To receive and note the EY External Audit Results Report 2019/20 and the management response to the report.

The Chairman invited Mr M Hodgson, from Ernst & Young (EY) to present the External Audit Results report for 2019/20 . He began by saying that he would split his presentation into two parts starting with the audit of the financial statements. He said that there was a materiality level of £1.21m for this audit and he was reporting any audit differences above £56k. He informed members that there was one late emerging issue which he would cover later. He explained that there were six audit differences to be adjusted. The biggest of these was the ‘Better Broadband for Norfolk’ scheme, which at £1m was below the materiality level. He said that this expenditure should have been classified as revenue expenditure classified under statute (REFCUS) rather than as an intangible asset. All of the audit differences had been adjusted now within the financial statement. 

Mr Hodgson then moved onto areas of audit focus. He explained that this section set out observations and conclusions including areas where there may be potential risk.

Taking the above sections together, he said that the report provided the committee with assurances that there was a low level of audit differences and none were individually material and there were no unadjusted differences. EY had gained all the assurances that they required against the audit risk areas. In conclusion, he said that ordinarily this would lead him to conclude that External Audit could issue an unqualified opinion on the financial statements presented to the committee. However, he said that there was an emerging issue nationally regarding infrastructure assets which had come to light in the last 2 -3 weeks. This was referenced on pages 68 and 69 of the Financial Statements. He said that the carrying value of infrastructure assets was £5.3m – above the materiality level of £1.21m. The issue was that for this type of asset (in this case coastal defences), any addition to the balance sheet should either be a new asset or a replacement part for an existing asset, with the replacement part being de-recognised and removed from the balance sheet. He said that it was very difficult to place a value on some of these assets as they had been constructed so long ago and records no longer existed. The challenge was that many of the ‘carrying values’ as at 31^st March 2020 were often over-inflated as they included the original value and any additional costs with nothing removed, so they were materially mis-stated. He said that External Audit was working with the Council’s finance team to establish which assets the Council’s infrastructure records related to, when were they originally put in, had they exceeded their useful life (20 years) and are any additions a new asset or a replacement for an existing asset. This was taking some time. CIPFA was considering this issue and there was a consultation underway which may result in a change going forwards, however, it was likely to be at least two months before an outcome was known. There were two options available, to continue to work to demonstrate that the Council’s infrastructure asset records were in line with the current code’s requirements or wait for the CIPFA consultation to say what the new approach was going to be. He said for this reason, he could not sign the Audit Opinion as planned. However, the committee could take assurances that he was ready to sign the audit as planned but this national issue needed to be resolved before he could sign it off. He advised that the recommendation for the approval of the accounts may need to be revised and subject to delegation to the Chairman once the outstanding issue had been resolved.

In terms of the AGS, he said that EY had requested some amendments following the Annual External Audit Results report – as outlined by the Director for Resources earlier in the meeting.

The Chairman invited members to speak:

Cllr S Penfold asked about the original value of infrastructure assets and what the situation was if it had been improved over time.  Mr Hodgson replied that it could have been repaired which was a revenue cost or it could be replaced which was a capital cost. In which case the original value was removed and the new, replacement value should be included. Cllr Penfold then asked if there was a date when the matter may be resolved. Mr Hodgson replied that the CIPFA workstream could take up to 3 months if it required a change to their Code. The preferred process would be that the Council was able to gain sufficient appropriate evidence that there were records regarding coastal defence assets. In this case, it was hoped that just after Easter would be ideal for ensuring it was code compliant. He concluded by saying that the two options were to defer approval to a subsequent meeting or to give the Chairman delegated authority to approve the accounts once EY were satisfied that this very specific issue had been resolved.

The Chairman asked about insurance costs for any original assets which were replaced. The Director for Finance replied that any insurance claim would support the cost of replacing the asset. The full cost would be reflected on the balance sheet regardless of how it was financed.

The Chief Executive commented that one of the issues that needed clarification was the ‘lifetime’ start date of 20 years. Most coastal defences were older than 20 years and grant funding had been received to repair several of them in recent years. All of this needed clarification.

Mr Hodgson then moved onto the second matter that he wanted to draw members’ attention to, the Value for Money section of the report. Referring to page 27 of the report, he said significant risks had been identified to the value money conclusion within the audit plan. Having completed procedures relating to the identified value for money risks, EY had concluded that the arrangements were not adequate in 2019/20. The findings were set out in the report. The weaknesses related to a sound system of internal control emanating from the procurement of a capability review, internal review of project management processes and a lack of performance reporting during the 2019/20 financial year. He said that EY was qualifying the value for money conclusion on an ‘except for’ basis. The arrangements were considered to be adequate with the exception of the matters set out above. He added that consideration had been given as to whether there was a need for EY to exercise their statutory audit powers but on balance felt this was not required, given that the issues concerned had previously been in the public domain. He concluded that there was a series of recommendations to address the weaknesses and the Council had already been taken in many of the areas identified.

The Chairman thanked Mr Hodgson. He said that the Committee would formally receive and note the report once the private session had concluded.