The item was introduced by Avtar Sohal (Grant Thornton), who advised the report followed the same principles as those that had been produced in previous years. The report had identified management override of controls and the valuation of Level 3 investments as being the most significant risks. However Avtar Sohal clarified it was not unusual for audits of local authorities to have management overrides flagged as an area of concern, as many would routinely make overprudent estimates to make their financial position look better. Additionally it was not unusual for Level 3 investments to be flagged as a risk, due to levels of financial information relating to them not always being readily available.
Regarding materiality, approximately £1.25million in mis-statements had been reported, which equated to around one per cent of the Fund’s total assets. Avtar Sohal said any errors above this figure would need to go into the Audit Findings Report. He said the Audit Findings Report was on track to be signed off before the statutory deadline, although the amount of work Grant Thornton was having to carry out in relation to audit requirements was increasing. He said if the report was delayed for any reason then Warwickshire County Council would be informed as soon as possible, after the Chair noted there had been previous instances of Council finance staff having to work late or at weekends to make sure the deadline was met.
Responding to a question from the Chair in relation to Level 3 investments, Avtar Sohal said checks were made in accordance with the appropriate guidelines and methodology. Responding to a question from Robert Zara, Avtar Sohal explained that some Level 3 investments were more subjective and did not correlate to stock market levels; for example, the value of a property that the Council might own was subject to market value data. He also explained that the use of the word ‘trivial’ to explain debts or mis-statements was an industry standard, even in cases where significant sums of money were involved. If an error was found then this would be raised and management at Warwickshire County Council would be given the opportunity to amend their financial statements. Grant Thornton had to decide what would be an appropriate level of triviality. Chris Norton (Strategy and Commissioning Manager - Treasury, Pension, Audit and Risk) said that an example of a Level 2 investment was one within a partnership such as Border to Coast, where the Council was not a shareholder but did have a share in the business.
Councillor Kettle said there had been a lot of press coverage about increasing inflation and interest rates. In particular, interest rates had risen significantly in a short period of time and Councillor Kettle said this would have a serious impact on the Pension Fund and the value of the Council’s portfolio. Councillor Kettle also stated his belief that the definitions for Level 2 and 3 investments should be more clearly defined in the Fee Letter, to allow people to have a better understanding of what was being audited and how the valuations might be reached. Avtar Sohal said inflation and valuations had been included in the Audit Findings Report as areas of significant risk. He said more detailed information on the different types of investment could be included within the Audit Findings Report, but felt it was not appropriate for it to be included in the Fee Letter.
Councillor Brian Hammersley asked if there was any information available as to the percentage of investments that were held in Levels 1, 2 and 3. Andy Felton (Assistant Director, Finance) said this could be circulated to members, along with descriptors of what each investment level entailed. Chris Norton said the majority of them would be in Level 3. Andy Felton said materiality needed to be separated from the remainder of the accounts, in order to provide a fairer and more accurate financial position.
Regarding the £2.2million overpayment that had been referred to in the previous meeting, Andy Felton said this was an authorised payment and, technically speaking, was not a debt or a write-off.
Councillor Kettle said it would be useful to have an understanding of the methodology used for valuing Level 3 investments. He said there had been issues with Grant Thornton’s staff resources in previous years due to the Covid pandemic and this had been understandable as it was a complex and unforeseen event. However Councillor Kettle stated his concern that potential reasons were already being put in place to explain why the deadline of 30 November could be missed. The Chair reminded members that an assurance had already been given by the auditor that the deadline would be met and Andy Felton said this would be delivered. Andy Felton said the valuation methodology was formulated by officers, who would then liaise with Grant Thornton and other investment partners to check the methodology was workable and the most appropriate way of progressing. Chris Norton said the governance arrangements were such that Council officers would look at the accounts in the first instance, and if a more detailed analysis was needed then this would be undertaken by Grant Thornton. Chris Norton stated that in the most recent financial year, more than £400million had been invested in private accounts.
Councillor Kettle said the instruction for the Fee Letter was broadly the same as last year’s, but said reference to inflation and interest rates as risks had not been included. There had also been changes to the portfolio, particularly the increase in the number of Level 3 investments. Andy Felton said that this fell within the scope of what Pension Fund officers were working on. Although inflation rates may change, this did not alter officers’ procedures and they would continue to make sure the valuation was in line with the accounting standards. Councillor Kettle said he would like to see more ‘personalisation’ included in the Fee Letter. Avtar Sohal said the Fee Letter needed to be approved by the Public Sector Audits Appointment, which was a national benchmarking exercise to ensure any fee increases were in line with the relevant standards.
Members unanimously agreed to approve the Annual Audit Plan and Fee Letter.