 2009,

Comprehensive Area Assessment. This aims to review the performance of local

partners in delivering better outcomes for local people. The assessment is

designed to focus attention on areas that need attention in order to deliver

additional and sustained improvement. Our work in this area is being led by the

local Comprehensive Area Assessment Lead (CAAL). The CAAL has shared

draft findings with officers and he is due to formally report in December 2009.

Alongside the CAA report we will issue our organisational assessment which

combines our judgements on your use of resources and managing performance.

Any issues arising will be discussed with you and planned into future years audit

and assessment activity.

Audit fees

7 Table 1 below shows the analysis of total fee and the increase of £15,000

compared to the initial estimated fee. The additional fee charged relates to

additional work required to issue my public interest report on the subject of

investments in Icelandic banks.

Table 1 Audit fees

Audit area Actual (£) Proposed (£) Variance (£)

Financial statements and annual governance statement 221,993 221,993 0

Value for money 77,672 77,672 0

Total audit fees 299,665 299,665 0

Non-audit work (public interest report) 15,000 0 15,000

Total 314,665 299,665 15,000

Actions

8 Recommendations are shown within the body of this report and have been

agreed with officers.

Independence

9 I can confirm that the audit has been carried out in accordance with the Audit

Commission’s policies on integrity, objectivity and independence.

Financial statements

5 North East Lincolnshire Council

Financial statements

The Council’s financial statements and annual governance statement are an

important means by which the Council accounts for its stewardship of public

funds.

Significant issues arising from the audit

10 I issued an unqualified opinion on your financial statements on

30 September 2009.

11 The quality of your financial statements and supporting working papers were

improved in 2008/09 compared to 2007/08 and your draft accounts were free

from material error. I identified some non material errors in the financial

statements and these were reported in my annual governance report.

Material weaknesses in internal control

12 On 24 June 2009, I issued a report in the public interest under section 8 of the

Audit Commission Act 1998 on the subject of investments in Icelandic banks,

which included a number of recommendations for action.

13 The report stated that effective financial control systems were not in operation

and senior officers did not adhere to your Annual Investment Strategy. If controls

had been in place, and professional advice received had been acted on, then the

Icelandic investments would not have been made by the Council during 2008. I

also expressed the concerns I had about the leadership and capacity of your

financial management function. I intend to follow up these findings during my

2009/10 audit.

Recommendation

R1 Obtain assurance that the recommendations outlined in the Public Interest

Report on the subject of investments in Icelandic banks are being addressed

and improvements have been made to the control environment.

Accounting Practice and financial reporting

14 I considered the qualitative aspects of your financial reporting and made 3 key

recommendations:

• members should seek assurance from officers that the reduced level of the

self-insurance reserve is sufficient for your needs going forward;

• ensure that any debts written off from the collection fund are properly

authorised in accordance with your constitution; and

Financial statements

North East Lincolnshire Council 6

• improve the timeliness of the schools bank account reconciliation process to

ensure that intra group transfers are dealt with on a timely basis and you are

not open to unnecessary risk.

International Financial Reporting Standards (IFRS)

15 In March 2008 the Treasury announced that the annual financial statements of

government departments and other public sector bodies would be prepared using

International Financial Reporting Standards (IFRS) from 2009/10 onwards. For

local government bodies the first full year of application is the 2010/11 financial

statements but the starting period for this (the transition date) is 1 April 2009.

Local government bodies will be required to produce their 2009/10 Whole of

Government Accounts return on an IFRS basis.

16 As part of my audit I have completed an Audit Commission survey on the

Council’s progress in preparing for the implementation of IFRS. The Council has

made some progress having completed an impact assessment and a timetable

with key dates has been drawn up. However there is still significant work to

complete to ensure deadlines are met. The introduction of IFRS requires the

support of all sectors of the organisation and should not be seen solely as a

finance issue.

Recommendation

R2 Ensure that there is sufficient capacity within the finance department and wider

organisation to support the implementation of International Financial Reporting

standards and key deadlines are not missed.

Use of resources

7 North East Lincolnshire Council

Use of resources

I considered how well the Council is managing and using its resources to

deliver value for money and better and sustainable outcomes for local people,

and gave a scored use of resources judgement.

I also assessed whether the Council put in place adequate corporate

arrangements for securing economy, efficiency and effectiveness in its use of

resources. This is known as the value for money (VFM) conclusion.

Use of resources judgements

17 In forming my scored use of resources judgements, I used the methodology set

out in the Audit Commission’s use of resources framework. Judgements were

made for each key line of enquiry (KLOE) using current four point scale from 1 to

4, with 4 being the highest. Level 1 represents a failure to meet the minimum

requirements at level 2.

18 Your use of resources scores are shown in Table 2 below.

Table 2 Use of resources

KLOE Use of resources theme Scored judgement

1.1 Financial planning 1

1.2 Understanding costs 2

1.3 Financial reporting 2

2.1 Commissioning and procurement 2

2.2 Data quality and Use of information 2

2.3 Good governance 2

2.4 Risk management and Internal control 1

3.1 Natural resources 2

3.2 Asset management 3

3.3 Workforce management Not assessed in 2008/09

2008/09 assessment

19 Our assessment of how you are managing performance has been adversely

affected primarily by shortcomings in treasury management and the delivery of

the capital programme.

• Failings in treasury management highlighted by investments in Icelandic

banks led to a Public Interest Report that highlighted weaknesses in your

internal control arrangements. My use of resources work identified concerns

about the way your finances have been managed.

Use of resources

North East Lincolnshire Council 8

• There was a lack of realism in your approved capital programme which again

had to be subject of significant re-profiling early in the year and yet was still

underspent.

20 Other aspects of your use of resources are more positive. In particular, the way in

which you manage your assets continues to be a strength. Data quality is a

relatively strong area (although improvements are required in the way in which

information is used), as are arrangements for improving your use of natural

resources.

21 There are several aspects, such as financial reporting, in which you have

improved your use of resources ratings in 2008/09 compared to the previous

year. There are also instances of improvements being made which are too recent

to have led to positive outcomes yet, for example, service redesign, developing

unit costing and transaction costing and the development of a sustainable

procurement policy.

22 The key improvement areas for you are to:

• complete the implementation of the treasury management improvement plan;

• ensure your capital programme is realistic and manage your finances in line

with it;

• provide decision makers with full information on the finances involved and the

anticipated impact of options for change for all key decisions; and

• improve internal control and the assurance framework.

Recommendation

R3 Review capital programme management arrangements, in particular the role of

the Capital Investment Strategy Group, to ensure that spending profiles are

realistic and priorities and objectives are not put at risk.

23 As you strive to improve your use of resources scores for 2009/10 it will be

important to focus on all aspects of ‘level 3′ performance and on evidencing

outcomes for the community as well as responding to the findings in my report.

Recommendation

R4 Implement a more robust approach to evidence gathering which encompasses

outcomes from key policy decisions and engages a wider range of officers in

the use of resources process.

Use of resources

9 North East Lincolnshire Council

VFM Conclusion

24 I issued a qualified conclusion stating that you had adequate arrangements to

secure economy, efficiency and effectiveness in your use of resources, except for

arrangements for:

• planning your finances effectively to deliver strategic priorities and secure

sound financial health; and

• managing risk and maintaining a sound system of internal control.

Closing remarks

North East Lincolnshire Council 10

Closing remarks

25 I have discussed this letter with the Chief Executive and the Chief Finance

Officer. I will present this letter at the Audit Committee on November 2009 and

will provide copies to all members.

26 Further detailed findings, conclusions and recommendations in the areas covered

by my audit are included in the reports issued during the year.

Table 3

Report Date issued

Audit plan March 2008

Icelandic bank investments – Public Interest report June 2009

Supplementary fee letter July 2009

Report to those charged with governance September 2009

Opinion on financial statements September 2009

Value for money conclusion September 2009

Partnerships review November 2009

Changing organisational cultures November 2009

Annual audit letter November 2009

27 Despite the difficulties surrounding the issue of the Public Interest Report on

Icelandic banks officers generally adopted an open, positive and constructive

approach to my audit. I wish to thank the officers and Members for the support

and co-operation that was provided during the audit.

Mark Kirkham

District Auditor

November 2009

The Audit Commission

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© Audit Commission 2009

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