London Borough of Waltham Forest: the local authority that can’t even finalise its annual accounts (3)

The saga of LBWF’s failure to complete its 2018-19 accounts – originally due, as for all other local authorities, on the last day of July 2019 – continues, and indeed seems to have no very clear end in sight.

What’s gone wrong? Recent papers to the LBWF Audit and Governance Committee provide some elucidation.

Initially, it appears, LBWF could legitimately claim that it was being thwarted by external circumstances, and long before those caused by COVID-19.

First, following statutory guidance, LBWF recently had changed auditors, with the incumbent, EY (Ernst & Young), adopting a somewhat different approach to its predecessor, KPMG. Second, official deadlines had been tightened, so there was less time to complete. Third, in the light of various recent accounting scandals, the relevant regulator (the Financial Reporting Council) was attempting to drive up standards everywhere, meaning that even in the public sector auditors were required to demonstrate greater professional scepticism when carrying out their work, of course time consuming. And, fourth, there continued to be ‘a shortage of appropriately skilled and experienced auditors across the audit sector’, which meant that those employed by EY were often stretched.

Little wonder, then, that in mid-2019 LBWF was far from alone in being tardy: indeed, on deadline day, nearly half of all local authority year end accounts allegedly remained unfinished.

However, over the following months, it became clear that external factors were not the whole story, and LBWF’s problems in part were self-inflicted.

For as EY’s audit work proceeded, so problems with LBWF’s working practices and records began to surface, many ‘complex’, ‘some going back a number of years’, and cumulatively these demanded ‘material amendments being made to the draft financial statements’, together with ‘prior period adjustments’.

To illustrate, EY discovered that LBWF’s had long valued its council dwelling portfolio using an ‘incorrect application’ of the required methodology; and in addition had been relying upon a fixed asset register which was marred by ‘significant errors’, including ‘duplicate records for the same asset and assets that were no longer controlled by the Council, such as schools that transferred to academy status over 10 years ago’.

Lurking in the background, as LBWF now admitted, were ‘significant control weaknesses’ which urgently needed addressing.

Finally, at a more prosaic level, it also was apparent that, when responding to EY, LBWF had produced working papers of only ‘varied’ quality, which ‘in turn added to the audit overrun’.

Thus, by mid-2020, LBWF’s earlier get-out clause – that many other local authorities were going through similar travails – was far less convincing; and in fact it now found itself part of a small group of laggards, perhaps 12 per cent of all local authorities, which still had not signed off their 2018-19 accounts.

As of today, LBWF’s apparent intention is to present a finished version of the 2018-19 accounts at the next Audit and Governance Committee meeting, scheduled for January 2021.

Nevertheless, there are several possible flies in the ointment. For example, as part of its remit, EY needs to deliver a value for money conclusion (i.e. certify that LBWF ‘has put in place “proper arrangements” to secure economy, efficiency and effectiveness on its use of resources’).

Yet as of September 2020, EY was still worried by a couple of substantial risks, one of which was ‘the establishment and governance of [the council’s] companies’. And given that some councillors have already expressed concern about exactly the same issue, clearing this hurdle may yet prove troublesome.

The knock-on impact of the saga, too, threatens difficulties. Because of the pandemic, the government now expects local authorities to finalise their 2019-20 accounts by the end of November 2020. However, the Audit and Governance Committee has already been warned that ‘subject to the conclusion of the 2018-19 accounts and other client commitments’, EY is unlikely to begin 2019-20 audit work before January 2021, so it looks as if a repeat of the earlier slippage has already begun.

Last but not least, there is the question of what this episode has cost the public purse. In September 2020, EY warned that, because of the ‘further issues and risks’ that had been identified ‘throughout the audit’, it would be seeking ‘a significant increase on the base scale fee’, the latter set at £128,736.

In addition, LBWF has needed to hire a good number of extra staff, including a new valuation team, and officers ‘with experience of dealing with similar issues at other local authorities’.

Whichever way it is looked at, the 2018-19 audit has not been a happy story.