AUDIT COMMITTEE
Minutes of a meeting held on 27th February, 2018.
Present: Councillor M.R. Wilson (Chairman); Councillor L.O. Rowlands (Vice-Chairman); Councillors: G.D.D. Carroll, Mrs. P. Drake, V.P. Driscoll, Dr. I.J. Johnson and K.F. McCaffer and Mr. P. Lewis (Lay Member).
Also present: Mr. S. Wyndham (WAO).
722 MINUTES -
RESOLVED - T H A T the minutes of the Extraordinary Meeting held on 31st January, 2018 be approved as a correct record.
723 DECLARATIONS OF INTEREST -
No declarations were received.
724 TREASURY MANAGEMENT AND INVESTMENT STRATEGY 2018/19 (S151O) -
Part 1 of the Local Government Act 2003 required Local Authorities to have regard to the Prudential Code. As the Council proposed to borrow in excess of this level to increase its capital expenditure, then it can. However, it would either have to find the additional costs of borrowing through savings in other services or increases in Council Tax.
The key objectives of the Prudential Code were to ensure that the capital investment plans of Local Authorities:
- were affordable;
- that all external borrowing and other long term liabilities were within prudent and sustainable levels;
- the treasury management decisions were taken in accordance with professional good practice.
The Council had previously adopted the CIPFA Treasury Management in the Public Services: Code of Practice 2017 Edition (the CIPFA Code), which required the Council to approve a treasury management strategy before the start of each financial year.
The proposed Treasury Management and Investment Strategy for 2018/19, attached at Appendix 1, covered a rolling period of three years and was intended to link in to the Medium Term Financial Planning process. The document also included a number of statutory Prudential Indicators that may be used to support and record local decision-making.
The Principal Accountant also provided specific explanations in regard to certain aspects of Appendix 1 and related to the undermentioned matters:
- The Interim Report;
- The Annual Investment Strategy;
- Future types of investment;
- Economic outlook;
- Bailed-In legislation and related credit outlook;
- Prudential Indicators linked to affordability and HRA; incremental impact of capital investment on Council Tax and housing rents and capital expenditure;
- Prudence – Capital Financing Requirements (CFR); gross debt and CFR, Operational boundary for external debt; authorised limit for external debt;
- HRA limit of indebtedness;
- MiFiDII.
In regard to Appendix 2, the Principal Account drew the Committee’s attention to proposed changes to officer delegations in regard to all executive decisions on borrowing, investments or financing.
The Council, during 2018/19, would continue to place investments with either the Debt Management Account Deposit Facility (DMADF) of the Bank of England or with UK Local Authorities.
It was noted that the Council had no investments with Northamptonshire Council who had recently filed a Section 114 Notice and had been advised not to make any new investments with them. If a Local Authority that the Council had investments with was to default on a loan repayment the Council would have recourse under the Local Government Act 2003 to collect any outstanding sums. Given the emerging picture in relation to Local Authority investments the Treasury Management section would set a maximum period of six months for investments made from the date of the report.
The Council would pursue the possible use of other investment tools, i.e. Treasury Bills and Money Market Funds during 2018/19 and may introduce these investment tools once relevant appraisals had been undertaken. However, the continuing uncertainty in the financial markets would continue to dictate that the importance of capital security which outweighed the importance of financial performance at present.
The Council would also continue to use credit ratings from the three main rating agencies Fitch Ratings Ltd, Moody’s Investors Service and Standard & Poor’s to assess the risk of loss of investments. The lowest available credit rating would be used to determine credit quality.
The Council’s Treasury Management operations entered into for the period 1st April, 2017 to 31st December, 2017, were in accordance with the Council’s approved strategy on Treasury Management. The following table set out the monies borrowed / repaid during the period:
.
|
Loan Type
|
Opening Balance
|
Received
|
Repaid
|
Closing Balance
|
|
|
01/04/2017
|
|
|
31/12/2017
|
|
|
£000
|
£000
|
£000
|
£000
|
|
PWLB
|
148,999
|
0
|
(1,807)
|
147,192
|
|
Other Long Term Loans
|
6,000
|
0
|
0
|
6,000
|
|
WG Concessionary Loan
|
2,100
|
0
|
0
|
2,100
|
|
Temporary Loans
|
100
|
0
|
0
|
100
|
|
Total
|
157,199
|
0
|
(1,807)
|
155,392
|
The Council’s investments for the period to 31st December, 2017 were as follows:
.
|
Borrowing Institution
|
Opening Balance
|
Received
|
Repaid
|
Closing Balance
|
| |
01/04/2017
|
|
|
31/12/2017
|
| |
£000
|
£000
|
£000
|
£000
|
|
Local Authorities
|
65,500
|
172,350
|
(172,350)
|
65,500
|
|
Debt Management Account Deposit Facility
|
4,250
|
1,398,650
|
(1,398,500)
|
4,400
|
|
Total
|
69,750
|
1,571,000
|
(1,570,850)
|
69,900
|
Interest at an average rate of 0.30% and amounting to £144,140 had been received from maturing investments for the first nine months of 2017/18
The Principal Accountant also referred specifically to the Annual Minimum Revenue Provision (MRP) Statement for 2018/19, which Welsh Government (WG) had issued guidance on what constituted prudent provision and this required the Council to approve an annual statement of its policy on calculating MRP. The Committee, at its meeting on 31st January, 2018, endorsed a proposal to amend the policy for calculating MRP for General Fund Supported Borrowing. MRP would be charged at 2% of the outstanding Housing Revenue Account Capital Financing Requirement in respect of housing assets. Capital expenditure incurred during 2018/19 would not be subject to an MRP charge until 2019/20. Based on the Authority’s latest estimate of its Capital Financing Requirement on 31st March, 2018, the budget for MRP had been set as follows:
.
|
|
31.03.2018 Estimated CFR
£000
|
2018/19 Estimated MRP
£000
|
|
General Fund
|
|
|
|
Supported capital expenditure
|
104,882
|
2,672
|
|
Unsupported capital expenditure
|
18,310
|
616
|
|
Total General Fund
|
123,192
|
3,288
|
|
Housing Revenue Account
|
|
|
|
Total Housing Revenue Account
|
77,585
|
1,552
|
|
Total
|
200,777
|
4,840
|
Included in the 2018/19 revenue estimates were principal repayments totalling £616k in respect of Prudential (unsupported) Borrowing. Of this funding £113k was in respect of two specific schemes, Llantwit Learning Community and Penarth Learning Community. The provision made in respect of these schemes was commensurate with asset life as estimated by the Council's External Valuer. Provision of £171k had been made for the repayments against a loan of £1.2m for refuse vehicles over an expected life of seven years. In addition, £332k had been included in respect of the Local Government Borrowing Initiative (LGBI) funding from WG for 21st Century Schools and the Local Road Network Improvement scheme. The provision in respect of LGBI schemes was commensurate with the applicable WG funding streams through the RSG.
The Section 151 Officer considered that the estimated costs of unsupported borrowing were both prudent and sustainable.
A Member referred to the Council’s Financing Requirement in particular the Council’s General Capital Supported Borrowing of £13.121m and £4.411m for the current Cardiff Capital City Regional Deal proposals and enquired how these were to be funded. In addition, he sought further clarification in regard to the Prudential indicators specifically, Authorised Limit for External Debt and the relationship between this and the Council’s Capital Financial requirements for borrowing. In response, the Principal Accountant indicated that the funding of the Council’s General Capital Supported Borrowing and the Council’s contribution for the Cardiff Capital City Regional Deal proposals would be met from a combination of internal and external borrowing. In regard to the relationship between the Authorised Limit for External Debt and the Council’s Capital Financing Requirements which were broadly related to the financial structuring of the Council’s borrowing to support its Capital Funding requirements and set the provision for temporary borrowing cash flow requirements.
Discussion ensued with a number of Members seeking clarification in regard to the difference between the Authorised Limit and for External Debt the Operational Boundary in External Debt; the implications for interest rate rises for the Council and the feasibility of paying down debt sooner than planned. In response the Principal Accountant indicated that the differences between both debt indicators related to investments that would be made on a temporary basis between one month to six months and for cash flow purposes. In regard to potential interest rate rises, the Strategy took account of an expected rate rise that had been signalled by the Bank of England and the majority of the Council’s borrowing requirements were set at a fixed rate. The Council would potentially receive greater income from its investments as a result of any rate rise. In terms of paying the Council’s debt down sooner, this would be more problematic with the Principal Accountant providing an explanation of the potential stumbling blocks for paying down debt in regard to for example Public Works Loan Board loans which were subject to penalty for early repayment of a loan. Whilst the Council was amenable to paying its debt off sooner it had to strike a balance in terms of what was in the best interest of the Council. The Council was also unable to take advantage of financial funding initiatives such as “off-set mortgages” due to provisions under the Council’s current Treasury Management Strategy.
The Chairman referred to the potential opportunities for the Council to invest in mutual organisations such as building societies. The Principal Accountant indicated that it was feasible for the Council to do so as such organisations were subject to the “Bail In Legislation”. The Principal Accountant also indicated that she would share the Council’s independent advisors’ advice on the subject.
In concluding, the Chairman enquired if it was feasible for the Council to make loans to Town and Community Councils and what was the Council’s position on the matter. In response the Principal Accountant indicated that the Council was not permitted to lend to Town or Community Councils at preferential rates and current policy requirements prevented the Council from doing so as this would have financial implications for the Council. Having regard to the Principal Accountant’s response, the Chairman requested that a further report on that subject be submitted to the Committee for consideration.
RESOLVED -
(1) T H A T the Treasury Management interim report for the period 1st April to 31st December, 2017 be endorsed.
(2) T H A T the policy for making Minimum Revenue Provision in 2018/19 be approved.
(3) T H A T the proposed 2018/19 Treasury Management and Investment Strategy be endorsed subject to noting the below which would require Full Council approval:
- The Authorised Limit for External Debt be set at £203.681M for 2017/18, £216.031M for 2018/19, £226.060M for 2019/20 and £226.292M for 2020/21.
- The Operational Boundary for External Debt be set at £175.441M for 2017/18, £195.637M for 2018/19, £199.906M for 2019/20 and £206.012M for 2020/21.
- The Section 151 Officer be given delegated authority within the total Authorised Limit and Operational Boundary as estimated for individual years to effect movement between the separately agreed limits for borrowing and other long term liabilities.
- An upper limit is set on its fixed interest rate exposures of £149.265M for 2017/18, for 2018/19 of 154.046M for 2019/20 of £159.482M and for 2020/21 of £165.362M of its net outstanding principal sum on its borrowings / investments.
- An upper limit is set on its variable interest rate exposures of £0 for 2017/18, 2018/19, 2019/20 and 2020/21 of its net outstanding principal sum on its investments.
- An upper limit of £5M for 2017/18, £5M for 2018/19, £2M in 2019/20 and 2020/21 is set for total principal sums invested for over 364 days.
- The amount of projected borrowing that is fixed rate maturing in each period as a percentage of total projected borrowing that is fixed rate for 2018/19 be set as below:
.
|
|
Upper Limit
|
Lower Limit
|
|
Under 12 months
|
20%
|
0%
|
|
12 months and within 24 months
|
20%
|
0%
|
|
24 months and within 5 years
|
30%
|
0%
|
|
5 years and within 10 years
|
40%
|
0%
|
|
10 years and above
|
100%
|
0%
|
- The Prudential Indicators set out in Appendix 1 be approved.
- The Treasury Management Policy set out in Appendix 2 be approved
(4) T H A T a further report be submitted to the Committee on the feasibility/practicalities of the Council providing loans to Town and Community Councils.
Reasons for decisions
(1) To present the Treasury Management Interim Report.
(2) To agree the basis of the Minimum Revenue Provision calculation for 2018/19.
(3) The Treasury Management and Annual Investment Strategy is prepared as required by the Local Government Act 2003.
(4) To allow further consideration of the matter.
725 PROJECT BANK ACCOUNT (PBA) (S151O) -
The Committee was apprised of proposals to use a Project Bank Account (PBA) for the implementation of the A4226 Five Mile Lane Improvement scheme, to be funded by a £25.8m Welsh Government grant, which was in line with Welsh Government’s commitment to ensuring sub-contractors involved in the delivery of public sector contracts in Wales were treated fairly.
Prior to implementation of a PBA, consideration would need to be given to its compliance with the Council's Treasury Management and Investment Strategy. The Council would only place its funds with institutions which have a credit rating of A- or higher if they were domiciled in the UK. The PBA would therefore need to be opened with an institution which met this minimum requirement.
PBAs were also ringfenced bank accounts with trust status and so act solely as a receptacle for transferring funds from the client to the lead contractor and its sub-contractors. PBAs allowed simultaneous payments to all levels of the supply chain.
The Council and the lead contractor would both be trustees of the account, however the account would be set up by the lead contractor.
The report also referred to circumstances where the Council’s Bankers and operators of its accounts were subject of the approval of the Section 151 Officer. The Section 151 Officer supported the opening of a PBA for this capital project.
Tabled for the benefit of the Committee was updated legal implications which supplemented information to that already contained in the published report. This was duly noted by the Committee.
In referring to the lead contractor’s responsibility for releasing payments to sub-contractors, assurances were sought that historical practices of delayed payments by lead contractors to sub-contractors would not continue under the above proposals. Carillion was cited as a recent example of sub-contractors being adversely affected following the company being placed in Administration. In responding to the Committee’s concern, the Head of Finance provided clarification and indicated that the proposed arrangements would provide improved governance arrangements with oversight by the Council to ensure all contractors involved with the project received payment without unnecessary delays.
The Project was unable to overspend as arrangements were in place to ensure the contract was delivered within agreed timescales and within budget.
RESOLVED -
(1) T H A T the proposed use of a Project Bank Account be endorsed.
(2) T H A T internal governance procedures are developed by the Head of Finance to manage the use of the account.
Reasons for decisions
(1) To ensure that Members are informed of the proposal to use the Project Bank Account for this scheme.
(2) To allow for the appropriate governance arrangements to be put in place.
726 CERTIFICATION OF GRANTS AND RETURNS 2016-17 (MD) -
The Wales Audit Office, as the Council's external auditors, was required to certify the claims submitted by the Council. This certification typically took place some 6-12 months after the claim period and represented a final, but important part of the process to confirm the Council's entitlement to funding.
The Council received and certified nine grant claims and returns from government departments and other bodies requiring external audit certification in 2016-17, supporting income of circa £97.025m.
Two recommendations with an associated action plan were set out in Appendix 2 of the report.
A Member queried whether it would be possible in future reports to provide a breakdown of grants claims which were subject to Audit certification. In response, Mr. Wyndham indicated that he would circulate the requested information to the Committee post meeting.
A summary of all claims and returns subject to certification were set out in Appendix A to the report, together with the certification fee and outcome of the External Auditor's review. The Council submitted all of its 2016-17 grant claims to the External Auditor on time and these had all been certified. Overall the External Auditors certified nine grants and returns; seven were certified with no issues arising; one required a qualification to the audit certificate with no amendment to the claim and one was both qualified and amended.
RESOLVED -
(1) T H A T the contents of the Council’s External Auditor’s report on the grant work undertaken for 2016/17 be noted.
(2) T H A T a breakdown of grant claims which were subject to Audit certification be provided to the Committee.
Reason for decision
(1&2) In acknowledgement of the Committee’s responsibility for monitoring of the Audit function.
727 INTERNAL AUDIT SHARED SERVICE CHARTER 2018/19 (OMA / HOA) -
As at 1st April, 2013, the Public Sector Internal Audit Standards (PSIAS) came into force and superseded the Chartered Institute of Public Finance and Accountancy (CIPFA) Code of Practice for Internal Auditors.
The PSIAS were applicable to all areas of the United Kingdom public sector and were based on the Chartered Institute of Internal Auditor's (CIIA) International Professional Practices Framework.
The roles of the Audit Committee in relation to Internal Audit were to:
- Oversee its independence, objectivity, performance and professionalism;
- Support the effectiveness of the internal audit process; and
- Promote the effective use of internal audit within the assurance framework.
One of the key actions which demonstrated the Committee's role in this respect was the approval of the Internal Audit Shared Service Charter. The Audit Committee approved the first Charter at their meeting held on 29th April, 2013, and have continued to be part of this process on an annual basis ever since.
The Head of Audit was charged with the responsibility for undertaking periodic reviews of the Charter in accordance with PSIAS. The Charter for 2018/19 contained a number of revisions as referred to by the Head of Audit, which related to the reformatting of the Mission Statement and additional bullet pointed narrative at page 1. The insertion of additional narrative on page 2 of the Charter relating to governance, risk management, etc. with further minor amendments to the narrative contained in paragraphs 2.10, 3.5, 3.6 and 3.10. The revised Charter attached at Appendix A required the Committee’s approval.
RESOLVED - T H A T the Internal Audit Shared Service Charter for 2018/19 be approved.
Reason for decision
To approve the above Charter for 2018/19 to ensure compliance with the Public Sector Internal Audit Standards.
728 INTERNAL AUDIT - OUTTURN REPORT - APRIL 2017 TO JANUARY 2018 (OMA / HOA) -
The Operational Manager for Audit informed the Committee of the Internal Audit performance in regard to activities contained within the 2017/18 Internal Audit Plan and for the above stated period. She made reference to Appendices A and B to the report for the consideration of the Committee which detailed (including the Head of Audit’s seven month position report), the work undertaken by the Internal Audit Service to date.
The undermentioned table showed an analysis of work carried out in relation to the above Plan (1,145 available days):
.
|
Directorate
|
2017/18
Audit Plan
Year
|
April to Jan 18
Budget days
Expected
|
April to Jan 18
Actual days
Delivered
|
|
Managing Director / Resources
|
315
|
263
|
213
|
|
Social Services
|
130
|
108
|
35
|
|
Environment & Housing
|
150
|
125
|
56
|
|
Learning & Skills
|
130
|
108
|
77
|
|
Cross Cutting (including Fraud & Error)
|
420
|
350
|
267
|
|
TOTALS
|
1,145
|
954
|
648
|
The above showed that 648 actual days had been achieved, which was less than that expected by 306 days. As at 1st April, 2017 the overall structure of the Section was based on 18 full time equivalents, however, following a restructure this had subsequently reduced to 14 full time equivalent posts which took effect from 1st October, 2017. At the time of the report the Section was carrying 7.5 full time equivalent vacancies. South Wales Audit Partnership would be retained to the end of the current financial year to complete pre-agreed priority audit work. Discussions regarding extending the existing shared service to encompass other local authorities in the region were ongoing at an officer and Member level.
Internal Audit had made a total of 50 recommendations in the 10 month reporting period, of which Management had given written assurance that all of these would be implemented. 29 had been completed, 10 were pending with a further 11 actions overdue.
The opinion contained within the report at Appendix A related to the system of internal controls at the Council and the overall control environment in place. Set out in Appendix B to the report was the supporting evidence which listed all those assignments which had been commenced / completed during the 10 months and where an assignment had been completed, an audit opinion had been applied.
Appendix A to the report also contained matters relating to internal control weaknesses identified during the reporting period, the Internal Audit performance indicators relating to the Welsh Chief Auditors benchmarking exercise, and governance arrangements which had remained largely unchanged since last reported to Committee in November 2017.
On the basis of the Internal Audit work undertaken to date and taking into account all available evidence, it was the Head of Audit’s opinion that a satisfactory assurance level could be applied to standards of internal control at the Council so far to date.
In referring to the three recommendations outstanding for more than three months a Member sought clarification on the subject matter of the three separate audits. The Operational Manager for Audit indicated that she did not have this information to hand and gave an assurance that she would circulate the relevant information to the Committee post meeting.
RESOLVED - T H A T the contents of the Internal Audit performance report for the period April 2017 to January 2018 be noted.
Reason for decision
In acknowledgement of the Committee’s responsibility for oversight of matters contained within the related Plan.
729 AUDIT COMMITTEE - FORWARD WORK PROGRAMME (OMA / HOA) -
Consideration was given to an updated Forward Work Programme for 2017/18 which had been previously approved by the Committee at its meeting held in April 2017.
RESOLVED - T H A T the updated Forward Work Programme for 2017/18 in regard to the Audit Committee be noted.
Reason for decision
To apprise the Committee of any changes to its Forward Work Programme.