Agenda item

The Ernst and Young LLP (EY) representative introduced the report which gave interim commentary on the Value for Money (VFM) arrangements for the Council.

 

The EY representative gave context to the interim report by explaining that work was not fully concluded in all areas – with information received from the council last week, which had prompted further queries. She said that EY were not in a position to give an audit opinion, adding that this needed to be completed by the backstop date of 30 December. The EY representative said that therefore, the VFM report would come back to Members as a composite report to include audit opinions. 

 

The EY representative said that fairly significant issues had been raised within the report, which would impact the audit opinion. She said that it was quite a complex and unusual situation, explaining that the statutory backstop dates had been brought in nationally by the Local Government Minister to clear the system wide audit backlog and reset the public audit system.

 

The EY representative said that the backstop date of 30 December had been given for the conclusion of all audits up to 31 March 2022, but to enable this a set of financial statements for that year needed to be produced/published, have undergone the thirty-day public inspection period, and subsequently been approved.

 

The EY representative said that VFM had three key areas;

 

·            Financial Sustainability

·            Governance

·            Improving Economy

 

The EY representative referred to page 37 of the report which detailed two areas of significant weakness around governance and improving economy, efficiency, and effectiveness. The first related to the non-preparation and publication of the financial statements for 2021/22 and 2022/23, and the Annual Governance Statement for 2021/22. The second in respect of the delays and overspends on major projects – in the main Hertford Theatre. 

 

The EY representative drew Members attention to the key findings around financial sustainability, which could be found at page 40 of the report. She said that there were no significant weaknesses identified, but as per the Finance Peer Challenge areas of improvement in financial management and reporting had been noted (which could be seen at page 43).

 

The EY representative referred to the council’s Minimum Revenue Provision (MRP) and said that the organisation was previously debt free, but now borrowing - largely to support its capital programme. She said that EY was recommending that the council;

 

·            Review its MRP policy and calculation to ensure it is necessarily prudent.

·            Ensure robust savings plans are in place.

·            Ensure that planned savings are produced in a timely manner.

·            Mitigate the future use of reserves balances. 

 

The EY representative referred back to the weaknesses identified in the council’s governance arrangements and said that the accounts for 2021/22 were not published until December 2023 with the Annual Governance Statement not included and the Statement of Responsibilities out of date. She said that the 2022/23 accounts were again published late, and that a Statement of Responsibilities and a narrative statement were not included. 

 

The EY representative said that as they viewed these governance weaknesses as significant, a statutory recommendation would be issued within their final reporting - which was not taken lightly. She said that the council would need follow certain processes following the statutory recommendation, which would include a public response.

 

The EY representative touched again on the council’s economy, efficient and effectiveness and said that it had a significant capital programme (particularly for its size). She said that EY recognised that a number of these schemes were undertaken to make revenue savings and generate income, and that they had noted and understood the thinking relating to the changes to the Old River Lane development (which were as a result of the Pandemic). 

 

The EY representative said that the context of increasing inflation and construction costs for Hertford Theatre was appreciated, but that EY were continuing their work to understand how these significant increases were processed and managed by the council.

 

The EY representative said that should they receive the information required from the council it was their intention to bring a report for 2021/22 and 2022/23 to the next Committee on 27 November 2024. She said that the audit opinions will be ‘disclaimed’ due to the backstop position, which was a position which many local authorities found themselves in.

 

The Chair thanked the EY representative for her report.

 

Councillor Williamson said that as the previous Executive Member for Financial Sustainability he was struggling to recognise the issues highlighted, and asked if this could be drilled down into. He also asked for the implications on the council being issued with a statutory recommendation.  

 

The EY representative said that she could give initial thoughts, but that Councillor Williamson’s question should probably be directed to officers. She said that the 2021 audit took a lot longer to complete than it should have done, mainly due to delays in obtaining information from the council. She said that this would not however have precluded the council in publishing its accounts, as per many other local authorities. 

 

The EY representative said that she was unable to say if the reason for the delays/ failure to publish was a capacity issue or a lack of focus, but she felt that EY had received a lack of engagement from the council. She said that legislation required the council to publicly publish the statutory recommendation and its response within a certain timeframe. She confirmed that there would be no financial penalty levied.  

 

Councillor Williamson said that he was surprised by EY’s findings, as he had worked with the Finance Team for a number of years. He said that it was very unfortunate.  

 

The Chair asked if, due to the seriousness of the situation, the council would have an opportunity to respond to EY prior to the statutory recommendation being issued.

 

The EY representative said that a draft would be shared with the Chief Executive and the Finance Team. She said that the council’s response would be their public response, but that there would be dialogue to ensure that both EY and the council were comfortable with the wording used.

 

Mr Sharman asked for clarification that the backstop date December 2024 related to audits for 2021/22 and 2022/23.

 

The EY representative said that this was correct and included all audits up to March 2023, she said that for East Herts this would mean audits for two years. The EY representative said that for 2023/24 the backstop date would be February 2025, which the council’s new auditors would be considering.

 

Mr Sharman asked if EY’s identification of there being no significant risks with regards to financial sustainability referred to the period up to March 2023.

 

The EY representative said that this was correct, and that EY would have looked at the setting for the 2023/24 budget, but the council’s new auditors would be looking at the current position.

 

Mr Sharman asked why the Committee were not made aware of the circumstances surrounding the statutory recommendation (i.e., the non-preparation and the publishing of the accounts) earlier.

 

The EY representative said that the 2021 opinion was not signed until March 2023, and when the financial statements were checked it was realised that they had not been published. She said that the delays in receiving information from the council had impacted timeframes, but that on reflection and with hindsight EY and officers could have brought something to the Committee earlier.

 

Councillor Connolly said that she was a substitute on the Committee but was aware of the audit issues around the country. She asked if Members could expect an investigation into how the council’s processes appear to have stopped.

 

The Executive Member for Financial Sustainability said that there would be discussions with officers going forward.

 

Councillor Nicholls observed that the Committee had not seen any representative from EY since the first meeting of the new administration, and asked if this was part of the issue.

 

The EY representative said that they attended meetings when they had reports to present. She said that there was a good relationship between EY and the Finance Team, with non-engagement a more recent issue. She said that EY recognised that the Finance Team was small, and they were sensitive with regards to capacity issues, but ultimately responsibility for producing financial statements sat with the council. 

 

The Interim Chief Executive said that she became involved with EY in August 2024. She said that information requested by EY was given to them on 15 August 2024, and so to say that the council had not responded was untrue.

 

The EY representative said that this was correct, with the information which the Interim Chief Executive referred to in support of VFM work. She said that EY was still awaiting information to enable them to issue a disclaimed opinion, which was requested (with chasers) in September 2024.

 

The Interim Chief Executive requested that EY’s requests for information be sent to herself, as well as the Section 151 Officer and the Finance Officer.

 

The Chair said that the issues raised occurred prior to his, and most of the Committee’s election. He therefore asked how East Herts stood in relation to other local authorities.

 

The EY representative said that she had one other council (which she audited) which was in the same position as East Herts, and that there were a handful in EY’s wider remit. She said that she had previously only issued one other statutory recommendation.

 

The EY representative said that she had wanted to discuss the issues with senior management, but had not received responses to meeting requests, leading her to reach out to the Chair and have subsequent conversations with the Interim Chief Executive.

 

The Chair said that as per Councillor Williamson’s comments, it would be helpful and fair to clarify and discuss the issues with EY and officers before the next meeting of the Committee.

 

The EY representative said that this would be helpful, and that EY would be very happy to discuss the issues in an informal meeting.

 

The Chair said that he understood that during the period in question Covid was still running its course, therefore meaning that procedures may have been different. He asked if this had been factored into EY’s findings, to include the government capital which had been given to the council.

 

The EY representative said that the Covid impact was considered as part of financial sustainability, with areas such as leisure and car parking closed/reduced during the pandemic, and the council receiving government funding. She said that East Herts did not have the social care obligations which severely impacted upper tier authorities, both during the pandemic and with its ongoing repercussions.  

 

The EY representative said that she audited East Herts approximately ten years ago, when there were high levels of reserves. She said that it was recognised that these reserves had been used to support the capital programme, meaning that the council had moved from being debt free to borrowing. She said that it was understood that this had been done to try and reduce revenue loss from assets.

 

The EY representative said that with regards to capacity, all councils were impacted during 2020/21. With EY sensitive to the drain of processing and managing the funding which was being passported though the council (such as that relating to National Non-Domestic Rates (NNDR)).

 

The Executive Member for Financial Sustainability said that there was still work to be done with regards to the 2021/22 and 2022/23 accounts, and asked if the December 2024 deadline could be met.

 

The EY representative said that the information which EY had requested for 2021/22 was not complicated, and she was hopeful that the council would be able to provide this. She said that the challenge for 2022/23 was for the council to be able to meet the inspection period, for which advice should be sought from the Monitoring Officer.

 

Councillor Nicholls said that as a Committee Member she felt that she did not have the full picture of the situation, which was not a satisfactory position to be in.

 

The Chair agreed with Councillor Nicholls and reiterated that he would be in contact with EY and officers outside of the meeting.   

 

RESOLVED – that the report be noted.