Agenda item

Section 24 Report

Meeting of Audit, Standards and Governance Committee, Wednesday 9th November 2022 6.00 p.m., NEW (Item 28/22)

Minutes:

Mr. J. Murray, Grant Thornton, presented the Section 24 Report. In doing so, it was explained that, as auditors, Grant Thornton, had powers under the Local Audit and Accountability Act 2014 to make, if necessary, statutory recommendations under Section 24 of the Act. The Committee were informed that following discussions with colleagues it was the judgement of Grant Thornton that the issues outlined within the report warranted statutory recommendations under the Act.

The background to the statutory recommendation was outlined for Members information and it was reported that a new financial ledger system had been implemented in February 2021. However, there had been significant challenges in respect of the Cash Receipting module in the new system.

Members were reassured that Officers had worked exceptionally hard with the suppliers of the Enterprise Resources Planning (ERP) system, Tech1 and that the Cash Receipting module issues had been resolved and this module was now live. However, despite the progress that had been made in the Cash Receipting module the delays experienced had resulted in the non-delivery of the financial statements for 2019/20. This, in turn, had also impacted on thedelivery of the publication of the 2020/21 accounts, which were due by the end of July 2022. As the Council had also fallen significantly behind in the finalisation of the accounts, other Government returns, such as Revenue Outturn and Capital Outturn had also been impacted.

It was highlighted that the Council had recognised these issues and in Q1 of 2022/23, planning had begunfor the 2020/21 financial audit, which was when the issues highlighted above had cometo the attention of the auditors.

The management response to the statutory recommendation had been provided within the report and Mr. Murray noted that some actions had already been undertaken. He explained that Grant Thornton would continue to liaise with management to understand the actions that the Council had taken and also to review the work that had been undertaken with Tech1. Finally, Grant Thornton would then look at the 2020/21 statements once they had been prepared. It was hoped that the 2021/22 financial statements would follow shortly after.

Once the presentation had concluded, Members were invited to ask questions in respect of the report. It was queried why, given the last meeting of the Audit, Standards and Governance Committee, which had only taken place 3 weeks previously in October 2022, had the Section 24 notice not been highlighted at that point? Grant Thornton explained that once a statutory recommendation was issued, there were very strict timescales and protocols that needed to be followed by the Council and auditors. Because the recommendation had not been issued at that point it would not have been appropriate to raise it at the October meeting. It was clarified that at the October 2022 meeting there had been a detailed update provided to Members regarding the financial ledger system. In addition to this it was confirmed that a Financial Recovery Report had been considered at theCabinet meeting held on 12^th October 2022, where the challenges regarding the financial ledger system had also been raised.

The Interim Section 151 Officer provided a response to Grant Thornton’s report and in doing so expressed his disappointment in respect of the statutory recommendation that had been issued by Grant Thornton,however, he understood the reasoning behind it. It was reported that there were three main elements regarding the delay to the preparation of the accounts. Alongside the challenges already highlighted regarding cash receipting, there had been a loss of Council staff, resulting in only 4 members of the Finance team during that financial year remaining. The Committee were informed that there had been two recruitment drives during 2021/22 with the second being more successful. It was noted that the Finance team were now almost up to capacity, with only 4 temporary staff remaining whose retention would be reviewed once the financial accounts had been finalised. It was further noted that the extra workload experienced during Covid-19 and the associated lockdowns, coupled with the limited numbers of finance staff had created a ‘perfect storm’ which had impacted greatly on the preparation of the 2020/2021 financial statements. Recruitment was highlighted as an issue at a national level and the Interim Section 151 Officer informed Members that 35% of Councils who had submitted their 2020/21 accounts had not had them signed off, at the time of this meeting, due to wider capacity issues across the finance sector. Members were informed that a further meeting would need to be called in December 2022 in order to have the Statement of Accounts 2020/2021 signed off by the Committee. The aim for completion of the draft financial statements for 2020/21 accounts was reported as being at the end of November 2022; and Members were reassured that all members of staff within the Finance Team were working on the accounts in order to meet this deadline. Once these were completed the plan was to commence the financial statements for 2021/2022, and that it was hoped that the Council would be working back to the “normal” financial timetable by the end of the 2022/2023 financial year.

Members expressed their concern as to whether the ERP system was fit for purpose. It was noted, by Officers, that there had been no other issues experienced in any of the other ledgers within the system and were reassured that as the issues had been resolved in respect of the cash receipting module the system was now considered fit for purpose. There was a detailed explanation provided by the Head of Finance regarding how the Cash Receipting module operated and where some of the issues lay. Members were informed that the accounts for Rubicon had been completed earlier in the year, and as a result of this, issues had been rectified. It was therefore hoped that once work had commenced on the two remaining ledgers it would be from a good grounding.

There were some further questions from Members concerning the timeline once the Statement of Accounts had been signed. There was particular concern expressed regarding whether Grant Thornton would have capacity in looking at the financial statements very soon after receiving them. It was clarified that it was unlikely that the audit of the 2020/2021 accounts would commence prior to Christmas 2022. There was a query regarding the number of Councils audited by Grant Thornton with outstanding audit opinions and whether any had been issued with a statutory recommendation. Mr Murray explained that he did not have those figures however, he agreed to find out the information and circulate to Members.

Further detailed questions were asked by Members which included the following:

· When was the Section 24 issued? – It was confirmed that the Section 24 had been issued on 31^st October 2022 and although the timeline for consideration of the statutory recommendation would usually be within one month of issue, in this instance Grant Thornton were comfortable with consideration of the recommendation at the next full Council meeting due to take place on 7^th December 2022.

· What were the costs for the implementation of the ERP system so far? – Officers explained that they did not have the information at the meeting and undertook to provide the information to Members.

Officers were also questioned by some Members regarding the transparency of the process that had taken place so far and why Members had not been informed of the severity of the issues within the ERP system earlier. Clarification was provided that the ERP system had not been implemented for the 2019/2020 financial year and due to the delays experienced in the 2019/2020 audit,auditors were not looking at information provided from the new system until Q1 2022/23, which was when the issues were highlighted. It was strongly confirmed that information had not been withheld from Members and that once the issues were identified in Q1 information had been provided accordingly.

There were queries from Members in respect of the reconciliation of information from the old ledger system to the new ledger system. Mr. Murray confirmed that as Grant Thornton had not yet seen the information for the 2020/2021 accounts, they were unable to confirm whether the reconciliation had been successful. However, it was confirmed by Officers that there had been an exercise of ‘back reconciliation’ undertaken and these reconciliations had been fully documented. It was confirmed that this information would be provided to the auditors.

In respect of the approval process of the ERP including a Cash Receipting module system, it was highlighted by Officers that the Cabinet approved the business case for the new system in March 2019. In addition to this it was confirmed that there had been a robust tender process undertaken. Clarification was provided by the Interim Section 151 Officer that the previous financial system was outdated, and the cash receipting was being supported by an older version of Civica. Initially it had been agreed that an updated version of the Civica system would be used for cash receipting. However, after the tender process the project team highlighted that Tech1 could offer assurances that a cash receipting solution could be provided as part of the new system.

It was reported that in terms of the accuracy of the information currently within the finance system, most Councils had regular income and expenditure that would be fairly stable month on month. It was noted that throughout Covid-19, that Bromsgrove District Council had experienced some inevitable differences in receipt of income, which had not been seen in previous years. This had caused some backlog in the way that income was received, it was noted that this was a national issue and not specific to Bromsgrove. It was reported that there had been income received as a result of returns made to Government and grant funding received throughout Covid-19. These grants, which were significant, had separate assurance processes which had been adhered to.

The issue of auditor capacity was raised by some Members; however it was confirmed by Mr. Murray that this was not the case and that adequate resources had been allocated as necessary. He stated that, historically, and as had been reported to the Committee, previous audits of the Council had taken a long time to complete. It was clarified that this was not due to the incorrect information being provided but due to the significant time it took for Officers to answer questions that the auditors had in relation to the information. Although the number of audit days was raised by some Members it was clarified that number of days were not allocated to external audit and that as many days as were needed were taken in order to get the assurance required. Number of days was, however, applicable to Internal Audit. It was clarified that Internal Audit were not involved in the auditing the set-up of the ERP system. It was confirmed however, that Internal Audit had been involved in auditing various areas of the ERP system since its implementation. The Head of Internal Audit Shared Service reported that a risk-based approach was taken when looking at the Internal Audit Plan and that resources were allocated accordingly. It was noted that the number of audit days had been increased when looking at the Core Financials as they were aware that there had been some issues experienced in the cash receipting system. It was confirmed that the Core Financials would be looked at in Q3 2022/23. Any issues that were identified in previous Core Financials audits would be revisited and the outcomes would be reported back to the Committee. This reporting process would also include any audits that had been awarded Limited Assurance at the previous audit.

Risk management was considered by the Committee during the detailed debate. Members were keen to better understand whether the risk of the Council being the first and only Council in the country to use the cash receipting system was highlighted within the business case that had been previously approved. Additional questions were raised in respect of why a dual or back up system was not operated during implementation. It was confirmed that there could not be two ledgers running at the same time and therefore there could be no back up or dual ledger used as this could potentially cause more issues. An additional area of concern raised by some Members was regarding the implementation dates of the new system. Members queried why the implementation had taken place on 8^th February 2021, nearing the end of the financial year and not at the end of the financial year 2021. It was explained that the implementation had originally been planned to take place in Q4 of 2021. However, due to the issues highlighted by the project team and the supplier,the decision was taken to delay by approximately 12 weeks which resulted in the date of the new system being implemented on 8^th February 2021. This decision also took into account that the existing ledger was nearly out of support by the previous supplier and so the implementation needed to take placeon this date.

The issuing of staffing levels was raised again by Members and further discussion was had as to whether there were lessons learned from the large number of staff who had left. In addition to this, Members questioned if there had been any ‘Exit Interviews’ carried out with staff who had left and whether during these interviews the ERP system was raised as an issue. Officers confirmed that they did not have the exact information in respect of the number of Exit Interviews carried out for those members of the Finance Team who had left during 2020 until the end of 2021. However, it was confirmed that all Council staff were offered an exit interview, although not all chose to take up the offer. In addition to this, it was noted that potentially the new skills that had been acquired by those members of staff who were trained on the new system were desirable to other employers in the work marketplace and this could have potentially been a reason why more staff than was usual left in a very short space of time.

In concluding the discussion, it was highlighted by some Members that the lack of information provided to them prior to the issuing of the Section 24 notice was not acceptable and that the management response provided in respect of the Section 24 did not include Member consultation. It was stated that Members wished to have more detailed briefings going forward in order to identify and challenge more rapidly and on an ongoing basis. The Chief Executive reiterated that there had been information provided in the Financial Recovery Report and that there would be more regular updates provided to Members and that the Financial Recovery report would be updated to reflect any updates in activity to both Cabinet and the Audit, Standards and Governance Committee.

The Portfolio Holder for Finance and Enabling, Councillor G.N Denaro, was invited to comment and in doing so thanked the Officers for recognising the issues and dealing with them. He expressed disappointment in the issuing of the Section 24 notice, particularly as it was felt that the issues had almost been resolved.

On being put to the vote it was

RECOMMENDED that the Section 24 Statutory Recommendation is accepted and that Council review the recommendation, endorse the actions included in the management responses which form the rectification process required as per legislation.

Supporting documents: