Agenda item

Christopher Paisley, KPMG director, advised that he would be leading on the 2023/24 year-end audit. There had been well-publicised delays to the external audit process in local government and it was anticipated that the borough’s 2022/23 year-end accounts would not receive an unqualified audit opinion. This was not specific to Welwyn-Hatfield and was in tandem with a consultation led by the Financial Reporting Council (FRC), DHLUC and Public Sector Audit Appointments (PSAA) around bringing in a backstop arrangement in respect of previous orders due to the significant number of prior audits that were unsigned; the consultation was complete and the outcome was awaited. Legislative provision for a disclaimer of opinion from the previous audit firm was anticipated which would identify what had not been audited, effectively drawing a line under it in order to deal with the audit process and deal with the backlog. From an audit perspective, KPMG was the borough’s new auditor and would not have any assurance on the 2022/23 year-end numbers due to the absence of an audit process for that year. There were expected to be provisions within legislation to allow KPMG to effectively audit the 2023/24 year-end and provide a disclaimer in its first-year opinion to say it had not audited the opening balance sheet in order to manage the process. KPMG had received a strong steer from the previous auditors that a disclaimer would be provided, and expected that once the legislative process had taken place it could start the audit for 2023/24 in the summer as planned. It had set out in its report how the audit was planned, key decisions it had made in respect of materiality etc. 

KPMG noted some key points in the report. There were three levels of materiality it worked with: 1) a material amount (around 2.5% of the Council’s overall expenditure, ie £3m) for the statement of accounts from the perspective of stakeholders; 2) performance materiality which directed its work and meant they actually audited to £1.9m and dealt with issues like the absence of a previous year’s audit, that it was a first year audit for KPMG and to deal with aggregation risk; and 3) a reporting threshold of £150,000.

The report set out the significant risks KPMG anticipated addressing through its audit which were representative of the sector as a whole. These included evaluation of land and buildings as this was subject to uncertainty and subjectivity; management override of controls (which was governed by international auditing standards); Local Government Pension Scheme pensions liability; and expenditure recognition. This was a standard suite of risks that would be expected to be addressed by an audit of a council. KPMG had considered the additional services provided and did not consider there were any threats to its independence as the Council’s external auditor.

The following points were made as part of the discussion:

-        The Chair asked whether the significant risks highlighted were by KPMG rather than the previous auditors. KPMG confirmed that was the case.

-        The Chair noted the ratio of non-audit fees to audit fees for the year was to be confirmed and asked when this would happen. KPMG said this was undertaken elsewhere in KPMG and the fee would be agreed with officers; the non-audit fees were of a low enough level that meant there was no threat to its independence.

-        A member asked if there was only one year (2022/23) that had not been fully audited and this was confirmed.

-        A member asked whether different auditors used the same criteria to assess value for money. KPMG explained the value for money scope of work was governed by an auditor guidance note from the National Audit Office.

-        There was a query about how often properties were valued and officers confirmed this was done on a rolling basis over five years although high value properties were valued annually.

-        A member asked why an audit for 2022/23 was not taking place, why audits did take place if it was possible not to have one, and if there were any risks to the Council as a result. KPMG said that as the Council’s new auditors, if they were required to audit the opening position there would be resource implications that would be untenable. There had been moves to simplify the process as that had been a contributory factor to the delays. The final backstop date for the 2023/24 year end accounts was May 2025 whereas for the following financial year it would be January 2026, and this would continue so that the backstop dates got progressively closer to the respective year-end. Responding to the issue about why audits took place, KPMG said it was widely recognised there was a lack of accountability particularly in cases where there were several years that had been unaudited and an increase in issues with accounts or misstatements due to not having the rigour of external assurances; audit was important as it was a crucial component of public accountability. It was far from ideal to have a missing audit but there had been pragmatic reasons for this. Officers added that the major risk was around the material statement of the accounts; this did not affect the Council’s ability to borrow and while there had been previous misstatements about pensions and assets, that was down to a difference of evaluation opinion and had no impact on the taxpayer. The biggest risk for unaudited accounts would be if misclassified expenditure was not picked up. However based on controls and previous audits, these had not been issues for the Council and officers were comfortable with the controls in place, did not feel that those risks were increased by the fact that the 2022/23 audit would be missed and noted that anything ongoing would be covered by KPMG when it picked up the next audit. A member responded that the accounts were regularly scrutinised so it was likely any major issue would be noted and actioned.    

-        A member asked how the situation had arisen. KPMG identified some of the key reasons as technical issues with accounts (although that was less accurate for smaller councils like Welwyn Hatfield); issues around infrastructure assets and how they were accounted for had been significant for some councils; the complexity of local government accounts; the level of experienced resource in the audit sector to effectively audit the accounts (existing firms had experienced difficulties in recruitment and retention); and the impact of the pandemic. Officers noted the Redmond review had highlighted some of the issues relating to the audit market including resources and significantly increased audit fees. It was agreed officers would circulate the Redmond review to members of the committee. KPMG added that over the last five years there had been a significant increase of FRC interest in the sector and scrutiny of the level of work, such as how much management estimates were challenged, which had led to increased work to provide an audit opinion safely.   

The Committee noted the indicative external audit plan and strategy for the year ending 31 March 2024.