EFA Audit Letter 200304 final

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• Publié par: Efta
• Nombre de lectures: 22
• Langue: English

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Essex Fire Authority

Audit Letter to Members 2004

November 2004

 

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

  The Members Essex County Fire & Rescue Service Headquarters Rayleigh Close Hutton Brentwood CM12 1AL     29 November 2004   Ladies and Gentlemen Audit Letter 2004 We are pleased to present our Audit Letter for 2004. We hope that the information contained in this report provides a useful source of reference for Members. We have again this year received considerable assistance from officers. We would like to take this opportunity to thank them for the time they have made available in helping us with our work. We look forward to discussing the Letter with Members of the Fire Authority on 15 December 2004.   Yours faithfully

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Essex Fire Authority 2004 Audit Letter to Members    

 

 

Contents   Section Page I   INTRODUCTION ....................................................................................................................................... 1   II   KEY RESULTS AND RECOMMENDATIONS ...................................................................................... 2   III   FINANCIAL ASPECTS OF CORPORATE GOVERNANCE ............................................................... 4   IV   PERFORMANCE MANAGEMENT ....................................................................................................... 10   V   ACCOUNTS ............................................................................................................................................. 14   VI   AUDIT PLAN 2004-05 ............................................................................................................................ 17          

Statement of Responsibilities In April 2000, the Audit Commission issued a revised version of the Statement of Responsibilities of Auditors and Audited Bodies. It is available from the Chief Fire Officer. 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 management letters are prepared in the context of this statement. The matters raised in this and other reports that will flow from the audit are only those which have come to our attention arising from, or relevant to, our audit that we believe need to be brought to your attention. They are not a comprehensive record of all the matters arising, and in particular we cannot be held responsible for reporting all risks in your business or all internal control weaknesses. Reports and letters prepared by appointed auditors and addressed to members or officers are prepared for the sole use of the audited body, and no responsibility is taken by auditors to any Member or officer in their individual capacity, or to any third party.   

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November 2004

Essex Fire Authority 2004 Audit Letter to Members  

 

I  Introduction 1.1 As the Council’s appointed auditors, we are required, under the Audit Commission's Code of Audit Practice (the “Code”), to issue an annualAudit Letter to Members on completion of our audit demonstrating that the audit objectives in the Code have been addressed. 1.2 As previously reported in our Audit Plan 2002-04 and subsequent update issued in March 2004, the Audit Commission changed the audit year to match with the financial year of local authorities. This change resulted in a 17- month audit period, running from November 2002 until March 2004. This report covers our audit of the 2003/04 Statement of Accounts and performance and governance audit work completed since the date of our 2003 Audit Letter to Members. 1.3 It is the responsibility of the Authority to identify and address its operational and financial risks and to develop and implement proper arrangements to manage them, including adequate and effective systems of internal control. In planning and performing our audit work we considered the significant operational and financial risks that are relevant to our responsibilities under the Code, and tailored our work accordingly. Our 2002-04 Audit Plan update was discussed and developed with officers and was approved by the Policy and Strategy Committee on 5 May 2004. 1.4 This Audit Letter is structured in line with the three areas of responsibility under the Audit Commission’s Code of Audit Practice, namely Financial Aspects of Corporate Governance, Performance Management and Accounts.   1.5 The outputs from our 2004 audit programme are summarised below: Audit opinions Nature of opinion Audit Letter Section V Audit Letter Section III V V IV

Statement of Accounts Reports Financial Aspects of Corporate Governance Statement of Auditing Standard (SAS) 610 report to those charged with governance Statement of Accounts Audit Use of Resources Review - Auditors Scored Jud ement Assessment

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Unqualified Report issued Final August 2004 Final August 2004 Final September 2004 Draft October 2004

November 2004

Essex Fire Authority 2004 Audit Letter to Members  

 

II  Key results and recommendations 2.1 We have highlighted a number of instances of good practice identified during the course of our work and certain areas where we recommend further action. This section provides a summary of key results and recommendations raised within this Audit Letter. In each case, we have provided a reference to the detail in the main text of the Audit Letter.

Key results and recommendations Paragraph Reference

Financial aspects of corporate governance 1. Members and officers will need to continually review and carefully consider the 3.7 level of the general reserve, taking account of known and estimated budget pressures, to ensure an appropriate working balance is maintained. 2. The Authority has received notification that it will be subject to capping 3.9 arrangements in 2005/06. Members and officers will need to ensure that all financial effects are quantified and considered in setting and finalising the budget for 2005/06. We are pleased to note that the Authority has already started to consider the possible affects in relation to its medium term financial plan. 3. The Authority is financing its 2004/05 Capital Programme through borrowing, as 3.12-3.14 allowed since the introduction of the Prudential Framework on 1 April 2004. We support the approach being taken Authority and suggest that, for the future, the Authority continue to consider and monitor the capital and revenue consequences of all decisions made to ensure full advantage of the opportunities available under the Prudential Framework can be taken. 4. Any Plans in relation to major capital schemes should be carefully considered in 3.15 terms of achievement of objectives in relation to cost efficiency and operational effectiveness. 

5. Members should ensure that recent progress on establishing a local code of 3.29-3.31 corporate governance including assessing the Authority against the CIPFA/SOLACE framework is maintained. Furthermore, Members will need to ensure that appropriate review procedures are put in place to ensure the continuing review of the effectiveness of the corporate governance framework and internal control system, including appropriate scrutiny procedures over the evidence for the SIC.

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November 2004

Essex Fire Authority 2004 Audit Letter to Members  

 

Performance Management  

 

6. In order to assist the Authority in planning for the Comprehensive Performance Assessment (CPA) review, we performed an assessment of the Authority’s framework. There were several key points for improvement arising from the assessment, including corporate risk management planning and governance arrangements, that the Members and Officers should take into account and action in preparation for the CPA review in February 2005. 7. The Authority has made good progress in implementing the national changes set out in the pay agreement. We were pleased to note the approach adopted for implementing all aspects of the modernisation agenda had been well planned and measured, with effective arrangements to project manage and monitor implementation. However, scope for improvement has been noted, in particular in relation to the need to review and develop corporate communications and identify measures to promote appropriate and timely information throughout the Service. Members and officers should continue to take into account the issues highlighted from the study and ensure that appropriate action and monitoring of arrangements is maintained in respect of the modernisation agenda. Accounts   8. We issued an unqualified opinion and completion certificate on the Authority’s Statement of Accounts on 31 August 2004.

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  4.6-4.7 4.16-4.18

5.2

November 2004

Essex Fire Authority 2004 Audit Letter to Members  

 

III  Financial aspects of corporate governance 3.1 In this section, we summarise the results from our reviews of the financial aspects of the corporate governance arrangements relating to:   Financial standing ƒ ƒ   Systems of internal financial control ƒ   Standards of financial conduct and the prevention and detection of fraud and corruption ƒ   Legality of significant financial transactions Financial standing 2003/04 Financial performance and position at 31 March 2004 3.2 The Chief Fire Officer and Treasurer have provided regular updates of the Authority’s financial performance to Members throughout the year. The 2003/04 financial outturn was reported to Members of the Policy and Strategy Committee on 28 July 2004. 3.3 The outturn position in 2003/04 noted a net underspend against the revised budget of £89,000, which following audit adjustments increased to £109,000. This net underspend resulted from several variances, the most significant of which included savings in relation to whole time firefighters’ and control staff pay and overtime (£358,000), a reduction against the estimated cost of leasing payments (£172,000), and overspends on retained firefighters’ pay (£563,000) and support staff pay and overtime (£214,000). The outturn report sets out the main reasons for these variances, together with the implications for the 2004/05 budget. 3.4 In relation to the Authority’s overall financial position at 31 March 2004, a net liability was shown on the balance sheet for the first time. This was due to the adoption of Financial Reporting Standard 17 – Retirement Benefits, which applied in full for the first time in 2003/04. This has resulted in the pension fund liabilities of both the firefighters’ and local government pension schemes being shown on the balance sheet and a corresponding pension reserve being created. The total liability of these schemes as at 31 March 2004 was £274.4m. We comment further on the local government pension scheme in paragraphs 3.10 and 3.11. 3.5 Further information in relation to the financial performance and position of the Authority is also contained within the Statement of Accounts, which was presented to the Fire Authority on 25 August 2004, together with the main changes between the provisional outturn and the final audited financial position.

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November 2004

Essex Fire Authority 2004 Audit Letter to Members     Future outlook

   

 

3.6 From 1 April 2004, the Authority became a major precepting authority which has allowed the Authority greater financial planning capabilities. As a result of this change in status, the Authority was required to set and levy its own council tax for 2004/05. Additionally, the Authority received a Revenue Support Grant from the Government, of £13.9m and a redistribution of business rates, amounting to £29.6m to aid in financing its services for 2004/05. These monies are in lieu of receipts from constituent authorities. 3.7 Prior to the change to precepting status, the Authority had not legally been allowed to hold reserves. However, following the change of status, the Authority now has the power to hold reserves and has therefore set council tax rates to allow the immediate build up of a general reserve, amounting to £2.1m –3.4% of budgeted net operating expenditure. Although it is not possible to establish an optimum level for the general reserve, a balance of between 2%-5% of net operating expenditure could, initially, be considered appropriate. However over the next few years, the Authority will need to continually review and carefully consider the level of the general reserve, taking account of known and estimated budget pressures, to ensure an appropriate working balance is maintained.   3.8 There are risk areas within the 2004/05 budget which the Authority should continue keep under consideration as the year progresses: ƒ   In relation to the cost of firefighters pensions and timing of lump sum payments, the Authority has set the 2004/05 budget based on past retirement trends. In addition the Authority has created an earmarked reserve, (a provision, prior to the full adoption of Financial Reporting Standard 17 this year), to account for future lump sum payments. The Authority was able to appropriate £309,000 to this reserve in the year, £109,000 greater than planned, leaving a year-end balance of £2.142m.   ƒ   The Authority’s budget takes account of transitional funding of £821,000 which, although dependent on progress achieved on the Government’s modernisation agenda, is expected to be received to help minimise council tax increases. Should this grant be withdrawn, the Authority will be required to use its general reserve and may lead to the need for the Authority to replenish this balance in 2005/06. This could present several difficulties in 2005/06 due to the capping arrangements placed on the Authority. Furthermore, we understand the Authority will be required to repay this funding in the future. However, whilst the method and terms of repayment are yet to be agreed, the Authority has incorporated this within its medium term financial plan. 3.9 The Authority was disappointed with the Secretary of State’s decision to apply capping arrangements in relation to 2005/06. The Authority received notification on 8 July 2004 that the Secretary of State had set a notional budget for the Authority for 2004/05 against which the Authority would be measured for capping purposes when setting the 2005/06 budget. However, no effects applied to 2004/05 budget set by the Authority. Members were notified of this announcement in a paper presented to the Policy and Strategy Committee on 28 July. Currently, as the capping criteria are not yet known, the financial implications of the notional budget set cannot yet be quantified. Members and officers will need to ensure that all financial effects are quantified and considered in setting and finalising the budget for 2005/06. We are pleased to note that the Authority has already started to consider the possible affects in relation to its medium term financial plan.  

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November 2004

   

 

Essex Fire Authority 2004 Audit Letter to Members     Essex County Council Local Government Pension Scheme 3.10 The next formal valuation review of the Essex County Council Local Government Pension Scheme is currently underway to assess the position of the fund at 31 March 2004. Although stock markets are showing signs of recovery, the forthcoming valuation may confirm a worsening position in the funds since the last formal valuation at 31 March 2001. This would require an increase in contribution rates in the future. 3.11 The Authority is aware of the potential impact of a pension fund deficit following interim valuations received. Although we understand from officers that the effects are not expected to be significant, the Authority will need to balance the requirements to resolve any funding deficit against the budgetary implications of increased employer superannuation contributions for the period to the next formal valuation.   Capital Expenditure 3.12 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. 3.13 We were pleased to note that the Authority has prepared prudential indicators and has plans in place to ensure these will be monitored appropriately in the future. Furthermore, borrowing limits have been set and are being monitored. In our view the Authority has made adequate preparation for the implementation of the Prudential Framework. 3.14 We understand that the Authority is currently taking advantage of the ‘freedoms’ granted under the Prudential Framework by borrowing to finance its 2004/05 capital programme. This has resulted in an expansion to the capital programme over 2003/04, particularly in relation to vehicles and equipment. The Authority is looking to phase out the leasing of fire appliances in favour of the outright purchase, having recognised that this will lead to savings on cost and administration efficiency. We support the approach being taken Authority and suggest that, for the future, the Authority continue to consider and monitor the capital and revenue consequences of all decisions made to ensure full advantage of the opportunities available under the Prudential Framework can be taken.   3.15 We commented in our previous Audit Letters on the Authority’s major capital plans which included establishing new headquarters and a number of new fire stations. These plans, still in their initial stages, are continuing and will need to be carefully considered in terms of achievement of objectives in relation to cost efficiency and operational effectiveness.       Systems of internal financial control 3.16 Our work in relation to the Authority’s systems of internal financial control included: ƒ   Considering the overall control environment within the Authority.

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November 2004

Essex Fire Authority 2004 Audit Letter to Members    

   

 

ƒ   Assessing and testing the management controls to ensure adequate systems of internal financial control within the Authority, including budgetary control. ƒ   Having regard to the work performed by the Authority’s internal audit service, provided by Essex County Council’s Audit and Corporate Assurance division (ACA). ƒ   Following up the progress made in relation to the recommendations raised in our Report to Management on our review of financial aspects of corporate governance 2003/04. 3.17 Essex County Council provides the Authority’s financial accounting systems on a contract for service basis. In carrying out our work, therefore, and where relevant, we have placed reliance on the work we performed on the County Council systems. Matters arising from that work have been included in the Essex County Council report to management. We have recommended that the Treasurer and Chief Fire Officer review this report and consider the extent to which relevant matters apply to Essex Fire Authority and implement appropriate actions. 3.18 In August 2004 we issued our Report to Management on our review of the financial aspects of corporate governance. We reported that we did not identify any significant weakness within the Authority’s budgetary control arrangements or financial systems. However, we identified a small number of instances where existing controls could be further enhanced. 3.19 Furthermore, we followed up a number of matters we had raised in previous years. Some matters had still to be actioned and the most significant of these relate to: ƒ   A review of the Authority’s corporate governance framework against the principles of the CIPFA/SOLACE framework, with a view to adopting a local code of corporate governance. We comment further on this matter below; and ƒ   A review and update, as appropriate, of the Authority’s IT security policy, taking account of recent legislation. 3.20 With respect to all matters raised we have agreed an appropriate course of action and timetable with the Treasurer and Director of Property and Strategic Finance. We recommend the Authority ensure these recommendations are implemented as appropriate. We will follow these matters up as part of our 2004/05 work.   3.21 We reported within our Audit Letter 2003, the need for Members to ensure they are kept fully aware of the situation as regards the pay settlement and the implementation of the new “Genus” payroll and HR system within Essex CountyCouncil. We noted it was vital to ensure that the adoption of the new system, transfer of data to the new system and administration issues did not impinge upon the correct application of the pay award. 3.22 The implementation of the Genus system, which had a revised implementation date of May 2004, has been further delayed following slippage in the timetable from problems encountered on the interfacing of the “Genus” systemwith existing underlying systems. No new implementation date has been set and the Authority is, therefore, currently continuing to use the existing payroll mainframe system. Members and officers should continue to keep this matter under review to ensure that the Authority continues to receive the payroll service it requires.  

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November 2004

   

 

Essex Fire Authority 2004 Audit Letter to Members     3.23 Despite this, we were pleased to note that, with the agreement of stages 2 and 3 of the pay award in August 2004 and the requirement as part of the modernisation agenda to move from a rank to role positions, the Authority was able to meet and process the appropriate award payments. 3.24 As part of our assessment of the adequacy of the overall control environment we consider the Authority’s internal audit service, provided by Audit and Corporate Assurance (ACA). ACA provide this service through both review of the financial systems of Essex County Council, who provide financial services to the Fire Authority, and a targeted programme of work agreed with the Fire Authority specifically in relation to the systems and controls operated by the Authority. In our view, the quality of the work of ACA is of a good standard and accords with relevant auditing guidelines. 3.25 In order to avoid duplication of audit work and make the most efficient use of your overall audit resource, we have held regular liaison meetings with ACA in order to manage our work effectively in relation to the financial systems and probity. We will continue to liaise with ACA as part of the planning process for next year’s audit.

A Framework for Corporate Governance / System of Internal Control

3.26 The Accounts and Audit Regulations 2003 include a requirement that the Statement of Accounts should contain a statement on the system of internal control (SIC) from 2003/04. This statement refers to much wider systems of control than purely financial systems and requires the Authority to have in place such systems of control.   3.27 Members, as representatives of the Authority, are required to conduct annual reviews of the effectiveness of the system of internal control, which will provide the findings to support the SIC. Whilst the Authority reviewed the system of internal control throughout the year, appropriate scrutiny procedures were not in place to assess the information supporting the SIC. We understand that this was due to the insufficient time being available between the issue of CIPFA’s guidance and the deadline for production of the accounts, which the Authority disclosed in the Statement of Accounts 2003/04. 3.28 The requirements outlined above are closely linked with the CIPFA/SOLACE recommendations for local authorities to review their existing corporate governance arrangements against the joint framework document and guidance note entitled “ Corporate Governance in Local Government: A keystone for Community Governance” , and prepare and adopt a local code of corporate governance.    3.29 We reported in our previous Audit Letters that the Fire Authority had not developed a local code of corporate governance, nor performed a self-assessment against the CIPFA/SOLACE framework. Little progress was made in 2003/04 and we again reported within our Report to Management on the Financial Aspects of Corporate Governance 2003/04 the need for this review to be performed. A review against the framework guidance will assess whether the Authority has in place suitably developed governance arrangements and internal control procedures and can inform the Authority’s 2004/05 SIC. 3.30 The Authority’s SIC highlights this review will be performed by March 2005. We were pleased to note recently that a paper “Corporate Governance Framework – A strategy for Delivery” has been presented to the Policy and Strategy Committee. This paper sets out five key

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November 2004