APPENDIX 1
AUDIT OF ACCOUNTS 2000/2001
FINAL ACCOUNTS MEMORANDUM
Introduction
1. The Audit Commission Act 1998 and the Code of Audit Practice require the external auditors
to give an opinion as to whether the statement of accounts presents fairly the financial
position of the Council and its income and expenditure for the year in question.
2. We gave an unqualified opinion on the 2000/01 accounts on the 20 December 2001. However,
during 2000/01 the Council planned to use a £13.6m capital receipt from the sale of Salford
Precinct to finance its capital programme. The completion of the sale was delayed until the end
of May 2001, which meant that, a significant part of the capital programme was unfinanced at
the year end.
3. The capital regulations make it clear that the Council is only able to incur capital expenditure in
so far as it has the necessary ‘credit cover’ which includes capital receipts. The 2000/01
accounts therefore do not comply with these regulations and we have referred to this failure in
our opinion.
Main conclusions
4. The Council is required to prepare and approve its accounts by the end of September each year
but this year the accounts were not approved by Council until 21 November 2001. A new
financial ledger was introduced in April 2000 and this hampered the closedown because of the
extra time needed by officers to familiarise themselves with the revised system. In addition
there were some delays in concluding the Education Directorate’s accounts due to a combination
of staffing problems and the need to resolve several long standing issues. We understand that
the Council sees this delay as a ‘one off’ and intends to produce the statements by the required
deadline in future.
5. On the whole the working papers produced for audit were of a good standard. However, there
was a problem with the timeliness of some of the supporting documents as they were not
available at the start of the audit and had to be produced on request. In order to help with
the smooth running of the audit and to provide a clear trail a comprehensive set of working
papers should be provided at the same time as the accounts.
6. Our audit highlighted two significant issues that need to be addressed by the Council. These
are the need to:
 carry out regular reconciliations throughout the year
 increase the bad debts provisions so that they accurately reflect the level of arrears
outstanding
7. We have raised both these issues on previous occasions. With regard to reconciliations we
found that a number of key accounts such as the bank and payroll control account were only
reconciled once, at year end, as part of the closure process. Clearly these need to be reconciled
regularly throughout the year so that any potential problems can be identified at an early
stage. There are plans to improve the timeliness of reconciliations in the future.
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8. In the case of bad debts, the provisions for both council tax and sundry debtors need to be
reviewed against the individual debts outstanding to ensure that they are sufficient. The
Council had already estimated that the council tax bad debts provision was inadequate and
planned to make up the shortfall by declaring a collection fund deficit of £550,000 for five
years. However we estimate that the gap is widening and that a bigger annual provision is
needed. With regard to general debtors, the City Council has agreed to review the 2001/02
outturn to determine whether there is scope to make an additional contribution to the sundry
debtors provision.
9. Our audit also highlighted several other issues most of which are straightforward clerical or
accounting errors that can be corrected in future years. However one issue relating to intra
authority debtors and creditors could ultimately impact on the revenue account.
The way forward
10.The detailed findings from our audit are outlined in the remainder of this report. Attached
at Appendix 2 is an agreed Action Plan for taking our recommendations forward.
Detailed findings
Control accounts
11.In order to ensure that the entries in the ledger are complete, they are usually structured in
such a way that creditor and debtor balances are held in numerous control accounts, each of
which should be reconciled to independent evidence. During the audit we found that some of
the control accounts, including cash, had only been reconciled once at year end as part of the
closure process. Furthermore a number had not been reconciled frequently in the new financial
year. As outlined in our interim audit memorandum, regular reconciliations should be carried out
throughout the year so that any potential problems can be identified and addressed at an early
stage.
12.In addition to the problem of frequency we found that some control account reconciliations
contained unexplained balancing items. Whilst in most cases these were relatively small, it is
important that they are investigated and cleared so that the imbalance does not remain on the
account indefinitely. The following reconciliations contained unexplained imbalances:
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housing rents system to rent debtor (£8,854)
cash received in the council tax system to the receipting system (£29,000)
cash received in the NNDR system to the receipting system (£90,000)
13.The reconciliation of the payroll control account showed that although the year end balance
was correct, there had been an unexplained entry during the year. A national insurance rebate
of £389,000 was expected to be on the account but was not included in the year end figures.
This indicates that this amount had either been credited directly to revenue or had been
reduced by an unidentified debit to the control account. We recommend that this anomaly is
investigated further as it is likely to have on-going implications for the Authority.
14.Last year we highlighted the problem of an imbalance of approximately £500,000 between
internal debtors and creditors. The imbalance had not been investigated as part of the 2000/01
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closedown although we understand that work on this issue is currently on going. The Authority
also plans to exercise greater control over internal invoices from 2002/03 to ensure that they
are paid promptly. It is important that, once the current problem is resolved, intra directorate
debtor and creditor balances are agreed prior to being netted off in the accounts.
RECOMMENDATIONS
R1 All balance sheet control accounts, including cash, should be reconciled on a regular
basis.
R2 Unexplained balances on control account reconciliations should be investigated and
cleared.
R3 The unexplained entry on the payroll control account should be investigated further.
R4 All intra directorate debtor and creditor balances should be agreed prior to being
netted off.
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RESPONSE
R1 An exercise is being carried out to review all control accounts that are necessary to
guarantee the integrity of the accounting system. This review is being focused on: Control account requirements
 Method of posting to the account
 Frequency of reconciliation
 Officer responsible for reconciliation
 Reporting requirements
It is intended that this report will be produced by the end of April 2002 and all
conclusions/recommendations will be implemented with effect from the 1 st May 2002.
There is no doubt that the major systems ie creditors, payroll and cash will be
subject to a monthly reconciliation.
Work is being carried out to establish the reason for the variation between the
housing rent system and the rent debtor, the implementation of the new SAFRON
rent accounting system should assist with the process.
R2 The analysis and reconciliation of cash income to individual fund accounts is not an
essential element as far as the integrity of the cash reconciliation exercise is
concerned but nevertheless it is agreed that fund reconciliations should be carried
out. The unexplained balances relate to the period before 31st March 2000 at which
time the responsibility for fund reconciliations was transferred to the corporate
services accountancy group.
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It has not been possible to allocate any time to investigating the balances because
of the problems in bringing the cash reconciliation process up to date but the
matter will be reviewed fully during the closedown of the accounts for 2001/02.
R3 As referred to in the responses to the interim audit memorandum an exercise is
being carried out to review all control accounts with a view to guaranteeing the
integrity of the accounting system.
In the case of payroll it is hoped to introduce a revision to the reconciliation
process early in the new financial year. This work is being treated as a greater
priority than investigating unexplained balances on the payroll account for 2000/01,
particularly as the the account was balanced overall at the end of the year
subject to a write-off to revenue amounting to £6,000. If resources become
available in the future, work will be carried out to establish the reason for the
apparent anomaly raised.
R4 Internal debtors and creditors have been a consistent problem over the last ten
years and more. During this period several exercises have been carried out and
have resulted in a considerable reduction in the amount of the imbalance. At
present the major element of the imbalance relates to transactions between schools and
and DSOs but it is hoped that this will be resolved by imposing a direct charge to
the schools involved.
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Work will continue in eliminating the remaining differences and a system will be
introduced to ensure that all internal debtors are matched by an equivalent internal
creditor.
Cash and bank
15.In addition to the problems with the timeliness of bank reconciliations mentioned above, we
found that the Council had numerous bank accounts containing small balances that were not
covered by the Council’s main bank reconciliation. One account, entitled Client Affairs Account
Imprest Number 2, contained a credit balance of £63,000. It is important that all bank
accounts are reconciled regularly and the year end reconciliations included with the final
accounts working papers. Furthermore there should be some central control over the opening of
bank accounts so that the Authority is aware of the overall position and is satisfied that all the
extra accounts are necessary.
RECOMMENDATIONS
R5 The numerous bank accounts outside the Council’s main bank account should be reconciled.
R6 Corporate Accountancy should exercise a central control over bank accounts to ensure
that:
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there is a central record of bank accounts
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all additional bank accounts are warranted
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regular reconciliations are carried out
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RESPONSE
R5 There are a significant number of bank accounts in addition to the four main authority
accounts. It is intended to review all of these accounts to establish responsibilities for
reconciliation purposes but this exercise has been held back until the cash reconciliation
process has been brought up to date.
During the course of the year the bank was instructed that requests to open new bank
accounts must be authorised by the Corporate Services Accountancy Group.
The Community and Social Services Directorate (CSSD) operates a number of bank
accounts in support of the services it delivers to Salford people. The responsibility for
reconciling these accounts is placed with nominated officers at establishments / teams
operating the accounts. Currently, although the accounts are reconciled on a regular
basis, the reconciliations are not formally notified to the CSSD Accountancy at the end
of the financial year.
The CSSD finance team will issue an instruction that all bank accounts should be
reconciled and that a record of the reconciliation will be required by the CSSD
accountancy team to form part of the Authority’s accounts.
R6 Please see answer to R5 above. The review referred to will embrace the need and use
of the various bank accounts involved.
Debtors
16.As part of the final accounts audit we examined the adequacy of the various provisions for bad
debts. Based on the age and value of debt outstanding we estimate that the council tax
provision could be understated by as much as £3m and council tax court costs by as much as
£500,000. The Council has recognised that there is a need to increase the bad debts provision
and plans to do this by declaring a deficit of £550,000 on the collection fund for five years.
17.However the collection rate assumed for the collection of current and future year’s council tax
exceeds the actual collection rate currently being achieved. Unless collection rates improve
significantly the additional bad debts provision mentioned above may be insufficient and at the
end of the five year period we estimate that uncollectable debts could exceed the provision by
over £900,000. We therefore recommend that the Council considers making an additional
provision for these debts. We understand that an increased contribution of £1m for 2002/03
has been agreed as part of the budget setting process.
18.With regard to sundry debts there is £11.9m of debt outstanding against which there is a
provision of £2.3m. £5.2m of the outstanding debt is over twelve months old and based on the
work we carried out as part of our income collection audit, a significant amount of this older
debt is several years old.
19.We therefore have concerns that the provision for sundry bad debts is understated although
the exact level of this under provision will only be determined when a realistic assessment is
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made of the likelihood of recovery of each individual debt. We therefore reiterate the
recommendation from our income collection report that this exercise should be carried out.
20.During our audit we found that certain debtors included in the balance sheet could not be
substantiated. These included the:
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£300,000 debtor for extra district pupils
£889,000 debtor for ERDF grants
£21,154 in a suspense account (code 2192)
£5,614 described as unidentified
21.We also found that the reconciliation of grant debtors is not always done as a matter of course
and often has to be undertaken on request. We raised this concern in our earlier report of
grant claims and have found cases of the grant debtors in the account being incorrect when
reconciled to the claims. It is important that these reconciliations are carried out regularly
and certainly at year end, as they give an assurance on the accuracy of the accounting records.
RECOMMENDATIONS
R7 The bad debts provision for sundry debts should be based on the likelihood of recovery
of each individual debt.
R8 Unsubstantiated debtors should be reconciled to the underlying records and any
unexplained balances written off.
R9 Grant claim balances in the accounts should be reconciled on a regular basis throughout
the year and at year end.
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RESPONSE
R7 With effect from 1st April 2002 any accounts raised from September 2000 onwards
which become irrecoverable will be “charged back” to the respective directorate with
the outcome being that the call on the bad debts provision should reduce substantially.
Of the £11.9m outstanding £2.7m is in respect of internal debtors.
Procedures have been introduced whereby all debts raised before September 2000 are
reviewed to establish the likelihood of recovery and those debts which are considered to e will be
be uncollectable will be put forward to the Lead Member for Corporate Services for
write off against the bad debts provision.
The relatively low level of the bad debts provision has been acknowledged for several
years but budget constraints have prevented adequate contributions being made to the
provision. £0.3m, however, was credited to the provision during the final accounts
process in 2000/01 and an amount of £0.5m has been included as a contribution in the
revenue budget for 2002/03.
R8 £300,000 debtor for extra district pupils – new procedures have now been put in place
whereby debtors in relation to recoupment for extra district pupils will only be accrued
for on the balance sheet where evidence has been provided of pupil details.
£889,000 debtor for ERDF grants – over half of the balance relates to grant claims for
which the cash entitlement has not yet been received. A large proportion of the
remainder relates to items from earlier financial years and this is to be investigated as a
matter of urgency.
£21,154 suspense account – Agreed
This item will be cleared during the closure of the 2001/02 accounts.
£5,614 long term debtor – this item has been the subject of a full investigation but it has
not been possible to identify the details. As the amount relates to an accounting period
several years ago and in view of the value involved it will be written off in the 2001/02
accounts.
R9 Agreed – the reconciliation of all key control accounts on a monthly basis and of other
appropriate accounts quarterly (incorporating grant claims) is part of the accountancy
procedures, which have been in place for over ten years. The reconciliation procedures
were reissued to accountants during the last financial year and it is intended to keep the
matter under review.
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Creditors
22.The creditors system is now integrated into the new financial ledger system (SAP) and as a
result there was no listing of year end creditors to support the figure included on the balance
sheet. We recommend that such a listing is produced in future.
23.We also found that, as with debtors, some creditors on the balance sheet could not be
substantiated. These included the :
 £443,697 creditor for extra district pupils
 £163,000 described as unidentified income.
RECOMMENDATIONS
R10 The creditors balance on the financial ledger should be proved at least annually to a
listing of creditors.
R11 Unsubstantiated creditors should be reconciled to underlying records and any
unexplained balances written off.
RESPONSE
R10 The exercise referred to in Response No.1 will consider how this can be achieved.
R11 £443,697 creditor for extra district pupils – similar to unsubstantiated debtors – new
procedures have now been implemented whereby creditors in relation to recoupment for
extra district pupils will only be accrued for on the balance sheet where evidence has
been provided of pupil details.
The £163,000 described as unidentified income – this account is used to hold items of
income which cannot be identified. Credits are received during the course of each
financial year where there is insufficient information provided to establish where the
income should be posted. The account is subject to constant review throughout the year
when full information is obtained the credits are posted to the appropriate accounts.
Officers have no control over the balance in the account at any time because of the lack
sufficient information provided when the money is paid to the authority.
Fixed assets
24.The Code of Practice on Local Authority Accounting introduced a new requirement for all
assets, including council dwellings, to be depreciated in 2000/01. The council revalued its
dwellings at the end of the year and as a result, did not depreciate them. However, this
departure from the Code and an estimate of what the depreciation would have been were
disclosed in the notes to the accounts.
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RECOMMENDATION
R12 Council dwellings should be depreciated in future to comply with the Accounting Code of
Practice.
RESPONSE
R12 A full note on the reason for the non depreciation of council dwellings was included in the
statement of accounts. Dwellings will be depreciated in 2001/02 and asset values will be
adjusted accordingly.
Stock and work in progress
25.Within the accounts is £84,950 in respect of a provision for future losses on long term work
in progress. However, as there is no work in progress shown in the accounts, it is unlikely that
the provision will be needed. Furthermore the amount has been netted off stock in the balance
sheet rather than being shown as a separate provision.
RECOMMENDATION
R13 The need for the provision for future losses on work in progress should be assessed and
the correct accounting treatment of this balance adopted.
RESPONSE
R13 It is agreed that on the face of it the provision was not required but clearly it has been
retained as a hedge against future costs. It is a mute point whether the provision should
have been netted off stocks and work in progress or included with general creditors. It
would be wrong however to show this as a separate provision in view of the value involved.
Contingent Liabilities
26.The accounts disclose as contingent liabilities items which may fall due in the future contingent
on an event that the Council has no control over. The Council used to have insurance cover from
Municipal Mutual Insurance (MMI), a company that is now in administration. The administrators
of MMI still anticipate that there will be no liability for Salford arising from this cover.
However, there is still a small possibility that a liability of up to £5m will arise and this is not
disclosed as a contingent liability.
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RECOMMENDATION
R14 Consideration should be given to disclosing the MMI contingent liability.
RESPONSE
R14 Agreed – This matter will be considered during the final accounts process for 2001/02.
It is difficult to justify the inclusion of an amount in view of the fluctuation in the
figures quoted. It is pointed out that other local authorities generally omit the inclusion
of any amount.
Other statements
27.The format for disclosures in the accounts is set out in the Statement of Recommended
Practice for Local Authority Accounts (SORP) 2000. On the whole the Council complies with
the SORP although this year there have been some revisions to the presentational
requirements for the Statement of Total Movements on Reserves that have not been adopted
in the accounts.
RECOMMENDATION
R15 The SORP presentational requirements for the Statement of Total Movements on
Reserves should be adopted in the future.
RESPONSE
R15 It is acknowledged that the new requirements were not considered when the statement
was produced. Having said that it appears that very few other authorities have
implemented the requirements. On the face of it the revised presentation will take up to
three additional pages and this would seem to be unnecessary in view of the limited value
of the disclosures. Nevertheless the matter will be considered fully for 2001/2002.
Housing Revenue account
28.The Housing Revenue Account (HRA) is a separate statement in the accounts. During the audit
of the HRA we found that there were some small presentational discrepancies in the HRA
disclosures. These have been discussed with the Housing Accountant and will be corrected
next year. These include :
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incorrect disclosure of rent arrears as a percentage of gross rent income
incorrect calculation of the percentage of tenants receiving housing benefit
incorrect disclosure of the reimbursement of housing benefit
contributions to earmarked reserves netted off expenditure.
Trust Funds
29.The Council administers a number of trust funds and for the last three years, has been trying
to establish who the trustees of each fund are. Some progress has been made but there are
still a number of funds for which the Council does not have the required information. Until this
is established the Council cannot be sure that it is complying with the Accounting Code of
Practice and the Charities Act in their disclosures and audit regimes.
30.Under the Charities Act trust funds with annual income or expenditure of between £10,000
and £100,000 should be subject to an independent examination. The accounts show that three
funds fall into this category but two of these (Salford Children’s Holiday Camp and Pendleton
Trust) had not had an independent examination of the 2000/01 accounts at the time of our
audit.
31.Furthermore the statement of assets and liabilities for Salford Children’s Holiday Camp shows
that the Fund has land and buildings to the value of £431,500 although these have not been
included in the Fund value in the accounts.
RECOMMENDATIONS
R16 The Council should establish who the trustees of each fund are and subsequently ensure
that they comply with the Accounting Code of Practice and Charities Act in their
disclosures and the audit regime.
R17 Funds where income or expenditure falls between £10,000 and £100,000 should be
subject to annual independent examination.
R18 The value of the Salford Children’s Holiday Camp Fund should be examined to determine
whether or not land and buildings totalling £431,500 should be included.
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RESPONSE
R16 The Head of Law and Administration has drawn up a report on trust funds and this
information will be used in drawing up the accounts for 2001/02.
R17 The Salford Children’s Holiday Camp is subject to an independent audit by a member of
the City of Salford’s internal audit team. Unfortunately, at the time of the District
Audit examination the internal audit work had not been completed.
For 2001/02 procedures will be implemented to ensure an independent audit is carried
out by a member of internal audit both for the Salford Children’s Holiday Camp and the
Pendleton Trust prior to the completion of the final accounts.
R18 Investigations are currently being undertaken to establish the ownership of the land and
buildings at Salford Children’s Holiday Camp.
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Appendix 2
REF.
R1
RECOMMENDATIONS
PRIORITY
Control Accounts
All balance sheet control accounts,
including cash, should be reconciled on a
regular basis.
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R2
Unexplained balances on control account
reconciliations should be investigated and
cleared.
3
R3
The unexplained entry on the payroll
control account should be investigated
further.
3
R4
All intra directorate debtor and creditor
balances should be agreed prior to being
netted off in the accounts.
3
R5
R6
Cash and bank
The numerous bank accounts outside the
Council’s main bank account should be
reconciled.
2
Corporate Accountancy should exercise
a central control over bank accounts to
ensure that:
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there is a central record of bank
accounts
2
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all additional bank accounts are
warranted
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regular reconciliations are carried
out
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Debtors
The bad debts provision for sundry debts
should be based on the likelihood of
recovery for each individual debt.
R8
Unsubstantiated debtors should be
reconciled to the underlying records and
any unexplained balances written off.
3
R9
Grant balances in the accounts should be
reconciled on a regular basis throughout
the year and at year end.
3
R10
Creditors
The creditors balance on the financial
ledger should be proved at least annually
to a listing of creditors.
R11
3
2
Unsubstantiated creditors should be
reconciled to underlying records and any
unexplained balances written off.
3
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AGREED
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NOT
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TARGET DATE FOR
IMPLEMENTATION
2002/03
2002/03
Subject to resources
being available
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Already implemented
2001/02 Subject to
availability of funds.
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REF.
RECOMMENDATIONS
PRIORITY
R12
Fixed assets
Council dwellings should be depreciated in
future to comply with the Accounting Code
of Practice.
R13
Stock and work in progress
The need for a provision for future losses
on work in progress should be assessed and
the correct accounting treatment of this
balance adopted.
R14
R15
R16
Contingent liabilities
Consideration should be given to disclosing
the MMI contingent liability.
Other statements
The SORP presentational requirements for
the Statement of Total Movements on
reserves should be adopted in the future.
Trust Funds
The Council should establish who the
Trustees of each fund are and subsequently
ensure that they comply with the
Accounting Code of Practice and Charity
Act in their disclosures and the audit
regime.
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R17
Funds where income or expenditure falls
between £10,000 and £100,000 should be
subject to an annual independent
examination.
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R18
The value of the Salford Children’s Holiday
Camp Fund should be examined to
determine whether or not land and
buildings totalling £431,500 should be
included.
2
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AGREED
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NOT
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TARGET DATE FOR
IMPLEMENTATION
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This will be reviewed
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accounts for 2001/02.
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