new external audit report 2016/17 - derbyshire · 2017. 12. 11. · preparethe...

External auditreport 2016/17

Derbyshire County Council &Derbyshire Pension Fund

September 2017

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Summary for Audit Committee

Financial statements This documentsummarises the key findings in relation to our 2016 -17 external audit at Derbyshire County Council (‘the Authority’) and Derbyshire Pension Fund (‘the Pension Fund’).

This report focusseson our on-site work which was completedin July and Augus t 2017 on the Authority and the Pens ion Fund’s significantrisk areas, as well as other areas of your financ ial s tatements. Our findingsare summarised inSec tion One.

There are currently the following outs tanding matters:

- Final audit Direc tor review;

- Addressing any rem aining audit queries and any m atters arising from our com pletion procedures;

- General audit file com pletionand review procedures;

- Pos t balance sheet events review up to the date of s igning the audit opinion; and

- Final review of the work ing papers and am ended accounts.

Subject to all outstanding queries being resolved to our satisfaction we anticipate issuing an unqualified aud it opinion on the Authority's financial statem ents before the deadline of 30 September.

We also anticipate issuing an unqualified audit opinion in relation to the Pension Fund ’s financial statements by 30 September 2017.

B ased on our work, we have raised 4 recommendations. Details on our recommendationscan be found in Appendix 1. The work in regard to re-valuation of PPE has led to significant extra work by both the audit team and officers of the authority.

We are now in the com pletionstage of the audit and antic ipate issuingour com pletion certificate by 3 0 September 2017.

Use of resources We have com pleted our risk-basedwork to consider whether in all s ignificant respec ts the Authority has proper arrangements to ensure it has taken properlyinform ed dec isions, worked with partners and third parties and deployedresources to achieve plannedand sustainable outcomesfor taxpayers andlocal people. We have conc luded that the Authority has made properarrangem ents to secure economy, effic iency and effectiveness in its use ofresources.

We therefore anticipate issuing an unqualified value for m oney conclusion.

See Sec tion Two for further details .

Whole of Governm entAccounts

This work is in progress and we expect to issue our report at the sam e time as we issue our audit opinion on the Authority’s accounts.

Public Interest Report We have a duty to consider whether to issue a report in the public interestabout som ething we believe the Authority should consider, or if the publicshould know about. We have nothing to report.

Acknowledgements We would like to take this opportunity to thank officers and Members for their continuing help and co-operation throughoutour audit work.

We ask the Audit Committee tonote this report.

© 2017 KPMG LLP, a UK limited liability partnershipKPMG International Cooperative (“KPMG Internation

Do c

and a member firm of the KPMG network of independent member firms affiliatedwit h 3al”), a Swiss entity. All rights reserved.

u m en t Classification: KPMG Confidential

Contents

Thekeycontacts in relation toour audit are:

John Corne ttDirector

KPMG LLP (UK)

Tel: [email protected] WaltonSenior Manager

KPMG LLP (UK)

Tel: [email protected]

John PressleyAssistant Manager

KPMG LLP (UK)

Tel: [email protected]

This report is addressed to Derbyshire County Council (the Authority) and Derbyshire Pension Fund (the Pension Fund) and has been prepared for the sole use of the Authority. We takeno responsibilityto any member of staff acting in their individual capacities, or tothird parties. Public Sector AuditAppointments issueda document entitledStatement of Responsibilities of Auditors andAuditedBodiessummarisingwherethe responsibilities of auditors begin and end and what is expected from auditedbodies. We draw your attention to this document which is available on Public Sector AuditAppointment’s website (www.psaa.co.uk).

External auditors do not act as a substitute for the audited body’s own responsibility for putting in placeproper arrangements toensure that public business is conductedinaccordancewiththe law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.

We arecommitted to providing you with a high quality service. If you have any concerns or aredissatisfied with any part of KPMG’swork, inthe first instance you should contact John Cornett, the engagement lead tothe Authority, who will try toresolve your complaint. If you are dissatisfied with yourresponse please contact the national lead partner for all of KPMG’s work under our contract with PublicSector Audit Appointments Limited, Andrew Sayers (on02076948981, or by email toandrew [email protected]). After this, if youarestill dissatisfiedwithhow your complaint has beenhandled you can access PSAA’s complaints procedure by emailing generalenquiri [email protected], bytelephoning 0207072 7445 or by w r itingtoPublic Sector Audit Appointments Limited, 3rdFloor, Local Government House, Smith Square, London, SW1P 3H.

2 Summary for AuditCommittee

4 Section one:financial statements

14 Section two: value for money

Ap pendices

20 One: Key issuesand recommendations

24 Two: Auditdifferences

25 Three: Materialityand reporting ofaudit differences

26 Four: Declaration of independenceand objectivity

28 Five: Audit fees

mailto:[email protected]

FinancialStatements

Section one

We anticipate issuing anunqualified audit opinion on theAuthority’s 2016/17 financial statements.We also anticipateissuing an unqualified auditopinion on the Pension Fund’s2016/17 financial statements.

We will also report that yourAnnualGovernance Statementcomplieswith the guidanceissued by CIPFA/SOLACE(‘Delivering Good Governancein Local Government’)published in April 2016.

6© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliatedwithKPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


Significant audit risks

Section one: financialstatements

Our External Audit Plan 2016/17 sets out our assessment of the Authority and the Pension Fund’s significant audit risks. We have completed our testing in these areas and set out our evaluation following our work:

Si gni ficant audit risks Work p erformed

Si gni ficant changes i nthe p ens ionl iabilitydueto LGPSTri enni al Valuation(Authori ty and Pens ionFund)

Why i s thi s a ri sk?

During the year, the Derbyshire County Council Pension Fund (the Pension Fund) has undergone a triennial valuation with an effective date of 31 March 2016 in line with the Local Government Pension Scheme (Administration) Regulations 2013. The Authority’s share of pension assets and liabilities is determined in detail, and a large volume of data is provided to the actuary in order to carry out this triennial valuation.

The pension liability numbers to be included in the financial statements for 2016/17 will be based on the output of the triennial valuation rolled forward to 31 March 2017. For 2017/18 and 2018/19 the actuary will then roll forward the valuation for accounting purposes based on more limited data.

There is a risk that the data provided to the actuary for the valuation exercise is inaccurate and that these inaccuracies affect the actuarial figures in the accounts. Most of the data is provided to the actuary by Derbyshire County Council, who administer the Pension Fund.

Our work to address this risk

As pa rt of our audit of the Pens ion Fund, we undertook work on a tes tbasis to agree the da taprov ided to the ac tuaryback to the systemsand reports from which it was derived and tounders tand the controls in place to ensure the accuracyof this da ta. We engaged specialists fromour KPMG pensions team to assess the actuary’s approach and the reasonableness of theassumptions used in determining the pens ions es timates. We were also required, under theprotocols put in place by the PSAA for this purpose, to respond to specific requests from theauditors of other admitted bodies.

There a re no s ignific ant m atters from our work which we need to draw to your a ttention.

Managem ent override of controls

Profess ional s tandardsrequire us to communicate the fraudrisk from m anagement override of controls as s ignificantbecause m anagement is typically in a unique pos ition toperpetrate fraud because of its ability to m anipulateaccounting records and prepare fraudulent financ ials tatem ents by overriding controls that otherwise appear to beoperating effec tively.

Our audit m ethodology incorporates the risk of m anagementoverride as a default s ignificant risk. We have not identifiedany spec ific additional risks of m anagement override relatingto this audit.

In line with our m ethodology, we carried out appropriatecontrols tes ting and subs tantive procedures, inc luding overjournal entries , accounting es timates and s ignificanttransac tions that are outs ide the norm al course of bus iness, orare otherwise unusual.

There are no m atters aris ing from this work that we need tobring to your attention.

Fraud risk of revenue recognition

Profess ional s tandardsrequire us to m ake arebuttable presum ptionthat the fraud risk fromrevenue recognition is a s ignificant risk.

In our Extern al Audit Plan 2016/17 we reportedthat we do not cons ider this to be a significantrisk for Local Authorities as there is unlikely tobe an incentive to fraudulently recogniserevenue.

This is s till the case. Since we have rebuttedthis presum ed risk, there has been no im pac ton our audit work .

Considerations required by professional standards

ed liability part nershi pand a member firm of the KPMG network of independent member firms affiliatedwit h 8ve (“KPMG International”), a Swiss entity. All rights reserved.

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Other areas of audit focusSection one: financialstatements

We have identified areas which are risks, but are less likely to give rise to a material error. Nonetheless we require an audit understanding of these risks and have set out our approach below.


Other areas of audi t focus Our work to address the areas

1. Subsidiary Company Background

The Authority is moving into new models of delivering services and has established the Derbyshire Developments Limited, as a subsidiary company.

What we have done

We have reviewed the a rrangements in place in regard to the establishment of the subsidiary company and the accounting t reatment for the new entity. We have no is sues to report as a result of our work in this area.

2 . Compliance to the Code’s disclosure requirements –Authority and Pension Fund

Background

CIPFA has introduced changes to the 2016 -17 Local Government Accounting Code (Code):

— Allowing loca l authorities to report on the same basis as they are organised by remov ing the requirement for the Serv ice Reporting Code of Prac tice(SeRCOP) to beapplied to the Comprehensive Incomeand Expenditure Sta tement (CIES); and

— Introduc ing an Expenditure and Funding Ana lysis (EFA) which provides a direc t reconc ilia tion between the way local authorities a re funded and preparetheir budgetand the CIES. This ana lysis is supported by a streamlined Movement in ReservesSta tement (MiRS) and replaces the current segmental reporting note.

The Authority was required to m ake a retrospectiveres tatement of its CIES (cost of serv ices)and the MiRS. New disc losure requirements and restatementof accounts requirecompliance with relevant guidance and correctapplic ation of applic able accountings tandards.

What we have done

For the res ta tement, wehave obtained an understanding of the methodology used to prepa re the rev ised s tatements. We have also ensured compliancewith new disc losurerequirements and found no issues to note.


JudgementsSection one: financialstatements

We have consideredthe levelof prudence withinkey judgements inyour2016-17financialstatementsandaccountingestimates.Wehavesetout our view belowacrossthe followingrangeof judgements.

Level of p rudence

Cautious B alanced

Optimistic

Accep tab le range

Audit differen ce

Audit differen ce


Sub j ective areas 2 016-17 2 015 -16 Commentary

Prop erty, Pl ant and Equi p ment (PPE) valuations (Authority)

Audit Difference

noted Va lua tions a re consis tent with inform a tion prov ided by the Authority ’s

ex terna l valuer. We have rev iewed the a rrangements anddiscussedthe approach with m anagers.The Authority has not m ade anys ignific ant changes to its approach to asset lives or its valuationa rrangements.

As reported elsewhere in this report we identified significant issues in relation to the valuations shown in the financial statements and material amendments have been made as a result of our work. The Authority ’s valuer has been able to prov ide us withsuffic ient ev idence and explanation to help us dec ide tha t the es tima te was not materially m isstated.

Pens i ons liability (Authori ty) There have been no s ignific ant changes in the approaches to determ

ining the es tim a te. The Authority has again relied on an independent expert actuarial valuation for its es tim a tes. We used our own actuarialexpert in the course of our work and did not identify any concernsrega rding the Authority ’s approach or the assumptions used. Thereported ba lance, together with assumptions and disclosures forinfla tion, discount ra te, sala ry growth, life expec tancyetc. a reconsistentwith the report from the external actuary.

Provi s ions (Authori ty) We have reviewed the Authority ’s approachto es timating its provis ions

and not identified any m aterial misstatement or further issues ofconcern for the Authority ’s attention.

I nves tments (Authori ty and Pens i on Fund)

We have reviewed a rrangements for determining the accuratevaluesfor the Authority and Fund’s investmentsand financial ins trument disc losures. We did not identify any concerns regarding the va luations recorded.

Dis clos ure ofRe tir ement BenefitPlans (Pe nsionFund)

IAS 26 requires the present va lue of the Fund’s promised retirement benefits to be disc losed (the liability is not inc luded within the NetAssets Sta tement).There have been no s ignific ant changes in theapproaches to determining the es tim ate. The Authority has again relied on an independent expert actuarial valuation for its es tim ates. We didnot identify any concerns regarding the Authority ’s approach or theassumptionsused.



Proposed opinion and audit differences – AuthorityAccounts


Subjectto all outstandingqueriesbeing resolvedto our satisfaction,weanticipateissuinganunqualifiedauditopinionontheAuthority’s2016/17 financialstatementsfollowingapprovalofthe StatementofAccountsbytheAuditCommitteeon27 September2017.

Audi t di fferences

In accordance with ISA 26 0 we a re required to report uncorrec ted audit differences to you. We a lso report anym aterial misstatements which have been corrected and which we believe should be communicated to you to helpyou m eet your governance responsibilities.

The fina l m a teriality (see Appendix 3 for m ore inform ation on m ateriality) level for this year’s audit was set a t£16m illion. Audit differences below £0.8 m illion a re not considered s ignificant.

We outline the differences found as a result of our work on PPE valuations on page 12 of this report. The differences to the 2016/17 balances have all been amended for. Those impacting on the 2015/16 balance have not been amended on the grounds of materiality. We request that this amendment is made and have asked for specific representations in the letter of representation elsewhere on the agenda of the Audit Committee.

We did not identify any other material misstatements. Aside from this issue we identified a small number ofpresenta tional is sues tha thave been adjus ted by management.

Annual governance statement

We have reviewed the Authority ’s final 2016 -17 Annual Governance Sta tementand confirmed that:

— it com plies with Delivering Good Governance in Local Government: AFrameworkpublished by CIPFA/SOLACE; and

— it is not m is leading or inconsistent with other inform a tion we a re aware of from our audit of the financ ia l s ta tements.

Narrative rep ort

We have reviewed the Authority ’s final 2016 -17 narrative report and have confirmedthat it is cons istent with thefinanc ial s tatementsand our unders tanding of the Authority .

Whol e of Government Accounts

This work is in progress and we antic ipate issuing our audit report a t the sam e time as we give the opinion on theAuthority ’s accounts.



Proposed opinion and audit differences – Pension FundAccounts


We anticipateissuinganunqualifiedauditopinionontheFund’s2016/17financialstatementsfollowingapprovalofthe financialstatementsby theAuditCommitteeon27 September2017. Weanticipateissuinganunqualifiedopiniononthe PensionFundAnnualReportat the same timeas our opinionon the StatementofAccounts.

Pens i on fund audit

Our audit of the Fund a lso did not identify any m aterial m isstatements. There are no other audit differences tha t we need to report to you.

We identified a sm a ll number of presenta tional corrections or adjus tments required to ensure tha t the accounts arecom pliant with the Code. We unders tand tha tm anagement will be addressing these where s ignificant.

Annual rep ort

We have reviewed the dra ft Pension Fund Annua l Report and confirm ed tha t:

— It complies with the requirements of the Loca lGovernm ent Pens ion Scheme (Administra tion)Regula tions 2008 ; and

— The financ ial and non-financial informa tion it conta ins isnot incons istent with the financ ial informa tionconta ined in the audited financ ial s tatements.

We antic ipate issuing an unqualified opinion on thePens ion Fund Annua l Report a t the sam e time as our opinion on the Sta tem ent of Accounts.

12

12


Accounts production and audit process

Our auditstandards(ISA260) requireus to communicateourviewson the significantqualitativeaspectsof theAuthority’s accountingpracticesand financialreporting.

We also assessedtheAuthority’sprocessforpreparing the accountsandits support foranefficientaudit.Theefficientproductionofthefinancial statementsandgood-qualityworkingpapers are critical tomeetingthetighterdeadlines.


Accounting practicesand fi nancial rep orting

We cons ider the Authority ’s accounting practices to beappropria te.

In our 2015 /16 ISA26 0 report we reported the strong process in place at the Authority for accounts preparation and this has continued for this year.

The Accounts and Audit Regula tions 2015 introduces as ta tutory requirement to produce a dra ft setof financial s ta tements much earlier for the yea r 2017-18 . It a lsoshortens the tim e available for the audit. The finance teamis aware of the ea rlier 3 1 May 2018 deadline for 2017-18 .

The im provementsm ade in the current year means theAuthority is in a strong pos ition to m eet the new 2017-18deadline but it needs to continue to ensure itsa rrangements are effective – especially in regard to the valuation issues noted elsewhere in this report.

Comp l eteness of draft accounts

We received a complete set of dra ft accountson 3 1 May2017, which is a month ahead of the s tatutory deadline and would meet the more challenging deadline set for next year.

Qual i tyof supporting working papers

Ea rlier in the yea r we issued our AccountsAudit Protocol 2016/17 (“Prepa red by Client” reques t) in which outlinesour docum entation reques t. This helps the Authority andthe Fund to prov ide audit ev idence in line with our expec ta tions.

All of the required work ing papers were available by theagreed da te and m et the expected qua litys tandards.

Resp onseto audi t queri es

The finance team responded promptly during the audit toour reques ts for additiona l information or explanation.

Pens i on Fund audi t

The audit of the Fund was completed a longside theAuthority ’s audit. There a re no spec ific matters to bring toyour a ttention rela ting to this . The qua lity of the work ingpapers was good and officers were helpful and responsiveduring the audit.

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliatedwithKPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.




We have reviewed the work of internal audit who have reviewed all of the sub-populations of assets potentially impacted by each type of error and re-performed an element of it. Based on this work we are content that the risk of an undetected material error as a result of these issues is acceptably low.

We have raised a number of recommendations in relation to this area in Appendix 1 of this report.

KPMG Sp ec i alists

We have engaged specialist KPMG sta ff to support ouraudit in response to m atters identified in the followinga reas :

• Pens ions Es timates - We engaged specialists from our KPMG pens ions team to assess the yourac tua ry’s approach and the reasonableness of theassumptions used in determining your pensionses timates.

• IT Controls – our IT spec ia lists undertook tes ting ofthe IT Genera l Controls as part of our audit approach.

There are no matters arising from their work tha t weneed to bring to your a ttention.

Control s over key fi nanc ial systems

We have tested key controls aspa rt of our focus ons ignific ant audit ris ksand other pa rtsof your keyfinanc ial s ystems on which we rely as part of ouraudit. The s trength of the control framework informsthe subs tantive tes ting we complete during our fina laccountsvisit.

Aside from the issues arising from the work completed in regard to the valuation of PPE we have noted one improvement point in regard to Payroll Reconciliations (see Appendix 1 for more details).

I T General Controls

We undertook tes ting of IT Genera l Controls as aprecursor for future reliance upon IT systemsaspartof our audit approach. We carried out a range ofproceduresto assesscontrols a round the authority’s financesys tem inrespec t of access to programs and da ta andprogram change control.

We have no matters to report to you as a result of our work in this area.

Valuation of PPE

We undertook testing in this area and found a series of errors relating to the process followed for the revaluation of PPE both for this year and the prior year.

The following issues were noted during this work:

• A number of errors were noted in the working papers submitted to the valuer in relation to assets within the Children's Services department. This led to assets being understated by £3.2million (£7.3million in prior year).

• Maintenance costs were not included as part of the valuation considerations for all PFI assets (they are required for all assets older than 5 years). This issue was also relevant for some non-PFI assets. This led to assets being overstated by £11million (£9.6million in the prior year).

• Examples were noted of AMP1 forms not being sent to the finance department and the valuation team. These forms indicate a significant event in relation to an asset (e.g. a major refurbishment) which may lead to a material change in the asset value. This led to assets being understated by £5.3 million (overstated by £0.6 million in the prior year).

• There was an error with the build cost used for some valuations in the prior year. This had an impact of understating the prior year PPE balance by £24.3 million.

• An inconsistent use of gross and internal floor areas in the valuation methodology – this is not an error as such but is not consistent. The Council have agreed to apply a consistent methodology in future years.

• Expenditure to de-contaminate land was incorrectly included in the valuation for a specific site - this led to assets being overstated by £4.7 million (£4.2 million in the prior year).

• Two assets were noted as being included on the balance sheet due to being finance leases when they should be categorised as operating leases. This has the impact of overstating the asset balance by £9.7m (£9.8m in the prior year).

• Human error in data input was also noted but this did not lead to a significant error in addition to those highlighted above.

Overall these issues have led to errors of assets being overstated by £17m in the financial statements (£7.4m in the prior year). The current year figures have been amended for, the prior year not on the grounds of materiality. The figures noted here are rounded to aid clarity of reporting.



CompletionSection one: financialstatements

We confirm that we have complied with requirements on objectivityand independence in relation to this year’s audit of the Authority’s2016-17 financial statements.

Beforewecan issue our opinion we requirea signedmanagementrepresentation letter.

Once we have finalisedour opinionsand conclusionswe will prepareour AnnualAuditLetterand closeour audit.

Dec l aration of i ndependenceand objectivity

As pa rt of the fina lis a tion process we a re required toprov ide you with representa tions concerning ourindependenc e.

In rela tion to the audit of the financ ia l s tatements of Derbyshire County Council and Derbyshire Pension Fund forthe yea r ending 3 1 March 2017, we confirm that therewere no rela tionships between KPMG LLP and DerbyshireCounty Counc il and DerbyshirePension Fund, its direc torsand senior m anagement and its a ffiliates that we considerm ay reasonablybe thought to bea r on the objec tiv ity andindependenc e of the audit engagem ent lead and audits ta ff. We a lso confirm tha t we have complied with EthicalStanda rds and the Public Sec tor Audit Appointm ents Ltdrequirem ents in rela tion to independenc e and objec tivity.

We have provided a deta iled dec laration in Appendix 4 inaccordance with ISA 26 0.

Management representations

You a re required to prov ide us with representa tions onspec ific matterssuch as your financial s tanding andwhether the transactionswithin the accountsa re legal and una ffec ted by fraud. We have provided a template tom anagement for presentation to the Audit Com m ittee. Werequire a s igned copy of your m anagement representationsbefore we issue our audit opinion.

Other matters

ISA 26 0 requires us to communica te to you by exception‘audit ma tters of governance interest tha t a rise from theaudit of the financ ia l s tatements’ which inc lude:

— Signific ant difficulties encountered during the audit;

— Signific ant m attersa rising from the audit tha t werediscussed, or subjec t to correspondence withm anagement;

— Other m atters, if arising from the audit tha t, in theauditor's professional judgment, a re significant to theovers ight of the financ ia l reporting process; and

— Matters specifically required by other auditings tanda rds to be com municated to those charged withgovernance (e.g. s ignific ant defic iencies in interna l control; is sues relating to fraud, compliance with lawsand regula tions , subsequent events, non disc losure,rela ted pa rty , public interest reporting, ques tions /objections, opening ba lances).

There a re no others m atters which we wish to draw toyour a ttention in addition to those highlighted elsewhere inthis report.

Value for moneySection two

Our 2016-17VFM conclusionconsiders whether theAuthority hadproper arrangementsto ensure it tookproperly informeddecisions, worked with partners and thirdparties and deployedresources to achieve planned andsustainable outcomesfortaxpayers and local people.

We have concluded that theAuthority has made proper arrangementsto ensure it tookproperly-informed decisions, worked with partners and third parties and deployedresources to achieve planned andsustainable outcomesfortaxpayers and local people.

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliatedwit h 17KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


VFM conclusionSection two: value for money

The LocalAuditandAccountability Act 2014 requires auditorsof local governmentbodiestobe satisfied that the authority ‘hasmadeproperarrangementsforsecuringeconomy,efficiencyand effectivenessin its use of resources’.

This is supported by the Code of Audit Prac tice, published by the NAO in April 2015 , which requires auditors to ‘takeinto account their knowledge of the relevant local sectoras a whole, and the audited body spec ifically, to identifyany risks that, in the auditor’s judgement, have the potentia l to cause the auditor to reach an inappropriateconc lus ion on the audited body ’s a rrangements.’

Our VFM conc lusion considers whether the Authority hadproper a rrangements to ensure it took properly informed dec is ions, worked with pa rtners and third pa rties and deployed resources to achieve planned and sustainableoutcom es for taxpayersand local people.

We follow a risk based approach to ta rget audit effort onthe a reas of grea test audit ris k.

VFM audit riskassessment

Financial statementsand other audit work

Identification ofsignificant VFMrisks (if any)

Assessment of work by other review agencies

Specific local risk-based work

Continually re-assess potential VFM risks

Concl udeon arrangements to

secure VFM

VFMconclusion

Overall VFM criteria: Inall significant respects, theaud ited body had properarrangem ents to ensure ittook properly informeddecisions, worked with

partners and third parties anddep loyed resources to achieve

p lanned and sustainab leoutcom es for taxpayers and

local peop le

Work ingwith

partnersand thirdparties

Sus tainableresource

deploym ent

Inform eddec is ion-m ak ing

VFM

con

clus

ion

bas

edo

n

1 2 3



Section two: value for money

In cons ideration of the above, we have concluded that in 2016 /17, the Authority has m adeproper a rrangements toensure it took properly -informed dec isions, worked with pa rtners and third pa rties and deployed resources to achieveplanned and sus tainable outcomes for taxpayers and local people.

Further deta ils on the work done and our assessment are prov ided on the following pages .

The table belowsummarisesour assessmentofthe significant VFM riskand area of focus identified againstthe three sub-criteria.This directlyfeedsinto the overall VFM criteriaand our valuefor money opinion.

VFM assessmen t summary

VFM riskI n formed decision -

makin gSustain ab le resource

dep loymen tWorkin g with p artners

an d third p arties

Sign ifican t VFM Risk

Delivery of savings plans

Overall summary


Significant VFM risksSection two: value for money


We identifiedone significantVFMriskand one areaof audit focus, ascommunicatedtoyou in our 2016/17ExternalAuditPlan. In bothcaseswe are satisfiedthatexternalor internalscrutinyprovidessufficientassurancethattheAuthority’scurrentarrangementsinrelationto theserisk areas are adequate.

VFM ri sk areas Work p erformed

Area of focus

Fi nanci als tandi ngand medi umtermfi nancialp l anning

Why i s thi s a risk?

The Authority’s budgets over recent years have delivered significant planned savings, but further financial challenges lie ahead. The Authority has a challenging savings plan involving savings of £70m over 2016/17 (£36m) and 2017/18 (£34m). The Authority forecasts predict that over the forthcoming years up to 2021/22, additional savings of £46m will also need to be found as the Authority faces further expenditure pressures and a continued reduction in resources. We understand the Authority has identified saving proposals for 2017/18, but may need to revisit the phasing of these savings and may also require further savings in future years to meet the potential impact of reduced resources on the financial standing of the Authority. Therefore we consider this as a significant risk.

Summary of our work

2017-18 budget

In Februa ry 2017, the Authority approved a balanced 2017-18 budget. The budget inc luded the required S.151Officer assurances rela ting to the robus tness of the budget and the adequacyof the level of reserves, butacknowledged the risksaround the delivery and tim ing of savings initia tives and the need to address themedium term budget shortfall from 2018-19 onwards. The budget reflec ts a mixed approach to addressingthe cos t pressures identified (£14m ) and reduced level of central funding (£23.7m reduction in genera lgovernment grants). The Authority approved:

• a 3 .9 9% increasein Counc il Tax, inc luding 2% for the ‘soc ia l care precept’;

• savings plans of £23.2m ; and

• A £10.8 m transfer from General Reserves during the year as part of the medium term financial plan.

We have reviewed the budgeting process, looked at the assumptions included within the calculations and reviewed how savings plans have been identified. We have also looked at the information presented to members as part of this process and have confirmed that detailed supporting document is made available as part of this process. Overall we do not have concerns with the arrangements in place.

Medium term financ ial planning

The Authority has during 2017-18 been developing further its options for securing m edium term financia lsus tainability . The overall financial planning fram ework reflects the Government’s four year funding settlement with the Counc il. Under this m ulti yea r settlement the level of genera l government grants wasexpec ted to fa ll from £44m in 2017-18 to £13.5m in 2019 -20. Managers have a lso been confirming theirassessment of the expected costpressures due to demographic changes and other factors.

We have met with each Executive lead for the significant functions of the Council during the ea rly pa rtof 2017-18 who evidenced the progress being m ade, with the proposals due to inform the autumn 2017 2018-19 budget setting process. The emerging framework indicates a way forward for the Authority to ba lance2018 -20 budgets which includes a com bination of use of reserves and additional savings. The planned use of reserves is set to reduce to £2m per annum from 2018-19 onwards. The current medium term position was reported to members in February 2017 and highlighted an underlying need for £80m of savings required by the end of 2021-22.

Appendices


Key issues and recommendationsAp pendix1

Our auditwork on theAuthority’s 2016-17financialstatementshas identifieda number of issues.Wehave listed theseissues in this appendixtogether withour recommendations.

TheAuthorityshouldcloselymonitor progressin addressingthe risks, including theimplementationof our recommendations.Wewillformallyfollow up these recommendationsnextyear.

Each issue and recommendation have been given a priorityra ting, which is expla ined below.

Issues that are fundamental and m aterial toyour sys tem of interna l control. We believetha t these issues might mean that you do notm eet a system objec tive or reduce (m itigate)a ris k .

Issues that have an important effect oninterna l controls but do not need im m edia teac tion. You m ays till meet a system objectivein full or in pa rt or reduce (m itiga te) a ris kadequa tely but the weakness remains in thesys tem.

Issues that would, if correc ted, im proveinterna l control in genera l but a re not v ita l tothe overa ll s ystem. These a re generally is sues of good prac tice tha t we feel would benefit if introduced.

The following is a sum mary of the issues andrecom mendations ra ised in the yea r 2016/17.

High priority

Medium priority

Low priority

Priority Total raised for 2 016/17

High 1

Medium -

Low 3

Total 4


Ap pendix1

Recommendations

Controls in p lace in regard to valuation process

As documented earlier in this report a large number of issues were noted as part of our work in the valuation of PPE held on the balance sheet. The initial trigger for this work was an audit request for information to explain all changes in asset values of over £2million.

This then highlighted that a large number of these changes were due to errors in the calculation basis in either 2015/16 or 2016/17. For each of these issues audit work has been completed to reach a conclusion that there is no unadjusted material error – however in future years management should obtain sufficient assurance as to the valuation of its asset base in advance of the final accounts audit.

Recommendati on

Our recommendations in this area are set out in the table below, together with the management response to each point.

High Priority

Recommendation Management Response ResponsibleOfficer

Due date

Review the capacity of the in house valuers to ascertain whether the large asset base of the Council can be re-valued in line with the required standards within the reduced timescales required in future accounting periods

We have reviewed the capacity of the in-house registered valuers and data support team and increased resources this year through the recruitment of agency workers, funded by a one-off budget underspend. Funding for future years is now being sought to secure permanent appointments and this activity has commenced, with a completion date for recruitment of Feb/March 2018.

To further assist capacity, (and to provide further delivery options if recruitment proves challenging), and in accordance with the council's financial regulations, member approval to the use of a national Estate Management Framework to supply fixed asset valuations is currently being sought. Member approval supported by a business case is currently being finalised with a date for approval December 2017

Sarah Morris March 2018

Formalise the terms of reference of any future valuations to ensure the valueris clear on timescales and reporting/audit requirements.

The Terms of Reference for 2017/18 will be revisited to include dates when valuations must be complete by Corporate Property and issued to Corporate Finance. The dates are to be agreed by both teams. Dates to be included into this document by 3 0/09/2017.

The terms of reference will also be reviewed to encompass any changes required from this year's reporting/auditing exercise and amended accordingly in conjunction with Corporate Finance. Changes required to reporting/auditing to be complete by 3 0/10/2017 subject to completion of the council's internal audit report.

John Cooper/Sarah Morris

March 2018


Recommendation Management Response ResponsibleOfficer

Due date

Remind the relevant officers of the requirements to issue an AMP1 form (to trigger a revaluation) when significant changes are made to an asset

An awareness campaign is currently underway to ensure that relevant officers are aware of the need to complete AMP forms. A guidance note has been prepared listing activities that require notification and a contact name and number is included. This document has been shared with key officers representing each directorate within the council through PAIG (Property Accommodation Implementation Group), with the aim they will cascade it through their teams. It will be raised at PAIG on a cyclical basis.

Further communications will be sent through DNet, the Schools Extranet and through the S4S team. (Schools services trading team) Whilst it is increasingly difficult to keep school's engaged with the requirement to notify us of changes they make through their own budgets, Corporate Property are increasing the number of Annual Premises Reviews (APRs) (landlords visits) to capture changes made to sites and inform the valuers where Corporate Property have not been informed via the AMP process.

Where capital programs of work are agreed at strategic level these will be shared with the Property Data team to assist information capture. The AMP on-line forms have also been re-designed and made more user friendly and comprehensive for both user and data processor.

Sarah Morris/Jo Hollick

March 2018

In future years review any individual asset valuation changes above £2m to check that similar errors have not been made

Where any changes are made to existing valuations whether through error or due to other reasons, all similar valuations will be revisited to review financial implications.

This will be part of our internal quality assurance process of 'sign-off' whereby all valuations and changes to valuations must be countersigned by a second registered valuer. This counter signatory process will include valuations delivered by external consultants.

Sarah Morris, Judy Mullaney

March 2018

Consider whether future Internal Audit review of calculations are carried out on a rolling sample basis

Corporate Property will fully engage with the council's internal audit process and work in accordance with the frequency of audits that audit consider are required.

Carl Hardman December 2017

Implement in full any recommendations made by Internal Audit as a result of their work

Corporate property await the report from internal audit and will implement their recommendations.

Dave Massingham

March 2018


Ap pendix1

Prior year recommendations

Supporting information for Journals

As reported in the previous two years our sample testing of journals found that fully documentation is not held on the financial system to fully explain the nature of the journal being processed (it is Council policy to attach such information).

Whilst our testing shows an improvement in this area we still found one item where supporting information was not attached. Further testing confirmed no underlying issue but documentation should be attached for all journals.

Recommendati on

We recom mend the Authority re-iterate to all officers responsible for preparing journals that sufficient documentation is attached to the system.

Management response

We will send out regular communications to employees reminding them of the im portance of at taching full documentation to journals

Responsible officer – Paul StoneDue Date – March 2018

Low priority

Low priority

Implementation of Pensions Administration System

Whilst further progress has been made further work is required to fully embed the operation of the Pensions Administration System.

Recommendati on

We recommend the Authority continue to progress this m atterduring 2017-18and report to the Audit Committee on this is sue.

Management response

We will continue to review the system and provide Audit Committee with an update during the financial year

Responsible officer – Dawn KinleyDue Date – March 2018

Management review of Payroll reconciliation

During our controls testing we noted that whilst a reconciliation is performed between the General Ledger and the payroll system a management review of this control is not formally documented and as such we cannot rely on this control.

Recommendation

We recommend that the Authority document the management review of this reconciliation.

Management Response

We will document the management review of the reconciliation.

Responsible officer - John CooperDue Date – March 2018

Low priority


Audit differencesAp pendix2

We are requiredby ISA 260 to reportall uncorrectedmisstatements, otherthan thosethat we believeare clearlytrivial, to thosecharged with governance(whichinyour case is theAuditCommittee).Wearealsorequiredto reportall materialmisstatementsthat havebeen corrected but that we believe shouldbe communicatedto you to assistyou in fulfillingyour governanceresponsibilities.

Our audit did not identify any m aterial m isstatements in our audit of the Authority or Pens ion Fund accounts. There were a num ber of presenta tiona l matters and notes to the accountswhich officers agreed to amend.

The amendments required as a result of the PPE valuation issue are discussed earlier in this report. For each amendment to the valuation of the PPE balance there have been corresponding amendments to reserves and the associated notes to the accounts.

We will check these expected am endm ents have been made to the final statem ent of accounts before giving our audit opinion.


Materiality and reporting of audit differencesAp pendix3

Materia l errors by value are those which a resimply ofs ignific ant num erical s ize to dis tort the reader’s perception of the financ ial s tatements.Our assessmentof thethreshold for this depends upon the s ize of key figures inthe financ ial s tatements, aswell as other factorssuch asthe level of public interes t in the financ ia l s tatements.

Errors which a re m aterial by nature m aynot be la rge inva lue, but m ay concern accounting disclosures of keyim portance and sensitivity, for example the salariesofsenior s ta ff.

Errors tha t a re m aterial by context a re those tha t woulda lter key figures in the financ ial s tatements from oneresult to another – for example, errors tha t changesuccessful performance against a ta rget to fa ilure.

We used the sam e planning m ateriality reported in ourEx terna l Audit Plan 2016 /17, presented to you in March2017.

Materia lity for the Authority’s accountswas set a t £16m illion which equa tes to a round 1% of gross expenditure.We des ign our procedures to detec t errors in spec ificaccountsat a lower level of prec is ion.

Rep orti ng to the Audi t Commi ttee

Whils t our audit procedures a re des igned to identifym iss tatementswhich are m aterial to our opinion on thefinanc ial s tatementsasa whole, we nevertheless report tothe Audit Com m ittee any misstatementsof lesseram ounts to the ex tent tha t these a re identified by ouraudit work .

Under ISA 260, we a re obliged to report om iss ions orm iss tatementsother thanthose which a re ‘c learly trivial’ tothose cha rged with governance. ISA 260 defines ‘c lea rlytriv ia l’ a s matters tha ta re clearly inconsequential, whethertaken indiv idually or in aggrega te and whether judged byany quantitative or qua litative c riteria.

ISA 450 requires us to reques t tha t uncorrectedm iss tatementsa re corrected.

In the contex t of the Authority , we propose tha t anindiv idua l difference could norm ally be considered to bec lea rly trivial if it is less than £0.8 m illion for the Authority .

Where m anagementhavecorrected m aterialm iss tatements identified during the course of the audit, we will cons ider whether those correctionsshould becom municated to the Audit Com m ittee to assist it infulfilling its governance responsibilities.

Materi al ity – Pens ionfund audit

The same principles apply in setting materiality for thePens ion Fund audit. Ma teria lity for the Pens ion Fund wasset a t £36 million which is approximately 1% of grossassets.

We des ign our procedures to detec t errors a t a lower level of prec is ion, set a t £1.2 m illion for 2016 /17

The assessment of what is material is a matter of professional judgmentand includes consideration of three aspects: materiality by value, natureand context.

3 0© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliatedwithKPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Ap pendix4

Declaration of independence and objectivity

Auditors appointed by Public Sec tor Audit Appointm entsLtd m us t comply with the Code of Audit Prac tice (the‘Code’) which s ta tes tha t:

“Th e auditor sh ould carryout th eir work with integrity, objec tiv ity and independence, and in accordance withth e eth ical frameworkapplicable to auditors, in cludingth e eth ical s tandards for auditors set by th e Financial R eportin g Coun cil, and any additional requiremen ts setout by th e auditor’s recognised supervisory body, or an yoth er body charged with oversight of th e auditor’sin depen dence. Th e auditor should be, and should beseen to be, im pa rtia l andindependent. Accordingly, theauditor sh ould n ot carryout any other work for anaudited body if th a t work would im pair th eirin depen dence in carrying out anyof th eir s tatutoryduties , or m igh t reasonably be perceived as doing so.”

In cons idering issues of independenc e and objectivity wecons ider relevant professional, regula tory and legal requirem ents and guidance, inc luding the prov isions of theCode, the deta iled prov is ions of the Sta tement ofIndependenc e inc luded within the Public Sec tor Audit Appointm ents Ltd Term s of Appointm ent (‘Public Sec torAudit Appointm ents Ltd Guidance’) and the requirem entsof APB Ethica l Standard 1 Integrity , Objectivity andIndependenc e (‘Ethica l Standards’).

The Code s ta tes tha t, in carrying out their audit of thefinanc ial s tatements, auditors should comply with auditings tanda rdscurrently in force, and as maybe amended fromtim e to tim e. Public Sec tor Audit Appointments Ltdguidance requires appointed auditors to follow the prov is ions of ISA (UK&I) 260 ‘Com m un ication of Audit Ma tters with Th ose Charged with Governance’ that areapplic able to the audit of lis ted com panies. This meanstha t the appointed auditor m ust disclose in writing:

— Deta ils of a ll rela tionships between the auditor and thec lient, its direc tors and senior m anagement and itsa ffilia tes, inc luding a ll services prov ided by the audit firm and its network to the c lient, its direc tors andsenior m anagementand its affiliates, tha t the auditorcons iders may reasonably be thought to bea r on theauditor’s objec tivity and independence.

— The rela ted sa feguards tha t a re in place.

— The tota l am ount of fees tha t the auditor and theauditor’s network firm shave charged to the c lient andits a ffilia tes for the prov ision of serv ices during thereporting period, ana lysedinto appropriate categories, for example, s tatutoryaudit services, further auditserv ices, tax advisory servicesand other non-auditserv ices. For each category, the amountsof any futureserv iceswhich have been contracted or where awritten proposa l has been submitted a re separately

disc losed. We do this in our Annua l Audit Letter.

Appointed auditors a re a lso required to confirm in writingtha t they have complied with Ethical Standards and tha t, inthe auditor’s professional judgement, the auditor isindependent and the auditor’s objec tivity is notcom promised, or otherwise declare tha t the auditor hasconcerns that the auditor’s objectivity and independencem ay be compromised and explaining the ac tionswhichnecessarily follow from his. These m attersshould bediscussed with the Audit Com m ittee.

Ethica l Standards require us to communicate to thosecha rged with governance in writing a t least annually all s ignific ant facts and matters, including those rela ted to theprov is ion of non-audit serv ices and the sa feguards put inplace tha t, in our profess ional judgem ent, may reasonablybe thought to bea r on our independenc e and the objec tiv ityof the Engagem ent Lead and the audit team.

General p rocedures to safeguard i ndependenceandob j ec tivity

KPMG LLP is com m ittedto being and being seen to beindependent. As pa rt of our ethics and independencepolic ies , a ll KPMG LLP Audit Pa rtners and s taff annuallyconfirm their com pliance with our Ethics and IndependenceManua l inc luding in pa rticular that they have no prohibitedsha reholdings.

Our Ethics and Independenc e Manual is fully consistentwith the requirem ents of the Ethica l Standards issued bythe UK Auditing Prac ticesBoard. As a result we haveunderly ing sa feguards in place to m a intain independenc ethrough: Ins tilling professional values, Communications, Interna l accountability, Risk management and Independentrev iews .

We would be happy to discuss any of these aspects of our procedures in m ore deta il.

Audi tor dec l aration

In rela tion to the audit of the financ ia l s tatements of Derbyshire County Council and Derbyshire Pension Fund forthe financ ial year ending 31 March 2017, we confirm tha tthere were no rela tionships between KPMG LLP and Derbyshire County Council and Derbyshire Pension Fund, itsdirec tors and senior m anagement and its a ffiliates that wecons ider m ay reasonablybe thought to bea r on theobjec tiv ity and independence of the audit engagem ent leadand audit s ta ff. We a lso confirm tha t we have compliedwith Ethica l Standardsand the Public Sec tor AuditAppointm ents Ltd requirem ents in rela tion to independenceand objec tiv ity.


Ap pendix5

Non-audi t work and i ndep endence

B elow we have lis ted the non-audit work perform ed and set out how we have considered and m itigated (wherenecessary) potential threa ts to our independenc e.

Summary of n on -audit work

Descrip tion ofn on -audit service Estimated fee Poten tial threat to auditor in dep endence and associated safeguards in p lace

Teachers’ Pensions Agency Return2015/16

£3 ,500

Self-in terest: This engagement is entirely separate from the audit and there is aseparate engagement letter in place.Self-review: The nature of this work is to issue the Accountant’s IndependentAssurance Report in accordance with the specific assurance instructions set out by theTPA. It does not impact on our opinion and we do not consider that the outcome of thiswork is a threat to our role as external auditors.

Man agemen t threat: This work was undertaken in accordance with theAssurance Instruction provided by the TPA.Familiarity: This threat is limited given the scale, nature and timing of the work. Advocacy: We will not act as advocates for the Authority in any aspect of this

work.I n timidation : Not applicable

Total estimated fees £15 4,028

Total estimated fees as ap ercen tage of the extern al audit fees (Authority an d Pension Fun d)

2%


Ap pendix5

Audi t fees

As com municated to you in our Ex terna l Audit Plan 2016 /17, our scale fee for the audit of the Authority is £125,3 56 plusVAT and for the Pens ion Fund is £28,672 plus VAT. However, we propose an additional fee due to work undertaken inrela tion to the CIES res ta tement and extra work in regard to PPE revaluations to cover the cos tsof the KPMG expertsand spec ialists we have needed to engage in response to m atters identified during the audit. This is s till subject to fina lagreement with the Finance Director and PSAA approva l.

Audit fees

All fees are quoted exclusive of VAT.

Note 1: This is still subject to PSAA determination.

P SA A fee table – A uthorityAccounts

Co m ponent of audit 2016/17(pla n ned fee)

£

2015/16(a c tual fee)

£

A c counts o pinion and use of resources work

P S AA scale fee 125,356 125,356

Additiona l work to conclude our opinion(note 1) TB C -

T o t al fee for t heAuthority set by the PSAA 125,356 125,356

P SA A fee table – P ension Fund Accounts

Co m ponent of audit 2016/17(pla n ned fee)

£

2015/16(a c tual fee)

£

A c counts o pinion work

P S AA scale fee 28,672 28,672

Additiona l work to conclude our opinion - -

T o t al fee for t heAuthority set by the PSAA 28,672 28,672

© 2017 KPMG LLP, a UK limited liability partnership and a member f irm of the KPMG netw orkofindependent member f irms af f iliated w ith KPMG International Cooperative (“KPMG International”), a Sw issentity . A ll rights reserved.

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