(a)

for the benefit of new Members to the Audit and Governance Committee a brief overview was provided on the Council’s pension transaction: in 2019 the Council undertook a transaction that was designed to reduce the pension deficit and the impact of the contributions to the pension deficit on the general fund. The transaction involved the purchase of shares in a specifically-designed company, which then used that money to reduce the pension fund deficit. From an accounting point of view, Grant Thornton as the Council’s Auditors, didn’t agree with the Council’s approach to the transaction. Grant Thornton did a review in 2021 of the governance upon making decisions around complex and innovative schemes; the results were reported back to the Audit and Governance Committee and the Council put in a process of how to deal with complex accounting matters;

(b)

it was highlighted that the Council had taken advice on the accounting treatment from CIPFA, however Grant Thornton didn’t agree with that advice. Both the Council and the External Auditor had taken legal advice as to how the transaction should be accounted for and the legality of various decisions. In 2023 the two legal parties reached an agreed position however it did involve further discussions and complications with the pension fund. The Council have accounted in their 19/20 accounts in a way that spreads the cost of the investment over a 20 year period however Grant Thornton didn’t agree that was the correct accounting approach – discussions were still ongoing;

(c)

different solutions to the accounting approach for the pension deficit transaction were contained in the external auditor’s report however that was a decision for the Council; officers were keen to close this matter off within the next few weeks so that the subsequent years audits could go through the audit process. The value for money work undertaken as part of the 19/20, 20/21 and 21/22 audits had all been completed;

(d)

The conflict between the Council and the External Auditor was one of accounting treatment – Grant Thornton had one view regarding how the payment into the pension fund should be discharged and, with advice, the Council has a different view. The transaction was material to the accounts, therefore the auditor had to pursue their line of thinking. If an audited body (the Council in this instance) chose not to amend the accounts in which the auditor thought were materially wrong then the process was an audit qualification. That was a judgement call for the Council to make in terms of how it would move forward with the auditing of this transaction;

(e)

there were different options available to the Council which included the accounts being qualified, or the Council having a directive with the DLUHC It wasn’t unusual for a Council to try and protect their payments when they get a three year evaluation to pay off the three years up front at a discount value in order to get benefit from that. The Council considered that pension deficits normally ran for 20 years so a figure was attributed to that of £72m and the Council found a way of paying that off in one go. The difference of opinion was that the Council considered the money had started as a capital transaction, however Grant Thornton believed that the Council had paid £72m in that year, so the entire £72m needed to be accounted for in that year;

(f)

where accounts were qualified, when you moved into the subsequent years’ accounts, the opening balance would be incorrect if the closing balance in the previous accounts was materially wrong from the auditor’s point of view; therefore the subsequent year would be qualified accounts. Over a period of time the Council would start to pay down the pension deficit and the payment would reduce the disputed amount between the auditor and the council however it was not known how long this would take. Eventually the accounts would become not material and not a qualification. It was further complicated by the fact that the Local Government Minister had written to all Council’s with his proposals for dealing with a backlog of accounts, some of which would involve qualifying audits that were not completed by a certain date;

(g)

the broader ramifications of having qualified accounts, in a commercial setting, would alarm lenders, it could cause some concern with some commercial partners; also from a governance perspective, there were not many qualified audit opinions in the local government sector; this was also a reputational issue;

(h)

It was expected that a decision on the accounts would be made by the time the September Audit and Governance Committee

1.

to note the External Audit Report – Progress Report;

2.

recommended that the External Auditor set out their vision for the Council’s outstanding audits at the September Audit and Governance Committee meeting detailing what work had been undertaken and what work was still left outstanding.