Agenda item - Ernst & Young Audit Results Report 2015/16

Report of Ernst & Young (copy to follow).

1)            That the Committee notes the findings set out in the 2015/16 Audit Results Report

30.1      The Committee considered a report of Ernst & Young that summarised the findings of the 2015/16 audit and included key messages arising from the audit of the financial statements and the results of work undertaken to assess the council’s arrangements to secure value for money on its use of resources. Representatives from Ernst & Young stated that they were in a position to give an unqualified opinion of the council’s financial statements subject to full completion of outstanding areas of work. A unqualified opinion would be issued for the council’s value for money arrangements as Ernst & Young were satisfied that the council had put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2016.

30.2      Councillor Robins enquired as to when the council had entered into its LOBO loan agreements, what constituted plant and equipment and how EY arrived at its property valuation figures.

30.3      Paul King stated the council had entered into its LOBO loan agreements approximately ten years ago, plant and equipment related to items used across council departments for example, schools and leisure centres and property valuation was related to the value of land and could be dependent on location.

30.4      The Assistant Director, Finance supplemented that the council’s LOBO loans had been agreed between 2002 and 2012 and equated to £75 million of the council’s £240 million loan portfolio. Furthermore, £25 million of these loans had recently been converted from LOBO’s to regular loans with the outlook for long-term loan rates being very stable.

30.5      Councillor Sykes asked if the rate of interest of the loans were re-negotiated during the conversion to regular loans.

30.6      The Assistant Director, Finance stated that this was not an option and the interest rate applied was that of the original agreed LOBO rate. The nature of a conversion meant that the interest rate cannot be changed by lender or borrower.

30.7      Councillor Morris asked for details of the level of interest on LOBO loans.

30.8      The Assistant Director, Finance clarified that the loans had an interest rate of between 3.7% and 4.8%. Recent loans made by the council had lower interest rates that reflected the current economic climate.

30.9      Councillor Morris asked if land valuation represented the re-build price of an asset.

30.10   Paul King stated the cost to build or re-build was an element of the valuation but also reflected the value of the land that could vary significantly depending on location.

30.11   Councillor Chapman asked what the likely consequences were in the delay in issuing the Audit Certificate.

30.12   Paul King explained that the EY could not formally conclude the audit and issue the audit certificate until the objection regarding the LOBO loans was resolved. Delays were not uncommon and there would be no further penalty in relation to the resolution of the objection. Furthermore, Brighton & Hove City Council was one of a number of authorities where similar objections had been made.

30.13   Councillor Taylor noted that an unqualified opinion had been issued for budgetary planning and asked if that meant the council had moved forward from the issue highlighted in the previous years audit of high unit cost in children and adults services.

30.14   Ian Young stated that the issue related more to a longer term planning, understanding and awareness of financial risk rather than unit cost reduction.

30.15   In reference to the objection made regarding LOBO loans, Councillor Druitt stated that he did not understand how the objection was valid if the council could not take any reasonable action to resolve it.

30.16   Paul King explained that the contention of the objection made was that the action taken was irrational and unreasonable and therefore unlawful which would be a matter for the courts to decide upon who would examine the nature of the decision and the terms and conditions of the loans in examining whether the objection should be upheld. Whilst it was lawful for the council to undertake borrowing, a decision would be made on whether that was irrational or unreasonable in this instance.

30.17   Councillor Druitt enquired as to the implication for the council if the courts did determine that the action was irrational and/or unreasonable and queried how a loan agreement from several years ago, related to the audit of the 2015/16 accounts.

30.18   Paul King explained the objection related to the legality of the accounts rather than the 2015/16 audit. Ian Young added that the procedure followed set criteria as there was no opportunity to object to previous year’s accounts.

30.19   RESOLVED- That the Committee notes the findings set out in the 2015/16 Audit Results Report.