www.pwc.co.uk
Government and Public Sector
North Norfolk District
Council
November 2011
Audit of the Statement of Accounts
for the year ended 31 March 2011
and Annual Summary of
Recommendations
North Norfolk District Council – Annual Audit Letter
November 2011
PricewaterhouseCoopers LLP
The Atrium
St Georges Street
Norwich NR3 1AG
www.pwc.com/uk
The Members
North Norfolk District Council
Council Offices
Holt Road
Cromer
Norfolk. NR27 9EN
November 2011
Ladies and Gentleman
We attach our report on matters arising from our audit of the Statement of Accounts
for the year ended 31 March 2011.
This report supplements the matters that were reported to the Audit Committee in
our 2010/11 report to those charged with governance (ISA 260 (UK&I), which was
presented on 22 September 2011.
We look forward to presenting it to Members on 6 December 2011.
Yours faithfully
PricewaterhouseCoopers LLP
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Auditors and of Audited Bodies’. It is available from the Chief Executive of each audited body. The
purpose of the statement is to assist auditors and audited bodies by explaining where the responsibilities
of auditors begin and end and what is to be expected of the audited body in certain areas. Our reports
and management letters are prepared in the context of this Statement. Reports and letters prepared by
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body and no responsibility is taken by auditors to any member or officer in their individual capacity or to
any third party.
North Norfolk District Council – Annual Audit Letter
November 2011
Contents
Introduction
1
Matters airisng from the audit of the Statement of Accounts
for the year ended 31 March 2011
2
Follow up of matters from previous years’ audits of the
Statement of Accounts
6
North Norfolk District Council
November 2011
Introduction
The purpose of this letter
It is the responsibility of the Deputy Chief Executive to prepare a Statement of Accounts, which presents fairly
the financial position of North Norfolk District Council (“the Council”). As part of our annual audit under the
Audit Commission’s Code of Audit Practice, we are required to provide an audit opinion on the Council’s
accounts. Our work in this area, the scope of which is described in our 2010/11 audit plan, was completed
during our audit visit to the Council in April, July and August 2011 and this report details those matters that we
wish to draw to your attention.
We are required by the Audit Commissions Standing Guidance for Auditors to provide an annual summary of
recommendations. This report incorporates our annual summary of recommendations. In total we have raised
20 recommendations.
As required by the Audit Commission Standing Guidance we have also provided an update on progress made in
implementing recommendations raised in previous years in the following reports:

2009/10 Review of Internal Financial Controls (September 2010);

2009/10 Report to those charged with Governance, International Standards on Auditing (ISA (UK&I)
260) (September 2010);

Statement of accounts 2009/10 (November 2010);

2008/09 Review of Internal Financial Controls (May 2009);

2008/09 Report to those charged with Governance, International Standards on Auditing (ISA (UK&I)
260) (September 2009); and

Statement of accounts 2008/09 (November 2009).
Where recommendations have been actioned in full, we have not reported these in the tables below.
1
North Norfolk District Council
November 2011
Matters arising from our audit of the Statement of Accounts for the year ended 31
March 2011
Observation
Recommendation
Management’s response
Arising from our audit for the year ended 31 March 2011 – Financial Systems
1) Information Communication
The Council should ensure the ICT security policy
Technology (ICT) Security Policy is
is updated on at least an annual basis.
out of date
At the time of our interim audit (April 2011)
the ICT Security Policy had not been
updated since January 2010. There is
therefore an increased risk that changes in
the system have not been reflected in the
Security Policy.
ICT Security Policy has been updated (May 2011), with the
current version (5.2) being available on the intranet.
2) Disaster Recovery Plan
The Council should ensure the Disaster Recovery
At the time of our interim audit (April 2011) Plan is updated to reflect the change in servers
from physical to virtual.
the Disaster Recovery plan was in the
process of being updated and at the time did
not reflect the change to virtual servers.
The Disaster Recovery Plan has been updated August 2011.
3) Test plan for the Disaster Recovery The Council should implement a testing strategy
plan is not complete and results are
each year to ensure that all vital elements of the
not captured
plan are tested annually.
At the time of our interim audit (April 2011)
when we reviewed the Disaster Recovery
test schedule we discovered that it did not
include the switch to virtualised servers and
that the results of testing are not always
captured formally in the Business
Continuity Log. It was also discovered that
recovery plans are tested in an ad hoc
manner with irregular updates to the testing
records.
Results spreadsheet supplied week commencing 8th
August. Final documentation all provided on 10/08/11.
1
The potential implication of this is that
without a formal record of testing results,
issues identified will not be resolved in a
North Norfolk District Council
November 2011
timely manner, increasing the risk that
should the Council undergo a disaster or
other service disruption, they would not be
able to recover data adequately or be able to
maintain services.
Arising from our audit for the year ended 31 March 2011 – Statement of Accounts
4) Accounting for Gold Car Park
income
The council currently collects all income
from the Gold Car Park and provides
Mundesley Council with a 50% share after
deducting costs. The method currently used
by the council to record income in the
statement of accounts is based on the
calendar year. As a result the car park
income is not fully prepared on an 'Accruals
Basis' in accordance with IAS1 and there is a
risk that the income is slightly misstatement
in the statement of accounts.
The Council should ensure that
Car Park income is accounted for on the accruals
basis per the financial year (April – March) as
opposed to the calendar year (January –
December).
This approach results in a minor timing issue that has no
impact on the overall accounts. This approach has been
followed for a number of years and follows the lease period
rather than financial year. Lease renegotiation will
endeavour to align the two periods.
5) Accounting for Access to Nature
The Council should ensure grant income is
Grant Income
accounted for on the accruals basis per the
Income for the Nature Grant project is
financial year as opposed to a cash basis.
received one month after the submission of
quarterly claims to the grant paying body.
The Council currently account for the
income only when it is received. As a result
the grant income is not fully prepared on an
'Accruals Basis' in accordance with IAS1 and
there is a risk that the income is slightly
misstatement in the statement of accounts.
Agreed going forward.
6) Rounding within Property Plant
and Equipment valuations
Our review of a number of calculations
undertaken by the Council’s internal
Valuation Specialist indicated figures are
being rounded within the calculation,
Whilst the impact in the accounts for 2010-11 was not
material in future years a lower rounding figure will be
used.
2
The Council should consider when applying
rounding to property valuations if the level of
rounding is appropriate for the property value.
For instance rounding to the nearest £1,000
instead of £10,000.
North Norfolk District Council
November 2011
resulting in different output valuations. If
this practice is undertaken when valuing
significant assets, it may result in asset
values being misstated in the statement of
accounts. Our testing identified that
valuations worth £98,760 had been rounded
to £118,500.
7) Market Based Valuation
Assumptions
Our internal valuations team reviewed the
assumptions used by the Council in their
2010/11 asset valuations for reasonableness.
Discrepancies were identified in certain of
the valuations of assets valued on a
depreciated replacement cost basis. In
valuing land the Council used an
assumption that residential land values
decreased by 10% on average between April
2008 and 2010. However this fall in value
refers to house prices rather than land
values. This is supported by the Nationwide
regional Quarterly Index which reflected a
fall of 10% in house prices in East Anglia
between Q1 2008 and Q1 2010. The same
index indicates that land values decreased
by 19% over the same period. On this basis,
the assumption that land values have fallen
by 10% over the period appears to
underestimate the negative movement.
In valuing buildings the Council based its
assumptions on the Building Cost Index (a
measure of the cost of raw materials) and
identified from this index that prices
increased over the period by approximately
6%. However, we would suggest that a more
appropriate index would be of tender prices
3
The Council should perform sufficient research
when valuing property valuations to ensure the
most appropriate valuation methodologies and
market information are being utilised.
More appropriate valuation methods will be used in future.
North Norfolk District Council
November 2011
(being the change in the price quotes
received by developers). Using the Spons
Architects & Builders Price Book 2011 the
tender price index has actually fallen by 16%
over the period. The discrepancy is that
although raw material prices have indeed
increased the down turn in construction
during the economic recession has meant
that building contractors have been unable
to pass on these increases and indeed the
lack of contracts has forced fierce price
competition.
There is a risk that using inappropriate
market assumptions in property valuations
will result in inaccurate valuations being
reported in the statement of accounts.
8) Inconsistency between 2010/11
valuations and carry forward values
per the fixed asset register
Our review of the Council’s 2010/2011
valuations, brought forward and carry
forward balances as recorded on the fixed
asset register identified inconsistencies
totalling £8,436.
The Council should ensure that
accounting records including the fixed asset
register are updated for the results of property
valuations accurately and in full.
Agreed.
9) Classification of Non Current
Assets held for Sale
As part of the transition to IFRS exercise the
Council classified assets sold during the
period April 2009 to March 2011 and those
expected to be sold in the period April 2011
to March 2012 as Assets held for sale on the
Balance Sheet. In accordance with IFRS 5
“Non current Assets Held for Sale and
Discontinued Operations” there are four
criteria which have to be met before an asset
can be classified as held for sale. The
The Council should ensure that when considering
if an asset meets the recognition criteria for an
asset held for sale in accordance with IFRS 5 that
all four criteria of the standard are given due
consideration.
The accounts for 2010-11 reflect the correct treatment and
consideration of all four criteria.
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North Norfolk District Council
November 2011
Council did not consider all four criteria in
the exercise and as a result an asset was
incorrectly classified as an asset held for sale
in the draft statement of accounts.
10) Accounting for Finance Leases.
The Council should ensure that the accounting
As part of the transition to IFRS exercise the periods applied to finance leases matches the lease
term as opposed to the depreciation policy.
Council identified that the waste collection
contract with Norse contained the substance
of a finance lease. The Authority accounted
for the finance lease over the period
matching the deprecation policy, which is
not to depreciate in the year of acquisition.
As a result the term applied to the lease for
accounting purposes was in excess of the
contract end date by one year resulting in a
misstatement in the statement of accounts.
The observation is correct and reflects the historical
treatment of these transactions over the seven year period
of the previous contract. For the new contract there will be
a matching of lease term and contract period.
11) Missing related party disclosure
declaration
The Council were unable to obtain a signed
related party declaration form for one
councillor despite sending numerous
declaration requests.
The Council did make every effort to secure a declaration
from this Councillor. In previous years this Councillor had
always submitted a “nil” return. It remains a priority to
obtain an annual declaration from all Elected Members.
5
The Council should make every effort to obtain all
related party declarations and if necessary remind
Councillors of their duty to cooperate with such
requests.
North Norfolk District Council
November 2011
Follow up of matters from previous years’ audits of the Statement of Accounts
Original Finding /
recommendation
Original Management response,
action taken and further
recommendations
New Management response
2009/10 Review of Internal Financial Controls
12) The date field for general
ledger journal postings can be
manually adjusted
The general ledger journal date field
is by default the date of entry, unless
manually overwritten. Our testing of
twenty-four journals identified one
instance where the input date had
been manually adjusted. The ability
for users to do this diminishes the
accuracy of the audit trail and
increases the risk of fraudulent
journal entries going undetected.
The Council should liaise with the
general ledger software company to
assess whether the manual override
can be blocked or otherwise
restricted.
13) Journals authorisation and
supporting documentation
All journals above £100,000 are
required to be authorised by the
Financial Services Manager, or in
their absence the Chief Technical
Accountant.
During our testing fifteen out of
6
AGREED
This has been logged with the software
provider.
This issue has been raised with the software supplier and they have been
unable to resolve it. An email will be issued to users to remind them not
to overwrite these dates.
Update 2010/11
We understand from management that
consultation with the software company
identified that this would be an expensive
solution. As an alternative the Council
issued guidance to staff reminding them
not to manually override the input date.
However our 2010/11 testing we identified
one journal where the entry date had been
manually adjusted. This impacts upon the
integrity of the audit trail.
We recommend that the Council
reiterates to staff the importance of
not overriding the manual date input.
Agreed
The functionality of the system allows all
journals to be recreated online and this will
duplicate all information included on the
pro-forma forms, i.e. cost centre, account
code, activity code, values, narrative, date
and originator.
We will continue to improve the cross referencing of evidence to
journals. However, where a journal is supported by a significant volume
of evidence that evidence is not usually duplicated for each journal.
North Norfolk District Council
November 2011
Original Finding /
recommendation
Original Management response,
action taken and further
recommendations
twenty-four journals actioned by the
Council were not authorised in
accordance with Section 1.3.6 of the
Council's Accountancy Procedures.
Furthermore, thirteen were not
supported by signed hard copy
journal entry pro-formas outlining
the account codes, activity codes,
values, narrative description and the
posting staff member.
Of the fifteen journals referred to as not
being authorised:
Four related to management unit journals,
these are input on a monthly basis and
represent 1/12th of the approved budget.
Whilst it is accepted that these will be
above the £100,000 value it is not
considered necessary for these to be
countersigned as there are compensatory
controls in place via the budget monitoring
in that any incorrect postings would be
flagged as a variance against the profiled
budget.
Others included journals input as part of
the year-end accruals process and closedown of the collection fund.
The accounting procedures will be updated
to clarify when journals require
authorisation.
Unless supporting documentation is
retained with the journal and it is
appropriately authorised, there is a
risk that erroneous or inappropriate
journal entries (i.e. manual
adjustments) to the general ledger
will be made. This could have a
material impact on the Council’s
financial statements.
The Council should ensure that
journals are only processed and
authorised when supporting
documentation is available and that
authorisation is evidenced.
Further management comment 2009/10:
Procedure notes have been updated.
Update 2010/11
Our testing in 2010/11 identified that for
four of the fifty seven journals tested we
were unable to validate that appropriate
authorisation had taken place as the
original hard copy documentation had been
misplaced.
We reiterate our original
recommendation.
7
New Management response
North Norfolk District Council
November 2011
Original Finding /
recommendation
Original Management response,
action taken and further
recommendations
14) System access level to the
general ledger
Our review of general ledger user
profiles identified that the
Information Director has the capacity
to input journals, this capacity is not
required for the specifications of the
role.
Agreed
We recommend that the Council
undertake a periodic review of
general ledger user access levels to
ensure they remain commensurate
with current roles and
responsibilities.
New Management response
There is a detailed process for gaining access to the system and also a
process for removing leavers so there should be no 'unauthorised' users
This information is not easily available in a having access to the system and both these areas are regularly reviewed.
system report that can be circulated to
Similarly the individual authorisation limits of users are reconciled to
managers for review. The formatting of the the authorised signatories lists so that where limits may have changed,
user roles data has taken longer to format
these are reflected on the system. The potential issue is that someone
than originally expected and therefore there may change jobs/responsibilities and these changes are not picked up
is a revised implementation date.
and reflected on the system ie they may move services and still be able to
see the codes for the old service which technically their access rights
should restrict.
Update 2010/11
No user review has been performed on the
general ledger (E-Financials) system in
A memo to managers will be re-issued and a review of existing users of
2010/11. This increases the risk of
the General Ledger will be completed by 31/03/2012.
unauthorised users having access to the
system.
We reiterate our original
recommendation.
15) A number of the Councils
team leaders have administrator
access to the Civica system; such
access is not required for their
current roles
Review of Civica and Comino
(housing benefit systems) user access
levels highlighted three team leaders
with full administrator access to the
Civica system. Discussion with the
Councils’ System Support Officer
highlighted these team leaders did
not require full administrator access
for their current roles.
Our discussions with management
8
Agreed
Access rights are being reviewed.
Certain access rights will be restricted to
two officers. For the purpose of annual
billing and year end it will be necessary to
reinstate them for that period to the two
additional officers.
When the service upgrades its back office
system this problem will be addressed
through a greater degree of flexibility
around access rights.
Update 2010/11
On reviewing access levels it was discovered
The Council continues to recognise the high levels of access provided to
some staff. As agreed in the last response we will continue to review this
and only where it is operationally necessary will access be granted at this
level. However it should be noted that the current system has limitations
in relation to access levels and the implementation of a new system
should improve this.
North Norfolk District Council
November 2011
Original Finding /
recommendation
Original Management response,
action taken and further
recommendations
also established that the system
support team does not undertake a
'formal' periodic review of
amendments to user profiles and
access levels, although the use of
Civica / Comino user access form acts
to ensure that user profile
amendments are subject to formal
authorisation.
that 8 members of staff have been given
system administration access to the Civica /
Comino system. Such a high level of access
is not necessary for all of these staff
members.
New Management response
We reiterate our original
recommendation.
The Council should restrict Civica
system profiles for team leaders to
ensure they do not have the ability to
edit and amend user profile setting.
In addition consider formalising and
documenting the process of the
quarterly review of Civica and
Comino user profiles undertaken by
the system support team.
Audit of the statement of accounts for the year ended 31 March 2010
16) Members Allowances
The Council maintains a detailed
listing of members’ allowances.
During our audit we reviewed this
listing and noted that it is continually
updated as changes to the level of
allowances payable to members
occur, for example as a result of a
change in role. However, a record of
these amendments is not maintained.
Agreed
Update 2010/11
A review of the members’ allowances
showed that an overpayment of £114.96 has
been made to a member. The overpayment
has occurred because of a lack of clarity
over the members’ role in June / July 2010.
We reiterate our original
recommendation and further
As a result, without a clear audit trail, recommend that in instances where
the process of verifying the accuracy overpayments to members are made
every effort is made to recover the
of payments, where a change has
overpayment.
occurred, becomes more difficult.
9
We continue to be vigilant and look to recover any overpayment as soon
as possible. A record of the changes in responsibilities and allowances
will be retained in future.
North Norfolk District Council
Original Finding /
recommendation
November 2011
Original Management response,
action taken and further
recommendations
New Management response
We recommend that a separate
members allowances listing is kept
for each year which documents any
changes in payments, showing the
historical rate and the rate going
forward.
Audit of the Statement of Accounts for the year ended 31 March 2009
17) Missing Lease agreements
The Council has a number of lease
arrangements which have no formal
lease agreement in place. Rental
income on such arrangements where
the Council acts as lessee total
£21,960.
Where the Council acts as lessor, the
total asset value leased to a third
party is approximately £430,100.
Without a formal lease agreement in
place, the Council cannot determine
the correct accounting treatment for
the leases. In addition, the Council is
subject to contractual risks associated
with the lease arrangements, for
example when disputes arise relating
to rental income due, which party is
responsible for the maintenance and
repair of the underlying asset, etc.
We understand that the Council has
drafted an action plan to address
known weaknesses associated with
10
Agreed.
Work has started on the action plan with
joint working between the property, legal
and finance departments.
From discussions with management we
understand that the action has been agreed,
and work in this area is ongoing.
We understand from management that of
the 75 leases (this excludes licences which
have all been reviewed) 67 have currently
been reviewed and action has been taken or
is in progress. The remaining eight will be
reviewed by 31 December 2010.
Update 2010/11
Our review of the lease register showed that
it is not being kept up to date.
Testing of a sample of 15 operational leases
showed that two leases ended before
31/3/2011 however the tenants remained in
the properties and continued to pay rent.
We recognise that the Council has
Management of leases continues to improve with earlier timescales for
renegotiation being adopted facilitated by the introduction of a new
Asset Management System.
North Norfolk District Council
November 2011
Original Finding /
recommendation
Original Management response,
action taken and further
recommendations
lease agreements. It is recommended
that responsible officers and
timescales are assigned to each
action. In addition, progress made
against the actions and targeted
timescales should be monitored on a
regular basis.
made significant progress in
addressing the weaknesses relating
to its lease arrangements however we
recommend that the process of
improvement is continued and
specifically the lease register is kept
up to date.
New Management response
With the implementation of
International Financial Reporting
Standards (IFRS) in 2010/11 (with
prior year comparatives needed in
respect of 2009/10) it is particularly
important that the Council addresses
current known weaknesses relating
to its lease arrangements as the
accounting treatment of leases under
IFRS is different to that under the
current UK accounting standards
applied by the Council.
18) Members Allowances
Total allowances paid to Members are
disclosed within the financial
statements. In addition, under
Regulation 26a of the Local
Authorities (Members Allowances)
(Amendment) Regulations 1995, the
Council must publish the total sum
paid to each Councillor during the
financial year. Due to the omission of
travel and subsistence claims from
the published figures, as well as the
Chairman’s allowance, the published
allowances were £8,669 lower than
those disclosed in the financial
statements. We understand that the
11
Agreed
The value of the amendment made in
2008/09 was not considered to be
significant and as such it was not deemed
necessary to re-publish the Member
allowances. We will continue to review the
process for accounting for Member
allowances in 2010/11.
Update 2010/2011
The Council is required to publish
information on member allowances
payments on its website. This has been
done however the amount disclosed is £302
less than disclosure in the accounts.
Agreed
North Norfolk District Council
Original Finding /
recommendation
November 2011
Original Management response,
action taken and further
recommendations
New Management response
published information was prepared
from the payroll system and did not
We reiterate our original
take into account these amounts that recommendation.
had been paid via the purchasing and
payables system (e.g. by invoice).
It is important that the Council
communicates accurate information
to the public, particularly when
fulfilling a statutory duty.
The Council should ensure that all
information, particularly that which
is published, is robustly scrutinised
to ensure it is accurate and complete.
In addition, the Council should
consider whether under Regulation
or, in the interests of openness, it
needs to re-publish the Member
allowances under Regulation 26a in
respect of the 2008/09 financial year
to ensure that the correct figures are
communicated.
19) Suspense Accounts
During our audit we identified a
number of suspense or holding
accounts which had not been cleared
to zero at the end of the financial
year. They contained amounts
relating to cash received for which the
Council had not yet identified to what
it related. These totalled over
£43,000.
Agreed
This suspense account relates to
unidentified income for which the main
items were subsequently transferred to the
relevant services in April. As part of the
closedown process an additional task will
be added in to review the balance on the
suspense account prior to the pulling the
overall outturn position together to ensure
where applicable relevant provisions can be
entered.
There is a risk that unless suspense
and holding accounts are cleared on a
Update 2010/2011:
timely basis, and before the
preparation of the accounts, that the The Council has a number of suspense
12
Review of suspense accounts is already included as an item on the
closedown timetable; balances at year end should only be minor and
justifiable.
North Norfolk District Council
November 2011
Original Finding /
recommendation
Original Management response,
action taken and further
recommendations
accounts will be misstated. A total
figure presented on an account can
also hide larger, more material
amounts that are netting off against
each other.
accounts with balances outstanding on
them as at 31 March 2011. The balance
totalled £7052.80.
We recommend that all suspense and
holding accounts are reviewed and
cleared on a regular and timely
basis. The balance should be zero at
year end for the preparation of the
accounts.
20) Netting off of debtors and
creditors
Debtor balances should not be off-set
against credit balances, and vice
versa, unless there is a right of off-set
(i.e. the debtor and creditor agrees
that the amounts can be off-set
against each other). We identified
debit balances of £2,500 and credit
balances of £5,300 that had been
incorrectly off-set. These were not
significant in total and so no
amendment to the accounts was
required. However, there is a risk
that, in future years, such off-setting
may become more significant.
We reiterate our original
recommendation.
Agreed
Due to the amounts no amendments will be
made to the figures within the Financial
Statements, further review will be carried
out as part of the 2010/11 closedown.
Update 2010/2011:
Whilst reviewing aged creditor reports we
noted a number of small debit balances
(totalling £2.8k) that had been incorrectly
netted off against creditors with no offset
right. These balances should therefore be
classified as debtors within the statement of
accounts.
We reiterate our original
The Council should ensure that no
recommendation.
debit or credit balances are off-set
against each other unless a formal
right to off-set is in place. To
facilitate this, officers should scan all
aged creditor and debtor listing as at
31 March to identify items that are
13
New Management response
Agreed
North Norfolk District Council
Original Finding /
recommendation
incorrectly off-setting (i.e. debit
balances within the creditors listing
and credit balances within the
debtors listing).
14
November 2011
Original Management response,
action taken and further
recommendations
New Management response
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