YORKSHIRE DALES NATIONAL PARK AUTHORITY ITEM 11 CHANGES TO THE EXTERNAL AUDIT AND FINANCIAL REPORTING REGIMES

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1 YORKSHIRE DALES NATIONAL PARK AUTHORITY ITEM 11 Committee: AUDIT AND REVIEW Date: 14 July 2015 Report: CHANGES TO THE EXTERNAL AUDIT AND FINANCIAL REPORTING REGIMES Purpose of the report 1. To set out changes to the external audit regime now underway, including the year-end financial reporting process and timetable. RECOMMENDATION 2. That Members: a. note the report; b. delegate the procurement of the Authority s future External Auditors to the Director of Corporate Services (in consultation with the chairman of this Committee), if an appropriate group procurement arrangement is available. Strategic Planning Framework 3. The information and recommendation contained in this report are consistent with the Authority s statutory purposes and its approved strategic planning framework, and specifically Corporate Plan Objective 35, Operate governance and financial arrangements that are fit for purpose. Introduction 4. This paper is intended to inform Members about the changes to the auditing and financial reporting landscape. 5. The closure of the Audit Commission on 31 March 2015 brought to an end its responsibility for providing the Authority s external auditor. Public Sector Audit Appointments Limited (PSAA Ltd), a new company created by the Local Government Association, will oversee the current external contracts until the latter expire. 6. Under the provisions of the Local Audit and Accountability Act 2014, the Audit Commission s responsibility for publishing the statutory Code of Audit Practice and guidance to auditors transfers to the National Audit Office, as does the responsibility for local Value For Money studies; the National Fraud Initiative moves to the Cabinet Office.

2 Our External Auditor 7. Up until 2007, the Audit Commission acted as our external auditor, with their staff undertaking the necessary audit fieldwork and reporting on our year-end accounts. In 2008 the external audit role was contracted out to Deloitte LLP, which has remained our external auditor since then. Deloitte LLP will audit our accounts for the financial year just ended, i.e. 2014/15, and will report their conclusions to the Authority in September. 8. With the current auditing contracts ending in 2015, the final act of the Audit Commission was to re-contract external audit services across the whole of local government. This was achieved by tendering for groups of local authority audits, EY (formerly Ernst & Young LLP) winning the contract for the group which incudes the Authority. The new contract will run for a minimum of two years, covering the year-end audits of 2015/16 and 2016/ For the next few months we have two auditors. Deloitte s audit work on 2014/15 will last until September, and they will take account of any significant financial events in between now and September that might affect the validity of the accounts on which they are required to give an opinion. 10. Our new auditors, EY, have an active responsibility for reporting on the proper running of the Authority from the start of the current financial year (1 April 2015). Although they will not be undertaking any audit work until late in 2015/16, and reporting on that work in September 2016, EY can be called upon to advise if circumstances should so require; they must be kept informed of financial developments which are significant enough to affect the future of the Authority and, under the Public Interest Disclosure Act 1998, they are the prescribed person to whom whistleblowing disclosures can be made. Responsibility for future external auditor appointments 11. The external audit contracts set up as the final act of the Audit Commission contain an option to extend for a further three years (i.e. to cover the audits of 2017/18, 2018/19 and 2019/20, the latter to be reported in July 2020). Our EY contract will end either with the 2016/17 audit or with the 2019/20 audit. A decision on whether to extend this contract or not will be made sometime this year (originally, this was to have been summer 2015) by the Department for Communities and Local Government. We do not have the option to exit this contract until it is completed. 12. Under the new regulations, when audit contracts expire, local authorities will have the power (and responsibility) to appoint their own auditors from a list of approved firms. From 2017 or up to 2020, a Recognised Supervisory Body as yet to be established, but overseen by the Financial Reporting Council will determine the eligibility of local public auditors and register them. 13. The mechanism for this future appointments process is not yet completely clear, and the lack of clarity may well bias a decision on when the latest external audit contracts should end, in favour of the permitted three year extension. The two current options are:

3 Participating in a group procurement exercise. This might be on a regional or sectorled basis (potentially, a joint exercise by NPAs), and there are strong indications from PSAA Ltd that participating in joint procurement arrangements would be the most appropriate option for most audited bodies; Undertaking our own stand alone procurement. This would require us to appoint an Independent Auditor Appointment Panel (IAAP) whose responsibility would be the procurement of external auditors and overseeing and advising on the maintenance an independent relationship between the Authority and the external auditor. There are extensive regulations around the creation of an IIAP, including the need for independent members and an independent chair, who are to be appointed via an open process similar to that required for the appointment of the independent person in the local government standards regime. There are likely to be additional costs associated with this process, as the role as it currently stands cannot be performed by the current Audit & Review Committee. The Accounts and Audit Regulations Coming into force on 1 April 2015, these regulations introduced a number of changes to current practice, the most significant of which is the timing of the end of year accounting process. Currently, the final accounts are prepared by June each year, and then examined by the External Auditor, the latter signing off on their opinion at the end of September. Between the preparation of the accounts and their signing off, there is a period of public inspection, currently 20 working days. 15. For the audit of the 2017/18 financial year, unaudited accounts must now be completed and published so that the public inspection period includes the first 10 working days of June (i.e. a completion date for this phase of 31 May), with the final audited final version to be published by 31 July. There are transitional arrangements for 2015/16 and 2016/17, the relevant dates being 30 June for the completion of the first phase (to allow inspection during the first 10 working days of July) and 30 th September for the final sign off. 16. Apart from increasing the pressure on our finance team during the year-end period, these changes may have implications for the accuracy of our accounts. The current process means that more time is available to make adjustments, as might be necessary if estimates or assumptions made early in the year-end process were found to be incorrect. There is less opportunity to adjust for such things in a condensed process. 17. Other key changes in this new legislation include: The requirement to publish the unaudited accounts The public inspection period will be 30 days (to include a minimum of 10 working days), but the rights to make objections and asks questions lapses at the end of the inspection period. Previously, the right extended until the auditor s sign-off.

4 A new requirement for a narrative report to accompany the Statement of Accounts, featuring comment by the Authority on its financial performance and on the economy, efficiency and effectiveness in its use of resources A requirement specific to NPAs that they must deposit their accounts (including the Annual Governance Statement and the above narrative report) with each constituent authority, being any authority entitled to appoint Members, including the secretary of State / Defra. Reporting requirements: Larger and Smaller Bodies / Authorities 18. There are different reporting and auditing requirements depending on the financial size of a local authority: Larger Category 1 Bodies include County and District Councils and those other authorities with a gross turnover of more than 6.5m, Smaller Category 2 Bodies include parish councils and other authorities with a turnover of less than this, unless they are statutorily required to report as a Larger Body. Smaller Bodies can opt for the same reporting and auditing regime as for Larger Bodies. 19. At present, NPAs have to report as Larger Bodies, because they are required to participate in the national Whole of Government Accounts (WGA) consolidation process, a requirement which overrides the 6.5m threshold. This requirement is a matter of statute and of Defra principle, and it would require a change in both to enable NPAs to report as a Smaller Body. 20. Although not currently applicable to NPAs, the advantages and disadvantages in reporting and accounting for a Smaller Body are summarised in the Appendix. One of the challenges that would face NPAs if they were to seek to change their WGA inclusion is that turnover across English NPAs spans the 6.5m threshold. For 2013/14, the most recent full set of final results, figures range from 3.9m (Northumberland NPA) to 13.9m (Peak District NPA), with YDNPA at 6.1m. It is difficult to see how those responsible for the WGA exercise would be happy to include some NPAs but not others. Audit Fees 21. Our external audit fee for the audit of the 2014/15 accounts (Deloitte) is set at 12,103, and the first fee under the new contract (EY), which will cover the audit of the 2015/16 accounts, is also fixed at 12,103. PSAA Ltd will consult on and set fees for 2016/17 and beyond, until the current contracts expire. However, the current level of fees is expected to apply until the end of the audit contracts (Audit Commission, March 2015), whenever that is. 22. Although this fee is substantial, it is significantly less than that we were paying when the external audit role was performed by the Audit Commission: our audit fee peaked in 2004/05, at 27,500, or 36,000 taking account of inflation. The change in fee is partly due to a reduction in the work now required, as well as the effectiveness of the outsourcing process managed by the Audit Commission.

5 23. The fee level for the next external audit contract, after the EY contract ends, will be affected by factors including turnover and risk. Because of the particular requirements of local government reporting, there is no certainty that future audit fees will be substantially less. There has been some suggestion that smaller local authorities have benefited from being included with much larger authorities in audit contract groups, resulting in lower audit fees by this association. This opportunity may not be available in the future. 24. The process of selecting audit firms that are eligible as external auditors for local authorities may also affect cost. The requirements in the Local Audit and Accountability Act 2014 have the potential to limit the market, as firms who want to take on this work will need to demonstrate that they meet more criteria for local public audit than under the Companies Act and indeed more than are required in other parts of the public sector. If this is the case, one of the hoped-for outcomes of this legislation, to open the audit market to smaller and, by inference, cheaper firms, may not be realised. Conclusion 25. This is very much a developing picture. The next key event is DCLG s decision about extending the EY contract. If this contract is extended, we will not have a role in appointing our next auditors until If the contract is not extended, our procurement process will need to start in the latter half of 2016, so as to have an auditor in place from 1 April 2017 to cover the financial year 2017/ Of the two options for procurement described in paragraph 13, a group procurement can be organised in line with our existing Financial Regulations, and it is recommended that this work be delegated to the Director of Corporate Services (who will consult the chairman of this committee). If a group procurement option is not available at the time it is needed, further proposals, including the development of an IIAP, will be brought back to this committee. Richard Burnett Director of Corporate Services 17 June 2015 Background documents: Local Government Act 2003, Part 1 Local Government, England: The Accounts and Audit (England) Regulations 2011, Statutory Instrument 817 Audit of small bodies, Scales of fees 2012/13 to 2016/17; Audit Commission May 2012 LGA takes Audit Commission successor role; Local Government Chronicle 27 March 2014 Local Audit and Accountability Act 2014 Local Government Transparency Code; DCLG October 2014 Yorkshire Dales National Park Authority confirmation of auditor appointments from 2015/16; Audit Commission 15 December 2014 Audit Commission, March 2015; Work programme and scales of fees 2015/16, Local government and police bodies Local Government, England and Wales: The Accounts and Audit Regulations 2015; Statutory Instrument 234 Local Government, England: The Local Audit (Smaller Authorities) Regulations 2015 Local Audit (Appointing Person) Regulations 2015 (draft)

6 Advantages and disadvantages of Smaller Body status APPENDIX Advantages Year end reporting. Less time needed to prepare year-end accounts: an income and expenditure account and a statement of balances are prepared, rather than a full set of statutory accounts. Disadvantages / Comments Regardless of status, the requirement for accounting processes and financial controls would remain; the only difference being the nature of year-end statutory reporting. Much of the information disclosed in the full statutory accounts is also a requirement of the Local Government Transparency Code, so would still need to be published, albeit not within the accounts. Likewise, there is no impact on the reporting requirements of Defra and DCLG. Switching. The regulations cover the problem of changing between the smaller and larger body status: this only happens if the threshold figure of 6.5m is exceeded for three years running. However, if such a change were to happen, it would require restatement of the simplified accounts into the fuller and more complicated form of the larger body accounts, in order to provide the required comparative figures from the previous year. This would require substantial extra work, including picking up on lost or out of date knowledge. External Audit. A much-reduced process, the output of which is a limited assurance conclusion, rather than the current unqualified opinion. Audit work is restricted to checking the internal consistency of figures within the required documents, the year-end bank reconciliation and any unexpected variances, along with a review of the Annual Governance Statement. No conclusion on Value For Money arrangements is required. Audit fees are significantly less: the scale fee that might be applicable to this Authority (turnover of between 5m and 6.5m) is currently 3,600. Although the auditing approach to smaller body status is reasonable in so far as it reflects the risk to the public purse (smaller bodies by their nature being financially less significant), the downside is that the level of assurance provided by the audit is much less, so that the reliance that an authority can place on the audit as a check that its finances are being managed properly is much more limited. Smaller body audits do not report on the adequacy and suitability of an authority s accounting policies and internal controls, and there is no opinion on the adequacy of corporate governance. It might be necessary to supplement a much-reduced external audit with additional internal audit work, to give adequate assurance over accounting processes and controls, though this would come at a cost.