EFA2005 Final Audit Letter

349976

Description

Government and Public Sector November 2005 Essex Fire Authority 2004/05 Audit Letter PwC PricewaterhouseCoopers LLP The Atrium St Georges Street Norwich NR3 1AG Telephone: [phone] Facsimile: [phone] The Members www.pwc.com/uk Policy & Strategy Committee Essex Fire Authority Hutton Brentwood Essex CM13 1AL November 2005 Ladies and Gentlemen, Audit Letter 2004/05 We are pleased to present our Audit Letter for 2004/05. We hope that the information contained in this report provides a useful source of reference for Members. We look forward to presenting this letter to the Fire Authority on 14 December 2005. Yours faithfully PricewaterhouseCoopers LLP Encs PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services Authority for designated investment business. Contents Section Page Executive summary ...............................................................................................................................................................................................................4 Accounts and governance.....6 Performance management .................................................................................................................. ...

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Extrait

Government and Public Sector

Essex Fire Authority 2004/05 Audit Letter

 

 

 

November 2005

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PricewaterhouseCoopers LLP The Atrium St Georges Street Norwich NR3 1AG Telephone: [phone] Facsimile: [phone] www.pwc.com /uk

The Members Policy & Strategy Committee Essex Fire Authority Hutton Brentwood Essex CM13 1AL   November 2005 Ladies and Gentlemen, Audit Letter 2004/05 We are pleased to present our Audit Letter for 2004/05. We hope that the information contained in this report provides a useful source of reference for Members. We look forward to presenting this letter to the Fire Authority on 14 December 2005. Yours faithfully  

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  PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services Authority for designated investment business.

Contents

 

Section Page Executive summary ...............................................................................................................................................................................................................4   Accounts and governance .....................................................................................................................................................................................................6   Performance management .................................................................................................................................................................................................. 12   Other Reviews .................................................................................................................................................................................................................... 15   Audit plans and fees update for 2004/05............................................................................................................................................................................... 17   Appendix A: Summary of unadjusted misstatements ............................................................................................................................................................. 19   Appendix B: Audit reports issued in relation to the 2004/05 financial year ............................................................................................................................... 20     Code of Audit Practice and Statement of Responsibilities of Auditors and of Audited Bodies We perform our audit in accordance with the Audit Commission’s Code of Audit Practice (the Code), which was issued in March 2002. This is supported by the Statement of Responsibilities of Auditors and Audited Bodies, which was issued in April 2000. Both documents are available from the Chief Fire Officer of each audited body. The purpose of the statement is to assist auditors and audited bodies by explaining where the responsibilities of auditors begin and end, and what is to be expected of the audited body in certain areas. Our reports and audit letters are prepared in the context of this statement and in accordance with the Code. Reports and letters prepared b appointed auditors and addressed to members or officers are prepared for the sole use of the audited bod , and no responsibilit is taken b auditors to an Member or officer in their individual capacit , or to an third part . A new Code of Audit Practice will be in place for the 2005/06 audit year, together with a new Statement of Responsibilities of Auditors and Audited Bodies, both of which were issued in March 2005.  

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Executive summar

The purpose of this Letter We are required, under the Audit Commission's Code of Audit Practice (the Code), to issue an annual Audit Letter to the Authority on completion of our audit, demonstrating that the Code’s objectives have been addressed and summarising all issues of significance arising from our work. Our Audit Plan, which was issued in Sept ember 2004, set out the risks that we identified as part of our audit planning, together with the targeted work that we planned to perform in order to address these risks. We have issued a number of reports during the audit year, detailing the findings from our work. A list of these reports is included at Appendix B to this Audit Letter. We have set out below what we consider to be the key issues arising from our audit work.

·   We expect to issue an unqualified audit opinion on the Statement of Accounts. Whilst the draft Statement of Accounts submitted for audit, was enerall of a ood qualit , a number of ad ustments and minor presentational amendments were made as a result of our audit [pa es 6 & 7]. ·   We have raised two qualitative matters as part of our SAS 610 reporting responsibilities -formal communication of relevant audit matters to those charged with governance.  These matters should be taken into consideration in the production of the 2005/06 Statement of Accounts [pages 7 & 8].

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·   In 2004/05, the first year that the Authority has been legally allowed to hold reserves, the Authority has managed to build up a general reserve of £2,933k as at 31 March 2005. Over the next few years, the Authority will need to continually review and carefully consider the balance of its general reserve, taking account of known and estimated budget pressures, to ensure an appropriate working balance is maintained [page 10]. ·   We issued an unqualified opinion on the Authority’s Best Value Performance Plan 2004/05 [page 12]. ·   It will be important for the Members to ensure that the action plan developed during our review of the overview and scrutiny process is taken forward following consideration by the working group [page 12].

·   Our review of HR and sickness monitoring, identified a number of high priority matters that the Authority will need to take into consideration and action as soon as practicable [page 13]. ·   The Authority received a CPA rating of “fair”. The action planning process is an important one. The next stage of the process relates to improvement planning. It will be important for the Authority to be able to demonstrate improved performance in order to attain a higher CPA rating in the future [pages 13 & 14].

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·  

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Following the creation of EFA Trading Ltd, it is likely that the Authority will be required to produce group accounts for 2005/06 in addition to the Authority’s Statement of Accounts. It will be important for the Authority to start the planning process in relation to these accounts at an early stage to ensure the revised deadlines for Member approval of the accounts can be met [pages 15 & 16].

 

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overnance

Accounts The purpose of our accounts work was to perform an audit of the Statement of Accounts of the Authority, in accordance with approved Auditing Standards. Early closing For 2004/05 the deadline for Member approval of the Statement of Accounts was 31 July 2005. This was one month earlier than the prior year deadline of 31 August. The Authority achieved this deadline, with the Statement of Accounts 2005/06 being approved by the Policy and Scrutiny Committee on 27 July 2005. The deadline for the approval of the accounts in 2005/06 is again one month earlier, on 30 June 2006. The Authority should take this into consideration within its closedown processes to ensure the new deadline can be achieved. Audit opinion and progress We expect to issue an unqualified opinion on the Statement of Accounts 2004/05.   Our audit fieldwork is substantially complete. However, we are still in the process of following up a few queries that require further explanation and/or audit evidence, the outcome of which may impact on the accounts.  

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Whilst the overall preparedness and quality of supporting information for our audit was of a good standard, we have had to put in more resources to undertake the audit than was originally planned.   This is as a result of a number of issues which were not foreseen at the time of our audit planning, including : ·   Reviewing the accounting treatment in relation to the revaluation of the Authority’s assets. This resulted in a significant adjustment being made, which required additional time in verifying that this was disclosed correctly within the accounts; ·   Reviewing the accounting treatment adopted by the Authority in relation to the recognition of expenditure and grant, and subsequent related depreciation and amortisaion, for Home Fire Risk Check Initiatives; ·   Difficulties on the part of the Authority in providing the audit evidence to support the revised Best Value Accounting Code of Practice (BVACOP) apportionment percentages. Delays were encountered as work was performed to assess the impact of the lack of evidence on our audit approach; ·   Determining and agreeing the appropriate classification of the Authority’s leases; and ·   A number of minor presentational amendments made during the audit to ensure consistency throughout the accounts.

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We have been liaising closely with the necessary officers and staff members to ensure the satisfactory resolution of the above matters.

Accounting issues The key accounting issue noted during our audit was in relation to the five yearly revaluation of the Authority’s assets. The Authority had not taken account of this revaluation within the Statement of Accounts 2004/05. Although the revaluation exercise was performed as at 1 April 2005 (financial year 2005/06), the conditions underlying the valuation were in existence at the balance sheet date of 31 March 2005. In accordance with SSAP 17 Accounting for Post Balance Sheet events, this is an adjusting event, which should therefore be reflected within the Authority’s accounts at the year end. The Authority has amended the accounts for this omission, which resulted in an increase to the balance sheet of £33m. Formal communication of relevant audit matters to those charged with governance (SAS 610 Report) SAS 610 - “Communication of audit matters to those charged with governance” requires us to communicate relevant matters relating to the audit of the financial statements to those charged with governance of the entity, sufficiently promptly to enable them to take appropriate action. We have agreed with you that these matters should be communicated to the Policy and Scrutiny Committee through this letter. SAS 610 specifically requires us to communicate the following matters to those charged with governance: ·   Expected modifications to the auditors' report; ·   Unadjusted misstatements; ·   Material weaknesses in the accounting and internal control systems identified during the audit;

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·   Views about the qualitative aspects of the entity's accounting practices and financial reporting;

·   Matters specifically required by other auditing standards to be communicated to those charged with governance; and ·   Any other relevant matters relating to the audit. In relation to the above points, we have the following matters to report: Expected modifications to the audit report As noted previously, subject to the satisfactory completion of our audit we expect to issue an unqualified opinion on the Authority’s Statement of Accounts 2004/05. Unadjusted misstatements Appendix A includes details of all unadjusted misstatements within the Statement of Accounts 2004/05. Qualitative aspects of the Authority’s accounting practices and financial reporting The accounts of the Authority are prepared using the Statement of Recommended Practice (SORP) 2004 and the Best Value Accounting Code of Practice, issued by the Chartered Institute of Public Finance and Accountancy. All local government organisations must follow these policies. Our audit work has not identified any significant departures from these accounting policies. However the matters described below have been identified and have caused us to comment on the qualitative aspects of the Authority’s accounting practices and financial reporting summarised in the Authority’s 2004/05 accounts. The Statement of Recommended Practice (SORP) requires that the appropriate treatment and disclosures are adopted within the Statement of Accounts in relation to finance and operating leases.     In brief terms, under a finance lease, the asset being leased is capitalised as

 

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a fixed asset in the Consolidated Balance Sheet and depreciated over its life (or the life of the lease whichever is shorter). The amount that the Authority is required to pay as total lease payments is included as a long term liability in the consolidated balance sheet. This amount reduces each year as lease payments are made. In contrast, with an operating lease, the asset is not recognised within the balance sheet. The lease rental payments are charged to the Consolidated Revenue Account over the life of the lease. The determination of the categorisation of the lease is detailed within the SORP, which is consistent with the accounting stan dard, SSAP 21, Accounting for leases and hire purchase agreements. These documents detail tests and advice to be applied in considering whether a lease should be classed as a finance lease. If these tests are not met then the lease is classified as operating in nature. The significant tests to consider are: ·   When the minimum value of the lease payments is under 90% of the fair value of the asset leased; and ·   When substantially all the risks and rewards of the asset have been transferred to the lessee.

The Authority leases a number of fire appliances and other equipment which are accounted for within the Statement of Accounts as operating leases. We have performed a detailed review of these leases and held discussions with the Director of Finance and Treasurer regarding the categorisation adopted by the Authority. We are satisfied with the assurance that has been provided by the Director of Finance and Treasurer to explain and justify the categorisation of the Authority’s assets within the Statement of Accounts 2004/05. These explanations and justifications, for which we have requested formal written representation, place greater focus on the first of the tests detailed above. Therefore, we recommend that, for 2005/06, the Authority performs a thorough review of its current leases, on a lease by lease basis, to assess, in greater detail, and to ensure that substantially all the risks and rewards of each lease have not passed to the Authority. This exercise should also be performed for any new leases entered into by the Authority.

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In the Consolidated Revenue Account, the Authority is required to analyse its net cost of servi ces over certain headings in accordance with the Best Value of Accounting Code of Practice (BVACOP). The aim is to allow greater comparability of financial information across fire authorities . The information for the Authority’s Statement of Accounts is compiled using the an excel spreadsheet, which apportions the financial information as recorded in the general ledger to the BVACOP headings based on number of factors including, for example, the proportion of time spent by firefighters in performing their different activities. Our review of the apportionment of the Authority’s net cost of services had noted that several amendments had taken place from the prior year. However, the Authority was unable to support the revised percentages and as such there is a lack of audit trail. Whilst we are satisfied that net cost of services within the Consolidated Revenue Account is not materially misstated there remains a possibility that the analysis of net cost of services is not accurately reflected within the Consolidated Revenue Account. We have requested formal written representation regarding the accuracy of the amounts.

Material weaknesses in the accounting and internal control systems We reported, in our Report to Management on the Financial Aspects of Corporate Governance 2004/05, that certain components of our work could not be completed until later in the year. We are pleased to report that we have now concluded our work in these areas and have not identified any further significant issues for the Authority to consider from this work. Other relevant matters We have the following relevant matters to report: 1. During our audit of the Authority’s accounts, we identified some detailed accounting matters which management will need to be aware of when producing the 2005/06 accounts or where procedural improvements can

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be made.

We will summarise these at the conclusion of our audit in a Report to Management on the Statement of Accounts, together with our recommendations and management responses. None of these matters have a bearing on the fair presentation of the Authority’s 2004/05 accounts.  2. In June 2005, we were asked by the Director of Finance and Treasurer to perform a review as part of our audit, of the payroll controls over promotions (permanent and temporary) in place at the Authority. Our work to date has identified a number of improvements for the Authority to consider, which we have discussed with the Director of Finance and Treasurer. We expect to complete this work shortly and will report our findings in a Report to Management on the Payroll Controls over Promotions. 3. SAS 610 also requires us to communicate with those charged with governance regarding: – The concept of materiality and its connection to our audit approach;

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– Our approach in addressing the risk of material misstatement; – Our approach to the assessment of, and reliance on, internal controls; – Intended reliance on the work of internal audit; – The work to be undertaken by any other firms of auditors, and how we will obtain assurance over the procedures of other auditors; and

– The independence and objectivity of the audit team. These matters have already been communicated to you in the audit plan and we have no changes to report to you. In particular we remain

independent within the requirements of ethical and auditing standards.

Financial standing In this section we comment upon the Authority’s general financial standing taking into account both its performance during the last year and its ability to meet known financial obligations. Overall financial performance Regular updates of the Authority’s financial performance have been reported to Members throughout the year. The Chief Fire Officer and Director of Finance and Treasurer presented the outturn report, including details of variances to budget, to the Fire Authority on 15 June 2005. This noted an under-spend against budget, amounting to £1,430k. This under-spend was mainly due to: ·   An under-spend of £792k relating to retained fire-fighters as a result of a 15% reduction in the level of incidents attended by these fire-fighters; and ·   A net under-spend on firefighters and control staff of £291k, predominantly occurring as a result of the establishment work force being below budget during the year.

 

The Authority set its counc il tax levy in 2004/05 to achieve a revised budget contribution to reserves of £2,486k at the year end. The Authority has achieved this objective. The draft Statement of Accounts, which was presented to the Policy and Strategy Committee on 27 July 2005, showed the Authority had achieved surplus of £2,933k reported within the Consolidated Revenue Account . In addition the Authority was able to make a contribution to the earmarked revenue reserve for pensions to ensure that the reserve as at 31 March 2005 is able to finance known pension lump sum payments which may arise in future periods.

No amendments have been made to the surplus achieved in the year as a result our audit of the Statement of Accounts 2004/05.

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Change in precepting status The Fire Authority became a precepting authority for the first time from 1 April 2004. As a result of this change in status, the Authority was able to set and levy its own Council Tax for 2004/05. Prior to the change in status the Authority was not legally able to hold reserves. However, the Authority now has the power to hold reserves and is able to set Council Tax in future years to achieve a prudent level of reserves. The Authority set its Council Tax levy for 2004/05 to build up, within the year, an appropriate balance on its general fund. The balance on the general reserve as at 31 March 2005 amounted to £2,933k, (3.9% of net operating expenditure). Whilst there is no prescribed recommended level as to a prudent balance for the general reserve, the Authority’s balance is within the guidance range, from 2% to 5%, established in a national review by the Audit Commission in 1998. Over the next few years, the Authority will need to continually review and carefully consider the balance of its general reserve, taking account of known and estimated budget pressures, to ensure an appropriate working balance is maintained. As well as the Council Tax levy of £34.6m, the Authority received a Revenue Support Grant from the Government of £13.9m and a redistribution from the National Non-Domestic Rates Pool of £15.7m from Government, to aid in financing its services for 2004/05. Pension fund valuation The Authority has received confirmation from the Essex County Council Pension Fund administrators of employer’s contribution rates for the three financial years from 2005/06, which require increases over the contributions for 2004/05, largely as a result of the need to recover the deficit on the Fund. We are pleased to see that the Authority has considered the impact of increases in employer’s contribution rates during its budget setting exercise for 2005/06.

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Prudential framework for capital expenditure From 1 April 2004, the Authority has been able to plan its capital expenditure under the new Prudential Framework, which focuses on the Authority’s ability to afford the consequences of spending decisions from future years’ revenue accounts and allows it to set its own limits on the borrowing needed to achieve an affordable capital strategy.   We have reviewed the steps the Authority took in 2004/05 to implement the Prudential Framework and manage the Authority’s spending and borrowing in the first year of operation, including the processes for reviewing limits and indicators under the CIPFA Prudential Code and determining the prudence and affordability of any prudential borrowing undertaken. There are no matters from this review which we wish to bring to the attention of Members.   Systems of internal financial control We have already issued our Report to Management on the Financial Aspects of Corporate Governance 2004/05 to the Director of Finance and Treasurer reporting the results of our review of systems of internal financial control at the Authority, as shown at Appendix B. There are no matters that we wish to draw to Member’s attention. We will follow up the action points in this report during our 2005/06 audit. Review of payroll controls over promotions In June 2005, we were asked by the Director of Finance and Treasurer to perform a review as part of our audit, of the payroll controls over promotions (permanent and temporary) in place at the Authority. This review was requested following the identification and investigation, by the Authority, of payroll overpayments, which had occurred as a result of the firefighter’s move from rank to role in accordance with the modernisation agenda. The Authority’s investigations identified that these overpayments had arisen under specific circumstances where firefighters had been promoted. Our review undertook to: ·   Confirm the procedures followed which resulted in the overpayments being made;

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·   Review the controls in place over the payroll system in relation to temporary and permanent promotions and report by exception; and ·   Test, on a sample basis, permanent and temporary promotions carried our since 1 April 2005, to ascertain whether appropriate pay rates were being applied. The majority of our field work was completed at the Authority in the week commencing 25 July 2005. However, following our work at the Authority’s headquarters, we were awaiting some information that was unavailable at the time of our fieldwork. We have recently received this information and following our review will be able to conclude on our work. Our review to date has noted a number of areas in which we believe the Authority’s controls could be strengthened. In addition, our testing identified a couple of employees whereby the individuals were not being paid appropriately.

We will issue the findings from our review in a Report to Management on the Payroll Controls over Promotions. Internal Audit During 2004-05, we considered the internal audit service, (provided by Essex County County’s Internal Audit function), as part of our assessment of the adequacy of the Authority’s overall control environment.

We are pleased to report that we have been able to place reliance on the work of Internal Audit. Statement of internal control The Accounts and Audit Regulations 2003 included a requirement that the statement of accounts prepared by an authority in England should contain a statement on internal control (SIC). These statements refer to much wider systems of control than purely financial systems and the Authority is required to have in place such systems of control. Authorities are required to conduct annual reviews of the effectiveness of the system of internal control, which will provide the findings to support the SIC.

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The Authority has stated that the systems have been i n place for the year ended 31 March 2005. Whilst we are not required to form an opinion on the SIC, the statement made by the Authority is consistent with our understanding of the Authority’s position. Standards of financial conduct and the prevention and detection of fraud and corruption   The primary responsibility for the prevention and detection of fraud and irregularities rests with the Authority’s management who should implement an adequate system of internal financial control, including security, segregation of duties, proper authorisation procedures, and an adequate internal audit function. Our responsibility is to review the arrangements made by the Authority. We have continued to liaise with Internal Audit in this area to ensure that the significant fraud risks are reviewed. There are no matters that we wish to draw to the attention of Members.

The legality of financial transactions It is the responsibility of the Authority to act within its specific legal powers and to take appropriate legal advi ce where necessary. Our work in relation to this area included consideration of the Authority’s arrangements to ensure the legality of significant financial transactions, and consideration of the Authority’s approach to legal aspects of new legislation and relevant national and local issues.

We have kept under review the Authority’s arrangements for monitoring emerging legal issues both from a legality perspective, and in relation to the potential impact on the financial standing of the Authority. We have requested information from the Authority’s monitoring officer with respect to the actions being taken by the Authority and are satisfied that its approach appears reasonable in the light of current information. There are no issues arising from our work that we wish to bring to your attention. We are also required by the Audit Commission Act 1998 to observe the rights of the public to raise matters with us and for electors to question us about the Statement of Accounts. No such matters have been raised with us.

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