Delayed NCC Audit Report into 2017/18 finances finally published

By Mick Scrimshaw on August 1, 2019

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The External Auditors presented their much delayed report in to the 2017/18 Accounts to Northamptonshire County Council’s Audit Committee this week.  I described it as a catalogue of mistakes and concerns although in fairness most of the problems in the council’s finances it raised were already known about and many had been discussed many times before although it is good to have all the issues pointed out in black and white.

The huge 172 page report which will have cost over £815,000 when the final bill is in dealt with many of the financial mismanagement issues that thrust NCC into the national and international headlines and they became the first ever council to effectively become bankrupt and the focus of a government inspection which in turn has led to the proposed abolition along with all the other local Borough and District Councils in Northamptonshire to be replaced to two brand new unitary councils for both the North and West parts of the county who will take on all the roles and responsibilities of the existing councils.

Some of the highlights of the report which deal with some of the most controversial aspects of the council’s financial dealings are quoted below:

Capital Flexibilities and Capital Programme:

there was generally very little evidence and supporting documentation provided to us to support the Authority’s overall use of capital receipts to fund transformational spending.

Evidence now exists which shows that projects previously presented to audit as time limited one-off projects are in actuality on-going costs which would be required to be incurred by the Authority. They therefore, in our view, do not meet the necessary criteria to be funded via capital receipts.

the consequence of this financial position is that the Authority now reports a negative general fund position as of year-end.

Section 106 monies:

…A further £4.5 million of S106 funding has been utilised in 2017/18. Following our review and subsequent discussions with Officers, the Authority confirmed it no longer wished to pursue the recognition of such revenue from Section 106 monies to fund general expenditure.

… this will contribute to the Authority’s negative general fund balance as of 31 March 2018.

Section 38 monies:

he Authority confirmed it no longer wished to pursue the recognition of

the £2.8 million of S38 monies utilised in year to fund general expenditure…. this will contribute to the Authority’s negative general fund balance as of 31 March 2018.

Financial Resilience:

e are unable to state that in 2017/18 Northamptonshire County Council had proper arrangements to ensure it took properly informed decisions and deployed resources to achieve planned and sustainable outcomes for taxpayers and local people. We therefore expect to issue an adverse 2017/18 value for money opinion.

Cost Savings Plans:

he Authority utilised £21.0 million of capital receipts in 2016/17 to fund transformational spending. These projects were designed to achieve £16.3 million of savings in year, however, only £8.1 million (50%) was delivered with many projects not delivering any savings at all. In total £7 million (33% of total projects) was spent on transformational projects that have not delivered any savings in 2016/17 nor 2017/18.

Transformational Plans and Capital Flexibilities:

As part of our review we noted that there was generally very little evidence and supporting documentation provided to us to support the Authority’s overall use of Capital Flexibilities for transformational spending.

There was a lack of robust governance over the entire process. For some projects, business cases had not been developed…

At the time of our work, no such evidence could be provided to us to show the

Authority had undertaken work to understand why certain projects had failed to deliver projected savings. As a result, there is a risk that the Authority does not learn from its mistakes,

Risk Management:

The Authority confirmed that the Strategic Risk Register has not been reviewed or revised by the Authority’s Management Team since the last Audit Committee. As a result, all of the actions within the Risk Register remained outstanding…

… Therefore for the financial year 2017/18 we are unable to gain assurance that risk registers are robustly collated, monitored and reported.

As of 2017/18, the Corporate Risk Register was not supported by sufficient and appropriate evidence, and it could therefore not be used to enable Cabinet to make appropriate decisions. [although in their presentation to the committee the auditors acknowledged this may have changed].

Chief Executive Payment:

The exit of the previous permanent Chief Executive was a decision taken by the former Leader in consultation with Cabinet

We noted that an element of pay, as for other ‘exit packages’ include holiday entitlement not taken. We were unable to gain assurance over this calculation as there is no central tracking or authorisation of annual leave taken during the year against individual’s entitlements, and therefore no auditable trail of evidence to confirm what the holiday balance for any employee is at any point in time.

Going concern:

Northamptonshire County Council had a long running underlying structural deficit of over £100 million up to the financial year ending 31 March 2018.

Completeness of draft accounts:

We received an updated version of the accounts on 11 June 2019. We were told that these had been thoroughly quality checked before being passed on for audit purposes. We immediately began our checking again, however, on 17 June 2019, whilst we were part-way through our final procedures, the Authority informed us that there were still errors and omissions within this version, and that a new, revised version would be provided for audit purposes. We received this on 18 June 2019.

One Angel Square:

Following the Cabinet decision to proceed with the transaction in February 2018, it was stated a the valuation had been undertaken into OAS as part of the Authority’s due diligence work leading to the sale and leaseback. We requested as part of our audit evidence, and eventually in July 2018 it was confirmed by the Authority to KPMG that no such valuation had been commissioned by the Authority, and the last valuation of One Angel Square had been obtained on 22 May 2017, the date at which OAS first became operational. Regardless of whether One Angel Square was due to be sold during the year, the Authority should have obtained a new valuation as of 31 March 2018 to ensure it was correctly reflected in the financial statements after becoming operational in May 2017.

… As a result, we requested that the Authority should obtain a new valuation as of 31 March 2018 for the purposes of year end accounting. This was provided to us on 7 August 2018 and valued One Angel Square at £41.6 million on an Existing Use Value basis.

During the course of the audit, it came to our attention that the Authority’s valuers had been engaged to provide a further subsequent valuation of the same property as of 16 April 2018 on a fair value basis. This was a significantly lower valuation, being £32.4 million, despite being only 16 days later.

… Following this, the Authority’s valuer reviewed its approach and provided a further revised valuation as of 31 March 2018, taking into account this new information which had come to light. This was under the Existing Use Value basis. The valuation was £37.4 million, a £4.2 million decrease to the value within the draft 2017/18 financial statements.

Capital Flexibilities and Capital Programme

The Authority’s Financial Peer Review report (published September 2017) states that the “Council’s future financial plans appear to be built with a very optimistic bias as to what can be achieved in general savings and by transformation through the ‘Next Generation Council’ model”. Since then, the Council has paused its transformation efforts through the NGC model and has begun making arrangements to bring its service delivery companies back in-house. None of the initiatives per the Final Budget 2018/19 and Medium Term Plan to 2021/22 involve the NGC model. There is a risk that these capital receipts may be applied to expenditure that is no longer transformational or designed to generate future savings.

In total £7 million (33% of total projects) was spent on transformational projects that have not delivered any savings in 2016/17 or 2017/18.

Examples include:

Adult Staff Costs: £702,000 spent, no savings delivered in 2016/17 or 2017/18;

Place Highways and Transport Transformation Projects: £636,000 spent, no savings delivered in 2016/17 or 2017/18;

Managing Agent: £495,000 spent, no savings delivered in 2016/17 or 2017/18;

Race to the Top Programme: £257,000 spent, no savings delivered in 2016/17 or 2017/18; and

Total Transport: £253,000 spent, no savings delivered in 2016/17 or 2017/18

Following subsequent discussions with Officers, the Authority has confirmed it no longer deems £16.959 million of expenditure to meet the definition of transformational spend as required by the guidance in order to be funded via capital receipts. Example projects included in the initial transformational spending, but agreed with Officers to not meet the criteria as set down in the guidance and therefore will now be removed and funded as general expenditure include:

Social Care Agency Placements: £4,450,416

Residence Orders: £3,751,981

Internal Professional Support Time Apportionment: £1,064,219

Place Highways and Transport Projects: £695,737

Customer Services Web Team: £433,409

Chief Executive and Directors Time Apportionment: £408,928

This was despite previous confirmations from the Section 151 Officer (S151) and his Officers that these were genuine transformation programmes, which had been through proper governance processes and met the requirements as laid down in the guidance issued from the Department for Communities and Local Government. We had reported the risks associated with this during the course of our 2016/17 audit, as well as our 2017/18 audit plan, interim report and progress reports. We held numerous meetings with the Authority in advance of the audit, regarding the level of evidence required to justify this expenditure. However, when we came to audit this, there was no evidence provided that these schemes were supported by robust documentation either for internal monitoring purposes or audit purposes. As such, it was considered by us that these were never truly transformational schemes.

In our view, it is clear whilst the Flexible Use of Capital Receipts provides an opportunity for Local Authorities to fund genuine investment in transforming services without any impact on revenue, Northamptonshire County Council took this too an extreme to the point of being imprudent due to the financial position it found itself, in.

As a result, this expenditure will need to be funded via general funding.

Management override of controls:

Professional standards require us to communicate the fraud risk from management override

of controls as significant because management is typically in a unique position to perpetrate fraud because of its ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively.

Fraudulent Revenue Recognition:

In the prior year, we raised concerns over income recognition in relation to the Public Health Grant, some of which did not appear to be in scope allowed by the terms of the Grant. In response, the Authority had stated that it intends to review its mechanism for recharges, but has not accepted our recommendation that the Authority should obtain independent external assurance to demonstrate compliance with the terms of the Grant. Since then, Public Health England has confirmed that it is currently investigating the Authority’s use of this Grant.

Public Health Grant:

On 15 June 2018, Public Health England wrote to the Authority to confirm that it had completed its investigation and concluded that the sum of £8.038 million (£3.49 million for 2015/16, £3.763 million for 2016/17, and £0.784 million for 2017/18) of ring-fenced public health grant funding was used to support activities that did not meet the grant conditions. Public Health England requested a response from the Authority on how this amount was to be reinvested.

Section 106 monies:

As previously reported in our External Audit Report 2016/17, the Authority utilised £9 million of Section 106 funding within its 2016/17 accounts, as approved by Cabinet on 16 May 2017 under “income prioritisation”.

… the Authority was unable to provide sufficient and appropriate audit evidence to demonstrate it had complied with Counsel’s advice. Specifically, the Authority did not review the terms and conditions of each individual S106 contribution, and it had not assessed whether they met the criteria provided by Counsel which would allow a more general utilisation of the funds. This disregarded important legal advice relating to the use of specific funding for general purposes, and resulted in a material audit adjustment. Following further discussions with Officers, the Authority confirmed it no longer wished to pursue the recognition of such revenue from S106 monies to fund general expenditure. It therefore proposed reversing this from the accounts. The total reversal of S106 monies is £9 million used in 2016/17 and £4.5 million used in 2017/18, a total of £13.5 million.

Section 38 monies:

As above, the Authority had previously accounted for the use of £2.8 million of Section 38 Highways contributions to fund non-specific expenditure. Following subsequent discussions with Officers, the Authority confirmed it no longer wished to pursue the use of this S38 money to fund general expenditure.

… As a result of this, and the lack of other mechanism to fund the expenditure previously accounted for via S38 grants, this will contribute to the Authority’s negative general fund balance as of 31 March 2018.

These are just some of the highlights I picked out of the lengthily report prior to the Audit Committee meeting but the whole report can be accesses by clicking here.

Mick Scrimshaw is the Leader of the Labour Group at Kettering Borough Council, the Shadow Cabinet Member for Finance at Northamptonshire County Council. He has a public record of standing up for Kettering as a County Councillor for the Northall division in Kettering, Northants and since May 2015, a Borough Councillor for the William Knibb ward. He is a keen cyclist and also runs a family business with his wife.

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