Agenda item

Consider the Annual Audit Reports from the External Auditor on various entities for review and scrutiny prior to Council approval.  (Reports to follow).

(a)       Scottish Borders Council Pension Fund 2022-23 Annual Audit Report; and

(b)       Audit Scotland Scottish Borders Council annual report

7.1       There had been circulated copies of the Scottish Borders Council Pension Fund 2022-2023 Annual Audit Report, Audit Scotland Scottish Borders Council annual report and associated covering letters.  The report summarised the findings from the 2022/23 annual audit of the Scottish Borders Council.  The key messages of the report included that Audit Scotland’s audit opinion on the annual accounts of Scottish Borders Council and its group were unmodified, which meant that the financial statements and related reports were free from material misstatements.  Adjustments had been made to the annual accounts as a result of the audit process.  The Council continued to balance its budget each year and operated within budget in 2022/23. Whilst facing significant financial challenges through inflationary pressures on pay and non-pay costs as well as demand on services, the Council continued to demonstrate sound financial management maintaining reserves in line with the long-term Revenue Financial Strategy.  There were appropriate and effective budget setting, financial management and monitoring arrangements in place.  Medium and longer-term financial plans reflected the Council’s strategic priorities and outcomes.  The Council plan outlined the Council’s vision for 2033 and elected members had shaped that vision.  The Council had elements of an effective performance framework but needed to ensure it could measure its performance against clearer outcome-based targets for the next ten years.  A Best Value Assurance Report on Scottish Borders Council was published in October 2019, containing seven improvement recommendations.  The Council had concluded these had been addressed.  Governance arrangements were appropriate and operated effectively.  There was effective scrutiny, challenge and informed decision making.  There was strong partnership working to meet the health and social care challenges facing the Scottish Borders.   The Council failed to comply with the statutory requirement for their significant trading operation, SBc Contracts to break even.

7.2       Mr Boyd presented the Scottish Borders Council 2022/23 Annual Audit Report and explained that overall materiality threshold for the annual audit was set with reference to gross expenditure, with the figure set at £250k.   There had been no material misstatements identified in relation to the valuation of land or buildings.  It was highlighted that the Council had one significant trading operation, SBc Contracts, and that under the Local Government in Scotland Act 2003 the operation was obligated to break even over a rolling three-year period.  SBc Contracts had reported an operating surplus of £1.299 million in 2022/23.  However, following technical accounting adjustments for IAS 19 Employee Benefits (including pensions), the final position was a deficit for 2022/23 of £75,000 for external works and a three-year cumulative deficit of £0.331 million.  Mr Boyd explained that this did not represent a material misstatement but did require work to change the recharging process in place.  Regarding the Pension ceiling asset, the unaudited accounts recognised the Council’s share of the pension scheme assets and liabilities in accordance with IAS 19.  During the course of the audit, management had engaged with the actuary to provide an actuarial valuation of the asset ceiling in accordance with IFRIC 14.  The information was not received during the course of the audit; however, the audit team had reviewed the actuarial assumptions and were satisfied that it was appropriate.  Mr Boyd highlighted that a judicial review had concluded that all Council assets built on Common Good land could not be considered as owned separately from the land they stood on and were therefore Common Good assets.  The Council had a number of operational assets which were on Common Good land, and it had been recommended that a formal agreement between the Council and Common Good funds was put in place for the use of the assets.  The issue was not unique to Scottish Borders Council.  It was highlighted that good financial management arrangements were in place, and that the Council operated within its budget for the year.  The Council continued to balance its budget each year and the level of reserves was in line with the long-term Revenue Financial Strategy.  There were appropriate and effective budget setting, financial management and monitoring arrangements in place.  Mr Boyd outlined that vision, leadership, and governance as well as best value had formed part of the wider thematic review of the audit.  Governance arrangements were appropriate and operated effectively and there was effective scrutiny and informed decision making.  The key aspects of the agreed action plan were presented, and Mr Boyd confirmed that management had agreed to the actions.

7.3       In response to a question regarding how progress against the agreed actions would be reported, the Director – Finance and Procurement explained that an operational action plan on how to deliver the outcomes would be drawn up and could be shared with the Committee.  Individual actions would have a responsible officer.  Regarding the Council’s under-borrowed position, Mrs Douglas explained that the Council set aside part of its revenue budget to pay back loans each year.   Revenue reports and balances were reported quarterly, with a view to adding to the treasury reserve over two years.  It was confirmed that underspend from previous years would be used to smooth peaks and troughs in costs associated with borrowing.  Mrs Douglas confirmed that on the advice of treasury advisors the Council had sought to borrow on the short term throughout 2022/23 due to the high rate of interest.   In response to a question regarding comments received at the Pension Fund Committee meeting regarding the annual accounts, Mrs Douglas explained that there had been recognition that whilst the Fund’s assets had reduced in value in 2022/23 there had also been a decrease in the liabilities of the fund by a greater amount.  That was expected to result in a better funded position.  The triennial valuation by the actuary would confirm the Fund’s funding position as at 31 March 2024.   In response to a question regarding the operating deficit of SBc Contracts, Mr Boyd explained that due to the IAS19 pension liability and internal recharges the entity was deemed an internal service.  Mrs Douglas explained that the work of Audit Scotland had concluded that when SBc Contracts staff were carrying out work on behalf of SBC, there was an obligation for SBC to recognise that they worked for the Council.  The Chief Executive confirmed that the deficit referred to in the report was a combination of accounting adjustments for pension and holiday pay not taken.  In response to a question regarding Mr Boyd’s outlook, Mr Boyd outlined that all Local Authorities faced different, unique challenges.  Financial challenges were common to all Local Authorities across Scotland.  Scottish Borders Council appeared to be operating with an understanding of their environment and how they needed to change and use technology to ensure that it was sustainable and could continue to deliver services.  In response to a question regarding the funding position of the Pension Fund, the Chief Executive confirmed that whilst the value of assets had fallen, the overall liabilities of the Fund had fallen by a greater degree.  Discussions would take place with the Actuary regarding the level of funding position to maintain following the completion of the valuation.  In response to a question regarding the recommendation to put in place formal agreements governing the use of Common Good assets, Mrs Douglas confirmed that the focus of such agreements would be the use of buildings.  The Director – Corporate Governance highlighted that a school building in Peebles was located on Common Good owned land, and that school therefore belonged to the Common Good as a matter of law.  Municipal use of the building would continue, and a full agreement would be put place.  Mrs McKinlay explained that there was not expected to be a financial benefit to the Common Good Funds of the formal agreements.  The Director highlighted that whilst Common Good Funds are separate legal bodies to the Council, the Council met operational costs and did not charge for the administration of the Funds.  In response to a question regarding changes made to the management commentary of the statutory external audit process, Mrs Douglas explained that no material changes had been made.  Minor alterations had been undertaken, largely to improve comprehensibility.  Mr Boyd confirmed that in respect of management commentary the audit was complaint with the requirements of the code.  In response to a question regarding updates on action plan actions, Mrs Douglas undertook to provide updates as they became available.  The Chair highlighted that in regard to the Best Value action agreed in December 2019 in response to the Best Value Assurance Report, a further best value report had been circulated with the annual audit report.  Mrs Douglas confirmed that an action plan formed part of the new report.  The Chair confirmed that she was happy for the previous actions related to best value to be marked as complete, with the new plan to supersede that.   

DECISION

(a)        NOTED the Annual Reports from the Council’s External Auditors prior to Council approval; and

(b)       AGREED to request updates from the Director – Finance and Procurement on progress against the agreed actions in the Action Plans from within the SBC 2022/23 Annual Audit Report and the Best Value thematic report.