Agenda item

Paul Jacklin, External Auditor at Grant Thornton LLP, presented to the Committee and explained how the Council would be audited. Risks that would be examined would include management override, valuation of land and buildings, investment properties and pensions assets. In addition to this, the external audit would examine the change of financial system from SAP, overseen by Hampshire County Council, to Oracle.

The Committee also heard that materiality had been set at £16.3 million which was based on 1.9% of the Council’s gross cost of services expenditure in 2023/24.

However, the Committee was cautioned that this was the figure determined at the planning stage and may change as the external audit progresses.

The Council’s pension fund would be audited by a different team and materiality would be £22.5 million. A separate materiality would be determined for the pension fund accounts as the amount, when including assets, is less than £22.5 million but the liabilities are considerable and thus it would be audited.

The Chair invited the Committee to comment and ask questions on the report. Members of the Committee individually:

1.    Questioned Grant Thornton’s claim that it has obtained 100% from the Financial Reporting Authority (FRC) Audit Quality Inspection and Supervision Inspection. It was noted that Grant Thornton audited 20 Public Interest Enterprises (PIEs) whereas BDO, which scored 40%, audited 217 PIEs. Concern was expressed that the use of percentages could be misleading.

2.    Sought clarification on how Grant Thornton LLP determined estimates and valuations and the impact this can have on the audit.

3.    Noted that the audit fee for the 2024/25 audit would be £427,772 which was higher compared to the 2023/24 audit. However, a full breakdown had not been provided.

4.    Drew attention to the materiality amount and asked how this would affect the audit especially in relation to work undertaken. Attention was also drawn to the report’s reference to ‘performance materiality’ of 70%. The Committee felt this was not clearly defined and questioned why performance materiality would be considered when auditing the Council’s accounts, but not when auditing the Council’s pension fund.

5.    Discussed the Housing Revenue Account (HRA), the challenges that it faced and how the audit would apply.

6.    Examined the audit strategy relating to Oracle, noting that Grant Thornton would limit its audit to the transfer of data from the old system to the new. It was observed that the external audit would not include the testing of the Oracle system itself, which raised concern that issues with Oracle may not be detected.

7.    Highlighted that Grant Thornton will, as part of its own audit, include audits by third parties. The Committee questioned how Grant Thornton  will be able to confirm that third party audits have been conducted correctly and the conclusions appropriate to the Council.

8.    Noted that Grant Thornton’s report was not easily accessible; attention was drawn to the font size which made reading difficult and the considerable use of colour was not necessary.

9.    Expressed concern that the Council intended to take a pension fund employer contribution holiday, noting that this decision went against actuary management advice. The Committee noted that this was a material change, and that it would have been more constructive to discuss the proposal in advance of the Investment Committee’s meeting.

The Committee heard that:

1.    Grant Thornton LLP had improved in recent years having previously recorded a lower score. Quality measures had been changed and greater specialisation undertaken. Reference was made to the Institute of Chartered Accountants of England and Wales which also rated Grant Thornton LLP highly. Following the Committee’s concerns, Grant Thornton would amend the way it presented the data. 

2.   The Council provides valuation reports as part of the audit. Grant Thornton’s own valuers will review these reports and challenge the Council’s valuations where they conclude that it is justified. Where Grant Thornton and the Council disagree over a valuation and no agreement can be reached, then the matter will be brought to the attention of the Committee.

3.  PSAA determines the audit fee scale which was confirmed by The Director of Financial Reporting and Control. The fee was conditional on the Council providing adequate financial statements and no unexpected issues arising requiring additional time or specialist personnel. Additional work was also being undertaken as the Council had moved to a new financial system, which accounted for most of the increase for 2024/25.

4.   Audit categories would not change because of the increase in the materiality threshold though it was acknowledged that sample sizes may be smaller. Performance Materiality related to testing, and it was clarified that this metric would be used in the audit of the pension fund. The Committee was provided with an example; performance materiality was £11.4 million, thus every single balance above this amount would be tested. The figure of 11.4 million is 70% of the planning materiality figure of £16.3 million.

5.    The focus of the audit on the HRA would be on the Council’s thirty-year strategy and the long-term financial viability.

6.    The audit on Oracle would be undertaken by a specialist IT team. Grant Thornton reviews testing reports undertaken by other parties to avoid duplication. The implementation would be audited, the Council’s processes examined and this would be considered in Grant Thornton’s determination on whether Oracle has met expectations set by the Council..

7.   Grant Thornton had a procedure on third party audits. In relation to valuation of pension assets, Grant Thornton used PWC as its actuary and the Committee heard about the metrics used to review the pension fund. In relation to the previous financial system provided by Hampshire County Council, their external auditor provided third party assurance, while Grant Thornton undertook work to validate their findings and further work on the Council’s controls.

8.   The pension fund was 200% funded and it was unlikely that the employer contribution holiday would negatively affect it. Whilst the actuary gives advice, it was also noted that the Investment Committee considered the proposal, and it was their decision to agree the change in employer contribution rate.

9. Grant Thornton would consider the Committee’s feedback on report design and layout.

The Chair concluded the discussion by thanking participants for their contributions and summarised the issues raised.