Agenda item

Report of Nathan Coughlin, Bishop Fleming, external auditor

Nathan Coughlin (NC) of Bishop Fleming introduced the plan, which sets out the proposed approach to this year’s external audit, to give a true and fair view of the financial statements for the council and group as a whole, including CBH and Gloucestershire Airport.  He highlighted key points:

-       materiality remains unchanged from previous years, based at a high level of 2% of overall expenditure to make sure there are no adjustments over that level which would require the audit opinion to be amended;

-       risk areas are very similar to prior years, including some which are prescribed by auditing standards – in particular management override controls – and risks around valuations of land and buildings, investment properties, and heritage assets, all significant items on the balance sheet. As in previous years, Bishop Fleming’s experts check the assumptions made by CBC’s experts regarding valuations, yield rates, estimates etc to ensure that these are materially accurate, reasonable and appropriate;

-       another significant risk is the valuation of the pension scheme, and again, Bishop Fleming uses its own experts to assess the reasonableness of the council’s assumptions to the year end, and ensure that these have been calculated appropriately and put through the accounts into the financial statements properly.  As in previous years, there are no concerns;

-       there is a new risk around implementation of new accounting standards, which results in local authorities having to recognise longer-term lease commitments which were previously recognised as operating leases on the balance sheet; essentially the initial change will be the grossing up of the balance sheet, with some subtle changes to the income and expenditure account, where the charges will sit going forward. Broadly, this will increase the value of assets and liabilities on balance sheet;

-       this has been flagged as an ‘other’ risk rather than a significant risk, as it is unlikely to be a materially significant balance, but it is a good opportunity to ensure that CBC is capturing all leases, including any that are embedded in contracts.  Process management will be reviewed and calculations checked in terms of liability and assets to ensure that these are materially correct.  Management is comfortable with this approach; 

-       finally regarding risk areas, a broad approach around the narrative on rebuilding assurance is to do a full audit on this year’s income and expenditure and balance sheet; last year it was not possible to complete everything on income and expenditure, so attention was focussed on making sure the balance sheet was audited.  There is more time this year, and the proposal is to present the audit fieldwork in late autumn, allowing space to make sure Members are 100% comfortable with everything on the balance sheet and income and expenditure account. There is still some uncertainty among all audit firms about the best way to build back assurance over reserves, but Bishop Fleming will do what it can this year to get back to a normal opinion over the next few years;

-       a new and experienced manager has been appointed to the audit team to boost capacity, and will be working on the CBC audit;

-       fees are set by the PSAA but are included for transparency, with a couple of things to be confirmed, including a review of the implementation of International Financial Reporting Standard 16 (IFRS16), which will involve an element of additional charge, and the additional procedures to build back assurance, although time has been saved by not having to repeat the work started last year.

In response to Members’ questions, NC confirmed that:

-       the timetable presents the process by which we will keep on track with the rowback of the backstop, setting out key deliverables on both sides.  The ultimate backstop for next year is February 2026, but the proposal is to have the fieldwork finished by the end of 2025 and presented at the January 2026 committee;

-       regarding valuations and the pension situation, there are no concerns arising from last year’s process – this is a well-trodden path by management and Bishop Fleming, and the IFRS16 is not a problem, included to ensure that everything is captured in terms of the definition of a lease;

-       regarding the valuation and assumption around Golden Valley, which is not yet built with no clear occupation rates, the auditors are looking at the position at March 2025, with the development still in early stages and only limited costs incurred other than the initial land costs and planning costs – the valuation judgement is not significant at this stage.  The Deputy Chief Executive confirmed that it is just valued as land in the accounts at the moment; the valuation will increase with planning consent;

-       regarding the timeline, whether all items can be met with current resources and local government reorganisation taking a lot of officer time, and whether there is a month or so of contingency at the end of it, the Deputy Chief Executive said that the work was done in a much shorter timeframe last year, and has every confidence that the timetable is achievable.  NC added that work couldn’t start till late November last year, but this is a different world, with accounts prepared by the end of June and time to get samples out early and allow managers time to respond.  There is a large number of projects for the council this year, and a conscious decision has been made to use a narrower team over a longer period.

A Member asked whether, if management supply the required information in line with the timeline, NC can provide assurance that CBC will receive either a clean audit report or an ‘except for reserves’ type qualification rather than another disclaimer.  He also asked why Bishop Fleming is going to do a substantive rather than controls-based audit, despite concluding that a control environment is effective.  He said a substantive audit will be a lot more labour-intensive than a controls-based audit, with a potential cost fee implication.

NC understood the concern about getting back to a clean audit opinion as soon as possible and could give assurance about getting to a position where work on this year’s balance sheet and income and expenditure account is complete, but the technical review is still ongoing about what that means and if the reserves piece is still outstanding, he cannot provide any conclusions at this stage.  The report will reflect that.

Regarding controls work, he said intensive work around substantive testing is the more common approach in the audit profession right now, whether transactional or using data analytics or AI tools, and is considered a more efficient way of doing things.  He has no concerns about the control environment that suggest more work is needed, but the approach will be focussed primarily on transactional testing.  There are risk areas around estimates and valuation judgements but  Bishop Fleming will look at how the  process is being followed and sample test valuations in portfolio, understand how assumptions been made for individual assets; this is not an approach that can be taken through the  control environment route – a lot of council audit that doesn’t lend itself as well to control environment process.  As a result of those things combined, Bishop Fleming’s approach is very much substantive for local authority audits.