Clackmannanshire Council
Report on the 2006-07 Accounts Audit
27 September 2007
Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Contents
Contents
Section
Grant Thornton UK LLP
Page
Executive Summary
3
Detailed Findings
4
Appendix A – Action Plan
11
Appendix B - Summary of Accounting Adjustments
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Executive Summary
Executive Summary
Introduction
We have audited the financial statements of Clackmannanshire Council (the Council) for the year ending 31
March 2007. This report sets out our key findings and discharges our responsibilities under ISA260 - reporting
matters arising from our audit to those charged with governance.
Key findings
We expect to give an unqualified opinion on the financial statements of the Council for 2006-07.
Our audit identified a number of adjustments to the Council's draft accounts. The combined impact of these
adjustments is to reduce the reported deficit in the Council's draft accounts from £11.688 million to £10.721
million in the revised accounts.
The key recommendations arising from our financial statements audit are that the Council should:

improve its financial management and planning arrangements to ensure it has sufficient resources to meet
both unforeseen circumstances and the significant long term financial commitments associated with the
implementation of the Three Schools PPP Project, Scottish Housing Quality Standard, and single status and
equal pay settlements;

ensure all planned income and expenditure is incorporated within the Council's annual budget presented to
members for approval;

develop a policy for managing future consultancy and advisory costs to ensure an adequate balance of risk
is achieved between the supplier and the Council;

seek authorisation from the Scottish Government to apply capital receipts to the Three Schools PPP Project
before proceeding to implement its financing model; and

develop a policy for approving and submitting its draft accounts to the Accounts Commission, and for
ensuring appropriate scrutiny arrangements are in place prior to the accounts being signed and published.
Status of our Report
This report is part of a continuing dialogue between the Council and Grant Thornton UK LLP and is not, therefore,
intended to cover every matter which came to our attention. Our procedures are designed to support our audit
opinion and they cannot be expected to identify all weaknesses or inefficiencies in the Council’s systems and
work practices.
The report is not intended for use by third parties and we do not accept responsibility for any reliance that third
parties may place upon it.
Acknowledgements
We would like to take this opportunity to thank the Head of Finance, the Accounting and Budgeting Manager and
other staff who have been involved in this audit for their assistance and co-operation.
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
Detailed Findings
Introduction
In accordance with the Code of Audit Practice (the Code) we are required to audit the financial statements of the
Council for the year ended 31 March 2007. In auditing the financial statements, we give an opinion on whether:

they present fairly the Council's financial position as at 31 March 2007 in accordance with Part VII of the
Local Government (Scotland) Act 1973 (the Act) and the CIPFA 2006 Statement of Recommended Practice
(2006 SORP); and

the Statement on the System of Internal Financial Control is consistent with the information we obtain
through our audit.
The 2006 SORP
The 2006 SORP introduced wide ranging changes to the presentation of local government accounts. These
changes are intended to improve the presentation and understanding of the accounts. Key changes include:

the replacement of the Consolidated Revenue Account with an Income and Expenditure account that reports
actual financial performance for the year;

appropriations to and from reserves are omitted from the Income and Expenditure account and are shown
separately in the Statement of Movement on the General Fund Balance;

the order of the financial statements has been amended, primarily to group together the primary statements,
including the Income and Expenditure account, balance sheet and cash flow statement.
In preparing the 2006-07 accounts in accordance with the new SORP, the Council has restated its 2005-06
accounts. This has resulted in the Council’s reported financial position for that year changing from a surplus of
£3.881 million to a deficit of £13.002 million. The increase in the deficit has been caused by implementation of
the 2006 SORP, but statutory adjustments ensure there is no overall impact on the Council's general fund
position.
Matters Arising
Under ISA260, we are required to communicate certain matters arising from the audit to those charged with
governance. This function is discharged by the Council's scrutiny committee who have received a copy of this
report. The areas considered are summarised in the table below:
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
Area
Key Messages
Independence and objectivity
We are able to confirm our independence and objectivity as auditors and note
the following:
of the audit team
Quality of the Accounts

we are independently appointed by Audit Scotland;

we comply with the Auditing Practices Board's Ethical Standards; and

we have not performed any non Code or advisory work during the year.
The draft financial statements were presented for audit on 29 June 2007 in line
with the agreed timetable. The accounts and supporting working papers were
of a good standard.
The Council had good arrangements in place to deal with implementation of
the significant changes introduced by the 2006 SORP.
Approach to the audit
Our approach to the audit was set out in our 2006-07 audit plan. We have
planned our audit in accordance with International Auditing Standards and the
Code.
We have considered the materiality of items in the financial statements both in
determining the audit approach and in determining the impact of any errors.
During the 2006-07 audit, we reviewed the core financial systems in operation
at the Council for the purpose of relying on controls for our accounts opinion.
Our interim report has identified some improvement actions to strengthen
internal controls, but no material internal control weaknesses have been
identified.
Accounting policies and
practices
We consider that the Head of Finance has adopted appropriate accounting
policies in the areas covered by our testing, in accordance with the 2006
SORP.
The accounts record a large pensions deficit of £42 million which will be funded
from ongoing revenue expenditure. The Head of Finance has considered and
confirmed that the Council remains a going concern and will confirm this in the
Letter of Representation.
Material risks and exposures
The Council has considered and confirmed that it has no material risks and
exposures which should be reflected in the financial statements and the Head
of Finance will confirm this in the Letter of Representation.
Audit adjustments and
unadjusted errors
We have identified several disclosure amendments and reclassifications to
improve the presentation of the accounts.
The total value of revenue adjustments made to the accounts was £1.5 million.
The net impact of these adjustments is to increase the General Fund balance
by £0.54 million. There are no unadjusted differences to report.
A full summary of adjusted and unadjusted differences is included at Appendix
2.
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
The key matters arising from the audit are:
Financial position
The Council's Income and Expenditure account records a deficit for the financial year of £10.6 million (£13 million
deficit in 2005-06). At the financial year end, the Council held usable revenue reserves of £10.7 million (£10.5
million 2005-06) representing 11% of net operating expenditure. The Council has earmarked £2.8 million of its
£3.8 million general fund balance for specific purposes, leaving only £1 million available to fund unanticipated
expenditure. The Council's reserves policy is to retain a minimum revenue balance of £1.8 million for unplanned
expenditure and unforeseen events, and the current low level of reserves, therefore, presents a significant risk
that financial plans will not be achievable.
Refer action plan point 1
Financial Management and Budgetary Control
The Council's accounts record a decrease in the general fund balance of £0.1 million which broadly meets its
budgeted expectation that the general fund would decrease by £69,000 over the financial year. This outcome
was only achieved following a number of audit adjustments to the draft accounts, without which the Council's
overspend would have been significantly higher than reported.
The Council did not include £1 million of advisors fees relating to the Three Schools PPP Project in the budget in
its 2006-07 budget and Council departments overspent their budgets by £0.5 million. These increased costs
were offset by £0.8 million of interest earned on revenue balances. This Council's overspend would have been
significantly higher had interest rate and market movements not delivered this windfall.
The exclusion of PPP advisor fees from the Council's budget represents a significant weakness in the Council's
governance and financial reporting arrangements. All planned costs should be transparently reported to
members, especially those relating to significant and complex projects.
Refer action plan point 2
The Council had difficulty controlling the overall cost for financial advice for the PPP Project and the contract was
awarded on the basis of open ended day rates. This meant that the Council bore the majority of the contractual
risk should the project be delayed or negotiations become more complex than anticipated.
Refer action plan point 3
Three Schools PPP Project
In response to the Council's request for our comments on the reasonableness of its provisional view on the
proposed accounting treatment of the Three Schools PPP Project (the Project), we confirmed on 6 March 2007,
that we were not minded to challenge the view that, in applying the Treasury Task Force guidance, the newly
created assets should be accounted for as off the Council’s balance sheet. This means that Project transactions
will be accounted for as revenue expenditure in the Council's accounts following construction of the schools.
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
The Council plan to make a significant capital contribution of £16m to the Project funded from capital receipts,
once the initial construction phase has been completed. This contribution will be made in exchange for a lower
unitary charge over the life of the Project and is non refundable.
The 2006 SORP, which sets out proper accounting practice, requires capital receipts to be credited to the usable
capital receipts reserve which is operated under powers provided by Schedule 3 of the Local Government
(Scotland) Act 1975 (which provides for a capital fund). The capital fund can only be used to fund capital
expenditure or loans fund repayments.
Under current local government financing regulations, the Council cannot apply capital receipts to a revenue
purpose. We have, therefore, recommended that the Council seek formal authorisation from the Scottish
Government to apply capital receipts to the Project before proceeding to implement its existing financing model.
In addition, the Project is planned to be part funded from above inflation increases in council tax over the life of
the project. The Scottish Government has recently announced an intention to replace council tax with a form of
local income tax and is seeking agreement from councils not to increase council tax levels for 2007-08. This
approach, if implemented, may have significant funding consequences for the Council.
Refer action plan points 4 & 5
Scottish Housing Quality Standard
The accumulated balance on the Housing Revenue Account (HRA) was £6.4 million at the year end. The
Council has been increasing its HRA reserve balances in recent years following its decision on 8 December 2005
to retain all housing stock and meet or exceed the requirements of the Scottish Housing Quality Standard
(SHQS) by 2015 from its own resources.
The Council has undergone a detailed process to assess how it will meet SHQS, but has not yet approved its
business plan to formalise how it will achieve this policy objective. This increases the risk that the Council will not
have sufficient resources available to fully upgrade its housing stock by the 2015 deadline set by SHQS.
Refer action plan point 6
Devolved School Management
Under the terms of the scheme of devolved management to schools and services within education, the Council
has earmarked a portion of general fund reserves, representing the devolved budget carried forward each year.
The balance at 31 March 2007 is £1.2 million following net increases to the fund since 1 April 2003 when the
reserve balance was £0.5 million.
The Council should bring forward spending plans to ensure that this fund is used for the purposes intended and
for the benefit of local education services.
Refer action plan point 7
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
Trading Operations
The Council's trading operations have all met their financial target to break even over a rolling 3 year period as
shown in the Table below:
Trading Operation
Property Contracts
Annual Target
Surplus
£'000
250
2006-07 Surplus
£'000
3-Year Surplus
£'000
82
447
80
212
379
330
294
826
Environmental and Engineering Contracts
Overall Position
The Property Contracts trading operation has a target to achieve a surplus of £0.25 million annually, but has not
achieved this target for each of the last 3 years. The Council should review its performance expectations in light
of the recent financial performance of this trading operation.
Refer action plan point 8
Council Tax Debtors
The Council records significant council tax debtors of £8.7 million in its accounts with approximately half of this
balance relating to debts which have been outstanding for over 5 years. The Council has provided for £5.5
million of this debt, calculated on the basis of 3.5% or 3% of income for each year. The methodology used by the
Council has not, however, been based on a recent assessment of the pattern of collection for council tax debts or
of likely recoverability, and does not take account of the age of the debt.
The Council should undertake a review of council tax debtors to assess likely recoverability based on size and
age of debt, and past collection performance, to ensure bad debts are sufficiently provided for within the
Council's accounts.
Refer action plan point 9
Fixed Asset Register
During the financial year, the Council identified two buildings in its ownership that had not been recorded within
the asset register. This has resulted in an understatement of fixed assets in prior years, and a lack of
maintenance planning for these buildings.
Refer action plan point 10
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Detailed Findings
Accounts Presentation
The 2006 SORP requires the Council's accounts to be presented in compliance with the requirements of
BVACOP. Our audit identified some presentation differences between the Council's draft accounts and the
required BVACOP presentation as outlined below:

the draft accounts were adjusted to remove the 'Other Operating Income and Expenditure' line from the
Income and Expenditure account and to re-allocate the £1.4 million of expenditure and £1 million of income
across other Council services;

there is no requirement for separate disclosure of capital grants not matched to fixed assets and for some
surpluses on trading undertakings in the Income and Expenditure Account, and therefore, £74,000 of
income recorded on these lines has been apportioned to the relevant service;

the Contribution from the provision for doubtful debts of £0.2 million recorded within the Income and
Expenditure account has also been removed and apportioned to the relevant service; and

a number of other minor presentation amendments were made to improve the overall presentation of the
financial statements.
Refer action plan point 11
Accounts Clearance Process
Local authority draft accounts are required to be signed and submitted to the Accounts Commission by 30 June
each year. The Accounts Commission review the accounts and provide approval for them to be advertised and
subject to public inspection. The Council submitted draft accounts on 29 June 2007 in accordance with the
statutory deadline.
There is, however, no formal approval process for submission of the draft accounts and this increases the risk of
error in the draft financial statements. In addition, scrutiny committee meetings where not scheduled to receive
the draft accounts for approval, or to receive and review the external auditor's report on the draft accounts or the
report from the Chief Internal Auditor on the systems of internal financial control. This represents a weakness in
overall governance arrangements.
The Council should develop a policy for approving the annual financial statements covering:

arrangements for either the scrutiny committee or full Council to review and approve the draft accounts prior
to submission to the Accounts Commission;

timetabling of meetings to ensure the external auditor has an opportunity to communicate audit matters to
the scrutiny committee, in accordance with the requirements of ISA260, in advance of the accounts being
finalised;

arrangements to ensure the scrutiny committee has an opportunity to review the finalised accounts and
Statement on the Systems of Internal Financial Control, together with the relevant internal and external
audit reports, prior to approval of the accounts for signing;
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Detailed Findings

arrangements for the scrutiny committee to provide an annual report to the full Council outlining its work
during the year and its key findings and recommendations, including recommending approval of the
financial statements for signing; and

arrangements for publication of the signed accounts in accordance with the requirements of the Local
Government (Scotland) Act 1973.
Refer action plan point 12
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Appendix A – Action Plan
Appendix A – Action Plan
No
Finding
Priority
Recommendation
Management Response
Responsible
Officer
Implementation
Date
High
The Council should ensure it has sufficient
reserves available to fund both existing
commitments and unforeseen
circumstances.
Agreed. Steps will be taken during the
next few budget cycles to replenish
reserves to an adequate level.
Head of Finance
March 2010
Financial Position
1
At 31 March 2007 the Council had only
£1 million of reserves which had not been
earmarked to fund existing commitments.
This does not meet the policy
requirement to retain £1.8 million of
unearmarked reserves.
The current level of the Council's
unearmarked reserves presents a
significant risk that financial plans will not
be achievable.
Financial Management and Budgetary Control
2
The decision not to include significant
elements of expenditure within the
Council budget represents a significant
weakness in governance and financial
reporting arrangements.
High
The Council should, in future ensure all
planned income and expenditure is
incorporated within its annual budget
presented to members for approval.
Agreed, although these costs were
regularly monitored during the year
Head of Finance
April 2008
3
The Council had difficulty controlling the
overall cost for financial advice for the
Three Schools PPP Project and the
contract was awarded on the basis of
open ended day rates.
High
The Council should develop a policy for
managing consultancy and advisory costs.
In particular, the Council's contracting
arrangements should ensure an adequate
balance of risk is achieved between the
supplier and the Council.
Agreed
Head of BITS
April 2008
This meant that the Council bore the
majority of the contractual risk should the
project be delayed or negotiations
become more complex than anticipated
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The Council should only enter into day rate
contracts for advisor's services on an
exceptional basis and with appropriate
safeguards to manage total project costs
within agreed budgets.
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Appendix A – Action Plan
No
Finding
Priority
Recommendation
Management Response
Responsible
Officer
Implementation
Date
Three Schools PPP Project
4
Under current local government financing
regulations, the Council cannot apply
capital receipts to a revenue purpose.
High
The Council should seek authorisation
from the Scottish Government to apply
capital receipts to the Three Schools PPP
Project, before proceeding to implement
its financing model.
Agreed. There seems to be a general
anticipation that these projects will
eventually feature on Councils’ Balance
Sheets, but in the meantime the
Scottish
Government
will
be
approached
Head of Finance
March 2008
5
The Scottish Government has recently
announced an intention to replace council
tax with a form of local income tax, and is
seeking agreement from councils to not
increase council tax levels for 2007-08.
This approach, if implemented, may have
significant funding consequences for the
Three Schools PPP Project.
Medium
The Council should review its funding
model and affordability assumptions for
the Three Schools PPP Project should a
change in local government finance
arrangements be agreed.
Agreed. The funding model will be
reviewed, but with several other
Councils in the same position we await
advice from the Scottish Government
about how these commitments are
going to be financed.
Head of Finance
March 2008
Medium
The Council should formalise its business
plan to demonstrate how it will achieve its
policy objective to meet and exceed the
SHQS standard by 2015.
Agreed.
Business Plan will
submitted to Council for approval
Head of Housing
December 2007
Medium
The Council should bring forward
spending plans to ensure that this fund is
used for the purposes intended, and for
the benefit of local education services.
Agreed.
Head
Education
April 2008
Scottish Housing Quality Standard
6
The Council has undergone a detailed
process to assess how it will meet the
Scottish Housing Quality Standard
(SHQS), but has not yet formalised and
approved its business plan to
demonstrate how it will achieve this
policy objective.
be
This increases the risk that the Council
will not have sufficient resources
available to fully upgrade its housing
stock by the 2015 deadline set by SHQS.
Devolved School Management
7
The Council holds £1.2 million of
reserves devolved to schools for local
education projects. This balance has
increased each year since it was
established in April 2003.
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Appendix A – Action Plan
No
Finding
Priority
Recommendation
Management Response
Responsible
Officer
Implementation
Date
Medium
The Council should review its performance
expectations in light of the recent financial
performance of this trading operation.
Agreed
Head of Finance
March 2008
Medium
The Council should undertake a review of
council tax debtors to assess likely
recoverability based on size and age of
debt, and past collection performance, to
ensure bad debts are sufficiently provided
for within the Council's accounts.
Agreed.
Head of Finance
September 2008
Medium
The Council should review its fixed assets
register against the register of ownership
held by its legal department to ensure the
fixed asset register is fully up to date.
Agreed
Head of Finance
March 2008
Agreed
Head of Finance
March 2008
Trading Accounts
8
The Property Contracts trading operation
has a target to achieve a surplus of £0.25
million annually, but has not achieved this
target for each of the last 3 years.
Council Tax Debtors
9
The Council has provided for £5.5 million
of council tax debt, calculated on the
basis of 3.5% or 3% of income for each
year. This approach may not sufficiently
provide for potential bad debts.
Fixed Asset Register
10
During the financial year, the Council
identified two buildings in its ownership
that had not been recorded within its
asset register. This has resulted in an
understatement of its fixed assets in prior
years and in a lack of maintenance
planning for these buildings.
The Council should also circulate its asset
register to services and request
confirmation of its accuracy and
completeness.
Accounts Presentation
11
The Council's accounts required a
number of presentational amendments to
ensure full compliance with BVACOP.
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Medium
The Council should undertake a
supervisory review of its accounts prior to
submission to audit to ensure they are
presented in full compliance with the
BVACOP.
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Clackmannanshire Council - Report on the 2006-07 Accounts Audit
Appendix A – Action Plan
No
Finding
Priority
Recommendation
Management Response
Responsible
Officer
Implementation
Date
High
The Council should develop a policy for
approving and submitting its draft accounts
to the Accounts Commission and for
ensuring appropriate scrutiny
arrangements are in place prior to the
accounts being signed and published.
Agreed
Head of Finance
June 2008
Accounts Clearance Process
12
There is no formal accounts approval
process for submission of the draft
accounts and this increases the risk of
error in the draft financial statements.
Scrutiny committee meetings were not
scheduled to receive the draft accounts
for approval, or to receive and review the
external auditor's report on the draft
accounts or the report from the Chief
Internal Auditor on the systems of internal
financial control. This represents a
weakness in overall governance
arrangements.
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Appendix B - Summary of Accounting Adjustments
Appendix B - Summary of Accounting Adjustments
Adjusted differences
1.1
This is a summary of accounting adjustments processed by the Council following our audit.
Income & Expenditure
Balance Sheet
account
Dr
Cr
Dr
Cr
£000s
£000s
£000s
£000s
To accrue invoices for valuation certificates
172
172
received before the year end.
Fixed assets
Creditors
Unrecorded liabilities
Unspent Supporting People Grant
393
393
To re-classify unspent supporting people
Income
Creditors
Social Services Creditor
58
58
To adjust for an accrued invoice within social
Social Work
work accruals paid before the year end.
Expenditure
grant as a prepayment.
Other income and expenditure
Reallocation of 'Other income and
expenditure' to services as required by
373
373
Service
Other
Expenditure
income and
Other
creditors
expenditure
BVACOP.
Contribution to/(from) Provision for
227
227
Doubtful Debt
Service
Contribution
To remove ‘Contribution to/(from) Provision
Expenditure
to/(from)
for Doubtful debts line from the Income and
provision for
Expenditure account and apportion across
doubtful debt
services.
Government Department Debtors
288
288
To correct classification of an NDR debtor to
NDR Grant
Govt. grant
Government Debtor.
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Appendix B - Summary of Accounting Adjustments
Income & Expenditure
Balance Sheet
account
Dr
Cr
Dr
Cr
£000s
£000s
£000s
£000s
Salaries and Wages
88
88
To write off a balance relating to Valuation
Service
Creditors
Board tax insurance creditors.
Expenditure
Depreciation on Non-Operational
352
352
780
428
Investment Properties
Statutory
Depreciation
Accumulated
Fixed Asset
To remove depreciation charged on non-
Adjustment
Depreciation
Restatement
operational investment properties in
Reserve
accordance with the 2006 SORP.
352
Capital
Financing
Reserve
Disclosure Adjustments
TOTAL Adjustments
A number of disclosure adjustments have been agreed to
improve the clarity and presentation of the accounts that do not
affect the reported financial position. Material adjustments to the
accounts included:

correction of a £0.1 million transposition error on the
Environment and Engineering Contracts trading account;

the inclusion of an additional contingent liability note (Note
31) to record the potential costs associated with the
implementation of single status; and

additional disclosure, within the Foreword, of the Council's
involvement in the Stirling-Alloa-Kincardine rail link.
952
1,491
1,779
1,240
The net effect of these adjustments is to increase the Council's general fund for the financial year by £0.539
million.
There are no unadjusted differences to report.
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