Governance and Accountability for Local Councils │

Governance and Accountability for Local Councils │
Governance and Accountability for Local Councils │ Preface 1
2 Governance and Accountability for Local Councils
Governance [guhv-er-nuhns] noun 14th Century
How local councils ensure that they are doing the right things, in the right way,
for the right people in a timely, inclusive, open, honest and accountable manner.
Accountability [uh-koun-tuh-bil-i-tee] noun 1794
Occurs when local councils that are entrusted with managing public funds to
provide public services explain to their communities how they have discharged
that trust.
Governance and Accountability for Local Councils │Preface 3
Acknowledgements
The first edition of this guide was published in 2002 and was the result of work overseen
by a project group with membership drawn from key stakeholders. It was always
recognised that the Practitioners’ Guide would need to be kept up to date with
developments relevant to the local council sector.
Therefore, what is now the Joint Practitioners’ Advisory Group (JPAG) was originally
formed in September 2002 as a standing group, also with members drawn from key
stakeholders, to help ensure that the guidance remains relevant to the needs of local
councils and is updated as appropriate.
Since 2005, the guide no longer applies to community councils in Wales which operate
within a quite separate, albeit very similar, legal framework. We are grateful to
representatives from Wales who continue to participate as full partners in JPAG although
the responsibility for producing guidance has now transferred to Wales.
Since April 2006, JPAG has expanded to include key stakeholders representing other
smaller bodies in England which are required to complete an annual return. Separate
guides for Local Councils and Internal Drainage Boards have now been issued by JPAG
and published by their respective sector representative bodies.
The current members of the Joint Practitioners Advisory Group are as follows.
David Aldous
Alan Fairchild
Graham Fletcher (CLG)
Sarah Steeds
Phil Winrow
Peter Lacey
Dr Jean Venables
Jon Tomlinson
Keeley Lund (CIPFA)
Alan Robertson
Clem Collins
Mark Lewis
George Wisz
Audit Commission (Chair)
Society of local Council Clerks (SLCC)
Department of Communities and Local Government
Department of Food and Rural Affairs (Defra)
Environment Agency (EA)
National Association of Local Councils (NALC)
Association of Drainage Authorities (ADA)
Upper Witham Internal Drainage Board and ADA
Certified Institute of Public Finance and Accounting
Clement Keys (representing audit suppliers)
Audit Commission Technical Support
Audit Commission Legal Team
Audit Commission (Secretary)
For Wales:
Deryck Evans
Ian Skinner
Simon White
Wales Audit Office
Wales Assembly Government
One Voice Wales
The contributions of the members of the group, and of those individuals who have
contributed from time to time to the development of the guides are gratefully
acknowledged. In particular, the first edition of the local council guide drew on and
updated CIPFA’s Accounting Guidance Notes for Local Councils, 1996 (‘the purple
book’) and we are grateful to CIPFA for allowing this and for their continuing support.
4 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils │Contents 5
Contents
Preface
7
The public accountability framework
9
Introduction
11
Part 1 - The legal framework for local councils in England
13
Part 2 - The annual return and corporate governance
21
Part 3 - Accounting guidance for local councils
55
Part 4 - Directions for Larger Local Councils (£1 million +) and those
approaching the threshold
105
Appendix 1 - Local council services and powers
107
Appendix 2 - Statement of responsibilities of auditors and of audited
small bodies
113
Appendix 3 - The approach to the audit of local councils in England
121
Appendix 4 - Extracts from the Audit Commission’s Code of Audit
Practice - highlighting amendments relevant to the audit approach for
local councils
123
Appendix 5 - Standing Guidance issued by the Audit Commission to
External Auditors to small bodies on the overall scope and approach of
their audit
125
Appendix 6 - Annual return for local councils for the year ending 31
March 2008
135
Appendix 7 - Accounts and Audit Regulations and Guidance
141
Appendix 8 - Local Government Investments - CLG guidance
143
Appendix 9 - An approach to internal audit testing
151
Appendix 10 - An executive checklist for financial year-ends
153
Glossary
155
Index
159
6 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils │Preface 7
Preface
Good governance, accountability and transparency are essential to local councils
and a cornerstone of the government’s approach to improving public services.
Those who are responsible for the conduct of public business and for spending
public money are accountable for ensuring that public business is conducted in
accordance with the law and proper standards. They must also ensure that public
money is safeguarded, properly accounted for and used economically, efficiently
and effectively.
In discharging this accountability, public bodies and their managements (both
members and officers) are responsible for putting in place proper arrangements
for the governance of their affairs and the stewardship of the resources in their
care. They are required to report on these arrangements in their published
Annual Governance Statement.
As a safeguard to the proper discharge of this accountability, external auditors in
the public sector give an independent opinion on public bodies’ financial
statements. They may also review, and report on, aspects of public bodies'
arrangements to ensure the proper conduct of their financial affairs, and those to
manage their performance and use of resources.
This publication has been prepared in response to the need for a clear statement
on ‘proper practices’ for both day-to-day practitioners - users and trainers alike and auditors, internal and external. It is a guide to the accounting practices to be
followed by local councils, and sets out the appropriate standard of financial
reporting to be followed. It represents ‘proper practices’ referred to in Accounts
and Audit Regulations.
We are committed towards making this guidance as useful, complete and ‘user
friendly’ as possible, but there will always be scope to improve. As it is our
intention to issue updated versions of this guidance from time to time, there is a
continuing opportunity to keep it up to date, identify and share good practice and
respond to the needs of local councils. If you have comments or suggestions as
to how to improve this guidance, please send these to ‘Practitioners’ Guide’ at
either NALC, 109 Great Russell Street, London WC1B 3LD or SLCC, 8, The
Crescent, Taunton, Somerset TA1 4EA.
8 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils │The public
accountability framework 9
The public accountability framework
1
This guide maps out in a practical way, the current requirements of legislation
and the responsibilities of the various parties involved. It explains the processes
that need to be carried out to comply with legal requirements and provides
examples of how this may be achieved, building on the good practices currently
being employed.
2
Basically stated, the accountability framework means that to inform taxpayers,
local councils must prepare a report on their activities for the year, which is
externally audited and then published.
3
The approach relies to a significant extent on self-certification by councils that
their internal arrangements are being maintained at a level consistent with good
practice. It requires the active participation of elected and appointed members in
the process of providing positive public assurance that their stewardship and
governance of the publicly owned assets with which they have been entrusted
has been properly managed.
4
Although councils have always provided some assurance to taxpayers through
approving the annual accounts, members also need to provide a written annual
governance statement. Councillors, working as a corporate body, will need to be
able to provide this assurance to stakeholders with confidence. The assurance
must therefore be based on adequate information about the operation of internal
controls within their councils.
5
The accountability framework is ‘risk-based’. It must be proportionate to risk, to
the amounts of public money involved and to stakeholders’ need for assurance.
While the limited assurance audit approach provides a lower level of assurance
than that which preceded it, it remains responsive to the need to safeguard the
proper conduct of public business.
6
External audit remains an essential element in accounting for public money. It
makes an important contribution to the stewardship of public resources and to the
corporate governance of public services. It also supports local democracy by
helping to ensure that members and officers are accountable to the communities
they serve and by providing assurance that the public money they manage has
been properly spent.
7
The public accountability framework encourages openness and transparency
from local councils by requiring that the annual return and external audit reports
are made public. Councils should consider also making available to local
taxpayers internal audit and other third party reports to demonstrate their
commitment to inclusiveness, openness and transparency.
10 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils │Introduction 11
Introduction
1
The purpose of this guidance is to help practitioners to understand
regulatory requirements faced by local councils. It provides a guide to the
accountability and audit framework and looks at how risk management,
principles of good internal control and the roles of the internal and external
auditors apply to local councils. The aim is to provide a source of
information about accounting and audit matters affecting local councils. It
is intended to be used not only by practitioners, but also by elected
members and officers, accountants, internal auditors and trainers.
2
Most local councils meet their public accountability and reporting duties by
completing a single document, the annual return, which is published
annually by the Audit Commission (the Commission). The annual return
balances the need for transparency and openness with the need to
minimise the burden of public reporting. It is designed to inform taxpayers
and other key stakeholders about the work and finances of their local
council in as accessible a way as may be achieved while still meeting
public reporting standards.
3
The accountability and audit framework applies to all local councils with
either annual expenditure or annual income up to £1,000,000. The largest
local councils operating above this threshold are subject to the same
accounting regulations and audit approach as principal authorities and
must follow the Statement of Recommended Practice (SORP)1. They are,
therefore, currently excluded from the scope of this guidance although in
Part 4 we provide some information and examples of how larger councils
may approach applying the SoRP.
4
The guidance is structured as follows.
1
•
Part one covers the legal framework within which local councils and
their auditors must work. This is supported by Appendix 1 which
summarises local council services and their legal powers.
•
Part two provides guidance on the annual return and corporate
governance. This takes practitioners through each of the sections of
the annual return and provides guidance on good practices.
•
Part three focuses on accounting guidance aimed at promoting good
practice when preparing the statement of accounts.
•
Part four directs larger local councils not covered by this guide and
those approaching the £1 million threshold to where they may find
guidance on how to apply the SoRP.
•
Appendices provide additional information and tools for
practitioners.
•
A glossary of words and phrases commonly used is included at the
end of this guidance.
The Statement of Recommended Practice (the SoRP) is available from the Chartered Institute of
Public Finance and Accountancy (CIPFA)
12 Governance and Accountability for Local Councils │Introduction
5
This document is intended to be a working tool for local councils. It is not a
comprehensive guide to all aspects of local government law applicable to
local councils. Nor can the guidance cover all queries about the application
of the accountability and audit framework as this develops over time.
6
Arrangements have, therefore, been put in place to provide technical
support through the respective county and regional structures of NALC
and SLCC, which are themselves supported by regular meetings of the
Joint Practitioners’ Advisory Group. These arrangements are intended to
provide sources of further support and guidance, and, from time to time,
the guidance in this document will be updated and revised as appropriate.
7
For a detailed summary of the rights of individuals in relation to the
accounts of local councils please see the Audit Commission’s publication –
Councils Accounts Your Rights. For those viewing this guidance
electronically you may access the publication via the following Weblink
http://www.audit-commission.gov.uk/reports/NATIONALREPORT.asp?CategoryID=&ProdID=53EEC57C-D29F-44a9-BA46210AD5959A0C.
Governance and Accountability for Local Councils │Part 1 - The legal
framework for local councils in England 13
Part 1 - The legal framework for local
councils in England
This part of the guidance describes the nature of local councils and the
legal framework within which they operate. It also covers the
development of the annual return approach to statutory reporting and the
supporting audit process.
What are local councils?
,
1.1
For the purposes of this guidance, the general term local council refers to a
number of bodies which have roles in the administration of community affairs.
These include Parish Councils, Town Councils and Parish Meetings (in parishes
where there is no parish council). This guidance also applies to Joint Committees
of local councils and to Charter Trustees. The roles of these bodies are similar
and there is a commonality of stakeholders in the local areas served by these
bodies. It is appropriate, therefore, that a common accounting, audit and public
reporting framework applies to them all.
1.2
Local councils are local government bodies, and can only do that which they are
empowered to do by law. Anything else, no matter how apparently justifiable or
useful, will be beyond the powers of the council (‘ultra vires’).
1.3
From 2008, local councils may select additional alternative styles, choosing from
the names Community, Neighbourhood or Village as well as Parish to describe
themselves. These alternative styles do not, however have any effect on legal
powers or affect formal reporting duties.
Parish Councils
1.4
Parish Councils are currently the most common type of local council. They were
constituted by the Local Government Act 1894 taking on powers and duties
which, until then, had been administered by churchwardens and overseers of the
poor. The current powers and duties of parish councils are derived from various
parts of legislation. Appendix 1 provides a short summary of the main local
council services and powers.
1.5
Parish Councils exist to discuss community affairs and exercise the powers
bestowed on them. The council itself is made up of councillors who are either
elected by local residents or selected to fill vacancies. Each council has a clerk
who acts as the chief officer and, depending on its size, a number of additional
staff may be employed.
14 Governance and Accountability for Local Councils │ Part 1 - The legal
framework for local councils in England
1.6
For most parish councils, the majority of income is derived from an annual
charge, the precept, on local electors. The precept is set each year by a parish
council as part of its annual budgeting process and is collected on the parish
council’s behalf by the local authority responsible for collecting council tax for its
area. The level of precept depends on the nature and scope of the parish
council’s activities.
1.7
There are other resources available to parish councils in addition to the precept.
Many parishes receive interest on bank balances, grants and income from
charges for the use of their facilities (through, for example, hall hire charges,
burial fees, car parks etc) and in some cases from returns on investments.
1.8
In March 2003 the Government announced its initiative for accrediting councils
who meet certain standards as ‘Quality Councils’. This is intended to encourage
more community service provision to be devolved from principal authorities to
local councils, where appropriate, together with the income and expenditure
associated with those services. Some legislation now distinguishes the powers
available to a parish council according to its status or otherwise as a Quality
Council. Certain Quality Councils meeting eligibility standards have the power to
promote well-being in their communities.
Town and City Councils
1.9
In some areas the parish council is known as the Town Council or, sometimes,
the City Council. As they often cover a larger population than many rural parishes
Town and City Councils tend to have larger precepts and provide a wider range
of services.
Local Government and Public involvement in Health Act 2007
1.10 Part 4 of this Act introduces new powers for parishes including:
•
alternative styles of name such as community, village or neighbourhood
council;
•
appointing councillors;
•
community strategies and governance reviews; and
•
extension of powers of well being.
1.11 Practitioners must take care to seek advice and guidance in respect of the
application of these powers.
Charter Trustees
1.12 Charter Trustees are found in large towns. They were established following local
government reorganisation in 1974 where former cities and boroughs became
part of district councils but did not become parish councils. The powers and
duties of Charter Trustees are contained in the Charter Trustee Regulations
1996. These include electing a mayor, owning and maintaining ceremonial
property and making and receiving official visits to or on behalf of the town. The
Charter Trustees may set a precept to cover their expenses.
Governance and Accountability for Local Councils │Part 1 - The legal
framework for local councils in England 15
Parish meetings
1.13 Parish meetings differ from parish councils in that they are not corporate bodies.
They exist to discuss the affairs of the local community and do not have the full
range of powers of parish councils except where express powers enable them to
exercise certain functions. Where there is no parish council the parish meeting
has statutory powers to provide and maintain:
•
allotments;
•
burial grounds;
•
closed churchyards; and
•
footway lighting.
1.14 The governing law applies equally to parish meetings, and their Chairs are
accountable to local electors. This proper practice guide applies, therefore,
equally to parish meetings as it does to parish and town councils and their joint
committees. Each local council, and parish meeting where there is no council, is
required, irrespective of size, to prepare accounts annually in the format specified
in the annual return and to have an audit.
1.15 A number of parish meetings and some very small parish councils incur no
financial transactions in a financial year, hold no balances and own no assets. A
short form annual return caters for such cases. Local councils fulfilling this
criterion should send to their appointed auditor on receipt of notification of audit, a
signed short form ‘no transactions’ annual return supplied to them by the auditor
for this purpose.
Joint committees
1.16 Schedule 2 of the Audit Commission Act 1998 identifies that ‘a joint committee of
two or more (local) authorities’ shall maintain accounts which are subject to
annual audit. Such joint committees will have an external auditor appointed by the
Audit Commission and, although they are not independent legal entities, for the
purposes of keeping accounts and submitting to audit, they are separately subject
to the same rules and regulations as other local councils.
1.17 The management of joint committees usually is located with one of the
participating councils known as the ‘lead’ council. The lead council is responsible
for meeting the accounting and reporting responsibilities of the joint committee
although all participants should approve the arrangements.
Councils’ accounts and audit arrangements
1.18 Two pieces of legislation set out how local councils should behave when
accounting for the public funds they manage and what rights local taxpayers have
in relation to those accounts. These are the Audit Commission Act 1998 and the
Accounts and Audit Regulations issued from time to time under the Act.
16 Governance and Accountability for Local Councils │ Part 1 - The legal
framework for local councils in England
1.19 The requirement for local councils to prepare accounts annually and to subject
them to external audit comes from the Audit Commission Act 1998 (the Act). The
Act describes the rights of taxpayers and other interested parties in relation to
those accounts.
1.20 The Act also provides that the Secretary of State may make regulations covering:
•
how accounts should be kept;
•
the form of accounts and how and when they must be approved and
published;
•
where and for how long taxpayers can view the accounts and the details
behind them; and
•
how taxpayers exercise their rights in relation to the accounts2.
1.21 This guide provides access to a current copy of the Accounts and Audit
Regulations 2003 as amended (the Regulations) for use as a reference tool for
practitioners at Appendix 7. Practitioners are reminded of the need to make sure
that they are always viewing the latest version of the regulations when
considering how they should be applied.
Roles and responsibilities within local councils
1.22 Local councillors are elected every four years in local elections, the whole council
retiring at the same time. A chairman or town mayor must be elected annually by
the council from among its members. From time to time vacancies occur which
may be filled following a by-election or by co-option or by appointment. While the
status of co-opted and appointed members is marginally different in law, all
members have the same duties and responsibilities in relation to a local council’s
governance and accountability.
1.23 Parish affairs are discussed at council meetings that must convene at least three
times a year in addition to the annual council meeting. In most parishes they are
held on a monthly basis and local electors may attend to observe the
proceedings.
1.24 Most local councils (although few parish meetings) employ a clerk to oversee the
administration of its affairs. Parish councils are required by section 151 of the
Local Government Act 1972 to appoint a responsible financial officer (RFO) to
manage their financial affairs. In many instances the clerk also holds the post of
responsible financial officer. Larger parishes may also have other employees
such as administrative assistants and grounds staff. As an employer, the council
has the same duties and responsibilities, including the operation of PAYE, as any
other employer.
1.25 If no responsible financial officer has been appointed the person responsible for
the administration of the financial affairs of a local council or, if no person is so
responsible, the person who is responsible for keeping the accounts of the
council is deemed to be the RFO.
2
See paragraph 7 in the Introduction section above for a link to more detailed guidance on electors’ rights.
Governance and Accountability for Local Councils │Part 1 - The legal
framework for local councils in England 17
1.26 It is the council as a whole, however, that is responsible in law for ensuring that
its financial management is adequate and effective and that the council has a
sound system of internal control which facilitates the effective exercise of their
functions and which includes arrangements for the management of risk.
1.27 Under the regulations, all local councils are required at least once a year to
conduct, in accordance with proper practices, a review of the effectiveness of
their system of internal control and publicly report the outcome. This annual
governance review must include a separate review of internal audit. Guidance on
how this review may be carried out may be found in paragraphs 2.79 to 2.96.
Section 2 of the annual return provides the means for local councils to report their
annual governance statement.
1.28 Practitioners may wish to refer to a helpful booklet produced by the Audit
Commission entitled Statement of responsibilities of auditors and of small audited
bodies which describes the relationship between local councils and their external
auditors. It seeks to clarify where the different responsibilities of the local council
and its auditor begin and end. The statement is reproduced at Appendix 2.
The Audit Commission and the development of
the limited assurance audit approach and the
annual return
1.29 A key feature of the audit approach which came into effect for financial years
ending on or after 31 March 2002 is that it seeks to recognise the differing
circumstances of local councils of different size. This is described in the flowchart
at Appendix 3.
1.30 This guidance focuses primarily on the needs of practitioners within local
councils. However, the following paragraphs may be helpful as background to the
development of the audit approach. Extracts from the Audit Commission’s Code
of Audit Practice can be found at Appendix 4. Key elements of the Commission’s
standing guidance to external auditors are reproduced at Appendix 5.
18 Governance and Accountability for Local Councils │ Part 1 - The legal
framework for local councils in England
1.31 The Audit Commission is an independent body with statutory responsibilities to
regulate the audit of local government in England. The Commission’s Code of
Audit Practice 2005 for local government bodies (the Code) sets the required
standards for its appointed auditors. The Code, when talking about how auditors
should discharge their statutory annual audit duties at local councils, states:
‘S1.2 It is the responsibility of small bodies to put in place proper
arrangements to ensure the proper conduct of their financial affairs,
and to monitor the adequacy and effectiveness of those arrangements
in practice. Small bodies are required to prepare their accounts in
accordance with their statutory responsibilities, and to maintain an
adequate system of internal audit of their accounting records and
control systems.
S1.3 Small bodies meet their responsibilities by preparing and
publishing, and providing the auditor with, the accounts prepared for
the financial year, together with such additional information and
explanation as is necessary to provide sufficient evidence that they
have maintained adequate systems of internal control and internal
audit throughout the financial year.’
1.32 Working with the Commission, the representative bodies for local councils and
their clerks, responsible government departments and the public sector
accounting professional body, CIPFA, undertook to develop a simple approach to
meeting this legal responsibility which is:
•
easy to prepare and may be easily understood by readers;
•
subjected to an appropriate level of external audit without the need for
lengthy preparation and inconvenience; and
•
cost efficient.
1.33 The outcome was the annual return, a sample copy of which is attached as
Appendix 6. For accounting years ending 31 March 2006 and thereafter,
completion of the annual return by local councils where annual income or
expenditure is £1,000,000 or less is a requirement under the Accounts and Audit
Regulations.
1.34 Part 2 of this guide considers the annual return in more detail, but some general
points about this approach should be noted.
1.35 The external audit approach described above relies heavily on the co-operation of
the council with the external auditor and on a significant amount of self
certification by the council. Corporate governance arrangements within the
council must be demonstrably sound and the annual return is expected to be
accurate and complete when presented to the auditor. The annual return should
be prepared in accordance with the proper practices presented in this guide.
Governance and Accountability for Local Councils │Part 1 - The legal
framework for local councils in England 19
‘Proper practices’
1.36 The Accounts and Audit Regulations refer, in a number of places, to the need for
local councils, in fulfilling the requirements of the Regulations, to follow ‘proper
practices’.
1.37 In the guidance which accompanies the revised 2006 Regulations in England
(see Appendix 7), CLG explains the source of the term ‘proper practices’, their
legal standing and where they may be found. The CLG guidance states that for
local councils it is this publication, Governance and Accountability in Local
Councils in England and Wales – a Practitioners ’ Guide 20033, in which the
proper practices in relation to both the accounts and internal audit may be found.
The council as trustee
1.38 Certain local authorities have powers to be appointed as trustee of local, usually
charitable, trusts and fulfil this role as either custodian or management trustee.
1.39 Charitable trusts in England are regulated by the Charity Commission which sets
out minimum standards of accounting and audit requirements where these are
not covered by the Trust Deed. The Charity Commission also requires annual
reporting by registered charities.
1.40 In cases where local authorities are sole managing trustees (ie hold legal title to
and manage the property and/or investments of the trust) the accounts of the
trust are a separate account of the local authority and therefore subject to
disclosure and audit. This requirement is in addition to any reporting or audit
required by Charity law.
1.41 Larger authorities meet this requirement via disclosure in the notes to the
accounts which are covered by an audit opinion. For smaller bodies preparing an
annual return there are no provisions for notes and so the required disclosure is
achieved through the annual return.
1.42 Section 1 of the annual return (the statement of accounts) requires the following
disclosure: ‘the council acts as sole trustee and is responsible for managing
(a) trust fund(s)/assets [Yes/No]’.
1.43 If the council has disclosed that it is a sole managing trustee it must also
complete the associated assertion in section 2 of the annual return (the annual
governance statement): ‘in our capacity as the sole managing trustee we have
discharged our responsibility in relation to the accountability for the
fund(s)/assets, including financial reporting and, if required, independent
examination or audit'
1.44 Smaller relevant bodies may in this way meet the requirement of the Audit
Commission Act to disclose each ‘account of the body’. Auditors can plan work
around these disclosures if required.
3
As amended and its successor publications
20 Governance and Accountability for Local Councils │ Part 1 - The legal
framework for local councils in England
1.45 There is no requirement for local councils to prepare consolidated or group
accounts to include the charitable trust funds. Where councils have historically
consolidated trust funds within the main accounts of the council, these should be
excluded for reporting purposes to avoid the risk of misleading readers of the
accounts.
1.46 Councils should ensure that a separate bank account operates to receive income
for each trust to which it is a custodian or managing trustee. If the council’s bank
account is used to pay for any expenditure on behalf of a charity (prior to
recovery from the charity account), then these transactions, including any VAT,
must be included in the annual return of the council as being its own expenditure
and income. However, to simplify accounting, it is recommended that a separate
bank account is established for the Charity as soon as possible and that funds
are never or rarely mixed. The reserves of the council should not include those of
any charity.
1.47 Meetings of the council when it is acting as charity trustee should take place
separately from those of the council acting as the council. Separate minutes must
be kept. In order to avoid confusion, charity business items should always be
minuted separately from council business items. Separate notices and agendas
for meetings should be issued.
1.48 The clerk should take responsibility for guiding the council regarding the capacity,
either as the council or the trustees for a charity, in which members are meeting.
The chairman should also seek to make the current capacity clear to the meeting
at the outset and throughout, particularly if meetings are held one after the other
or where confusion around capacity is possible.
1.49 The value of charity property should not be shown in the council’s books of
account and annual return as council property. Charity assets held as custodian
or managing trustee should, however, be recorded in the council’s asset register
and identified there as ‘charity assets held by the council as trustee’.
Governance and Accountability for Local Councils │ Part 2 - The annual return and
corporate governance 21
Part 2 - The annual return and corporate
governance
This part looks at the annual return in more depth to provide practitioners with
guidance on completing the return and submitting it to annual audit. It explains
risk management, internal controls and the role of internal audit. Understanding
these, and how they work together, is key to good governance and the proper
completion of the annual return, and thus to the success of this approach.
Part 2 of the guidance is structured as follows.
• What is the annual return?
• The statement of accounts.
• Explaining significant variances and analytical review.
• Bank reconciliation in support of the annual return.
• Investments.
• The annual governance statement.
• The external auditor’s certificate and opinion.
• Internal audit’s annual report.
• The review of the system of internal audit.
• Risk management.
What is the annual return?
2.1
2.2
The annual return (see Appendix 6) is a document that has several purposes:
•
to report the annual statement of accounts as approved by the council;
•
to certify that the council has discharged its statutory duties in relation to its
financial affairs;
•
to record that the external auditor has fulfilled his/her statutory responsibility;
•
to inform the local taxpayer and elector about what and how their council
has been doing during the last financial year; and
•
to be a source of information for government and other stakeholders about
the activity of local councils.
The annual return is in four linked sections which should be read as a whole:
1.
the statement of accounts;
2.
the annual governance statement;
3.
the external auditor’s certificate and opinion; and
4.
the report from internal audit.
22 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
2.3
The first three of these sections are intended to be displayed to the public. The
annual return has been designed so that when it has been signed by the auditor
and returned to the local council, a copy of the three key sections (1 to 3) can be
opened up and easily displayed on most notice boards.
The statement of accounts (Section 1 of the annual
return)
2.4
Each local council is required by section 151 of the Local Government Act 1972 to
appoint a responsible financial officer (RFO) as the person responsible for the
administration of its financial affairs4. The annual return is the local council’s
statutory statement of account. It must be signed by the RFO to certify that it
presents fairly, the financial position of the council at the end of the year to which it
relates and its income and expenditure, or that it properly presents receipts and
payments, as the case may be (see paragraph 2.7), and that it is consistent with the
council’s underlying financial records. The Council must also disclose here if it is a
sole managing trustee (see paragraphs 1.38 to 1.49).
2.5
This means that, by signing the certificate, the council’s RFO is satisfied, and can, if
requested, demonstrate, that the accounting procedures, which have been
determined by the RFO on behalf of the council, have been observed throughout
the year and that the supporting financial records of the council are maintained in
accordance with proper practices and kept up to date. The signature required is that
of the RFO at the time of approval – any new appointee will wish to take reasonable
steps to ensure that the certificate is accurate.
2.6
Current rules require local councils where the gross income or expenditure
(whichever is the higher) for the year has exceeded the threshold of £200,000 for a
period of three continuous years, to report their financial details on an income and
expenditure basis, from the third year onwards. In Part 3 of this guide, detailed
guidance is given, together with examples, about what needs to be done at the
year-end to convert a receipts and payments account into an income and
expenditure account. This guidance may be found in paragraphs 3.72 to 3.79.
2.7
Local councils operating below the £200,000 threshold may choose to report either
on an income and expenditure basis or on a receipts and payments basis.
However, councils that change the basis on which their accounts are presented
should ensure that the comparative accounts in the annual return are shown on a
consistent basis. Any change in the way that the accounts are presented, ie from
income and expenditure to receipts and payments (or vice versa) must be reported
on the annual return by adding the word ‘RESTATED’ at the top of the prior year
column in section 1, and explained by means of a note to the auditor.
2.8
The council itself is also asked to give a public assurance (see paragraphs 2.37 to
2.49) that in approving the annual statement of accounts it is satisfied that this has
been prepared in accordance with the requirements of the Regulations and proper
practices. As with other decisions made by the council, all of which have a legal
implication, councillors have a duty to make themselves familiar with the
requirements contained in the Regulations as they are jointly and severally legally
responsible.
4
See paragraph 1.25 for guidance on how to determine who is responsible for administering the council’s financial
affairs if no formal RFO appointment has been made.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 23
2.9
Alongside the RFO’s certificate, the person presiding at the committee or meeting
at which the approval is given is required to confirm, by signing the statement at the
bottom of section 1 of the annual return, that the accounts have been approved by
the council in accordance with the Regulations. Currently these require the
accounts to be approved as soon as reasonably practical and in any event within
three5 months after the end of the period to which the statement of account relates.
The intention behind the additional requirement for the chair of the committee or
meeting to sign and date the statement of accounts is that the chair’s signature
formally represents the legal completion of the council’s approval process for the
accounts.
2.10 In practical terms, as the financial year-end for local councils is 31 March in any
year, the accounts have to be approved by 30 June. However, the further the
distance between the year end and the accounts approval and publication date, the
less useful the accounts are to the reader. The statutory approval date should be
seen, therefore, as the latest date by which this can be given. It is good practice to
complete the accounts and have them approved by the council and published as
close as possible to the financial year end to which they relate.
2.11 Section 1 of the annual return standardises the presentation of accounts by local
councils into a simple and easy to read format. For the benefit of both the compiler
and the reader, each of the ten-line items carries a note of explanation about the
intended source of the information and an explanation of how the figure is
calculated.
2.12 All sections of the annual return should be completed, including writing ‘nil’ or ‘0’ in
any section that does not appear to apply. Leaving blank spaces leads to questions
by readers who may not be sure if the compiler intended a nil balance or whether
an omission or error has occurred. For auditors, such uncertainty must be
eliminated, and so any unexplained omissions will lead to additional, avoidable,
correspondence with the council for which additional fees will be charged.
2.13 All figures in the annual return should agree to the primary financial records of the
council. The RFO must be able to show how the figures in the annual return
reconcile to those in the cashbook and other primary records of accounts. Members
should expect to see this reconciliation when they are asked to approve the
accounts in the annual return.
2.14 More detailed accounting guidance to help support completion of the annual return
is contained in Part 3.
Explaining significant variances and analytical
review
2.15 One of the documents called for to accompany the annual return when it is sent by
the council to the external auditor, is an explanation of significant variances in levels
of expenditure and balances.
5
Approval by 30 June applies from the financial year ending 31 March 2009. For 2008 it is 31 July.
24 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
2.16 The purpose of showing comparative annual receipts and payments or income and
expenditure in financial statements is so that the reader can observe and note any
changes in levels of activity from one year to the next. The absence of significant
variances from one year to the next implies that the council has continued to
provide expected services at the same level and approximately at the same cost as
previously. Readers are therefore drawn to any items which are significantly
different or unusual, as representing a possible change in the scope or level or cost
of services they have come to expect.
2.17 The external auditor, acting as the public watchdog, asks the question about
significant or unexpected changes in the accounts on behalf of local taxpayers and
is looking for a sufficiently detailed and meaningful analysis and explanation from
the council of the reasons for change.
2.18 It is also good practice for local councils to incorporate an analytical review into
their regular budget monitoring procedures to probe the underlying reasons for
variations in expected income or expenditure. This helps to ensure that members of
the council understand fully the pattern of income and expenditure flows during the
year and informs decision making.
2.19 Analytical review can be carried out in a number of ways and leads to an
understanding of:
•
variations in income or expenditure (or receipts and payments) from year to
year;
•
variations between actual figures and budgeted income and expenditure (or
receipts and payments); and
•
the relationships between various figures or line items in the same set of
accounts.
2.20 For example, an unexplained increase in precept of say 20 per cent which is not
matched by a corresponding increase in expenditure requires an explanation.
Conversely, a 50 per cent rise in annual precept with a corresponding increase in
balances that is explained as being, say, the first of a number of budgeted annual
contributions to an earmarked reserve for the planned rebuilding of a village hall,
may well be accepted by the auditor as being reasonable and requiring no further
action.
2.21 Similarly, an increase in borrowing without an equivalent increase in capital
spending and in the value of fixed assets would raise a question. The answer may
well be that the timing of the borrowing and the expenditure fell in different financial
years, but an explanation is required nonetheless.
2.22 The question ‘what is ‘significant?’ is often asked. Any change (or even the absence
of change when one might be expected – as in the above example of a precept
increase not matched by expenditure) can be significant and the RFO should be
prepared to explain any figure presented in the accounts. However, as a general
‘rule of thumb’ and given that the figures in section 1 of the annual return are
aggregates rather than specific expenditure line items, changes (either up or down)
of 10 to 15 per cent and greater will almost certainly require a formal explanation.
External auditors may state a percentage figure in their letter calling the audit. This
figure should be followed.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 25
2.23 Balances that move to or from zero will also generally require an explanation. As
most expenditure by local councils comes from the provision of statutory (rather
than voluntary) services, the sudden absence or appearance of an expenditure
category implies a change in service provision.
2.24 Where the value in annual return Box 7 does not equal annual return Box 8, this
difference must be explained. This difference should only occur in cases where the
council’s accounts are presented on an income and expenditure basis, and the
most common explanation is the effect of debtors and creditors in the council’s
statement of balances. It should be possible to provide the auditor with details of
the year-end debtors and creditors showing how the net difference between them is
equal to the difference between annual return Boxes 7 and 8.
2.25 As councils have no legal powers to hold revenue reserves other than those for
reasonable working capital needs or for specifically earmarked purposes, whenever
a council’s year-end general reserve is significantly higher than the annual precept,
an explanation should be provided to the auditor.
2.26 Earmarked reserves, which are set aside for specific purposes and for savings for
future projects, should be realistic and approved by the council. It is generally
accepted that general (ie un-earmarked) revenue reserves usually lie within the
range of three to twelve months of gross expenditure. However, the amount of
general reserve should be risk assessed and approved by the Council.
2.27 From the figures provided in the statement of accounts, the external auditor is able
to carry out an analytical review in order to improve knowledge about the council,
gain some assurance about consistency and so to plan the audit work accordingly.
Bank reconciliation in support of the annual return
2.28 The submission of the annual return must also be accompanied by a copy of the
council’s bank reconciliation. The bank reconciliation, which must cover all bank
accounts held by the local council, is a key tool for management’s assurance that
the council’s finances are being properly managed by those responsible. The lack
of such a basic internal control would indicate an unacceptable control weakness
and would probably lead to the council incurring additional audit work and cost
which could otherwise be avoided. Further information on performing bank
reconciliations is in Part 3.
Some notes about investments
2.29 It is rare for a local council to hold investments other than in the form of easily
accessible bank deposit or other short-term savings accounts. These short-term
investments are often used to maximise income from cash balances during the
financial year.
2.30 Occasionally, circumstances require councils to consider making other types of
investments, for example while deciding how to apply the proceeds of an asset sale
or a donation.
26 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
2.31 Long-term investments in assets whose capital values may fluctuate carry
considerable risks and require active management. Investments management is a
specialist area. Prudent councils will always seek independent professional
assistance when developing their investment strategy and before making decisions
around this kind of expenditure. Such a strategy will consider whether it is
appropriate to retain long term investments, and comply with the Secretary of
State’s investment guidance for local government bodies6 and relevant legislation7.
2.32 In making long term investments, the council should develop an Annual Investment
Strategy. If investments exceed £500,000 this is a requirement. The Strategy will
set out management arrangements for the investments held and procedures for
determining the maximum periods for which funds may prudently be committed. It
will ensure that the council has properly assessed the risk of committing funds to
longer term investments.
2.33 All investments by local councils, other than in interest bearing accounts, must be
identified as long-term investment and treated as capital expenditure. Any
investment with a maturity longer than 12 months is by definition a long-term
investment and thus capital expenditure. When forward planning, councils should
have regard to the fact that the acquisition of long-term assets is always capital
expenditure that reduces available balances and reserves.
2.34 A council may also on occasion decide to support its work by making a loan to a
local body. This type of investment creates a long-term asset.
2.35 When a council receives shares following a de-mutualisation of a Building Society
or similar institution this also creates a long-term asset.
2.36 Part 3 below provides guidance on how councils account for and report short-term
and long-term investments in the annual return.
The annual governance statement (Section 2 of the
annual return)
2.37 Those who are responsible for the conduct of public business and for spending
public money are accountable for ensuring both that public business is conducted in
accordance with the law and proper standards, and that public money is
safeguarded and properly accounted for, and used economically efficiently and
effectively.
2.38 In discharging this accountability, public bodies and their management (both
members and officers) are responsible for putting in place proper arrangements for
the governance of their affairs and the stewardship of the resources at their
disposal.
2.39 Councils are expected to make a number of representations and assertions in eight
statements of assurance, which together comprise the annual governance
statement about the accountability of the council. The annual governance statement
together with the statement of accounts must be approved at a full council meeting.
6
See Appendix 8: Local Government Investments – guidance under section 15(1)(a) of LGA2003 letter
12 March 2004
7
In particular, Local Government Act 2003 s 16 and Regulation 25 of the Capital Finance Regulations 2003
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 27
2.40 The statements are explained in the following paragraphs. Each statement is
quoted in italics before a brief explanatory note. There is an additional
representation required in cases where the council is the sole managing trustee of
charitable assets or funds.
1. ‘We have approved the statement of accounts which has been prepared
in accordance with the requirements of the Accounts and Audit
Regulations and proper practices.’
2.41 This first statement covers the accounts of the local council. Through the act of
formally approving the accounts the council asserts that it has prepared those
accounts in the way prescribed by law and in accordance with proper practices.
2. ‘We have maintained an adequate system of internal control, including
measures designed to prevent and detect fraud and corruption and
reviewed its effectiveness.’
2.42 This second statement covers the council’s responsibility to ensure that its affairs
are managed in accordance with proper standards of financial conduct and
arrangements exist to prevent and detect fraud and corruption. The council also
asserts that it has tested those arrangements at least once in the year to make sure
they are working in an adequate and effective way.
2.43 A more detailed discussion about internal controls, which auditors may wish to test,
can be found in the section on risk management which starts at paragraph 2.97.
3. ‘We have taken all reasonable steps to assure ourselves that there
are no matters of actual or potential non-compliance with laws,
regulations and codes of practice which could have a significant
financial effect on the ability of the council to conduct its business or
on its finances.’
4. ‘We have provided proper opportunity during the year for the exercise
of electors’ rights in accordance with the requirements of the
Accounts and Audit Regulations.’
2.44 The third and fourth statements cover the local council’s responsibility to act within
the law and to put in place proper arrangements to ensure that its financial affairs
are conducted in accordance with the law and relevant regulations, including
providing the opportunity for electors to exercise their rights to inspect the financial
records and ask questions of the auditor.
2.45 The third statement confirms that the council has only done things that it has the
legal power to do, and, at the fourth statement, confirms that it has during the year
allowed all persons who may be interested the opportunity to exercise their rights. A
positive response confirms that the council has also complied with the codes of
practice which it has endorsed and adopted to regulate the way in which it carries
out its business.
28 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
5. ‘We have carried out an assessment of the risks facing the council and
taken appropriate steps to manage those risks, including the
introduction of internal controls and/or external insurance cover where
required.’
6. ‘We have maintained throughout the year an adequate and effective
system of internal audit of the council’s accounting records and control
systems and carried out a review of its effectiveness.’
7. ‘We have taken appropriate action on all matters raised in reports from
internal and external audit.’
2.46 The fifth, sixth and seventh representations cover a local council’s responsibility to
develop, implement and regularly monitor the effectiveness of systems of internal
control (see risk management section below) covering:
• the overall control environment, including internal audit;
• the identification, evaluation and management of operational and financial risks;
• budgetary control and monitoring arrangements; and
• the documentation and application of control procedures.
8. ‘We have considered whether any litigation, liabilities or commitments,
events or transactions, occurring either during or after the year-end,
have a financial impact on the council and, where appropriate have
included them in the statement of accounts.’
2.47 The eighth statement covers the local council’s responsibility to conduct its financial
affairs and to put in place proper arrangements to ensure that its financial standing
is soundly based.
2.48 This statement provides assurance that the council has considered and disclosed in
the annual return all matters relevant to its business, including any relevant events
which have taken place in the period between the end of the financial year being
reported and the date of the annual return, which could have an impact on its ability
to continue its work.
9. ‘Trust Funds - in our capacity as the sole managing trustee we have
discharged our responsibility in relation to the accountability for the
fund(s)/assets, including financial reporting and, if required,
independent examination or audit.’
2.49 This representation is used by councils that act as sole managing trustee of trust
funds or assets who have already answered ‘Yes’ to the note in section 1. This
statement confirms that the sole managing trustee has complied with Charities
Acts, has arranged for an audit or independent examination of the trust’s accounts
(if required) and has completed all appropriate returns to the Charity Commission.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 29
The external auditor’s certificate and opinion
(Section 3 of the annual return)
2.50 The issue of a certificate of completion by the external auditor effectively concludes
and ‘closes’ the audit process for any given year. The external audit is ‘opened’ by
the auditor appointing a date for the exercise of rights of electors.
2.51 The auditor’s formal report recognises the relative statutory responsibilities of the
council and its auditors and spells these out clearly in the annual return for all
readers. It is important that members and external auditors alike recognise these
different responsibilities and manage their affairs accordingly. Because of the
different roles involved and the need to demonstrate independence, it is not
possible, for example, for the external auditor to prepare the annual return for the
council and then give his/her opinion on it. A more detailed presentation about the
relative responsibilities of auditors and audited bodies may be viewed at
Appendix 2.
2.52 The auditor’s report contains an opinion on the accounts. This must state the basis
on which the opinion is reached and note any exceptions to the opinion. The
opinion in the auditor’s report within the annual return represents a limited level of
assurance which is appropriate to the circumstances of local councils operating at
or below the £1,000,000 threshold. Councils maintaining sound internal controls
and other governance arrangements means that the amount of work required from
external auditors to fulfil their statutory duty can be correspondingly reduced to a
proportionate level.
2.53 While in most cases the auditor will not need to qualify his or her opinion in any
way, this situation may arise. If the auditor has not been presented with the
assurances required in relation to the accounts or the annual governance
statement, or the information presented means that the auditor cannot give an
unqualified opinion, and then the auditor will report this as an exception to the
opinion within the audit report. The annual governance statement item 7 should
include consideration of actions taken by the council in response to any audit
opinion qualifications that may have been raised in previous years as well as to
reports from internal audit.
2.54 If the auditor modifies the opinion in any way this is a qualification of the accounts.
Auditors may, however, wish to draw the council’s attention to matters without
qualifying the opinion. Such events are recorded in a separate section of the
auditor’s report below the opinion for information and action by the council.
2.55 Practitioners are reminded that to be awarded Quality Parish or Town council
status, there is a requirement that the council’s statement of account bears an
unqualified opinion given by the external auditor.
2.56 A local council, or in the case of a parish meeting, the chairman, is responsible for
displaying a notice in a conspicuous place for a period of at least 14 days stating
that the audit has been completed and that the accounts are available for inspection
by local electors. The completed annual return bearing the external auditors
certificate and signed opinion must either be published or be displayed alongside
this notice. The annual return is designed to make the display easy.
30 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
2.57 If internal controls within local councils are inadequate, there is an increased risk of
error, mistake and fraud. Local councils should consider this as part of its risk
management arrangements (see below).
Internal audit’s annual report (Section 4 of the
annual return)
2.58 Regulation 6 of the Accounts and Audit Regulations 2003 as amended imposes a
duty on local councils to ‘maintain an adequate and effective system of internal
audit of its accounting records and of its system of internal control in accordance
with the proper practices in relation to internal control’. CLG’s Guidance on the
Accounts and Audit Regulations 20038 explains that for local councils the
non-statutory proper practices in relation to internal control may be found in this
Practitioners’ Guide.
2.59 Internal audit is a key component of the system of internal control. The purpose of
internal audit is to review whether the systems of financial and other controls over a
councils activities and operating procedures are effective. It is essential that the
internal audit function is sufficiently independent of the other financial controls and
procedures of the council which are the subject of review. The person or persons
carrying out internal audit must also be competent to carry out the role in a way that
will meet the business needs of each local council.
2.60 Internal audit is an ongoing function reporting to the council at least once a year. It
is not, however, one that should be carried out only once each financial year; nor
does it have to be carried out only at the completion of each financial year-end. It is
undertaken throughout the financial year to test the continuing existence and
adequacy of internal controls.
2.61 It would be incorrect to view internal audit as the detailed inspection of all records
and transactions of a council in order to detect error or fraud. It is the periodic
independent review of a council’s internal controls resulting in an assurance report
designed to improve effectiveness and efficiency of the activities and operating
procedures under the council's control. Managing the council’s internal controls
should be a day-to-day function of the staff and management and not left for
internal audit.
2.62 Having established what internal audit is and what its relationship with the council
should be, it is important for councils to consider whether internal audit is
proportionate to the needs, the size and the circumstances of the council.
2.63 Each council sets out its control objectives, usually in the form of standing orders
and/or financial regulations. The smaller the council, the less onerous these need to
be. Similarly, the scope of internal audit at smaller councils will be correspondingly
less than at larger ones. The more complex the council is or becomes, in terms of
its organisation and range of services, number of employees, etc. the wider ranging
the scope of internal audit will be.
8
CLG Circular 03/2006 issued 18 August 2006 – see Appendix 7
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 31
2.64 It is a matter for the council to determine the necessary scope and extent of its
internal audit, and when securing an internal audit service, to make sure that it is fit
for the purpose for which it is required at that particular council. There is
considerable practical experience among local councils in securing internal audit
services which is summarised in the following paragraphs. More up to date
information about locally available sources of internal audit can be obtained by
contacting the secretaries of either NALC county associations or SLCC branches in
your area.
2.65 Local councils secure internal audit in various ways and a range of options is given
below (see box). As stated above, it is for each local council to determine how best
to meet the legal requirement for internal audit having regard to its business needs
and circumstances.
Local councils secure an internal audit in various ways including:
•
appointing a local individual or a member of a panel of individuals
administered by a County Association of Local Councils or Branch of the
Society of Local Council Clerks. An individual will need to demonstrate
adequate independence and competence to meet the needs of the local
council;
•
employing a competent internal auditor with sufficient organisational
independence and status to undertake the role;
•
purchasing an internal audit service from the principal authority where it is
usual for a small team of employees to be established as internal audit; and
•
purchasing an internal audit service from a local firm or specialist internal
audit practice. The firm needs to have an understanding of the local
government framework and a number of professional firms offer a service to
public bodies, authorities and commercial companies. For the largest of local
councils a specialist contractor appointment may be appropriate.
For practical examples of how local councils have secured internal audit see
paragraph 2.71.
2.66 Local councils will take into account their size and complexity when determining the
way in which they will ensure that adequate internal audit arrangements are in
place to meet legal requirements. There are two key principles, which all local
councils must ensure are met by their internal audit function, regardless of how
procured. These principles are independence and competence.
2.67 Independence means that whoever carries out the internal audit role must not have
any involvement in the financial decision making, management or control of the
council, ie the council’s financial controls and procedures. It follows, for example,
that the circumstances in which a member of a council can demonstrate that they
are sufficiently independent of the financial decision making and procedures of the
council are difficult to envisage, since such a member would need to exclude
themselves from key financial decisions by the council in order to maintain their
independence.
32 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
2.68 Similarly, it would not be appropriate for any individual or firm appointed by the
council to assist with the accounting, preparation of financial statements or the
annual return, to be appointed as internal audit. Particular care should be taken to
avoid conflicts of interest in cases where an external provider of accounting
software is engaged who also offers internal audit services through an associate
company, firm or individual.
2.69 Those charged with carrying out internal audit should not be asked to offer
consultancy or advice on the council’s financial controls and procedures. For them
to do so would prejudice their ability to give an objective and independent view on
whether these meet the needs of the council.
2.70 There is no requirement for a person providing the internal audit role to be
professionally qualified, but essential competencies to be sought in any internal
audit service are an:
•
understanding of basic accounting processes;
•
understanding of the role of internal audit in reviewing systems rather than
undertaking detailed checks that are more appropriately the responsibility of
management;
•
awareness of risk management issues; and
•
understanding of accounting requirements of the legal framework and powers
of local councils.
2.71 There are a number of practical examples of how local councils have sourced their
internal audit service which are shown in the box below.
A number of innovative and creative solutions have been developed by NALC
County Associations, SLCC branches and local councils themselves for sourcing
internal auditors at reasonable cost:
•
local panels of members who are no longer able to carry out the internal
audit function at their individual councils1;
•
local panels of officers (usually clerks) providing internal audit services to
each other and sometimes wider afield1;
•
local residents who are retired accountants;
•
local residents who are former members or clerks of the local council;
•
local bank managers (some high street banks have community development
policies which encourage their officers to take part in community activities –
they are not allowed to charge);
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 33
•
local business owners and managers – a number of larger corporations have
policies similar to the banks with regard to community action;
•
independent examiners for local charities;
•
specialist internal audit service providers operating on a fixed fee or on an
hourly rate;
•
consortia organised by the local NALC or SLCC branch (or sometimes in
partnership) providing affordable internal audit services; and
•
individuals identified by NALC or SLCC acting under their quality controls to
provide internal audit services to local councils.
Additionally, in a very positive and welcome development, a number of district
council have offered, under their community development budgets, to provide
training and support for potential internal auditors for local councils.
1
Subject to the guidance that one to one reciprocal arrangements between
councils are unlikely to be seen as being sufficiently independent to satisfy this
requirement.
2.72 The duties of internal audit relate to reporting to the council on the adequacy of
systems of control. Internal audit’s annual report may be found at section 4 of the
annual return but the guidance given within the annual return is necessarily brief.
2.73 The work of internal audit should be subject to an engagement letter on first
appointment by the Council, setting out the terms of the appointment. Engagement
terms may include:
•
roles and responsibilities;
•
audit planning;
•
reporting requirements;
•
assurances around independence and competence;
•
access to information, members and officers;
•
period of engagement;
•
remuneration; and
•
any other matters required for the management of the engagement by the
council.
2.74 Councils and internal audit may also find helpful the following more detailed
guidance on how internal audit is carried out.
34 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Subject
Guidance
1
Proper bookkeeping
The basic record of receipts and payments is always the
starting point of an accounting system; the majority of
internal controls will work back to that original record. It is
essential that the system requires that the basic cash book is
kept up to date and balances are regularly verified against a
bank statement or the actual cash in the petty cash tin. This
record will also agree with the supporting vouchers, invoices
or receipts. Even though the arithmetic may be automatic on
a computer based system it is necessary to check that the
additions and balancing are correct. The level of checking
will depend on who does what and at what frequency. Where
there is a computer based system, the reliability of
information reported by the system depends on the quality
and accuracy of data input, and how it is then processed,
and so tests of the integrity of data input and processing
should be considered. A councillor or member of staff may
do the checking or verification; internal audit will test that the
checking verification within the system has been undertaken.
2
Financial
Regulations
Standing
Orders
Payment
Controls
The first step in establishing a financial system is to identify
the general rules applicable at council or committee
meetings and in carrying out the council’s business. The
Standing Orders, Financial Regulations and other internal
instructions do this. Model versions of Standing Orders and
Financial Regulations are available from NALC and SLCC.
Internal audit should have a copy of the current Standing
Orders, Financial Regulations and any internal instructions.
Internal audit’s report to the council will include any
recommendations for improvement in these documents
arising as a result of their work during the year. The level of
checking will depend on the content of the Standing Orders
and Financial Regulations.
The amount of work may well vary, and more extensive
testing of compliance may be needed from time to time, but
as a minimum, having established whether the council has
within the year reviewed its Standing Orders and Financial
Regulations for continued relevance, internal audit will test.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 35
2
Subject
Guidance
Financial
Regulations
Standing
Orders
Payment
Controls
In purchase order procedures:
•
that the correct number of estimates, quotes or full
tenders depending on estimated value of contract have
been obtained (Standing Orders will state the value at
which tenders are required; Financial Regulations or
Standing Orders will show the value where estimates or
quotes only are required);
•
that proper purchase authority by council, a committee
or officers (under clear delegated powers) is in place;
and
•
that a proper legal power has been identified for the
expenditure.
In purchase payments:
•
that the supporting paperwork confirms that there is a
fully approved invoice and authorisation for payment;
and
•
that VAT is identified appropriately for reclaim.
In most councils these checks can be limited to a sample of
transactions selected at random plus those which are large
or unusual, such as each payment for a value in excess of
£1,000, or some other figure appropriate to the level of
activity of the council. The aim is for internal audit to check
that the systems put in place by management are working
and are appropriate.
Standing Orders and Financial Regulations may well repeat
the statutory requirement to maintain ‘a separate account’ of
expenditure and income under Local Government Act 1972
section 137 and Local Government Act 1986 section 5.
Internal audit should check annually that such an analysis is
kept and that the cash limit in section 137 is not exceeded.
Internal audit may scrutinise the resulting list of expenditure
and should consider whether the power is being properly
used but would not check through for the correct analysis of
every item.
Internal audit should also check that payments of interest
and principal in respect of loans (and investments if any are
held) are in accordance with an agreed schedule.
36 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Subject
Guidance
3
Risk
management
The greatest risk facing a local authority is not being able to
deliver the activity or services expected of the council.
The council is likely to be managing many of those risks
when it reviews its insurance and its systems. The minutes
are an essential record of such reviews. Budget setting and
insurance review are annual activities; the review of systems
may be less frequent. It is suggested that systems should be
reviewed in some detail, unless triggered by external or
internal audit reports, or change in risk, at least every four
years or on the change of Clerk/RFO. This might be more
appropriate for larger councils on a cyclical basis.
Minutes should be checked by internal audit for any
suggestion of unusual activity and evidence that risks are
being identified and managed.
More guidance regarding risk management can be found in
this section at paragraph 2.97.
4
Budgetary
controls
Internal audit will not check the budget but will verify that a
budget has been properly prepared by the council and
adopted in setting the precept. The regular reporting of
expenditure, and variances from budget, is an important part
of the proper control of public money. Internal audit will
expect to see the regular reports to council and the variance
analysis. That variance analysis and the decisions of council
or committee taken as a result may suggest areas for
additional analysis by internal audit. Part of budgetary control
is to ensure adequate but not excessive reserves or
balances. Progress against budgets should be regularly
monitored. It is particularly helpful when determining the
likely precept that will be required for the following year.
Internal audit will be keen to establish that this has taken
place.
More guidance on the budgetary process can be found in
Part 3, paragraph 3.29 onwards.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 37
Subject
Guidance
5
Income
controls
Internal audit will look for evidence that the precept and grant
income is properly and promptly received. In value this is
usually the largest item of income. Internal audit is more
likely to focus on other income particularly where it is
unusual or cash-based.
Cash income brings higher risks, in turn requiring greater
control by ticket issues, receipt issues, segregation of duties
of the cashier and the invoice-raising clerk. The need for
greater control implies a need for internal audit to verify the
operation of all checks and balances. If the council has let
property or holds investments, then the council should have
established a system to ensure regular income collection; a
diary of expected dates of income etc. Internal audit will look
for evidence of such activity and any necessary progress or
invoice chasing. If the income is from quoted investments
these is a clear risk to be addressed in terms of identifying
the investment policy to be followed, controls over who can
initiate a change of investment and an awareness of the
investment risks being accepted.
6
Petty cash
procedure
Internal audit will be looking to see that there is an
established system in place rather than ad hoc
reimbursement. If the clerk is reimbursed for all small cost
expenses or there is a separate cash float, a regular
payment must be made to keep up to date. Internal audit
would be looking to see that reimbursement is regular and
evidence that on occasions an independent person has
physically counted the cash balance and checked to be in
agreement with the up-to-date record. The council should
have a system for the regular approval of petty cash
expenditure.
38 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
7
Subject
Guidance
Payroll
controls
Internal audit will be seeking reassurance that the system is
delivering the correct payments for wages and salaries and
that PAYE/NIC is correctly deducted from the gross pay and
paid to HM Revenue and Customs. Historically, one of the
greatest areas of risk for local councils has been the
improper payment of wages and salaries, together with the
lack of proper deduction of income tax and national
insurance contributions. There are some simple tests to
establish whether a person is employed by a local authority
or can be regarded as a contractor. The clerk is always
regarded as an employee – as an ‘office holder’. If a
deduction for tax or national insurance is not made by the
employer, HM Revenue and Customs has the right to seek
the lost tax and contributions from the employer as if the
payments made were after deduction of the appropriate
amounts (ie the amount sought is ‘grossed up’). There may
also be a liability for interest and penalties that can increase
the sum significantly.
The clerk, even at the smallest of councils, will need to be
able to produce evidence that the correct tax treatment of
salary has been arranged with HM Revenue and Customs.
HM Revenue and Customs seek to avoid setting up a PAYE
scheme for a single employee whenever possible, so will
seek to ‘code out’ any parish council salary through other
income, pension scheme or by direct assessment. The
council should to have a letter from HM Revenue and
Customs (addressed to the Council) confirming that
arrangements to their satisfaction have been made for the
particular employee. Internal audit may verify that evidence
each year as part of the annual statement forming part of the
annual return.
Changes to contracts of employment (whether annual salary
change, or other) would normally require formal agreement
by council, committee or less frequently the RFO, as well as
a written statement for the employee. The council should
record evidence of such agreement. Internal audit should
check that this evidence is in place and would agree sums
paid to those shown as payable.
The purpose of specifically investigating the PAYE/NIC
system recognises the risks inherent in these items, either
through fraud or error, and the risk of significant
management time and penalties in making corrections if
errors arise.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 39
Subject
Guidance
8
Asset control
The Council is required to maintain an asset and investment
register. In the smallest councils, this may only be a note
produced for the members and local electors. Internal audit
will be interested in seeing that there is evidence that the
continuing existence of owned and managed assets is
checked on a regular basis. In a larger council the register
may be hand written, typed or computer produced; the
essence is the same in that the system should require
verification on a regular basis. This verification should
include confirmation that insurance cover is adequate and
sufficient.
If investments are held then the asset register will be a more
active record; it should include details of cost, values, and
expected income that can be checked against the actual
income. Dates and references to minutes of the members’
review of the investments against the investment policy
might also be included. The Council will have regard to the
advice from the Secretary of State published on
12 March 2004 (see Appendix 8). This will be particularly
important when considering de-mutualisation or privatisation
shareholdings which have no identifiable cost and may have
a volatile value.
9
Bank
reconciliation
In most councils, the bulk of the financial records will be
concerned with a current account and a form of deposit
account at a bank or building society.
A regular feature of the financial system will be the
reconciliation of the balances shown on the statements with
those calculated in the council’s financial records. It is
strongly recommended that on receipt of a bank statement,
there should be a reconciliation of the appropriate cash book
record. Internal audit will wish to see that this has been
done, but should not undertake the reconciliation unless it
requires re-performance. It may be appropriate for the year
end balances and the reconciliation to be checked in detail.
The basic cash book record must not be written up from the
bank statements. That does not provide any form of control.
The cash book record is written up from the council’s
records: cheque counterfoils and the paying-in books,
together with the known direct payments and credits. It is the
cash book record that is checked regularly against the bank
statements to provide control.
40 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Subject
Guidance
9
Bank
reconciliation
The bank reconciliation should include a note of the historic
cost of current investments held by the council, if any, so that
this can also be monitored to ensure that these funds are
performing in the way planned by the council and also so
that the council can have, each time this is reviewed, as
complete a picture as possible of its liquidity and available
funds.
As part of internal control, a member may be appointed to
review the bank reconciliation in detail and to evidence that
review by signing the reconciliation form and the bank
statements.
10
Year - end
procedures
It is the duty of the council and the RFO to produce the
year-end financial statements. Internal audit will be looking to
see that the appropriate accounting basis is used, that the
figures can be followed through on working papers and that
adjustments, transfers, contra entries etc are fully explained
and justified. Internal audit would not be expected to check
all figures but will probably verify a small sample and the
totals. In producing year-end financial statements there is a
need to consider proper valuation of assets and liabilities. A
system will be in place for identifying outstanding amounts
(receivable and payable) and then for deciding on their
materiality for inclusion in the income and expenditure
accounts. Internal audit will scrutinise the lists of creditors
and other balances to ensure that the system is working
adequately and that the RFO has correctly identified
transactions in the one year that may relate to another.
2.75 It is not possible to draw up a standard internal audit programme for local councils
in view of the need for each programme to address the particular needs of each
council. It is also important for councils to recognise that internal audit’s function is
to test and report to them on whether the council’s system of financial control put in
place by management is adequate and working satisfactorily. It is not for the
external auditor, nor is it a matter for internal audit, to actively seek evidence of
fraud, corruption, error or mistake. Internal auditor’s role is to assist the council in
fulfilling its responsibility to have and maintain proper arrangements for the
prevention and detection of fraud, error or mistakes.
2.76 Internal audit reports to the council and its work is to a certain extent capable of
constraint and direction by the council. The external auditor reports to the council
but seeks direction from guidance issued by the Audit Commission and from the
legislation under which they are appointed and work.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 41
2.77
It is proper for internal audit to carry out other tests on the systems of the council.
Such tests may be suggested by the external auditor or by the council’s own risk
management process. All such work is to be reported to council. Any report by
internal audit is addressed to the council, may suggest actions by the council, and
should be treated as a document open to view by local taxpayers.
2.78
A possible approach to testing by internal auditors is contained in Appendix 9 to
this guidance. This is not a checklist requiring completion, but a suggested method
of approach.
The review of the system of internal audit
What does the law say you have to do?
2.79 The regulations require councils to carry out an annual review of the effectiveness
of their system of internal audit. This review is an integral part of continually
improving governance and accountability.
2.80 Local councils must at least once a year carry out a review of internal audit and
include the results in the annual governance statement which is Part 2 of the annual
return.
2.81 The review must be balanced to the council’s internal audit needs and usage. It
should be designed to provide sufficient assurance for the council that standards
are being met and that the work of internal audit is effective. Councils must judge
the extent and scope of the review by reference to their own individual
circumstances.
So what needs to be reviewed?
2.82 Regulation 6 requires, as a primary matter, that a council ‘shall maintain in
accordance with proper practices an adequate and effective system of internal audit
of its accounting records and system of internal control’.
2.83 Local councils source their internal audit in a number of ways (which are described
elsewhere in this guide). The starting point for the review should be an assessment
against the internal audit standards set out in paragraphs 2.58 to 2.78. This will
include as a minimum making an assessment of each of the following.
•
The scope of internal audit.
•
Independence.
•
Competence.
•
Relationships.
•
Audit planning and reporting.
42 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Who should carry out the review?
2.84 A key point to note is that it is the responsibility of the council to conduct the annual
review. This is not a review that can be carried out by the external auditor or as part
of the annual audit. Nor is it something that can be delegated to the clerk or RFO,
and certainly not to internal audit.
2.85 Although the internal audit provider cannot be allowed to influence the direction or
extent of the review, it is considered good practice to seek their input into the
process.
2.86 There are no hard and fast rules as to who actually performs the review or how it is
carried out, but councils may wish to set up a small working party for this purpose
or ask an appropriate committee. Whichever way the review is carried out the
results must be reported to and considered by a full meeting of the members of the
council because of the link to the council’s Annual Governance Statement.
2.87 There is no single approach that will suit all local councils. Much will depend upon
the size of the council and arrangements already in place for conducting the wider
review of the system of internal control and risk management generally.
What should the review cover?
2.88 Areas for review should be based around the components of internal audit which
are identified in paragraph 2.83. These will include principally a consideration of the
extent to which internal audit adds value and how well it is helping the delivery of
the council’s objectives.
2.89 The effectiveness of internal audit should not be judged solely by the extent of
compliance with expected standards. The review is primarily about effectiveness,
not process. In essence, the focus of this review should be on the quality of delivery
of the internal audit service ie reliable assurance about the council’s internal
controls and its management of risk.
2.90 A checklist to assist councils in carrying out the two principal aspects of the review
of internal audit - compliance with standards and overall effectiveness - is provided
below.
What evidence can be used?
2.91 Wherever possible, evidence to support the review should be gathered throughout
the year. There are many possible sources of evidence and some examples are set
out below.
•
Previous year’s review and action plan.
•
Annual report by internal audit.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 43
•
Periodic reports from internal audit, if any, which could include one or more of
the following.
-
An internal audit plan.
-
Cyclical internal audit monitoring reports.
-
The results of any investigations.
-
Review of performance indicators, if used.
•
Any reports by the external auditor covering internal audit work or on key
financial systems.
•
Results of any other external reviews of internal controls or aspects of them
including Quality Parish assessments.
What is the outcome of the review?
2.92 The review of the effectiveness of internal audit cannot be considered in isolation as
it feeds into the council’s review of the wider system of internal control. The report
on the review must, therefore, include an opinion as to whether or not the internal
audit system is effective.
2.93 Aside from the need to publicly report the outcome of the review, if there are any
areas identified for development or change in internal audit, an action plan should
be produced so that the council can manage the remedial process. The action plan
should set out the areas of improvement required, any proposed remedial actions,
the people responsible for delivering improvement, and the deadlines for
completion of the actions.
What is the timescale?
2.94 Just as the Annual Governance Statement needs to be considered throughout the
year, the review of internal audit should not be left until the year-end. The review
feeds into the Annual Governance Statement and so it needs to be completed first.
So councils must allow time for the review in drawing up their timetable for the
completion of the annual return.
2.95 Monitoring of action plans to address weaknesses identified in the previous year’s
review should also happen throughout the year, linked to the way that the Annual
Governance Statement action plan is continuously monitored.
Is training available?
2.96 Those carrying out the review of internal audit will need to understand the purpose
of the review, what it includes, and how to carry it out. Training on this may be
delivered by NALC and SLCC or from the local district or unitary authority.
44 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils │Part 2 - The annual return and corporate governance 45
Internal Audit Review Checklist - Part 1 - Meeting standards
Expected
Standard
Evidence of Achievement
1. Scope of
internal audit
Terms of reference for internal audit were (re)approved by full council on [date].
Internal audit work takes into account both the council’s risk assessment and
wider internal control arrangements.
Internal audit work covers the council’s anti-fraud and corruption arrangements.
2. Independence
Internal audit has direct access to those charged with governance (see Financial
Regulations).
Reports are made in own name to management.
Internal audit does not have any other role within the council/board.
3. Competence
There is no evidence of a failure to carry out internal audit work ethically, with
integrity and objectivity.
4. Relationships
All responsible officers (Clerk and RFO) are consulted on the internal audit plan.
(Evidence is on audit files).
Respective responsibilities for officers and internal audit are defined in relation to
internal control, risk management and fraud and corruption matters (job
descriptions and engagement letter).
The responsibilities of council members are understood; training of members is
carried out as necessary. (See Member training plan).
5 Audit Planning
and reporting
The annual internal audit plan properly takes account of all the risks facing the
council and has been approved by the council [date].
Internal audit has reported in accordance with the plan on [date].
Yes
Areas for
or No development
46 Governance and Accountability for Local Councils │ Part 2 - The annual return and corporate governance
Internal Audit Review Checklist - Part 2 - Characteristics of Effectiveness
Characteristics of
‘effectiveness’
Evidence of Achievement
Internal audit work is
planned
Planned internal audit work is based on risk assessment and designed to
meet the council’s needs.
Understanding the whole The annual audit plan demonstrates how audit work will provide assurance
organisation its needs
for the council’s Annual Governance Statement.
and objectives
Be seen as a catalyst for
change
Internal audit supports the council’s work in delivering improved services to
the community.
Add value and assist the The council makes positive responses to internal audit’s recommendations
organisation in achieving and follows up with action where this is called for.
its objectives
Be forward looking
In formulating the annual audit plan, national agenda changes are
considered.
Internal audit maintains awareness of new developments in the services,
risk management and corporate governance.
Be challenging
Internal audit focuses on the risks facing the council.
Internal audit encourages managers/members to develop their own
responses to risks, rather than relying solely on audit recommendations.
Ensure the right
resources are available
Adequate resource is made available for internal audit to complete its work.
Internal audit understands the council and the legal and corporate
framework in which it operates.
Yes
Areas for
or No development
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 47
Risk management
2.97 In all types of undertaking, there is the potential for events and consequences
that may either be opportunities for benefit or threats to success. Local councils
are no different and risk management is increasingly recognised as being central
to their strategic management.
2.98 Risk management is the process whereby local councils methodically address the
risks associated with what they do and the services which they provide. The
focus of good risk management is to identify what can go wrong and take
proportionate steps to avoid this or successfully manage the consequences.
2.99 Risk management is not just about financial management; it is about ensuring the
achievement of objectives set by the council to deliver high quality public
services. The failure to manage risks effectively can be expensive in terms of
litigation and reputation, the ability to achieve desired targets, and, eventually, on
the local community’s Council Tax bills.
2.100 The local council audit approach seeks to encourage local councils to address
these issues by placing emphasis on the need to keep under review and, if need
be, strengthen their own corporate governance arrangements, thereby improving
their stewardship of public funds and providing positive and continuing assurance
to taxpayers.
2.101 The importance of looking afresh at risk comes in the wake of a more demanding
society, bold initiatives and more challenge when things go wrong. It also arises
because of the significant changes taking place as a result of the Government’s
service improvement agenda, including, for example, Quality Parishes and
encouraging the delegation of service delivery associated with attaining Quality
status. Local authorities currently face pressures, including those associated with
the powers around well-being, that potentially give rise to a range of new and
complex risks and which suggest that risk management is more important now
than at any other time.
2.102 Members are ultimately responsible for risk management because risks threaten
the achievement of policy objectives. As a minimum, at least once each year
members should:
•
take steps to identify and update their record of key risks facing the council;
•
evaluate the potential consequences to the council if an event identified as a
risk takes place;
•
decide upon appropriate measures to avoid, reduce or control the risk or its
consequences; and
•
record any conclusions or decisions reached.
48 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
2.103 It is impossible, and potentially dangerous, to attempt to present a suggested list
of the risks which local councils face, and this guidance does not do this. The
range, nature, complexity and scale of the business of councils vary. Similarly the
priorities and service delivery objectives of one council will differ from those of
others. For this reason each council must identify, for itself, the key risks to
achieving successfully its priorities and service objectives. Identifying risks can be
a daunting task and so local councils may find it helpful to use, as a starting point,
the examples of risk set out in the three tables at the end of this section of the
guidance.
2.104 Support for councils wishing to improve their risk management arrangements,
over and above that provided by this guidance, is available through training
available from the technical support teams of both NALC and SLCC directly,
and/or the council’s insurance provider and by reference to various elements of
the National Training Strategy.
2.105 One reason why risk identification can be daunting is that, without doing anything
else, it could lead to a long list of potential threats with no sense of their relative
importance. For this reason the council should also evaluate the potential
consequences of a risk occurring and consider how likely this is.
2.106 For example, a single large capital project will present a number of individual
risks that will each require evidenced assessment and response to make the
project manageable. The risk assessment in such a case may well lead to the
very reasonable conclusion that the biggest risk is that the council does not
possess the skills internally to successfully deliver the project and that outside
assistance is required.
2.107 The consequences of an identified risk may include immediate financial loss but
even if the immediate impact is non-financial (such as an adverse impact on the
council’s reputation) this can have financial consequences in the longer term if,
for example, if this impedes the council’s ability to bid for funds in future.
2.108 The assessment of potential impact need not be any more complex than
classifying each impact as high, medium or low. At the same time it is a good
idea to assess how likely a risk is to occur and this too can be done using high,
medium and low categories. These value and probability assessments enable the
council to decide which risks it should pay most attention to when considering
what measures to take to manage them.
2.109 After identifying and evaluating risks councils need to decide upon appropriate
measures to take in order to avoid, reduce or control the risks or their
consequences. Examples of control measures relevant to some of the risk areas
which councils are likely to face are given in the three tables at the end of this
section of the guidance.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 49
2.110 The council’s internal auditor has a role in reviewing the effectiveness of control
measures that the council decides to put in place. Examples of internal audit tests
to confirm how effective are the measures and controls designed by the council in
respect of identified risks are also set out in the three tables at the end of this
section.
2.111 The tables are, for ease of reference, grouped into the three main types of
decision that councils take in relation to managing risk, having considered the
controls which they need to have in place. These are:
•
take out insurance (table 1);
•
work with a third party to manage the risk (table 2); or
•
self-manage the risk (table 3).
2.112 The tables are not intended to be exhaustive and they cover topics which are not
relevant to all councils. They are intended to create a starting point for the
development of a bespoke system of risk management for each local council.
50 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Table 1
Areas where there may be scope to use insurance to
help manage risk
Risk identification
Insurance cover for risk is the most common approach to certain types of
inherent risks.
✓ The protection of physical assets owned by the council – buildings,
furniture, equipment, etc (loss or damage).
✓ The risk of damage to third party property or individuals as a consequence
of the council providing services or amenities to the public (public liability).
✓ The risk of consequential loss of income or the need to provide essential
services following critical damage, loss or non-performance by a third
party (consequential loss).
✓ Loss of cash through theft or dishonesty (fidelity guarantee).
✓ Legal liability as a consequence of asset ownership (public liability).
Internal controls
A council’s internal controls may include the following.
✓ An up to date register of assets and investments.
✓ Regular maintenance arrangements for physical assets.
✓ Annual review of risk and the adequacy of cover.
✓ Ensuring the robustness of insurance providers.
Internal audit assurance
Internal audit testing may include the following.
✓ Review of internal controls in place and their documentation.
✓ Review of management arrangements regarding insurance cover.
✓ Testing of specific internal controls and reporting findings to management.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 51
Table 2
Areas where there may be scope to work with others
to help manage risk
Risk identification
The limited nature of internal resources in most local councils means that
councils wishing to provide services often buy them in from specialist
external bodies.
✓ Security for vulnerable buildings, amenities or equipment.
✓ Maintenance for vulnerable buildings, amenities or equipment.
✓ The provision of services being carried out under agency/partnership
agreements with principal authorities.
✓ Banking arrangements, including borrowing or lending.
✓ Ad hoc provision of amenities/ facilities for events to local community
groups.
✓ Markets management.
✓ Vehicle or equipment lease or hire.
✓ Trading units (leisure centres, playing fields, burial grounds, etc).
✓ Professional services (planning, architects, accountancy, design, etc).
Internal controls
A council’s internal controls may include the following.
✓ Standing orders and financial regulations dealing with the award of
contracts for services or the purchase of capital equipment.
✓ Regular reporting on performance by suppliers/providers/contractors.
✓ Annual review of contracts.
✓ Clear statements of management responsibility for each service.
✓ Regular scrutiny of performance against targets.
✓ Adoption of and adherence to codes of practice for procurement and
investment.
✓ Arrangements to detect and deter fraud and/or corruption.
✓ Regular bank reconciliation, independently reviewed.
52 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Internal audit assurance
Internal audit testing may include the following.
✓ Review of internal controls in place and their documentation.
✓ Review of minutes to ensure legal powers are available, and the basis of
the powers recorded and correctly applied.
✓ Review and testing of arrangements to prevent and detect fraud and
corruption.
✓ Review of adequacy of insurance cover provided by suppliers.
✓ Testing of specific internal controls and reporting findings to
management.
Table 3
Areas where there may be a need to self-manage risk
Risk identification
There are a number of activities that create business risks but do not fall easily
into either of the above categories for a number of reasons, principally because
they are either difficult to quantify or considered inefficient to have provided
externally or just uninsurable.
✓ Keeping proper financial records in accordance with statutory
requirements.
✓ Ensuring all business activities are within legal powers applicable to local
councils.
✓ Complying with restrictions on borrowing.
✓ Ensuring that all requirements are met under employment law and
regulations.
✓ Ensuring all requirements are met under HM Revenue and Customs
Notices and regulations (Income Tax, National Insurance and VAT).
✓ Ensuring the adequacy of the annual precept within sound budgeting
arrangements.
✓ Monitoring of performance against agreed standards under partnership
agreements.
Governance and Accountability for Local Councils │Part 2 - The annual
return and corporate governance 53
Internal controls
✓ Ensuring the proper use of funds granted to local community bodies under
specific powers or under section 137.
✓ Proper, timely and accurate reporting of council business in the minutes.
✓ Responding to electors wishing to exercise their rights of inspection.
✓ Meeting the laid down timetables when responding to consultation
invitation.
✓ Meeting the requirements for Quality parish status or other accreditation.
✓ Proper document control.
✓ Register of Members’ Interests and Gifts and Hospitality in place,
complete, accurate and up to date.
A council’s internal controls may include the following.
✓ Regular scrutiny of financial records and proper arrangements for the
approval of expenditure.
✓ Recording in the minutes the precise powers under which expenditure is
being approved.
✓ Regular returns to HM Revenue and Customs; contracts of employment
for all staff, annually reviewed by the Council, systems of updating records
for any changes in relevant legislation.
✓ Regular returns of VAT; training the responsible officer in matters of VAT
and other taxation issues as necessary.
✓ Regular budget monitoring statements.
✓ Developing systems of performance measurement.
✓ Procedures for dealing with and monitoring grants or loans made or
received.
✓ Minutes properly numbered and paginated with a master copy kept in
safekeeping.
54 Governance and Accountability for Local Councils │ Part 2 - The annual
return and corporate governance
Internal controls
✓ Documented procedures to deal with enquiries from the public.
✓ Documented procedures to deal with responses to consultation requests.
✓ Monitoring arrangements by the council regarding Quality Council status.
✓ Documented procedures for document receipt, circulation, response,
handling and filing.
✓ Procedures in place for recording and monitoring Members’ interests and
Gifts and Hospitality received.
✓ Adoption of codes of conduct for members and employees.
Internal Audit Assurance
Internal audit testing may include the following.
✓ Review of internal controls in place and their documentation.
✓ Review of minutes to ensure legal powers in place, recorded and correctly
applied.
✓ Testing of income and expenditure from minutes to cashbook, from bank
statements to cashbook, from minutes to statements etc. including petty
cash transactions.
✓ Review and testing of arrangements to prevent and detect fraud and
corruption.
✓ Testing of disclosures.
✓ Testing of specific internal controls and reporting findings to management.
Governance and Accountability for Local Councils │Part 3 - Accounting
guidance for local councils 55
Part 3 - Accounting guidance for local
councils
This part provides guidance on how local councils meet their statutory
responsibilities most effectively, particularly in relation to the preparation of the
annual statement of accounts (in the form of section 1 of the Audit Commission
annual return.) It is structured as follows.
•
Introduction.
•
Routine financial procedures.
•
Procedures for prompt and accurate recording of transactions.
•
The budgeting process.
•
Capital budgeting.
•
The Cash Book.
•
Preparing the Audit Commission annual return.
•
Audit notices and the presentation of the annual return.
Introduction
3.1
3.2
The Accounts and Audit Regulations provide a comprehensive framework for the
accounts of a local council, taking the wider definition of what constitutes ‘the
accounts’ as:
•
the day-to-day records of financial activity that help with the management of
the council's funds – the books of account; and
•
the summary of the council's financial activity that is prepared at the end of
each year for reporting to the public – the statement of accounts (ie section 1
of the Audit Commission’s annual return).
Manually kept books of account, or an effective computerised accounting system,
provide the basis for the statement of accounts, in that the statement of accounts
is compiled from the information recorded in the books. But the books of account
are important in themselves in the running of the council throughout the year. A
good set of books will allow a council to appreciate at any time:
•
the amounts that it has spent in the year, the income it has received and its
financial commitments;
•
whether, in the light of this information, its spending plans for the rest of the
year are still affordable;
56 Governance and Accountability for Local Councils │ Part 3 - Accounting
guidance for local councils
3.3
•
the assets that it owns (things that will be of economic benefit to the council
in the future: eg buildings, vehicles, investments, cash) and the liabilities that
it owes (eg outstanding payments for goods and services, borrowings); and
•
the extent to which its funds are secured from loss by internal checks and
controls.
These objectives are sensible in themselves, but so as to ensure that all councils
achieve a minimum standard of accounting, the Accounts and Audit Regulations
specify what councils must do to achieve them. Local councils must ensure that:
•
the body's accounting system and the form of their accounts and supporting
accounting records are determined by the responsible financial officer;
•
the responsible financial officer ensures that the accounting systems are
observed and that the accounts and supporting records of the body are
maintained in accordance with proper practices and kept up to date;
•
the accounting records are sufficient to show the body's transactions and to
enable the responsible financial officer to ensure that the statement of
accounts complies with the Accounts and Audit Regulations;
•
the accounting records in particular contain:
•
-
entries, from day to day, of all sums of money received and expended by
the body and the matters to which the income and expenditure or receipts
and payments account relate;
-
a record of the assets and liabilities of the body; and
-
a record of income and expenditure of the body in relation to claims made
by them for contribution, any grant or subsidy from the Government; and
the accounting control systems include:
-
measures to ensure that the financial transactions of the body are
recorded as soon as reasonably practicable and as accurately as
reasonably possible, measures to enable the prevention and detection of
inaccuracies and fraud, and the ability to reconstitute any lost records;
-
identification of the duties of officers dealing with financial transactions
and divisions of responsibilities of those officers in relation to significant
transactions; and
-
procedures for uncollectable amounts, including bad debts, not to be
written off except with the approval of members, or under delegated
authority, the responsible financial officer, and for the approval to be
shown in the accounting records.
Governance and Accountability for Local Councils │Part 3 - Accounting
guidance for local councils 57
Routine financial procedures
3.4
This section of the guidance summarises the requirements of the Accounts and
Audit Regulations, for the accounting framework that should be maintained by
local councils.
3.5
All local councils, including parish meetings where there is no parish council,
have a statutory duty under section 151 of the Local Government Act 1972 to
appoint an officer to be responsible for the financial administration of the council.
The responsible financial officer (RFO) is often also the clerk to the council, but
this is not automatically the case. The council must formally determine in who the
responsibility is to vest recognising that there are particular risks that arise in the
unusual circumstances where an elected member is appointed (unpaid) to this
office. Decisions about appointing and RFO should always be the subject of a full
risk assessment and consideration evidenced by council minute. The proper
segregation of duties means that the Chairman of Council or a Finance
Committee should never be appointed (even on a short-term basis) either as
Clerk and/or as RFO.
3.6
The appointment of a responsible financial officer does not mean that members
then have no responsibility for the financial health of the council. On the contrary,
members continue to be accountable for ensuring that the council does not live
beyond its means, but the responsible financial officer takes on the duty of
designing and implementing the accounting arrangements that will assure
members that finances are being properly managed.
3.7
The following table summarises the duties that are placed on the responsible
financial officer and suggests the arrangements that might be put in place to
ensure that these duties are met.
58 Governance and Accountability for Local Councils │ Part 3 - Accounting
guidance for local councils
Statutory duty
Possible arrangements
1
•
The responsible
financial officer
determines the body’s
accounting system and
the form of its accounts
and supporting
accounting records.
•
•
2
The responsible
financial officer ensures
that the accounting
systems are observed
and that the accounts
and supporting records
of the body are
maintained in
accordance with proper
practices and kept up to
date.
•
•
•
The council should make it a formal duty of
the responsible officer to keep accounting
systems under continual review to ensure
their adequacy for the council's purposes.
The council must facilitate this duty by
ensuring that the officer is competent to
meet their responsibilities (either by
requiring certain qualifications on
appointment or by training) and providing
sufficient resources for the running of the
systems.
The accounting systems that are used will
be particular to each individual council.
The smallest may require nothing more
than an account book and a file in which to
store bills. Larger councils might need an
integrated computer package, with
facilities for payroll, debtors, creditors and
VAT.
Measures for ensuring accounting systems
are observed include making available a
written record of procedures, training staff
to operate the systems properly and
regular audits to confirm effective
operation.
Certain procedures are designed to
confirm that accounting systems have
been observed, the most notable being the
preparation of the bank reconciliation (see
below). Good practice would be to report
to each council meeting that the latest
bank reconciliation has been prepared
successfully.
The proper practices specified by the
Accounts and Audit Regulations, are
represented by the contents of this
guidance.
Governance and Accountability for Local Councils │Part 3 - Accounting
guidance for local councils 59
Statutory duty
Possible arrangements
2
The responsible finance
officer ensures that the
accounting systems are
observed and that the
accounts and supporting
records of the body are
maintained in
accordance with proper
practices and kept up to
date.
•
3
The accounting records
are sufficient to show the
body's transactions and
to enable the responsible
financial officer to ensure
that the statement of
accounts complies with
the Accounts and Audit
Regulations.
•
•
The requirement to be up-to-date
means that transactions should be
entered in the records as soon as
possible after they take place.
Backlogs should not be allowed to
develop, and, where other officers
are responsible for spending money
and collecting income, then
procedures will need to be in place to
inform the responsible financial
officer of their dealings for entry in
the accounts. Timeliness is made
easier if the council has
arrangements for the latest financial
position to be reported at each
council meeting.
The responsible financial officer must
ensure that the accounting systems
are sufficiently detailed to record
each individual transaction that is
entered into. For instance, where the
council charges for village hall
bookings, the books should record
each individual booking rather than a
total for the value of all bookings
made in any week.
Accounting records will be sufficient
to ensure that the statement of
accounts complies with the Accounts
and Audit Regulations, if they allow
the analysis of transactions in
accordance with section 1 of the
Audit Commission annual return.
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Statutory duty
Possible arrangements
4 The accounting records
in particular contain:
• entries from day to
•
Day-to-day records (see Example 1)
day of all sums of
money received and
expended by the
body and the matters
to which the income
and expenditure or
receipts and
payments account
relate;
• a record of the
•
Assets and liabilities register (see
assets and liabilities
Example 2)
of the body; and
• a record of income
•
Grants register (see Example 3)
and expenditure of
the body in relation
to claims made by
them for contribution, Note – Examples may be found at the end
grant or subsidy from of Part 3.
the government.
5 The accounting control
•
Document and adopt control systems
systems include:
to clarify everyone’s duties and
• measures to ensure
responsibilities and to encourage a
that the financial
culture that does not tolerate bending
transactions of the
or breaking the rules.
body are recorded
•
Review systems at least annually or
as soon as
more frequently if required following
reasonably
any significant change of procedure
practicable and as
or key personnel.
accurately as
•
Add new systems if there is a
reasonably possible,
business need to do so.
measures to enable
•
Report annually to the council prior to
the prevention and
their completion of the annual return.
detection of
inaccuracies and
fraud, and the ability
to reconstitute any
lost records;
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guidance for local councils 61
Statutory duty
•
•
Possible arrangements
identification of the
duties of officers
dealing with financial
transactions and
divisions of
responsibilities of those
officers in relation to
significant transactions;
and
procedures for
uncollectable amounts,
including bad debts,
not to be written off
except with the
approval of the
responsible financial
officer and for the
approval to be shown
in the accounting
records.
Procedures for prompt and accurate recording of
transactions and the prevention and detection of
inaccuracies and fraud
3.8
The guidance in the following paragraphs should be taken into consideration by
councils when determining their procedures for prompt and accurate recording of
transactions and the prevention and detection of inaccuracies and fraud.
Accounts for payment
3.9
Section 135 of the Local Government Act 1972 requires councils to make
Standing Orders that include provisions for securing competition and regulating
the manner in which tenders are invited. To comply with these requirements,
councils should set within their Financial Regulations a limit for the purchase of
goods and services above which three estimates or quotes should be invited from
persons or firms competent to do the work. Standing Orders will state a higher
value above which competitive tenders in sealed envelopes should be invited. It
is the responsibility of councils to determine their own limits that are most
appropriate to local circumstances.
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3.10 As far as possible, a fully priced official order should be sent to suppliers in
advance of delivery of goods. Official orders both commit a supplier to a price and
help prevent unauthorised credit being granted in the council's name. On receipt
of invoices, verification that the relevant goods or services have been received
should be obtained and invoices checked to ensure that the arithmetic is correct,
agreed discounts have been deducted and everything is acceptable regarding
reclaiming the VAT. Practitioners should keep up to date with VAT Guidance
issued by HM Revenue and Customs and, from time to time, by NALC and
SLCC.
3.11 The payment process should always be carried out in accordance with the
council’s own Financial Regulations. Once the invoices have been approved,
cheques or any other order for payment must, by law, be signed by two members
of the council. In addition to the members signing, the clerk or responsible
financial officer may also be required to sign cheques or other similar bank
instructions. Cheques should only be released once confirmation has been
obtained that adequate funds are available. In any event, all payments made
since the last meeting should be reported to the next council meeting. Members
should never sign blank cheques, funds transfers or similar bank instructions
which are presented unsupported by the appropriate documentation.
3.12 The council should develop control procedures for any payments by bank
transfer, or other electronic means, taking into account the risks brought about by
the ease and speed of these transactions and the difficulties faced in unravelling
them should they go wrong. In developing adequate control procedures members
must bear in mind legal requirements regarding official signatures.
3.13 If there is any doubt as to how much the council owes to one of its regular
suppliers, the supplier should be asked to send a statement of the council's
account. It would be appropriate to request statements as at 31 March each year
to assist with the preparation of the annual return.
Receipts
3.14 Cash and cheques should be entered into the cash book on the date of receipt
and banked promptly and intact (ie without any of the cash being kept back for
spending). Practitioners should be aware that some receipts may require VAT to
be accounted for and paid over by the council, particularly where sales of items
are involved and certain thresholds have been reached. Once again, the RFO
should be familiar and up to date with the rules governing such transactions.
These are published by HM Revenue and Customs and accompanied by
guidance for practitioners.
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3.15 Where any person, such as a swimming pool manager or cemetery
superintendent or any other employee or member carrying out the usual activities
of the council, receives money on behalf of the council, their responsibility is to
ensure that such funds are either banked or promptly deposited with the
responsible financial officer. Anyone handling cash on behalf of the council
should be properly trained in the procedure that they are to operate. They must
be provided with the appropriate duplicate receipting and recording documents.
With such an arrangement, the responsible person in receipt of the money would
need to maintain a record showing, in strict date order, the money and cheques
received and bankings or deposits made. This collection and deposit record
needs to be examined from time to time to ensure that bankings are made
regularly and that the cumulative totals match to the cash book and banks’
statements.
Cash balances
3.16 Where a council builds up balances these must be safeguarded by investing in
an appropriate account. Investing balances by local councils must be done
prudently and in accordance with the requirements of the Local Government Act
2003 and Guidance issued by the Secretary of State (see Appendix 8).
3.17 Before finalising and adopting procedures and internal control systems involving
cash, the responsible financial officer should always check the requirements of
insurers under Fidelity Guarantee insurance cover arrangements, which may well
specify the amount, location and minimum security arrangements required
regarding the handling of cash or bank balances.
3.18 The number of petty cash floats should be kept to a minimum and should not be
used when an official order is more appropriate. The floats should be adequate in
size to meet small items of expenditure and should not require reimbursement
more frequently than once a month – this will require careful setting of float levels.
Adequate records of the receipts and payments should be maintained for each
float and regular reconciliation performed, usually with such regularity that
successful reconciliation can be reported at each council meeting.
Debts due to the council
3.19 Effective debt collection is an essential part of proper financial management.
Local councils need to ensure that invoices raised are paid promptly or that
appropriate recovery action has been taken. Additionally, debts shown to be
unrecoverable should be written off, after full consideration of the possibilities for
and the likely costs of pursuing the debt.
3.20 Debt monitoring arrangements should be in place covering all activities of the
council which involve receiving payment. For example, if the council rents out a
number of allotments, a separate record may be appropriate for that purpose.
The record would need to include details of the person who owes the debt, the
amount, the arrears brought forward at the start of the accounting period,
amounts due in the year, amounts paid in the year, any debts written off, and a
note of the current state of any recovery action taken.
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3.21 At the end of each year, the record will need to be reconciled to ensure that the
figures for arrears brought forward plus new amounts due, less new receipts and
write-offs, balances to the arrears that need to be carried forward into the next
year’s accounts.
Payroll
3.22 The remuneration payable to all staff must be approved in advance by the
council. Guidance on this issue is issued jointly by the National Association of
Local Councils and the Society of Local Council Clerks and should be referred to.
3.23 Local councils with any employees are, by definition, employers and are,
therefore, required to operate under Pay as You Earn (PAYE) rules from
HM Revenue and Customs. PAYE taxes and National Insurance contributions
should be deducted in every instance unless authority not to do so has been
received from HM Revenue and Customs in writing. Such deductions should be
passed on to the Collector of Taxes on or before the date prescribed. In addition
the general requirements of the Employment Acts apply (written statements,
holiday and similar which are not within the scope of this guidance).
3.24 Local councils should pay particular attention to situations where contractors are
engaged to carry out the council’s services. Councils should always be alert to
the risk that occasions may arise when contractors cease to be self-employed
and become employees for tax purposes. It is unlikely that the function of clerk to
a local council in England can ever be self-employed.
3.25 As part of risk management, written confirmation should always be sought from
HM Revenue and Customs to ensure that payments for services are being
correctly treated; otherwise councils may find themselves with unexpected and
significant liabilities to pay income tax and employers National Insurance
contributions. Care must be also taken when making any payments of expenses
or allowances to non-employees, eg members, which should also be considered
as falling within the scope of PAYE.
Insurance
3.26 All local council employers are required by law to take out employers' liability and
fidelity guarantee insurance and all cover should be kept under constant review
making sure it adequately reflects changes in circumstances.
3.27 Adequate insurance against third party risks is vital especially if a local council
owns property such as bus shelters, swimming pools and playground equipment.
3.28 The council should review the range and value of insurance cover each year. At
the expiry of each policy, consideration should be given to inviting competitive
quotations for the new policy.
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The budgeting process
3.29 The preparation of an annual budget is one of the key statutory tasks to be
undertaken by a local council, irrespective of its size. The budget has three main
purposes:
•
it results in the council setting the precept for the year;
•
subject to the council’s Financial Regulations, it gives the clerk and other
officers overall authority to make spending commitments in accordance with
the plans approved by members; and
•
it provides a basis for monitoring progress during the year by comparing
actual spending against planned spending.
3.30 The importance of the budget should not be underestimated. It is essential that
council members understand how it is put together and how it should be used in
the running of the council. At its simplest the budget compares what a council
would like to spend in the forthcoming year on local services with the amount of
income it expects to generate, with the excess of planned spending over income
being made up by the precept. But as the year progresses, things will not always
go to plan and the prospect of a shortfall of available cash during a financial year
can present a significant risk. Reviewing the budget against actual expenditure
regularly gives members early warning about the likelihood of a shortfall (or
surplus) and helps them to decide what responsive action to take.
3.31 The following table sets out the process for preparing and making use of the
annual budget.
1 Deciding the
form of the
budget
The first decision that a council must take is the level of
detail at which to prepare the budget. This involves
scheduling out all the headings under which the council
expects to make payments or is likely to receive cash
(eg clerk's remuneration, village hall booking fees). An
estimate will then be prepared for each of these
headings of the value of transactions that will take place
in the next year.
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2 Review the
current year
budget and
spending
In making estimates, most councils will start by looking
at current year figures, with three main purposes:
• to identify activities that are being carried out this
year that will also be carried out next year and need
to be budgeted for again (eg payment of the clerk,
running costs of the village hall);
• to identify things that are happening in the current
year that will not happen next year and do not need
to budgeted for again (eg a
one-off grant to the local sporting association for
renovating their premises, running costs of a sports
centre that is to be closed); and
• to identify items that are not in the current year
budget, and need to be added for next year's budget
(eg major drainage works in the cemetery,
employment of a caretaker for the village hall).
This is called ‘incremental budgeting’, as it builds on the
decisions that the council has taken in the past.
An alternative approach that councils sometimes take is
to start with a clean piece of paper and build a fresh
budget that is not constrained by what has happened in
previous years. This is sometimes described as
‘zero-based’ budgeting.
3 Determine the
cost of spending
plans
Having determined what the council wants to spend its
money on, the next stage is to work out the costs of its
plans. For existing activities, this will require an
assessment of likely changes in the level of the activity
and the possible impact of wage and price inflation. The
prices of new activities will have to be estimated using
the best information currently available.
4 Assess levels of
income
Careful consideration should be given to budgeted levels
of income for the forthcoming year. Many councils may
have no other income but the precept, but for others the
budget setting process will usually be the time when
decisions are taken about what level fees and charges
should be set for the next twelve months.
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5 Bring together
spending and
income plans
For many activities, spending and income decisions will
be linked directly – eg if the council decides to extend
the opening hours of the community hall, then it will
spend more on heat and light but also generate more
income from charges.
However, it is an important stage of the budget process
when spending plans are brought together with
assessments of income to see how affordable the plans
are. When doing this it is usual practice to be more
optimistic about spending plans (ie to expect that the
council will be able to carry out all its plans and spend as
intended) and more pessimistic about income levels (ie
to assume that the council might not be able to generate
all the income it hopes to).
Affordability will usually be judged by the impact the
overall plans will have on the precept. If there is an
increase in the council's budgeted net spending for next
year over the current year, would this result in an
increase in the precept that would be acceptable to the
local population as an addition to their council tax? In
fact, many councils will work the other way around:
deciding first what a reasonable increase would be for
the precept and then working out what the extra funds
generated can be spent on.
6 Provide for
contingencies
and consider the
need for
balances
Some councils may have absolute certainty in their
spending plans for the forthcoming year. For instance, if
the only significant outgoing is the clerk's remuneration
and this is agreed before the start of the year, the council
will know exactly how much it will spend. However, most
councils will have some uncertainty in their plans,
perhaps because of general factors such as inflation or
changes in interest rates on cash deposits or specific
things such as not knowing exactly how much firms will
tender for the re-wiring work planned for the village hall.
Before committing itself to its spending plans, the council
should review the need for amounts to cover
contingencies, in case inflation is higher than expected
or works are more costly than was first thought. The
amounts added to the budget should not be excessive.
Councils might work to the principle that it is better to
raise cash from a higher precept and not use it than to
set the precept too low, and so run out of cash and run
the risk of incurring an unlawful overdraft.
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6 Provide for
contingencies and
consider the need
for balances
(continued)
A well-managed council will also look forward beyond
the end of the year for which the budget is being set and
think about whether there are any substantial
commitments that it would be prudent to set aside funds
for. For example, the village hall may need re-roofing in
three years time, but the council could not afford the
cost from that year's budget. Instead, a balance could be
built up by raising the precept for a proportion of the cost
in each of the next three years.
Most councils will therefore budget to carry forward a
balance, to cover contingencies or specific spending
plans. This means that in setting the budget the council
will have to estimate what balance will be brought into
the new year, decide what balance it wants to carry
forward and charge the difference against the new
year's precept.
See paragraph 2.26 for guidance on the level of unearmarked general revenue reserves.
It is possible that the council’s spending plans,
particularly capital expenditure, may require a level of
external borrowing. Borrowing by local councils is
subject to government controls and with certain limited
exceptions the Secretary of State’s approval is required.
He or she may impose conditions in accordance with
which the borrowing shall be carried out. Councils must
always take advice before commencing any contractual
borrowing arrangements. NALC or SLCC can provide
useful guidance to assist councils in making borrowing
decisions and obtaining the necessary approvals and
funds. Decisions to pay outright, hire or lease should be
taken prudentially and bearing the rules on borrowing in
mind.
Councils should also be aware of, and have internal
controls in place to avoid the possibility of ‘accidental’
borrowing which can occur, for example, if regular
payments are made at a low point in the council’s cash
flow cycle, ie at year-end, and just before the precept
payment is received.
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7 Approve the
budget
Having determined the planned levels of spending,
anticipated income and the balances needed to be
carried forward for contingencies and future spending
plans, the budget needs to be approved. Much of the
work preceding this stage may be delegated to the
responsible financial officer, but the council must
approve the finalised budget. Sufficient information
needs to be provided with the budget papers so that
members can make a reasonable and informed
assessment about the desirability and affordability of the
plans for the coming year.
At the same time that the budget is set, members will
also approve any delegation of responsibility for
spending amounts set out in the budget. For example,
the budget might include amounts for paying a grant to
the local youth club: authorisation might then be given to
the responsible financial officer to pay the grant without
having to make further reference to the council.
There is no statutory requirement to publish the budget,
but many councils will put a copy on the notice board
once it has been approved. It must be made available
on request under the Freedom of Information Act 2000.
8 Confirm the
precept
The important statutory stage of the budget process is
confirming the precept that is to be raised on the district
council or unitary authority for the area. The law requires
that precepts be issued a month before the new financial
year starts, ie by 1 March. The district council/unitary
authority may ask for precepts to be issued by an earlier
date to assist their setting and administration of the
council tax and will normally provide assistance to local
councils to ensure that everything goes smoothly.
All other parts of the budget process will be timed so
that the date for setting the precept can be achieved
safely.
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9 Review
progress
against the
budget
Once the budget has been approved, it should be an
active tool for managing the council's finances. The wellrun council will have the following arrangements in
place.
• Progress reports prepared periodically through the
year, showing spending and income to date against
budgeted amounts. Care should be taken to profile
the budget across the year and not necessarily
assume, say, that half the budget would have been
spent after six months. For instance, a significant
element of spending may be grants to local
organisations paid at the start of each financial year.
There would then be a peak of spending in April that
would not be characteristic of the other months of
the year. An effective report would therefore contain
projections for the full year based on the spend to
date and future plans.
• The report is presented at each council meeting.
This would provide members either with comfort that
the spending plans were proceeding as hoped or
with information about areas where spending was
higher or lower than anticipated. In the latter case,
members will be able to consider the need to amend
their expenditure plans (perhaps by switching
amounts from one budget heading to another that is
overspent – known as ‘virement’), to take steps to
increase income, or to make decisions about using
the funds that have been saved for contingencies.
• It is good practice to change a budget that is shown
by experience to be ineffective. However, changes
should only be made with the authorisation of those
who approved the original budget.
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Some notes on Capital Budgeting
3.32 Councils can only use receipts from the sale of fixed assets (‘capital receipts’) in
excess of a de minimis value for specified purposes, of which the main ones are
the repayment of external debt and the financing of capital payments. Capital
payments relate to the acquisition, construction and enhancement of land,
buildings, vehicles, plant and equipment; the provision of grant-aid for such
expenditure by another body will, in many cases, also be within the definition of
capital expenditure. This work generally involves high levels of payments that
need to be properly planned over an appropriate timescale. It is unlikely that the
majority of smaller councils will embark on many major capital schemes, but
where they do they should have a long-term capital budget or a rolling capital
programme. Advice should be sought from NALC or SLCC where a capital
receipt is to be realised.
3.33 The capital budget should be reviewed annually and the impact of any capital
schemes on the revenue budget assessed. This is particularly important in
relation to the running costs that will be incurred when a new asset is brought into
use. Where such schemes cannot be funded from capital balances the impact on
borrowing and the level of the precept will have to be considered. Councils should
be aware of the revenue budget implications of undertaking capital projects,
including the impact on audit fees.
The Cash Book
3.34 The most important accounting record maintained by smaller local councils will be
the cash book – a register of all the payments made and receipts taken in by the
council. There may be a temptation to rely on the bank statement as a record of
cash transactions. However, a cash book is essential because the statements
provided by the bank will not necessarily be a reliable record of the council's cash
balances because:
•
the bank can make errors and omissions in processing transactions - the
council needs its own records to provide a check on the bank statement; and
•
there can be considerable timing differences between writing cheques to
other parties and their being cashed by the bank, and between receiving
income and it being credited to the council's account. The bank statement
therefore takes time to catch up with the actual cash flows of the council and
cannot provide an up-to-date position.
3.35 The cash book therefore provides the day-to-day record of all cash and cheques
received and cash payments made and cheques drawn. However, there is no
prescribed format for the cash book. Depending upon the complexity of the
council's finances, it can be kept in a notebook, a ledger, or on a computer
spreadsheet or by using a specialist accounting package.
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3.36 Whatever medium is used for the cash book, it will normally be set out in a
columnar format – the date and description of the transaction will be written in the
left-hand column, and the value of the transaction entered in other columns
across the page according to the nature of the receipt or payment. The headings
for the columns will be chosen by the council to cover the main categories into
which their cash transactions fall. Example 1 at the end of this part shows a
typical layout for the cash book.
3.37 The basic principles for managing a cash book effectively are as follows.
• The cash book should start each year at 1 April on a fresh page or new
spreadsheet, with the first entry being the cash balance brought forward at the
end of the preceding financial year; if a page is filled during the course of a
year, the page should be balanced off and balances carried forward to the top
of the new page (see below for guidance on balancing off).
• All entries should be dated – receipts should be recorded on the day that the
cash or cheque comes into the council's possession (not when banked);
payments should be recorded on the day that cash is handed over or cheques
despatched (not when the cheques are eventually cashed). No cash book
entries should be made for income that the council knows it should have
received but has not, or monies that it should have paid over but has not or
cheques written but not despatched – these are items for inclusion in the
listing of assets and liabilities at year end.
• Details of the transaction should be entered, as well as a reference to
supporting documentation – the description should be sufficiently detailed to
allow the cash book to be understandable if the supporting documentation
were lost or destroyed, but not excessively so. Each authority will have its own
referencing system for voucher numbers, linking to the bills, invoices, receipts,
etc, that support the cash transaction, usually using the numbers already
marked on the council's own documents and marking up new serial numbers
on the documents received from other parties.
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guidance for local councils 73
•
•
When recording receipts and payments, it is useful, particularly as an aid to
bank reconciliation, to employ a system in which the gross receipts and
payments are written down in their own columns on the left-hand side of the
cash book and the receipts and payments are also then analysed on the
right-hand side across the various account headings that the council has
chosen. The account headings in the cashbook analysis are usually the
same ones that the council has chosen for its budget. This system is helpful
because:
-
it has an element of internal check in it, because, if all the entries have
been made properly, the total of the left-hand side and the sum of all the
columns on the right-hand side will equal each other;
-
it is particularly useful for separating out the reclaimable VAT elements
of receipts and payments for the preparation of claims for reimbursement
by HM Revenue and Customs; and
-
it also makes for easier budget monitoring as each of the columns can
be ruled off and added periodically and then compared against the
planned budget spend for the same period.
Where a council has more than one bank account, it may be easier to
operate a separate cash book for each account, treating transfers between
accounts as receipts and payments in the same way as for transactions with
other parties. However, if the council only has a straightforward savings
account, there may be room in the cash book for two additional columns for
the receipts and payments of the savings account.
3.38 What this means in practical terms is that if, for instance, the clerk had ordered
goods from a supplier on credit in the council's name and spent £30 on computer
supplies and £20 on cleaning materials, arranging for a cheque for £50 to be
drawn to settle the bill, then the following would happen.
•
The need to make the payment of £50 would be recorded on the council's list
of liabilities when the goods are received.
•
Just before the cheque is put in the post, entries in the cash book would be
required.
•
A gross payment of £50 would be written in the payments column on the
left-hand side of the cash book.
•
Entries would be made in the appropriate columns on the right-hand side of
the cash book for computer supplies and cleaning materials to the value of
£25.75 and £16.80 respectively (ie net of 17.5 per cent VAT) and for
reclaimable input VAT of £7.45.
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3.39 Apart from making day-to-day receipts and payments entries on a timely basis,
there are two important tasks that have to be performed on the cash book:
•
reconciling the cash book to the bank statement; and
•
balancing the cash book at the end of the financial year.
3.40 Circumstances will arise when it is necessary to cancel a cheque or a payment
after it has been drawn. If the cheque has been made out incorrectly, (wrong
name, date, amount, etc.) it should not be destroyed but crossed through with the
word ‘cancelled’ written across the face and stapled to the back of the cheque
book or kept safely for future reference. An entry in the cashbook should be made
recording the date, the cheque number and the fact that it has been cancelled.
3.41 If the error is discovered after the cheque or payment has been recorded in the
cashbook, it is not helpful simply to cross through the entry. Good practice would
be to record the cancellation as an entry in the receipts column giving all the
details of number, name, date and amount together with a comment that this
represents a cancelled cheque. If the cheque has already been sent, a copy of
the letter to the bank cancelling the payment should be kept in the file of
cancelled cheques.
3.42 These cancelled cheque procedures, if followed, will allow the process of
balancing the cash book (see paragraphs 3.59 - 3.60) to take place most easily.
Reporting investments
3.43 Where a council holds short term investments such as deposit or savings
accounts, all year-end balances must be reported in detail within the bank
reconciliation and be included in the sum of annual return Box 8 - Total cash and
short-term investments. Auditors may wish to confirm these account balances
from time to time.
3.44 The council may also hold long-term investments (see paragraphs 2.29 to 2.36
on how to distinguish short-term and long-term investments). On acquisition,
long-term investments should be recorded in the cash book as capital
expenditure and will therefore appear as part of the annual return Box 6 - Total
other payments. Any asset created in this way should also be recorded on the
asset register at the same purchase cost. At year end the asset will therefore
appear within the sum at annual return Box 9 – Total fixed assets and long term
assets.
3.45 Each asset owned by the council should be recorded on the asset register at its
original purchase cost. In the event that the original purchase cost is not known at
the time of first recording on the asset register, the council should, having taken
appropriate advice, establish a current value for the asset. This value will act as a
proxy for the original purchase cost and remain unchanged until disposal.
3.46 The market value of long term investments may change over time. At each year
end, the RFO should make a note on the asset register of the market value of
each investment at 31 March to inform readers. However, any gain or loss as
compared to purchase cost will only ever be accounted for at the time of disposal
when the total proceeds will be included in annual return Box 3.
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guidance for local councils 75
3.47 Any dividend or interest payments received during the year from these
investments should be recorded as income and reported in annual return Box 3 –
Total other receipts.
3.48 When the council has incurred expenditure by giving a loan, grant or other
financial assistance to a body this transaction should also be recorded as a
capital expenditure item in the cash book. Any loan made must also be added to
the asset register.
3.49 The outstanding amount of any loan at 31 March each year, excluding interest,
falls to be reported in the sum of annual return Box 9 – Total fixed assets and
long-term assets. Any repayment of a loan or part of it, or any interest received
should be recorded as an income item in the cash book when received and
reported in annual return Box 3 – Total other receipts. This receipt will also be
reflected as an increase in annual return Box 7 - Balances carried forward. Any
repayments of loan principal must also be applied to reduce the amount of the
loan outstanding on the asset register.
Reconciling the cash book to the bank statement
3.50 Bank statements are important documents as they are evidence provided by an
independent party of the state of the council's cash balances. They contrast with
the cash book, which is the council's own record of its cash position. It is
consequently an invaluable exercise to compare the balances on the bank
statement with the balance in the cash book at any particular date and
understand the reasons for any differences between them. This will reveal
whether there are any errors, omissions or discrepancies in either the bank
records or the cash book (eg cheques drawn properly have been known to be
altered by recipients before being banked.)
3.51 Bank reconciliation should be performed regularly, perhaps quarterly or monthly.
Whenever it is done, the reconciliation should cover each of the council’s bank
accounts. Most commonly, councils will operate a current account through which
most transactions are made, and possibly one or more deposit accounts.
3.52 Bank reconciliation is a key tool for management as it identifies available funds at
a specific moment in time which aids good decision making, particularly when
there are competing priorities. The year-end bank reconciliation is particularly
important as it will ‘prove’ the total cash and short-term investments balance
shown on the council’s annual return (section 1, line 8). As bank statements may
be made up to different dates in the month, care should be taken, particularly at
year end, to ensure that the statement being reconciled includes balances as at
31 March.
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3.53 Some councils will carry out a reconciliation every time they receive a bank
statement, which is good practice as it identifies bank errors early on. It is for
each council to decide how regularly it wants to receive the assurance that a
successful reconciliation can provide. Reconciling the cash book to bank
statements should be reported to members, and the full reconciliation made
available for their scrutiny each time it is done. Approval of the bank reconciliation
by the council or the chair of finance or another council nominee is not only good
practice but it is also a safeguard for the RFO and may fulfil one of the councils
internal control objectives.
3.54 There are a limited number of reasons for differences between bank statements
and the cashbook, and most councils will be able to use a standard layout for the
bank reconciliation. The common reasons are:
3.55
•
unpresented cheques – payments are recorded in the cash book when the
authority commits itself to making them, usually by handing over a cheque,
putting a cheque in the post or completing the instructions for an automated
payment; the balance on the bank account will not reduce until several days
later when the cheque or instruction is received by the bank and processed.
Unpresented cheques therefore need to be deducted from the bank
statement balance in the reconciliation;
•
‘payments in to the bank’ which are outstanding (‘sometimes referred to as
‘cash in transit’). Receipts are recorded in the cash book when they come
into the possession of the council; however, they will not be recognised on
the bank statement until after cash is banked or cheques are cleared.
Payments in to the bank which are outstanding from the bank statement
therefore need to be added to the bank statement balance in the
reconciliation; and
•
there may be transactions in the bank statement that are not recorded in the
cash book – this will particularly apply to interest payable and bank charges,
which might be advised to the council for the first time through the bank
statement. The bank statement may also show up direct debits, standing
orders and other automated payments that have been omitted from the cash
book. None of these is strictly an item for the reconciliation, however. Instead,
the cash book should be updated to record all of these transactions, and the
resulting balance is then brought into the reconciliation.
A standard layout for financial year-end bank reconciliation would look
something like this (although the model can be applied for reconciliations carried
out at any time of year).
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guidance for local councils 77
Bank Reconciliation
Council Name __________________________________
Financial year ending 31 March 20xx
Prepared by____________________(Name and role [clerk/RFO etc])
Date_________
Approved by:___________________(Name and Role RFO/Chair of Finance, etc)
Date_________
Balance per bank statements as at
31 March 20xx
eg
Current account
High interest account
Building society premium a/c
Petty cash float
£
£
1,000.00
3,000.00
10,000.00
10.00
14,010.00
Less: any unpresented cheques at 31 March
(normally only current account)
Cheque number
000154
000157
000158
Add: any unbanked cash at 31 March
eg Allotment rents banked 31 March (but not
credited until 1 April)
(40.00)
(18.00)
(2.00)
(60.00)
50.00
50.00
Net bank balances as at 31 March 20xx
13,980.00
The net balances reconcile to the Cash Book (receipts and payments
account) for the year, as follows
CASH BOOK
Opening Balance
Add: Receipts in the year
Less: Payments in the year
Closing balance per cash book [receipts and payments
book] as at 31 March 20xx (must equal net bank balances
above)
15,280.00
6,500.00
(7,800.00)
13,980.00
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3.56 The procedure for preparing the bank reconciliation will usually be:
•
enter the balances from each of the bank statements for the chosen date at
the head of the page;
•
review the bank statements for transactions that have not been recorded in
the cash book, such as interest and bank charges, and make the appropriate
cash book entries;
•
balance off the cash book (see below) and enter the resultant balance at the
foot of the page;
•
identify the cheques that have been recorded as drawn in the cash book but
have yet to show up on the bank statement – this will usually be the cheques
that have been drawn on the days immediately prior to the bank statement
date, but there may be others where the payee is taking a long time to
present the cheque at its bank;
•
identify the cash collected or cheques received that have been entered on
the cash book but not banked in sufficient time for the bank to have
processed them and add them to the bank balance;
•
if the calculation (bank balance – unpresented cheques + payments into the
bank outstanding) does not then equal the cash book balance, an in-depth
analysis of the bank statement and cash book may be necessary to discover
the reason for the unreconciled difference; and
•
the bank reconciliation should always be balanced to the penny – you cannot
stop looking for reconciling items once the difference has been reduced to a
tolerable amount, as this difference might actually be comprised of two
significant undiscovered errors (one positive and one negative) that just
happen to cancel each other out.
3.57 Where a council has more than one bank account, each account should be
balanced to the cash book, including any inactive accounts that may be open. In
these circumstances there will be a third category of possible reconciling items –
transfers between accounts that have been requested but not yet processed by
the bank.
3.58 Practitioners should note that transfers between bank accounts are neither
receipts nor payments and should not be included in the totals of receipts and
payments in the cashbook and therefore excluded from Boxes 3 and 6 of
section 1 of the annual return.
Balancing the cash book
3.59 The process of ‘balancing the cash book’ involves putting new entries in the cash
book so that the totals in the receipts and payments columns equal each other.
However, this equalisation is carried out (paradoxically) in order to confirm the
differences between the two.
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3.60 The purpose of balancing the cashbook is explained as follows (and
demonstrated in Example 1 at the end of this part of the guidance).
•
The first step in balancing the cash book is to add up the figures in the
receipts and payments columns, including the brought forward cash figure –
in the example this gives totals of £2,119.12 and £784.99 respectively.
•
As a cross check, the totals in the receipts and payments columns on the lefthand side should be reconciled to the detailed receipts and payments entries
on the right-hand side. This requires that the brought forward cash balance is
ignored in the totals for the left-hand side (ie in the example, the total for
receipts would be reduced from £2,119.12 to £1,110.37, the receipts actually
taken in the year) and that the right-hand totals add back in the VAT
elements that have been separated out.
•
Looking at the totals for the receipts and payments columns on the left-hand
side, the next step is to work out the amount that would bring whichever is
the lower of the two figures (£784.99) up to the value of the higher
(£2,119.12). In this example, the difference is a net receipt of £1,334.13.
This figure is entered under the lower of the two figures as ‘balance to be
carried forward’. (This figure will become the ‘balance brought forward’ which
opens the next financial period. Practitioners should always check that the
opening balance in the cashbook is identical to the ‘balance to be carried
forward’ from the previous period.)
•
When the balance carried forward is added to the total figure (in this case
under the payments column) it should equal the total for the other column £2,119.12. The cash book is thereby balanced, and is ruled off to start a
fresh period of accounting. The figures that balance are not very meaningful
in themselves – it is just important that they are the same.
•
To complete the process, the balance carried forward at the end of the old
period is entered as the first item in the new period of accounting. This is
done by entering the balancing figure (£1,334.13) in the other column to the
one that was used in the balancing process. This figure will then represent
the cash balance carried forward to the new period, either cash-in-hand (if in
the Receipts column) or cash overdrawn (if in the Payments column). It is the
figure that is used as the cash book balance in the bank reconciliation.
Accounting for Fixed Assets
3.61 This section covers the arrangements in respect of the acquisition, maintenance
and eventual replacement of those items of a capital nature where values tend to
be high and which have a useful life of more than one year. These items are
usually described as fixed assets (or more frequently now as non-current assets)
and comprise the sum of land, buildings, play equipment, plant, office equipment
and vehicles etc. Long-term investments which are capital expenditure (see
paragraph 2.29 to 2.35) create a non-current asset which must also be accounted
for in the asset register. See paragraph 3.43 to 3.49 on how to report long-term
investments.
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3.62 Fixed assets acquired in any year must be added to the asset register for
management purposes. For accounting purposes, however, acquisitions and
disposals of fixed assets must be treated as any other purchase or sale and
recorded as part of annual receipts or payments, expenditure or income.
Commercial concepts of depreciation, impairment adjustments, etc are not
appropriate for local councils. For reporting purposes therefore, the ‘book’ value
of fixed assets will usually therefore stay constant until disposal.
3.63 If assets are not being managed properly the Council is exposed to the risk of
financial loss relating to:
• improper asset management – without the right management information,
outdated patterns of use may run on unchallenged or unnoticed;
• improper asset usage and maintenance – assets may not be fit for purpose,
be underused or so out-of-date as to be incapable of satisfactory
modernisation. Equally they may be capable of alternative, additional or more
intensive use or be readily saleable. These opportunities may be missed
where no comprehensive information on assets is available; and
• asset ownership – the continued ownership of assets may be overlooked
altogether and risks unmanaged.
3.64 These risks are most likely to be realised when information is poor. In particular
where information about assets is not available or access to information about
assets is denied by being out-of-date or non-existent. The risk of financial loss
can be greatly reduced by setting up an asset register which holds all the
information needed.
3.65 An asset register is the starting point for any system of financial control over
assets as it:
•
facilitates the effective physical control over assets;
•
provides the information that enables the Council to make the most cost
effective use of its capital resources;
•
ensures that no asset is overlooked or under utilised and is therefore used
most efficiently;
•
pools all the information available about each asset from across the
organisation and makes it available to every part of the organisation;
•
provides a record of the sources of evidence used to support the existence
and valuation of assets to be covered by insurance;
•
supports the annual return entry for capital assets by collecting the
information on the cost or value of assets held; and
•
forms a record of assets held for insurance purposes.
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3.66 The key information needed in the asset register is:
•
dates of acquisition, upgrade and disposal (it is useful to keep a record of
disposed assets as an asset management tool);
•
costs of acquisition and any expenditure which increases the life of the asset;
•
useful life estimate;
•
location;
•
responsibility (it may be appropriate to assign responsibility for each asset to
members of staff);
•
present use and capacity, for example in terms of site area, internal floor
areas, and measures of occupancy and/or usage;
•
corresponding periodic measures of usage or occupation;
•
any available indications of asset value and condition; and
•
charges for usage or occupancy.
3.67 Most assets will be first recorded in the asset register at their purchase cost. In
some cases this may not be known and a proxy cost substituted, usually the
insurance value, or, where the asset is land or is not insured, a value estimated
by the council based on external advice. Whatever valuation basis is adopted, it
is essential that the basis is applied consistently. If for some reason the council
decides that the basis of valuation is to be changed, the figures shown on the
annual return the previous year should also be changed to the same new basis
and marked as ‘RESTATED’. The council must provide an explanation for the
change to the external auditor.
Preparing the Audit Commission annual return
3.68 Section 1 of the Audit Commission annual return represents the statutory
statement of accounts that councils will be required to prepare, to have audited
and to publish. If the books of account have been kept in good order during the
year and the cash book has been balanced and reconciled to the bank statement
at the 31 March, then the Return should be straightforward to prepare.
For councils with gross income or expenditure (whichever is the
higher) in any year under £200,000
3.69 For councils with turnover of less than £200,000 the annual return should be
prepared on a receipts and payments basis, or, if the council so wishes, it may be
prepared on an income and expenditure basis (in which case see next section).
3.70 The receipts and payments basis requires councils only to consider their actual
bank and cash transactions. The entries for the annual return will usually be
taken straight from the summary totals in the cash book.
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3.71 For example, if the council whose cash book is shown in Example 1 had no
further transactions for the year, then its annual return would be compiled like
this.
This
Year
Last
Year
£
£
Notes on compilation from
the Example 1 cash book
1
Balances
brought
forward
1,009
This should be the brought
forward figure shown at the
head of the cash book for this
year – it will equal the last
year figure in line 7 of the
Return.
2
(+) Annual
precept
600
The total in the Precept
column of the cash book.
3
(+) Total
other
receipts
510
The total in the Receipts
column (£2,119.12), less the
balance brought forward
(£1,008.75) and the annual
precept (£600).
4
(-) Staff
costs
(200)
The total in the Clerk's Salary
column.
5
(-) Loan
NIL
interest/
capital
repayments
-
6
(-) Total
other
payments
(585)
The total in the Payments
column (£784.99) less staff
costs (£200).
7
(=)
Balances
carried
forward
1,334
The sum of the above entries.
8
Total cash
and
investment
1,334
As line 7 – no other balances
held but cash.
9
Total fixed
assets
NIL
-
10
Total
borrowings
NIL
-
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guidance for local councils 83
For councils with gross income or expenditure (whichever is the
higher) in any year between £200,000 and £1 million, or for those
electing to report income and expenditure
3.72 For councils with annual turnover between £200,000 and £1 million the annual
return has to be prepared on an ‘income and expenditure’ basis. In income and
expenditure accounts, the transactions for the year comprise all those instances
in the twelve months where the council has received economic benefits or given
others economic benefits (irrespective of the year in which they are paid for).
3.73 For example, suppose a council has its owned offices re-roofed in March but the
builders do not issue an invoice until April and the council does not settle the bill
until May. The cash book will therefore record a bank outgoing in May of the new
financial year. However, the council will have received the benefit of the works
before the end of the financial year in March and have an obligation to pay the
builders, even though their invoice has not arrived to confirm the exact amount
due. In order to show the proper financial position of the council for the old year,
expenditure should be recognised in March.
3.74 In contrast, someone might put down a refundable deposit in February on a
booking for the hall in June. The cash book would record a cash receipt in
February. However, the council will not be providing any economic benefits to the
booker (ie use of the hall) until June of the new financial year, and would be
unwise to spend the cash receipt until the event takes place. The receipt would
not then count as income in the old financial year and would be treated as a
prepayment to be accounted for in the new financial year.
3.75 Income and expenditure accounting thus gives a more sophisticated presentation
of a council's true financial position, focusing on the balance of economic benefits
that it has under its control, rather than just its bank balance.
3.76 Very few councils will actually maintain their books of account on an income and
expenditure basis. The cash book will be the main focus for day-to-day
accounting and balancing off and reconciliation to the bank statement, and
remains the most important control over the accounting system. Subsidiary
records will be kept of the council's debtors (people who owe the council) and
creditors (people the council owes) based on invoices, but transactions will be
made in the cash book for this activity only when cheques and cash are actually
received.
3.77 This means that there will need to be a special exercise at the end of each
financial year to convert the receipts and payments record represented by the
cash book into the income and expenditure account required by section 1 of the
annual return.
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3.78 The exercise is a little complicated because care has to be taken to make
adjustments for both ends of the financial year. For example, as well as adding in
amounts owed at the end of the year that are not in the cash book, payments that
are in the cash book but relate to amounts owed at the end of the previous year
have to be taken out. The adjustments required comprise the following.
Debtors: situations where the
council has provided goods or
services before the end of the
year, but has not yet been paid
for them by 31 March.
To convert ‘receipts’ into ‘income’ take the
cash book totals for receipts and:
• deduct the amount of debtors brought
into the calculation of income for the
previous year; and
• add the amount of debtors outstanding
at the end of this year.
Receipts in advance: situations To convert ‘receipts’ into ‘income’ take the
where the council has received
cash book totals for receipts and:
cash before the year end, but
• add the amount of receipts in advance
has not yet provided the
excluded from the calculation of
relevant goods and services by
income for the previous year; and
31 March.
• deduct the amount of receipts in
advance held at the end of this year.
Creditors: situations where the To convert ‘payments’ into ‘expenditure’
council has received goods or
take the cash book totals for payments
services before the end of the
and:
year, but has not yet paid for
• deduct the amount of creditors brought
them by 31 March.
into the calculation of expenditure for
the previous year; and
• add the amount of creditors
outstanding at the end of this year.
Prepayments: situations where To convert ‘payments’ into ‘expenditure’
the council has paid cash before take the cash book totals for payments
the year end, but has not yet
and:
received the relevant goods or
• add the amount of prepayments
services by 31 March.
excluded from the calculation of
expenditure for the previous year; and
• deduct the amount of prepayments
made at the end of this year.
Stock: consumable goods (eg
To adjust for stock in expenditure take the
bar supplies) purchased before
cash book totals for payments and:
the end of the year but which
• add the amount of stock brought
have not been used by
forward as an asset from the previous
31 March.
year; and
• deduct the amount of stock held at the
end of this year.
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Provisions: any other situation
in which the council has an
obligation to make a payment,
but it is uncertain when the
payment will be due (eg a claim
has been made for
compensation against the
council that is likely eventually
to result in the council making
recompense). (NB. This is only
likely to occur in rare
circumstances for councils.)
To adjust for provisions in expenditure
take the cash book totals for payments
and:
• add the value of any provision that
needs to be made for events taking
place in this year; and
• deduct the value of any provisions
made in previous financial years and
brought forward, to this financial year
and where payment has been made to
settle the obligation and those no
longer required.
3.79 Councils will need to have effective arrangements in place to identify and
calculate the adjustments needed. These will include:
•
deciding on a level of materiality for adjustments – income and expenditure
needs to be shown fairly, but excessive accuracy is not beneficial. For
instance, most councils will have utilities bills that include prepayments for
standing charges and payments in arrears for energy consumption that
strictly should be adjusted for into their appropriate years. As this is a regular
item of expenditure it is not usually worth apportioning individual bills across
financial years, but just ensuring that four bills (if payable quarterly) are
charged each year;
•
making sure that a record is retained of the adjustments that were made in
preparing the income and expenditure accounts for the previous financial
year;
•
examining entries in the cash book before 31 March for possible receipts in
advance and prepayments and entries after 31 March for possible debtors
and creditors;
•
examining invoices after 31 March for possible debtors and creditors;
•
assessing the value of stock at the 31 March (having a formal stocktaking if
the council has a proper stock control system); and
•
considering whether the council has any other obligations arising from events
that took place before 31 March that mean it will not be able to avoid making
a payment at some time after 31 March.
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Notes applicable to all local councils
3.80 Compilation of the annual return from the cash book might not always be
straightforward. The following table discusses some difficulties that might arise
with each line of the return.
1 Balances
brought
forward
The balance brought forward at the start of the current
year should match the balance carried forward at the end
of the previous year. However, it is always possible that
errors and omissions can be found in the accounts, even
after an audit. If there were mistakes in the previous year’s
accounts, then the current year Return should be prepared
as if the mistake had not been made – ie the last year
figures for the balance brought forward should be the
corrected figures and not those published last year. In this
event, last year’s column must be marked ‘RESTATED’
and a note prepared for the auditor explaining the mistake
and how it has been corrected this year.
2 (+) Annual
precept
There will be very few occasions when the precept on the
district council is not paid in full before the end of the
relevant year or is paid early when 31 March falls on a
weekend or bank holiday.
3 (+) Total
other
receipts
This figure will simply be the total cash receipts taken by
the council in the year, reduced by the value of precept
payments recorded in the preceding box.
If the statement of accounts is being prepared on a
receipts and payments basis, VAT charged on goods and
services provided by the council should be included, even
though the tax is payable to HM Revenue and Customs.
Some adjustments may be necessary where the council
has more than one bank account – transfers between
bank accounts (eg between current and deposit account),
would show up as receipts and payments for the individual
accounts in the cash book, but they are not receipts and
payments for the council as a whole. Both sides of a
transfer between the council’s own bank accounts should
be ignored when adding up receipts and payments for the
year.
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4 (-) Staff
costs
This figure comprises all payments made in relation to the
employment of staff. Include employment expenses which
are benefits (mileage, travel, etc) but not items of
reimbursement of expenses for postage, stationery or
other outlays made on behalf of the council. Where the
council makes deductions for PAYE and National
Insurance and pays employer’s contributions for NI and
pensions, then Staff costs should include payments to
HM Revenue and Customs and any pension contributions.
5 (-) Loan
interest/cap
ital
repayments
Most councils will not have any borrowings and will not
then have interest or capital repayment transactions. For
those that have borrowed from the Public Works Loans
Board, the figure will be the payments made in the year in
accordance with the PWLB repayment schedule.
If a council goes overdrawn at the bank, then any interest
or charges paid as a result of the overdraft should be
included under this heading. Bank charges other than
those arising as a result of temporary borrowing should be
included in Total other payments in line 6.
6 (-) Total
other
payments
This figure should simply be the total cash payments made
by the council in the year, reduced by the value of staff
costs and loan interest and capital repayments recorded in
the preceding two boxes.
If the statement of accounts is being prepared on a
receipts and payments basis, VAT on goods and services
acquired by the council should be included, even though
the tax is reimbursable by HM Revenue and Customs.
Some adjustments may be necessary where the council
has more than one bank account and transfers have been
made between them – see Total other receipts above.
7 (=)
Balances
carried
forward
This should be the total of all the preceding entries, taking
care to get the + and – entries the right way round. It
should also match the balance carried forward on the cash
book at the end of the year.
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Two notes on VAT
3.81 For councils reporting on the receipts and payments basis, the amount of VAT
charged to ‘customers’ and the VAT refund made by HM Revenue and Customs
will be included in line 3 (other receipts); the amount of VAT paid to suppliers and
any paid to HM Revenue and Customs will be included in line 6 (other payments).
3.82 For councils reporting on the income and expenditure basis the amounts of VAT
collected from customers, paid to suppliers, and payable to, or repayable by,
HM Revenue and Customs will be posted to a Creditor Account which will result
in a balance due to, or from, HM Revenue and Customs. This balance will be
included in Creditors or Debtors as appropriate – ie in this case the only value of
VAT to be included in the Annual Return figures will be any that is to be written off
as irrecoverable (usually due to a partial exempt position on VAT).
Moving from Receipts and Payments to Income and Expenditure
3.83 Having prepared a receipts and payments account from the cash book, the
receipts and payments account needs to be converted into an income and
expenditure account by the adjustments set out in paragraph 3.78. Suppose that
the council in Example 1 had the following circumstances.
Debtors
•
•
Receipts in
advance
•
•
Creditors
•
•
The hall booking fee of £75 received on 8 April 20xx
was paid in arrears for an event that took place on
30 March 20xx before the year start and had been
accounted for as a debtor in last year's income figure.
A hall booking fee of £200 for an event held on
14 March 20yy was not paid until 30 April 20yy after the
year-end.
Hall booking fees of £300 were taken before
1 April 20xx for events that were to take place after
1 April and these were accounted for as receipts in
advance in last year's income and expenditure figure.
The hall booking fees of £150 received on 24 May 20xx
were for an event that did not take place until April 20yy
in the following financial year.
The payment of £45 for the repair of a window made on
22 April was for work carried out before the start of the
year and had been accounted for as a creditor in last
year's income and expenditure figures.
No payment has yet been made for the replacement of
a door in February 20yy – an invoice received after the
year-end confirms that £56 is payable.
Governance and Accountability for Local Councils │Part 3 - Accounting
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•
Prepayments
•
Stock
•
Provisions
•
•
Before 1 April 20xx the council paid £220 in advance for
a service cover agreement on its kitchen equipment for
the year starting on 1 April 20xx.
The grant of £250 paid to the sports association on
17 May was to cover the period running from June 20xx
to May 20yy, extending beyond the end of the financial
year – one sixth of the grant (around £40) is a
prepayment for amounts due after 31 March 20yy.
Checks of the levels of stocks of cleaning products in
the village hall showed that £120 was held at
31 March 20xx and £70 at 31 March 20yy.
In July 20xx there was an accident in the village hall
that resulted in slight injury – the council's solicitor
estimates that the council will end up with a bill for
compensation of £300 that will not be covered by
insurance.
In November 20xx, an earlier claim for accident
compensation was settled without the council having to
pay a penny – however, a provision had been made in
the previous year's income and expenditure account for
£100 for a likely settlement.
The following adjustments to the receipts and payments account would then be
necessary.
R+P
£
1
Balances
brought
forward
2
(+) Annual
precept
(+) Total
other receipts
(-) Staff costs
(-) Loan
interest/
capital
repayments
(-) Total other
payments
3
4
5
6
7
(=) Balances
carried
forward
Previous
Current year
year
adjustments
adjustments
£
£
I+E
£
1,009
(30)
-
979
600
0
0
600
510
(75)
300
0
0
200
(150)
0
0
785
(585)
45
(220)
(120)
100
(56)
40
70
(300)
1,334
0
(196)
(200)
0
Notes on compilation from the receipts
and payments account
This should equal the last year figure in line 7
of the Return and the adjustment requires
replacing the R+P amount with last year's I+E
figure
Debtors adjustments
Receipts in advance adjustments
(200)
-
(1,026) Creditors adjustments
Prepayments adjustments
Stock adjustments
Provisions adjustments
(note – as the payments figure is presented
as a negative, deductions from payments are
shown as positive figures and additions as
negatives.)
1,138 The sum of the above entries
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3.84 As a check that the income and expenditure figures have been properly prepared,
councils should agree the balance carried forward in line 7 back to the assets and
liabilities held at 31 March that have been taken into account in the conversion.
Using the figures above.
£
Balance carried forward
1,138
Cash (positive if credit, negative if overdrawn)
1,334
Debtors (positive figure)
200
Receipts in advance (negative figure)
(150)
Creditors (negative figure)
(56)
Prepayments (positive figure)
40
Stock (positive figure)
70
Provisions (negative figure)
(300)
1,138
3.85 The other entries in section 1 of the annual return will be compiled separately
from the income and expenditure exercise.
8 Total cash and
short-term
investments
For most councils, this line will be identical to the
figure carried forward from the end of year balanced
cash book that was taken into account in the bank
reconciliation.
Investments in the form of bank deposit or other
short-term saving accounts must be added to the total
in box 8 and shown on the bank reconciliation.
9 Total fixed
assets and
long-term
investments
This should be the value of all fixed (ie non-current)
assets recorded in the asset register including any
long-term investments (see paragraph 3.61).
For instance, the council might have invested surplus
funds in Government securities, and the purchase of
these would have been accounted for as if it were a
payment out of the cash book, suggesting that the
council had spent money rather than invested it. In
order to give a fair view of the council's finances, the
cost value of these investments (as recorded in the
schedule of assets and investments) should be
included in this line.
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10 Total borrowings This should be the amount outstanding at 31 March
each year. If a council has borrowings, they will
usually be in the form of longer-term loans from the
Public Works Loan Board. Instalment finance,
including HP or leases which have not been classed
as borrowing by CLG, should not be included here.
The amount borrowed at 31 March should be easily
calculated by reference to official loan schedules.
3.86 The annual return requires supporting documentation for the accounts in
section 1 to be provided to the auditor. Because of its importance as confirmation
that the council’s books of accounts are supported by the bank’s records, the
most important document to be provided is the year-end bank reconciliation. The
reconciliation should be prepared to at least the detail of the example above, so
that the auditor can appreciate the difference between the year-end cash book
and bank account balances and the nature of the items that reconcile that
difference. The council should carry out a separate reconciliation for each bank
account operated by the council although the results may then be summarised.
3.87 The other supporting documentation required to accompany the annual return is
a brief explanation of significant year-on-year variations between the figures on
the return. This is because the auditor will be considering the reasonableness of
the return using a technique called analytical review. The auditor will look at the
council's figures for last year and, using their accumulated knowledge about the
council and of the influences over the council this year, develop an expectation
for what this year's figures should be. This expectation will be compared with the
actual figures and, where they are significantly different, the auditor may have
some concern that the accounts might be wrong. Councils will be able to remove
this doubt by providing explanations for the differences between this year and last
year.
3.88 For example, a reasonable expectation may be that staff costs should rise each
year only by the level of wage inflation. Thus, if the clerk's remuneration had risen
from £2,500 to £2,575 year on year (3 per cent), this could reasonably be
assumed to be attributable to a cost of living increase. However, if the
remuneration had risen to £2,900, ie by 16 per cent, then the auditor would need
reassurance that a mistake had not been made in recording staff costs. If the
explanation was that the council had implemented tighter new financial
procedures that required the clerk to work more hours a week, this should be set
out in a note to the auditor.
3.89 The important thing about such information notes is that they should remove
doubts about possible errors or omissions, and they therefore need to explain
fully the difference. For example, a note stating simply that staff costs had risen
20 per cent because the clerk's hours had risen 20 per cent would still leave the
question as to why the hours had risen this year.
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3.90 It is impossible to give definitive guidance on what ‘significant’ year-on-year
variations are by, for example, giving a standard percentage figure below which
movements do not need to be explained. It might sometimes be significant that
there has been no change between this year's and last year's figure. For
instance, if a council's other payments were high in one year because of
exceptional expenditure on re-roofing the offices, then the auditor would expect in
the following year that payments would fall back to the usual level rather than
remain at the same high value as the previous year. ‘No change’ in the accounts
would then be significant and need explanation. However, as a general ‘rule of
thumb’ any increase of plus or minus 10 to 15 per cent or more in any line item
should be formally explained as a matter of course as should any expenditure
that has either started or ceased.
3.91 The test for significance is then usually whether, if the figures were amended to
leave an item out, someone reading the annual return would get a different idea
about how much the council had spent or how much income it had generated in
the year, enough to think it had done better or worse than it actually had.
3.92 In deciding what needs commenting on, councils should think about noting the
following.
•
One-off items of spending or income from last year and this year.
•
Regular items of spending and income where the relevant activity (eg
number of hall bookings) has risen or fallen between the two years or where
prices have not changed in line with inflation (eg a price freeze on charges
for hall rentals).
•
Items of spending and income that used to be regular but which were made
for the last time last year and do not feature in the current year (eg a grant to
a sporting association that went out of existence).
•
Items of spending and income that were made for the first time in the current
year and will be made regularly in future years (eg running expenses for a
newly opened one stop shop facility).
Audit Notices and the presentation of the annual
return
3.93 The Act and the regulations contain important provisions that open the accounts
of a council up to public scrutiny as councils are custodians of public funds.
Members of the public as well as local councillors have rights to satisfy
themselves about the regularity of a council's finances. They may ask questions
about and make objections to particular items of account. For more detailed
information about the rights of electors please refer to the Audit Commission
publication Councils Accounts Your Rights.
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3.94 These opportunities for scrutiny cover both the books of account and the
statement of accounts, but are restricted to particular times. Although councils are
not required to open their books on request, increasingly there is a move towards
their doing so in pursuit of demonstrating openness and transparency.
3.95 The particular things that the council must do to facilitate public rights in relation
to the accounts are:
•
advertise the rights of the public at the appropriate times;
•
allow public inspection of section 1 of the annual return and the supporting
books of accounts and other documents once the Return has been drafted;
and
•
publish sections 1 and 2 of the annual return after it has been audited,
together with the auditor's report (section 3), and make available other
relevant documents.
3.96 The council’s appointed auditor is the person responsible for setting the date of
the commencement of the audit period from which time electors may exercise
their rights. This date will usually be agreed with the responsible financial officer
before the auditor’s notice of audit is sent to the council in order that it can be
advertised by display in a prominent place. Similarly, a public notice that the
auditor’s certificate, which effectively closes the audit for any particular year, has
been received must be displayed when it has been received. The auditor’s
certificate is in section 3 of the annual return.
3.97 The council has to carry out its duties in accordance with the law. As with all
aspects of the law, there is scope for interpretation as to what the provisions of
the regulations require. A common issue arising is whether councils have any
discretion to restrict access to the books of accounts if they suspect that the
interested party is seeking to get hold of personal or commercially sensitive
information. Personal information held by a council, for example, is protected
under s15 of the Act. This protection does extend to personal details of staff and
their individual salaries and deductions. If there is uncertainty, the external auditor
may be requested to exercise the authority to rule on what is personal
information.
3.98 Councils are therefore recommended to read the requirements of the Accounts
and Audit Regulations for themselves, and use this guidance only to provide
support for the conclusions they arrive at themselves as to what the Regulations
require then to do. Where there is doubt, councils should consider taking legal
advice.
3.99 The external auditor is not responsible directly for enforcing the provisions
relating to public scrutiny. However, as their audit might not be properly carried
out if the responsibilities of others have not been met (eg failure to advertise the
audit), they may be willing to comment on issues that the council is having
difficulty resolving.
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3.100 The following timetable summarises the tasks that a typical council will need to
schedule in order to prepare the accounts for approval, inspection and publication
in accordance with the Accounts and Audit Regulations.
Step
Task
Comments
1
Arrange for the
council to receive
the documents
needed to prepare
the annual return
Likely tasks include:
• requesting bank statements for 31 March
for all bank accounts;
• arranging for savings account books to be
made up to date for 31 March; and
• obtaining written confirmation of loans and
investments at 31 March, including interest
for the year.
2
Close, balance and
reconcile the cash
book and update the
schedule of assets
and liabilities
This should be done as soon as practicably
possible after the end of the financial year, and
certainly in good time for the council to approve
section 1 of the annual return by the statutory
date (see step 3).
For advice on balancing and reconciling the
cash book, see paragraphs 3.59 to 3.60.
For advice on preparing income and
expenditure adjustments, see paragraphs 3.72
to 3.79.
3
Draw up Statement
of Accounts and
Annual Governance
Statement
From 2008/09, the latest date for approval
(see step 6) of the annual return is 30 June.
Ensure receipt of current year annual return
from the external auditor in good time and make
arrangements for the necessary committee
and/or full council meeting to approve the
accounts.
4
Receive
confirmation of the
date of audit with
the auditor
As part of their statutory responsibilities, the
external auditor has to appoint a date when
local electors can exercise their right to ask
questions about the accounts or to object to any
item of account and to notify the council.
The council has no official role to play on this
date, but needs to know the date as steps 6
and 7 have to be scheduled to be completed
before it.
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Step
Task
Comments
5
Display a notice of
public rights
In preparation for step 7, councils are
required to display a notice (or notices) in a
conspicuous place(s) in the council's area
setting out:
•
the dates of the 20 working day period
during which the accounts and other
documents will be available for
inspection;
•
the place at which, and the hours
during which, they will be available;
•
the name and address of the auditor;
•
the rights conferred on the public by
sections 14 and 15 of the Act (public
inspection of accounts and right to
challenge); and
•
the appointed date for audit.
The notice is must be displayed for at least
14 days immediately before the
commencement of the inspection period
(step 7). Therefore, as step 7 has to be
started at least 20 working days before the
auditor's appointed date, this means that the
notice should be posted at least six weeks
before the appointed date (and longer if
there are any public holidays during the
inspection period). It is important that the
council ensures that the notice is posted
promptly and that it is remains displayed for
the whole period up to the date of audit.
The council will give a public assurance as
part of the annual governance statement in
the annual return that this step has been
carried out during the financial year.
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Step
Task
Comments
6
Submit the
completed annual
return to the council
for approval
Regulation 10(2) requires the responsible
financial officer to sign and date the
statement of accounts, income and
expenditure account and statement of
balances, or record of receipts and
payments, and certify that it presents fairly
the financial position of the council at the
end of the year to which it relates and its
income and expenditure or that it properly
presents receipts and payments, as the
case may be, for that year. The certification
is already set out in section 1 of the annual
return and just needs signing by the
responsible financial officer confirming that
the statement of accounts is correct. This
certification is required from the post holder
at the time of approval.
After certification, regulation 10(4) requires
that the accounts are approved by a
meeting of the council (or one of its
committees) and that the person presiding
at that meeting signs and dates the
accounts to signify the completion of the
approval process. Again, there is space on
section 1 of the annual return to record the
council's resolution and the presiding
member’s signature. It is sensible to do this
before the accounts are made available for
inspection in step 6, but this is not a
statutory requirement. However,
regulation 10(4) (a) also requires that this
must be done as soon as reasonably
practical and by 30 June at the latest.
If a Council is unable to approve the
accounts by 30 June then, according to
regulation 10(6) it must: a) within 20 working
days of 30 June hold a meeting of the
Council to consider the annual return; and b)
if the meeting cannot agree to approve the
accounts the Council shall publish a
statement explaining the reasons why it
cannot approve the accounts.
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guidance for local councils 97
Step
Task
Comments
7
Make the statement
of accounts and
other documents
available for
inspection
Regulation 14 requires the accounts and all
books, deeds, contracts, bills, vouchers and
receipts relating to them to be available for
inspection by interested parties for
20 working days before the auditor's
appointed date. The council can require that
interested parties give reasonable notice
that they wish to inspect records and do not
have to grant immediate access on request.
The public are entitled to make copies of
any of the documents available for
inspection.
This can be the most contentious part of the
annual accounts and audit process, where
allegations can arise that documents are not
being made available or that interested
parties are taking advantage of the
inspection period.
Section 15 (4) of the Act prevents a council
from releasing certain personal information.
However, there is a presumption that the
council will be open and transparent with
information about its activities, so where a
council wishes to withhold information, legal
advice should always be sought. In relation
to personal information, the auditor has legal
powers to determine whether information
should be released.
The inspection period has to be completed
before the auditor’s appointed date for audit.
98 Governance and Accountability for Local Councils │ Part 3 - Accounting
guidance for local councils
Step
Task
Comments
8
The audit
Section 6 of the Act entitles auditors to
rights of access at all reasonable times to all
documents of the council that the auditor
determines are necessary for the audit. The
auditor also has a right to require any
persons holding or accountable for
documents to provide any information and
explanations the auditor thinks necessary
for the audit.
In most instances, however, the audit will be
carried out co-operatively, with the council
and the auditor agreeing a time when the
audit work is to be performed and the
responsible financial officer will be available
to assist the auditor.
The Audit Commission provides guidance to
external auditors which may be viewed at
Appendix 5.
9
Publish the
statement of
accounts
Regulation 12(1) states that as soon as
reasonably possible after the completion of
the audit but no later than September 30,
the local council should publish its statement
of accounts and the auditor's certificate. This
requirement can be met by displaying
sections 1 to 3 of the annual return. Copies
should also be kept for purchase by any
person on payment of a reasonable sum. A
Public notice in a conspicuous place stating
that the accounts have been published is
required.
If the accounts are published before the
audit certificate is received, the notice
should declare and explain the fact that an
audit opinion has not yet been given.
CLG’s guidance circular (03/2006) clarifies
what is meant by ‘publication’ in Regulation
12 and gives examples of good practice
(see Appendix 7). Although publication does
not require any preparation beyond the
annual return nor the distribution of copies
of the statement of accounts to persons who
have not expressed an interest in receiving
them, it does require positive action.
Governance and Accountability for Local Councils │Part 3 - Accounting
guidance for local councils 99
Step
Task
9
cont.
10
Comments
Publication does not mean merely the appearance
of the accounts in the documents of meetings,
committees or sub-committees of the council. Nor is
the requirement covered by merely providing copies
to enquirers on demand. Good practice might
include putting a copy on each of the council’s
notice boards, copying it onto a website, publishing
it as a separate leaflet or publication in a newspaper
or as part of a newsletter.
It is a matter for the council to consider the
appropriateness of the publication arrangements
they have in place, bearing in mind the need to
make information as widely available as practicable,
but also taking into account local circumstances,
including the size of the local council, the resources
available, the number of electors, and the existence
of any local information networks.
At the conclusion
of the audit,
display a notice of
public rights
Regulation 18 requires that as soon as possible
after the auditor has certified that the audit is
completed the council should for at least 14 days
display a notice in a conspicuous place that the
audit has been completed and that the statement of
accounts (sections 1 to 3 of the annual return) is
available for inspection.
The statement of accounts that is made available
(not the notice itself) must:
• contain any amendments required by the
auditor's report (or a statement of the
amendments that were required);
• if auditor's amendments have been made, be
accompanied by an explanation as to the
material respects in which the accounts have
been altered;
• contain a statement of the rights of local
electors under section 14 of the Audit
Commission Act 1998 to inspect and copy the
statement of accounts and auditor's reports; and
• state the address at which and the hours during
which the statement of accounts and auditor's
reports are available for the exercise of these
rights.
100 Governance and Accountability for Local Councils │ Part 3 - Accounting guidance for local councils
Example 1
Cash Book layout
Receipts
Date
Details
Voucher
No
Balance brought forward
20XX
1 April
2 April
8 April
21 April
22 April
27 April
30 April
1 May
7 May
15 May
17 May
17 May
19 May
24 May
27 May
31 May
Clerk's remuneration
Cleaning materials
Booking fees
Gas bill
Repair of broken window
Booking fees
Precept instalment from
District Council
Clerk's remuneration
Booking fees
VAT reimbursement
Kitchen supplies
Grant to sports association
Electricity bill
Booking fees
Office supplies
Grant from Sports Council
sub-totals for the period
31 May
totals
balance carried forward
Receipt
balance brought forward
Payments
Precept
VAT Transactions
Grants
Clerk's
Salary
Administration
Grants
Hall
Expenses
VAT Input
VAT
Output
VAT
Repayment
1,008.75
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
17
100.00
24.65
75.00
100.00
20.98
3.67
102.34
38.30
6.70
24.93
4.36
81.72
14.30
75.00
102.34
45.00
100.00
600.00
100.00
600.00
100.00
75.00
10.37
100.00
75.00
10.37
29.29
250.00
96.02
150.00
250.00
150.00
37.69
32.08
100.00
5.61
100.00
1,110.37
784.99
2,119.12
784.99
1,334.13
2,119.12
2,119.12
1 June
Payment
Hall
Booking
Fees
400.00
600.00
100.00
200.00
32.08
250.00
268.27
34.64
-
1,334.13
The headings used in this example are for illustration only and may not necessarily be those of most use to individual
councils.
10.37
Governance and Accountability for Local Councils │Part 3 - Accounting guidance for local councils 101
Example 2
Ref
No
001
002
003
Schedule of Assets
Description
ASSETS
Offices and grounds
Ogre Pastorale kitchen
oven
Land Church Drive –for
Village Hall Trust
004
Land at Gigg Lane Paddock
005
HorsePower 324 desktop
computer
Blunderbuss CP22 printer
006
007
008
009
Hall booking fees –
Weasley wedding reception
Hall booking fees – Malfoy
18th birthday
Investment – (sale of
allotment) Treasury Stock
5% 2014
Identification
Date
Acquired
Value
Custodian
Deeds held at
White Horse
Bank
Serial no:
AURJH231
Land Reg cert
48/72/B899
11 July
18xx
£300,000
(Insurance
Value
£400
Caretaker
N/A
£8,000
Council as
custodian
trustee
Clerk
£500
Clerk
£100
Clerk
£150
Clerk
£150
Clerk
£40,000
RFO for
Investment
panel
Deeds held at
White Horse
Bank
Serial no:
SJND28344
Serial no:
LWO19382
Invoice 00045
Invoice 00046
Certificate No
XP 45/003
lodged with
Bank
23 June
20xx
28
December
20xx
8
September
19xx
1 March
20xx
1 March
20xx
8 April 20xx
10 June
20xx
19 August
20xx
Disposal/Discharge
Caretaker
Held as trustee only
Sold 9 June 20xx for
£10,000
Written off 19 October 20xx
– council resolution 146
Paid in full 29 June 20xx
102 Governance and Accountability for Local Councils │ Part 3 - Accounting
guidance for local councils
Notes
This layout for a schedule of assets would only be suitable for a small council that
does not have many fixed assets, or hold stocks. Other councils would need to
separate the schedule into different documents:
•
an inventory of property;
•
stock control records (eg for bar supplies); and
•
debtors ledgers (eg for allotment rentals).
In determining the layout needed, the objectives to keep in mind are that the
schedule should help the council:
•
to know at any time what its assets and liabilities are and keep them under
control; and
•
to prepare the entries in the annual return.
Governance and Accountability for Local Councils │Part 3 - Accounting guidance for local councils 103
Example 3
1 May
20xx
1 Aug
20xx
8 Sept
20xx
Advice
1 Nov
20xx
Advice
Advice
Advice
Record of Grants
Lottery Funding for Leisure Centre Gym Extension
Receipts
£
Payments
First grant instalment
8,000 30 Apr 20xx
Invoice First interim payment to
BL467 Bodgers Ltd
Second grant instalment
8,000 31 Jul20xx
Invoice Second interim payment to
BL489 Bodgers Ltd
Contribution from
24,000 31 Oct 20xx
Invoice Final payment to Bodgers Ltd
Philanthropy
BL504
International Ltd
Third grant instalment
8,000
Balance to be paid by
the council
Total
£
15,432
17,816
14,992
240
48,240
Total
48,240
104 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils 105
Part 4 - Directions for Larger Local
Councils (£1 million +) and those
approaching the threshold
Local Councils where the greater of income or expenditure for the year
exceeds £1 million for three consecutive years must, from the third year
onwards, prepare accounts in accordance with the proper accounting practices
found in the CIPFA Statement of Recommended Practice (the SoRP) for the
appropriate financial year.
Larger councils should not underestimate the changes to their arrangements
that will occur on crossing this financial threshold.
Councils should plan well in advance as they encounter new accounting
requirements. These include the need to provide comparative figures in the
accounts which means that, effectively, councils should be ready to report their
financial statements in accordance with the requirements of the SoRP from
year two onwards.
NALC and the former 41 Group of larger local councils prepared a commentary
on the SoRP for larger councils providing examples of how they may meet the
varying requirements.
The commentary does not in itself provide a source of proper practice. That is
contained within the SoRP and supporting guidance. The commentary is
intended to provide practitioners with examples of how larger local councils
may meet their statutory responsibilities most effectively, particularly in relation
to the preparation of the statement of accounts.
The commentary also contains helpful information on how councils may best
prepare themselves for the significant changes, including resource and skills
requirements.
It is structured in two distinct parts:
•
•
an introduction for members and non-accounting staff; and
detailed examples of how practitioners meet the requirements of the
SoRP.
Councils wishing to obtain a copy of the commentary should contact their local
NALC County Secretary.
106 Governance and Accountability for Local Councils │ Part 4 - Directions for
Larger Local Councils (£1 million +) and those approaching the threshold
Governance and Accountability for Local Councils │ Appendix 1 - Local
council services and powers 107
Appendix 1 - Local council services and
powers
Function
Powers and Duties
Statutory Provisions
Allotments
Powers to provide allotments.
Duty to provide allotment
gardens if demand unsatisfied.
Smallholdings and Allotments
Act 1908, ss 25, 26 and 42.
s.23.
Baths and
Washhouses
Power to provide public baths
and washhouses.
Power to provide bathing
places.
Public Health Act 1936, ss
221, 222, 223 and 227.
Local Government
(Miscellaneous Provisions)
Act 1976 s.19.
Burial grounds,
cemeteries,
crematoria and
closed
churchyards
Power to acquire and maintain.
Power to provide.
Open Spaces Act 1906, ss 9
and 10; Local Government Act
1972, s.214.
Parish Councils and Burial
Authorities (Miscellaneous
Provisions) Act 1970, s.1.
Local Government Act 1972,
s.215(6).
Local Authorities Cemetery
Orders 1977 and 1986.
Power to agree to maintain
monuments and memorials.
Power to contribute towards
expenses of cemeteries.
General management powers.
Bus Shelters
Power to provide and maintain
shelters.
Local Government
(Miscellaneous Provisions)
Act 1953, s.4.
Parish Councils Act 1957, s1.
Bye Laws
Power to make bye-laws in
regard to pleasure grounds.
Cycle Parks.
Baths and Washhouses.
Open spaces and burial
grounds.
Mortuaries and post-mortem
rooms.
Public Health Act 1875, s.164.
Road Traffic Regulation Act
1984, s.57(7).
Public Health Act 1936, s.223.
Open Spaces Act 1906, s.15.
Public Health Act 1936, s.198.
Charities
Duties re parochial charities.
Charities Act 2003 s.79.
108 Governance and Accountability for Local Councils │ Appendix 1 - Local
council services and powers
Function
Powers and Duties
Statutory Provisions
Clocks
Power to provide public clocks.
Parish Councils Act 1957, s.2.
Closed
Churchyards
Powers as to maintenance.
Local Government Act 1972, s.215.
Commons and
common
pastures
Powers in relation to enclosure,
as to regulation and
management, and as to providing
common pasture.
Enclosure Act 1845; Local
Government Act 1894, s.8(4);
Smallholdings and Allotments Act
1908, s.34.
Conference
facilities
Power to provide and encourage
the use of facilities.
Local Government Act 1972, s.144.
Community
centres
Power to provide and equip
buildings for use of clubs having
athletic, social or recreational
objectives.
Local Government (Miscellaneous
Provisions) Act 1976, s.19.
Community
Transport
Various – see Transport below.
Local Government and Rating Act
1997.
Crime
prevention
Powers to spend money on
various crime prevention
measures.
Local Government and Rating Act
1997, s.31.
Drainage
Power to deal with ponds and
ditches.
Public Health Act 1936, s.260.
Entertainment
and the arts
Provision of entertainment and
support of the arts.
Local Government Act 1972, s.145.
Gifts
Power to accept.
Local Government Act 1972, s.139.
Governance and Accountability for Local Councils │ Appendix 1 - Local
council services and powers 109
Function
Powers and Duties
Statutory Provisions
Highways
Power to repair and maintain
public footpaths and bridle-ways.
Power to light roads and public
places.
Provision of litter bins.
Power to provide parking places
for vehicles, bicycles and motorcycles.
Power to enter into agreement as
to dedication and widening.
Power to provide roadside seats
and shelters, and bus shelters.
Consent of parish council
required for ending maintenance
of highway at public expense, or
for stopping up or diversion of
highway.
Power to complain to district
councils as to protection of rights
of way and roadside wastes.
Power to provide traffic signs and
other notices.
Power to plant trees etc. and to
maintain roadside verges.
Highways Act 1980, ss.43, 50.
Investments
Power to participate in schemes
of collective investment.
Trustee Investments Act 1961. s.11.
Joint
Committees
Power to form and participate in
joint arrangements for services.
Local Government Act 1972, s101
and s102.
Land
Power to acquire by agreement,
to appropriate, to dispose of land
Power to accept gifts of land.
Local Government Act 1972, ss.124,
126, 127.
Local Government Act 1972, s.139.
Litter
Provision of receptacles.
Litter Act 1983, ss.5, 6.
Local Energy
saving
measures
Power to encourage or promote
microgeneration etc.
Climate Change and Sustainable
Energy Act 2006, s.20.
Lotteries
Powers to promote.
Lotteries and Amusements Act 1976,
s.7.
Markets
Power to establish or acquire.
Food Act 1984, s.50.
Parish Councils Act 1957, s.3; and
Highways Act 1980, s.301.
Litter Act 1983, ss.5, 6.
Road Traffic Regulation Act 1984,
ss.57, 63.
Highways Act 1980, ss.30, 72.
Parish Councils Act 1957, s.1.
Highways Act 1980, ss 47, 116.
Highways Act 1980, s.130.
Road Traffic Regulation Act 1984,
s.72.
Highways Act 1980, s.96.
110 Governance and Accountability for Local Councils │ Appendix 1 - Local
council services and powers
Function
Powers and Duties
Statutory Provisions
Mortuaries
and post
mortem rooms
Powers to provide mortuaries and Public Health Act 1936, s.198.
post mortem rooms.
Nuisances
Power to deal with offensive
ditches.
Public Health Act 1936, s.260.
Public Health Act 1875, s.164.
Open spaces
Power to acquire land and
maintain.
Power to light.
Open Spaces Act 1906, ss 9 and 10.
Parish
Property and
Documents
Powers to direct as to their
custody.
Local Government Act 1972, s.226.
Public
buildings and
village hall
Power to provide buildings for
offices and for public meetings
and assemblies.
Local Government Act 1972, s.133.
Local Government (Miscellaneous
Provisions) Act 1976, s.19.
Public
Conveniences
Power to provide.
Public Health Act 1936, s.87.
Recreation
Power to acquire land for or to
provide recreation grounds,
public walks, pleasure grounds
and open spaces and to manage
and control them.
Power to provide gymnasiums,
playing fields, holiday camps.
Provision of boating pools.
Public Health Act 1875, s.164.
Local Government Act 1972,
Sched. 14, para. 27.
Public Health Acts Amendment Act
1890, s.44.
Open Spaces Act 1906, ss 9 and 10.
Local Government (Miscellaneous
Provisions) Act 1976, s.19.
Public Health Act 1961, s.54.
Seats and
Shelters
Power to provide.
Parish Councils Act 1957, ss 2 and 3.
Telecommunications
facilities
Power to pay British
Telecommunications or any other
public telecommunications
operator for loss sustained
providing telegraph office or
telecommunication facilities.
Telecommunications Act 1984, s.97.
Town and
Country
Planning
Right to be notified of planning
applications.
Town and Country Planning Act
1990, Sched. 1, para. 8.
Open Spaces Act 1906, s.10.
Governance and Accountability for Local Councils │ Appendix 1 - Local
council services and powers 111
Function
Powers and Duties
Statutory Provisions
Tourism
Power to contribute to
organisations encouraging
tourism.
Local Government Act 1972, s.144.
Traffic
Calming
Powers to contribute financially to
traffic calming schemes.
Highways Act 1980, s.274A.
Transport
Powers to spend money on
community transport schemes.
Establish and support car
sharing.
Grant to bus service for elderly
and disabled.
Grant to support taxi fare
concessions.
Power to investigate needs and
publicise transport services.
Local Government and Rating Act
1997,
s.26
War
memorials
Power to maintain, repairs,
protect and adapt war memorials.
War Memorials (Local Authorities’
Powers) Act 1923, s.1; as extended
by Local Government Act 1948,
s.133.
Water Supply
Power to utilise well, spring or
Public Health Act 1936, s.125.
stream and to provide facilities for
obtaining water there from.
Well being
Available only to councils meeting LG and Public Involvement in Health
certain conditions.
Act 2007, s77.
s.27
s.28
s.29
This list is current at the time of publication (April 2008) but the publishers do not
make any representations about it. In addition to the specific powers and duties listed
above, local councils have certain general powers (eg s.111 and s.137 LGA1972)
and are also subject to duties under various Health and Safety, Employment,
Equalities and other legislation. Further information may be obtained from local and
regional representatives of NALC and SLCC.
112 Governance and Accountability for Local Councils │ Appendix 1 - Local
council services and powers
Governance and Accountability for Local Councils │Appendix 2 Statement of responsibilities of auditors and of audited small bodies 113
Appendix 2 - Statement of
responsibilities of auditors and of
audited small bodies
General Introduction
1 The Audit Commission (the Commission) is responsible for appointing auditors
and determining their terms of appointment, as well as for preparing a Code of
Audit Practice, which prescribes the way in which auditors are to carry out their
functions. The Commission has prepared a Code for the audits of local
government bodies and various bodies that provide public services locally. From
time to time, the Commission issues guidance to auditors under section 3(8) of
the Audit Commission Act 1998 (the Act) and paragraph 7 of Schedule 1 to the
Act. This statement sets out guidance on general responsibilities relevant to
audits and so supports the Code.
2 The purpose of this statement is to assist auditors and audited small bodies
(audited bodies) by summarising where – in the context of the usual conduct of an
audit – the different responsibilities of auditors and of the audited body begin and
end, and what is to be expected of the audited body in certain areas. Throughout
this statement, the term ‘audited body’ covers both the members of the body (for
example, elected members in local authorities) and its management (the senior
officers of the body).
3 The Code recognises the different needs of small bodies. The Commission has to
set the threshold for small bodies at £1 million to harmonise the accounting and
audit requirements for small bodies with those in the Accounts and Audit
Regulations 2003 (as amended). Small bodies have the same responsibilities as
principal authorities in relation to governance and accountability although the
regulatory approach has been tailored to their needs.
4 The responsibilities of auditors are derived from statute (principally the Audit
Commission Act 1998) and from the Code. Nothing in this statement is intended
to limit or extend those responsibilities. In particular, audited bodies should note
that, because auditors must not prejudice their independence of the audited body,
the audit role does not include providing financial or legal advice or consultancy to
the audited body.
5 Auditors may wish to refer to, and/or incorporate, this statement in audit planning
documents, reports and other audit outputs.
114 Governance and Accountability for Local Councils │ Appendix 2 Statement of responsibilities of auditors and of audited small bodies
Introduction to responsibilities
6
Those who are responsible for the conduct of public business and for spending
public money are accountable for ensuring that public business is conducted in
accordance with the law and proper standards, and that public money is
safeguarded and properly accounted for, and used economically, efficiently and
effectively.
7 In discharging this accountability, public bodies and their management (both
members and officers) are responsible for putting in place proper arrangements
for the governance of their affairs and the stewardship of the resources at their
disposal. They are also required to report on their arrangements in their annual
governance statement.
8 It is the responsibility of the audited body to ensure that proper arrangements are
in place, but certain individuals have specific responsibilities. Local authorities
have three designated statutory officers each of whom has a specific role in
relation to accountability and control. These are:
•
the head of paid service, usually the chief executive, responsible to the full
council for the corporate and overall strategic management of the authority;
•
the monitoring officer who is responsible for reporting to the authority any
actual or potential breaches of the law or any maladministration, and for
ensuring that procedures for recording and reporting key decisions are
operating effectively; and
•
an officer with the responsibility for the proper administration of their financial
affairs.
9 Small bodies will have a chief executive officer, often known as the Clerk, and a
Responsible Financial Officer. The Clerk is the equivalent of the head of paid
service and will advise the body about any actual or potential breaches of the law
or any maladministration, and ensure that procedures for recording and reporting
key decisions are operating effectively. The Responsible Financial Officer is the
equivalent of the finance officer. In some very small bodies, the role of Clerk and
Responsible Financial Officer may be combined, although a separation of these
two key roles is always desirable.
10 In carrying out their responsibilities, auditors may wish to obtain representations
from management, both orally and in writing, on important matters.
11 The following paragraphs summarise the responsibilities of auditors and of
audited bodies in relation to the responsibilities of auditors described in the Code.
Auditing the financial statements
12 The financial statements, which comprise the published accounts of the audited
body, are an essential means by which it accounts for its stewardship of the
resources at its disposal. These are presented in a summarised format as the
statement of accounts in the annual return, as provided by the Audit Commission.
Governance and Accountability for Local Councils │Appendix 2 Statement of responsibilities of auditors and of audited small bodies 115
13 It is the responsibility of the audited body to:
•
put in place systems of internal control to ensure the regularity and lawfulness
of transactions;
•
maintain proper accounting records; and
•
prepare financial statements that present fairly the financial position of the
body and its expenditure and income or properly present its receipts and
payments.
14 The audited body is also responsible for preparing and publishing with its
financial statements an annual governance statement prepared in accordance
with proper practice9.
15 Auditors audit the annual return, which combines the financial statements and the
annual governance statement and give their opinion in the form of a limited
assurance statement.
16 Auditors are required by the Audit Commission to:
•
review the audited body's compliance with the requirements for the
preparation of annual accounts to determine whether it has been prepared
properly in accordance with relevant legislation and proper practices;
•
carry out a high-level analytical review of financial and other information
provided to the auditor;
•
review such additional information and explanation as is necessary to provide
sufficient evidence that the audited body has maintained an adequate system
of internal control and internal audit throughout the financial year; and
•
provide an opinion whether, on the basis of these reviews, the accounts of the
audited body and the other information provided are in accordance with the
Audit Commission's requirements and that no matters have come to the
auditor’s attention giving cause for concern that relevant legislative and
regulatory requirements have not been met.
17 In carrying out their audit of the financial statements, auditors will have regard to
the concept of materiality.
18 Auditors plan and perform their audit on the basis of their assessment of risk.
Where necessary, auditors may examine selected transactions and balances on
a test basis and assess the significant estimates and judgements made by the
audited body in preparing the statements.
19 Auditors may evaluate significant financial systems, and the associated internal
financial controls, for the purpose of giving their opinion on the financial
statements. Where auditors identify any weaknesses in such systems and
controls, they will draw them to the attention of the audited body, but they cannot
be expected to identify all weaknesses that may exist.
9
For local councils, charter trustees and other local government bodies proper practices may be found in
'Governance and Accountability in local councils in England - a Practitioners' Guide 2007 published jointly by
NALC and SLCC; for Internal Drainage Boards proper practices may be found in 'Governance and
Accountability in Internal Drainage Boards in England - a Practitioners' Guide 2006' which is published by ADA.
Other bodies may refer to either of these publications for the source of proper practices as appropriate.
116 Governance and Accountability for Local Councils │ Appendix 2 Statement of responsibilities of auditors and of audited small bodies
20 Auditors review whether the annual governance statement has been presented in
accordance with relevant requirements and report if it does not meet these
requirements or if the statement is misleading or inconsistent with other
information of which the auditor is aware. In doing so auditors take into account
the knowledge of the audited body gained through their work in relation to the
audit of the financial statements.
21 Auditors are not required to consider whether the annual governance statement
covers all risks and controls, nor are auditors required to form an opinion on the
effectiveness of the audited body’s corporate governance procedures or risk and
control procedures.
22 In carrying out their work on the annual return, auditors will:
•
plan to complete work and meet agreed deadlines;
•
maintain close liaison with the audited body; and
•
provide appropriate and adequate resources and assign responsibilities to
staff with the relevant expertise and experience.
23 Where audited bodies do not meet agreed timetables and/or provide poor
documentation such that additional audit work is necessary, or the audit is
delayed, auditors will charge additional fees to cover the costs incurred.
Specific powers and duties of auditors
24 Auditors have specific powers and duties under the Audit Commission Act 1998
in relation to matters of legality and electors’ rights. Fees arising in connection
with auditors’ exercise of these powers and duties, including costs relating to the
appointment of legal or other advisers to the auditors, are borne by the audited
body.
Reporting the results of audit work
25 Auditors provide:
•
oral and/or written reports or memoranda to officers and, where appropriate,
members on the results of, or matters arising from, specific aspects of
auditors’ work;
•
an audit report including the auditor’s opinion on the financial statements and
the statement of assurance; and
•
a certificate that the audit of the accounts has been completed in accordance
with statutory requirements.
Governance and Accountability for Local Councils │Appendix 2 Statement of responsibilities of auditors and of audited small bodies 117
26 In addition, the following outputs, the need for which may arise at any point during
the audit process, are issued where appropriate:
•
a report dealing with any matter that the auditor considers needs to be raised
in the public interest under section 8 of the Act; and
•
any recommendations under section 11(3) of the Act.
27 When considering the action to be taken on audit reports, audited bodies should
bear in mind the scope of the audit and responsibilities of auditors, as set out in
the Code and as further explained in this statement. Matters raised by auditors
will be drawn from those that come to their attention during the audit. The audit
cannot be relied upon to detect all errors, weaknesses or opportunities for
improvements in management arrangements that might exist. Audited bodies
should assess auditors’ conclusions and recommendations for their wider
implications before deciding whether to accept or implement them.
28 Although annual audit letters and reports may be addressed to officers or
members of the audited body, they are prepared for the sole use of the audited
body. Auditors do not have responsibilities to officers or members in their
individual capacities (other than in the exercise of auditors’ specific powers and
duties in relation to matters relating to electors’ rights) or to third parties who
choose to place reliance upon the reports from auditors.
Ad hoc requests for auditors’ views
29 There may be occasions when audited bodies will seek the views of auditors on
the legality, accounting treatment or value for money of a transaction before
embarking upon it. In such cases, auditors will be as helpful as possible, but are
precluded from giving a definite view in any case because auditors:
•
must not prejudice their independence by being involved in the
decision-making processes of the audited body;
•
are not financial or legal advisers to the audited body; and
•
may not act in any way that might fetter their ability to exercise the special
powers conferred upon them by statute.
30 In response to such requests, auditors can offer only an indication as to whether
anything in the information available to them at the time of forming a view could
cause them to consider exercising the specific powers conferred upon them by
statute. Any response from auditors should not be taken as suggesting that the
proposed transaction or course of action will be exempt from challenge in future,
whether by auditors or others entitled to raise objection to it. It is the responsibility
of the audited body to decide whether to embark on any transaction.
118 Governance and Accountability for Local Councils │ Appendix 2 Statement of responsibilities of auditors and of audited small bodies
Access to information
31 Auditors have wide ranging rights of access to documents and information in
relation to the audit. Such rights apply not only to documents and information held
by the audited body and its members and staff, including documents held in
electronic form, but also to the audited body’s partners and contractors, whether
in the public, private or voluntary sectors.
32 There are strict restrictions on the disclosure of information obtained in the course
of the audit, subject only to specific exemptions. The Freedom of Information Act
2000 does not apply to the Commission’s appointed auditors, as they have not
been designated as ‘public authorities’ for the purposes of that legislation.
Audited bodies wishing to disclose information obtained from an auditor are
required by law to seek the auditor's consent to that disclosure.
Grant claims and returns – certification
33 The Commission agrees to make certification arrangements in accordance with
the framework set out in the separate Statement of Responsibilities of
grant-paying bodies, authorities, the Audit Commission and appointed auditors in
relation to claims and returns. The responsibility for ensuring the completion,
accuracy and completeness of grant claims and returns lies with the audited
body. Grant-paying bodies may require independent examination as a condition
of their acceptance of claims and returns and may ask the Commission to make
arrangements for auditor certification of claims and returns. The Commission will
have regard to what it is appropriate, practically and professionally, to expect the
certification process and auditors to do before agreeing to make certification
arrangements.
Audit of charitable funds
34 This section is relevant to those charities to which the Audit Commission
undertakes an audit under s29 of the Audit Commission Act 1998.
35 Trustees of charitable funds have a duty to prepare financial statements for each
financial year which give a true and fair view of:
•
the state of the charity's affairs at the end of the financial year; and
•
the incoming resources and the application of those resources by the charity
for that period.
36 Trustees must ensure that the financial statements are prepared in accordance
with the Statement of Recommended Practice – ‘Accounting and Reporting by
Charities’.
Governance and Accountability for Local Councils │Appendix 2 Statement of responsibilities of auditors and of audited small bodies 119
37 It is the duty of the auditor to report to the trustees whether the financial
statements give a true and fair view and whether they have been prepared in
accordance with the Charities Act 1993 and the Charity (Accounts and Reports)
Regulations10.
38 Auditors are also required to report immediately to the Charity Commissioners
any matter which they have reasonable cause to believe is, or is likely to be, of
material significance to the Commissioners' functions under s8 (general power to
institute inquiries) or s18 (power to act for protection of charities) of the 1993 Act.
Such matters may relate not only to the activities or affairs of the charity, but also
to any institution or body corporate which is connected with the charity.
10
All charitable funds with a gross income over £10,000 require independent scrutiny. However for accounting
periods commencing after February 2007 the trustees of unincorporated charities with a gross income of
£500,000 or less and gross assets of £2.8 million or less may elect for an independent examination of the
financial statements. The auditor must then follow the procedures set out in the Charities Acts.
120 Governance and Accountability for Local Councils │ Appendix 2 Statement of responsibilities of auditors and of audited small bodies
Governance and Accountability for Local Councils 121
Appendix 3 - The approach to the audit
of local councils in England
1
2
The limited assurance audit approach distinguishes between three types of
local council:
•
councils with annual income or expenditure of £1 million or more
(Group A);
•
councils with neither annual income or expenditure in excess of £1
million (Group B); and
•
councils with neither annual income nor expenditure exceeding
£200,000 (Group C).
The exhibit below describes the new audit approach to each of the three
groups.
Exhibit 1
Exhibit Local council audit – model of delivery
.
*Non-compliance indicates the presence of unmitigated risk factors which
will lead to a more intensive audit as required.
122 Governance and Accountability for Local Councils │ Appendix 3 - The
approach to the audit of local councils in England
Governance and Accountability for Local Councils │ Appendix 4 - Extracts
from the Audit Commission’s Code of Audit Practice - highlighting
amendments relevant to the audit approach for local councils 123
Appendix 4 - Extracts from the Audit
Commission’s Code of Audit Practice highlighting amendments relevant to the
audit approach for local councils
‘Schedule 1: The audit of small bodies’
Introduction
S 1.1. It is inappropriate to apply the same level of audit scrutiny to certain bodies as to
principal authorities, because of the relatively small amounts of public money
controlled by the bodies in question. This Schedule sets out the approach to be
adopted for the audit of small bodies with either annual income, or annual
expenditure, of up to a financial level determined, after consultation with relevant
bodies, from time to time by the Commission (referred to in this Schedule as
small bodies).
Governance and accountability
S 1.2. It is the responsibility of local councils to put in place proper arrangements to
ensure the proper conduct of their financial affairs, and to monitor the adequacy
and effectiveness of those arrangements in practice. Small bodies are required to
prepare their accounts in accordance with their statutory responsibilities, and to
maintain an adequate system of internal audit of their accounting records and
control systems.
S 1.3. Small bodies meet their responsibilities by preparing and publishing, and
providing the auditor with, the accounts prepared for the financial year, together
with such additional information and explanation as is necessary to provide
sufficient evidence that they have maintained adequate systems of internal
control and internal audit throughout the financial year.
The audit approach
S 1.4. Auditors of small bodies should undertake an examination of the annual accounts
and additional information and explanation provided by the body.
124 Governance and Accountability for Local Councils │ Appendix 4 Extracts from the Audit Commission’s Code of Audit Practice - highlighting
amendments relevant to the audit approach for local councils
S 1.5. Auditors should meet their responsibility by:
• reviewing compliance with the requirements for the preparation of the annual
accounts;
• carrying out a high level analytical review of financial and other information
provided to the auditor; and
• reviewing such additional information and explanation as is necessary to
provide sufficient evidence that the body has maintained an adequate system
of internal control and internal audit throughout the financial year.
S 1.6. Where, on the basis of the auditor’s review, the auditor requires further evidence
in relation to any relevant matter, additional testing should be undertaken to
address the auditor’s concerns.
S 1.7. When the auditor has completed an examination of the annual accounts and
additional information and explanation provided, the auditor gives an opinion on
the accounts and certifies the completion of the audit. Auditors provide assurance
in the form of an opinion whether, on the basis of their review, the accounts and
the other information provided are in accordance with the specified requirements
and that no matters have come to their attention giving cause for concern that
relevant legislative and regulatory requirements have not been met.
Governance and Accountability for Local Councils │Appendix 5 - Standing
Guidance issued by the Audit Commission to External Auditors to small
bodies on the overall scope and approach of their audit 125
Appendix 5 - Standing Guidance issued
by the Audit Commission to External
Auditors to small bodies on the overall
scope and approach of their audit
Small Bodies – The Audit Approach
Schedule 1 of the Code
1
Auditors must recognise the fundamental difference between carrying out an audit
with a view to giving a ‘presents fairly’ or ‘true and fair’ opinion, and carrying out
an audit of a small body with a view to giving limited assurance in an opinion
based on limited procedures. They should plan their work accordingly, adopting a
risk based approach.
2
The Commission works closely with the National Association of Local Councils
(NALC) and the Society of Local Council Clerks (SLCC) and their respective
County Associations and branches. Similarly, in relation to Internal Drainage
Boards, the Commission has developed a technical matters relationship with the
Association of Drainage Authorities (ADA). The Commission supports NALC’s,
SLCC’s and the ADA’s technical advisory networks. These networks, rather than
the external auditors, should be the first point of contact for small bodies with
technical accounting queries or questions about the new audit framework. The
Commission will provide technical support to the NALC/SLCC network as well as
to auditors. In view of this, if asked to provide technical assistance, auditors may
wish to remind small bodies and their officers of these arrangements and that
auditors are entitled to charge for time taken in resolving enquiries which are
outside the audit engagement.
Model of delivery
Overview
3
The model of delivery approved by the Commission is shown in the flowchart at
Appendix 2 of Governance and Accountability in Local Councils in England – A
Practitioners’ Guide (2008) published by NALC and SLCC.
126 Governance and Accountability for Local Councils │ Appendix 5 Standing Guidance issued by the Audit Commission to External Auditors to
small bodies on the overall scope and approach of their audit
4
5
The key elements of the model are as follows.
•
All small bodies in England and Wales are required to complete an annual
return (see Appendix 6 of the Practitioners’ Guide for the pro forma return).
•
Some small bodies, such as parish meetings, which have no financial activity
may opt for the short-form annual return which serves as a ‘nil return’ but
meets their statutory reporting duty.
•
Small bodies with an annual turnover (ie the greater of gross income or
gross expenditure) up to £200,000 are entitled to a ‘basic’ audit.
•
Bodies with an annual turnover between £200,001 and £1 million receive an
‘intermediate’ audit.
•
Small bodies with an annual turnover greater than £1 million or which are
statutory best value authorities fall outside the scope of these arrangements
and will receive a full Code audit ie leading to a ‘presents fairly’ opinion.
Bodies with a regular turnover that is approaching £1 million may wish to opt
for a ‘full’ audit in anticipation of their future transition into this group.
•
The limited assurance approach comprises three key elements:
-
a compliance test against the requirements of the annual return;
-
a high level analytical review of the financial and supporting information
provided to the auditor; and
-
a review of the statement of assurance.
•
These tests and reviews are complemented by a report from the council’s
appointed internal auditor providing compliance evidence.
•
This work leads to the issue, by the external auditor, of a limited assurance
opinion on the annual return and a certificate of closure.
•
At no extra cost to individual bodies selected, all annual returns will be subject
to a 5 per cent selection for more detailed audit – the ‘spot check’.
•
The model envisages that wherever the auditor is, for any reason, unable to
progress directly to giving an opinion on the annual return, based on the
information submitted for audit, enquiry and/or further audit work should be
targeted at the specific omission, error or risk area. The reasons for additional
work should be appropriately documented, and the council informed of the
intention to carry out the work and the likely cost implications before
commencement. Any further audit testing is designed to deal with the specific
issues identified and auditors should ensure that they avoid over-auditing.
The Commission has established the overall framework within which auditors will
operate but, as with any audit, appointed auditors will need to exercise
professional judgement on how best to carry out the work required in support of
the limited assurance opinion on the annual return.
Governance and Accountability for Local Councils │Appendix 5 - Standing
Guidance issued by the Audit Commission to External Auditors to small
bodies on the overall scope and approach of their audit 127
6
All audits (regardless of the size of the smaller body) must still be ‘called’ by the
auditor in accordance with statutory requirements. This process ensures that
the statutory rights of electors can be exercised. Under this process the auditor
appoints a date, on or after which electors’ rights may be exercised, by notifying
the relevant smaller body. Each appointed auditor will need to make their own
administrative arrangements for meeting this requirement, but may wish to use
the Commission’s AF3 form which is designed for this purpose and distributed
to auditors annually by the Commission. Each smaller body is responsible for
properly publicising this information. Electors’ rights are a sensitive area and so
the auditor will wish to be satisfied that the body has provided a positive
assurance that they have been properly provided for.
Basic audit
7
The auditor must carry out these procedures for all small bodies falling below the
£1 million threshold. Where the body has a turnover of less than £200,000 per
annum, and is not selected to be part of the 5 per cent quality assurance
sample, then these procedures will – if properly applied – enable the completion
of the limited assurance audit. Where the council has a greater turnover, or is
part of the quality assurance sample, the ‘intermediate audit’ procedures
described below will also have to be followed.
8
The council will complete and submit the annual return pro forma. Three sections
should be completed as follows.
9
•
Section 1: Statement of accounts – the body should have transferred key
financial data items from their prime accounting records in accordance with
the guidance provided on the pro forma.
•
Section 2: Statement of assurance – this should be completed by the
members of the body summarising their acceptance and understanding of
their statutory responsibilities and providing an acknowledgement that they
have fulfilled the duties imposed by statute (as per the pro forma).
•
Section 4: Annual report by internal audit – this should contain a report on the
adequacy and effectiveness of the body’s system of internal controls as per
the pro forma.
Guidance in the annual return pro forma reminds bodies to attach certain other
documentation. This will be the minimum required and failure to provide this will
trigger additional audit input, which may be charged to the smaller body. The
further information to be submitted to the external auditor with the annual return
is:
•
year-end bank reconciliation. An example of the suggested format is given in
the Practitioners’ Guides. Copies of bank statement pages covering the
31 March financial year end may also be attached; and
•
brief explanation(s) of significant variances between and within years in the
annual return.
128 Governance and Accountability for Local Councils │ Appendix 5 Standing Guidance issued by the Audit Commission to External Auditors to
small bodies on the overall scope and approach of their audit
10 Auditors may also wish to obtain certain optional additional information, as
follows.
•
If audit procedures (analytical review, risk assessment, cumulative audit
knowledge etc), or the body’s unresolved omission or error on the annual
return, or some other justifiable reason, indicate possible irregularity, the
auditor may, having informed the body of his/her intention, request an
independent verification of bank and/or investment balances in order to carry
out required further work. But auditors should note that there is a cost
implication for small bodies in making such a request. Banks may charge up
to £50 for this service.
•
The Commission will annually circulate to auditors year-end balances of
borrowings by small bodies from the Public Works Loan Board (‘PWLB’).
•
Auditors should make their own arrangements with Council Tax managers of
principal authorities in their contract/ appointment area (or their auditors) to
receive client local council precept data for the relevant financial year.
11 When the relevant information is obtained, the next step is the completion of the
audit. There are two elements to this process:
•
in cases where a properly completed annual return is submitted and the high
level analytical review indicates no unresolved material audit risk, the auditor
should proceed to sign the certificate and opinion at section 3 of the return;
or
•
if additional audit work is indicated from the initial examination of the annual
return, auditors should identify the specific area of concern and the additional
work required, which should be limited to dealing with the specific area of
concern, make an estimate of the time required to carry out this work and
inform the audited body before commencing the work. The justification for the
decision to carry out any additional work must be properly evidenced.
Intermediate audit (bodies with turnover between £200,000 and £1 million)
12 In addition to the requirements of the basic audit above, auditors should plan and
carry out work in order to complete the Commission’s intermediate audit
guidance. This focuses on the body’s overall control environment and helps the
auditor to plan any further work indicated by the results. The guidance is set out
below.
13 The intermediate audit is the process whereby auditors obtain additional audit
evidence in support of their opinion to reflect the additional audit risk associated
with higher levels of activity or expenditure at larger small bodies, as defined
below, or in support of the 5 per cent spot check of basic audits.
Governance and Accountability for Local Councils │Appendix 5 - Standing
Guidance issued by the Audit Commission to External Auditors to small
bodies on the overall scope and approach of their audit 129
14 In addition to the basic audit, auditors may wish to apply general and specific
audit tests designed to give them greater assurance about the audited body’s
risk management and corporate governance arrangements than can be
provided by the annual return alone. It is applicable to all small bodies where
either their annual expenditure or annual income exceeds £200,000 but is
below £1 million. It is also applicable to an annual sample of 5 per cent of small
bodies with a turnover of under £200,000 per annum. This sample is used to
establish the ongoing efficacy of the basic audit approach.
15 The intermediate audit seeks to test one or more of the assertions made by the
audited body and thereby provide additional audit evidence through a ‘show me’
approach to the responses given in the statement of assurance. The auditor will
consider the following factors in order to determine the frequency and extent to
which they wish to apply some or all of the suggested tests:
•
the initial risk assessment; and
•
cumulative audit knowledge and experience.
16 In addition, the auditor may also consider the following factors, when information
is received from the smaller body:
• the outcome of the analytical review of information supplied; and
• the level of compliance with requirements.
17 The auditor will only consider making a further document request if the necessary
information cannot be obtained from the documents already obtained from the
smaller body.
18 The Commission expects the evidence required by auditors for intermediate audit
to be proportionate to the audit risk. Any additional work arising from
intermediate audit must be evidenced and documented as appropriate.
19 Each of the eight assertions in the statement of assurance (section 2 of the
annual return) is reproduced below, together with some suggested tests that
may be applied, either in the form of an additional questionnaire to the smaller
body or by using other audit methods.
20 In order to reduce the frequency of correspondence and to provide a reasonable
time for response, the Commission recommends that in practice, auditors
should, wherever possible, advise the audited body when calling the audit about
the additional evidence being sought under intermediate audit. A provision for
this has been made in the AF3.
21 The cost of intermediate audit, whether determined by the turnover of the smaller
body or required for the 5 per cent sample of smaller bodies, is included in the
scale fees.
22 Auditors should note when planning the intermediate audit that the format of the
audit opinion is the same limited assurance opinion that applies to basic audit.
130 Governance and Accountability for Local Councils │ Appendix 5 Standing Guidance issued by the Audit Commission to External Auditors to
small bodies on the overall scope and approach of their audit
Other matters - previous years’ audits not completed
23 In cases where the previous years’ audits have not been completed/closed,
auditors should include the following text in their report on the return: ‘The audit
of the [smaller body]’s accounts for the years ended 31 March 20XX and 20YY
have yet to be concluded and as a consequence the audit for the year ended
31 March 20ZZ must remain open. While the audit report given above is in
advance of the conclusion of the audit, we can confirm that our opinion is
subject only to the changes that may be required to balances brought forward
as shown in section 1 as a consequence of the conclusion of prior years’
audits.’
Other matters - audits not completed at statutory deadline
24 In the event that an audit has not been concluded and no audit opinion has been
issued prior to the statutory deadline, the Accounts and Audit Regulations
stipulate that the smaller body should publish its statement of accounts together
with a declaration and explanation of the fact that no audit opinion has been
issued by the statutory publication date. Auditors should provide to bodies a
‘confirmation’ letter suitable for public display confirming that as ‘at the statutory
publication date no audit opinion has yet been issued in relation to the
statement of accounts for the year ended 31 March 20XX.’
25 A covering letter provided to the smaller body should set out the requirements of
regulation 12 of the Accounts and Audit Regulations 2003 and should indicate
that the smaller body can meet its statutory obligations by displaying a copy of
the Annual Return marked ‘subject to audit’ at the top of section 1 of the Annual
Return and by displaying a copy of the ‘confirmation’ letter, confirming that the
audit opinion has not been issued. The covering letter may also indicate that the
requirement to publish can be achieved by display of the items on the same
notice board(s) or publication which was used for the notice of audit although
publication in a newspaper is not required unless that is the smaller body’s
usual or preferred method of advertising the audit.
Governance and Accountability for Local Councils │Appendix 5 - Standing Guidance issued by the Audit Commission to
External Auditors to small bodies on the overall scope and approach of their audit 131
Statement of Assurance
Possible further assurance request
Possible additional documentation
request
‘We have approved the accounts
which have been prepared in
accordance with the requirements
of the Accounts and Audit
Regulations and proper practices.’
Does the smaller body have access to a
Practitioners’ Guide on proper practices and have
the accounts been prepared in accordance with
this guidance?
Has the body properly prepared its financial
summary?
Did the body/committee review the bank
reconciliation?
Copy of financial statements on
which annual return is based.
‘We have maintained an adequate
system of internal control, including
measures designed to prevent and
detect fraud and corruption.’
Confirm that arrangements in place to ensure
system of internal control are fully documented.
Confirm that the body receives regular reports
regarding internal controls/fraud protection.
Copy of internal auditor’s reports re
internal controls.
Copy of minute(s) where internal
controls discussed/approved.
‘We have taken reasonable steps to
assure ourselves that there are no
matters of actual or potential
non-compliance with laws,
regulations and codes of practice
which could have a significant
financial effect on the ability of the
smaller body to conduct its business
or on its finances.’
Confirmation that all expenditure decisions made
are within existing powers and minuted.
Confirm body has adopted Standing Orders and
Financial Regulations.
Confirm smaller body has adopted and applies
the Code of Conduct, if applicable.
Confirm all members have received training on
the Code of Conduct, if applicable.
Copies of minutes for a selected
period showing expenditure powers
have been properly identified.
Copy of Standing Orders/Financial
Regulations and/or minute adopting.
Copy of minute adopting Code of
Conduct.
Extract from declarations of interest.
Sample copies of members’
acceptance of office.
Copy of extended trial balance
(if I&E).
Copy of closing bank statements.
132 Governance and Accountability for Local Councils │ Appendix 5 - Standing Guidance issued by the Audit Commission to
External Auditors to small bodies on the overall scope and approach of their audit
Statement of Assurance
Possible further assurance request
Possible additional documentation
request
‘We have provided proper
opportunity for the exercise of
electors’ rights in accordance with
the requirements of the Accounts
and Audit Regulations.’
Confirm that the notice of audit has been
prominently advertised/displayed.
Confirm that the notice of completion of the audit
has been properly advertised/displayed.
Confirm that accounts have been made available
to electors.
Copy of notice of audit.
‘We have carried out an
assessment of the risks facing the
smaller body and taken appropriate
steps to manage those risks,
including the introduction of internal
controls and/or external insurance
cover where required.’
Confirm arrangements for risk management and
how this has been carried out/updated and/or
considered by the smaller body.
Confirm that appropriate insurance cover for
identified risks is in place.
Confirm smaller body regularly seeks assurance
regarding internal controls.
Copy of risk management minute.
‘We have maintained an adequate
and effective system of internal
audit of the smaller body’s
accounting records and control
systems.’
Confirm that internal audit is carried out in
accordance with proper practice guidance in the
Practitioners’ Guide.
Confirm that internal audit is not requested to
undertake tasks or give advice which may
compromise or fetter his/her independence or
invalidate the smaller body’s insurance.
Copy of minute
appointing/reappointing internal
audit.
Copy of letter of engagement
scoping IA work.
Copy of annual letter from IA
confirming continuing independence.
Copy of notice of completion of audit.
Copy of arrangements in place for
inspection of accounts.
Copy of insurance schedule including
value of Fidelity Guarantee bond.
Copy of any risk assessment reports
(if any).
Governance and Accountability for Local Councils │Appendix 5 - Standing Guidance issued by the Audit Commission to
External Auditors to small bodies on the overall scope and approach of their audit 133
Statement of Assurance
Possible further assurance request
Possible additional documentation
request
‘We have taken what we consider to
be appropriate action on all matters
raised in previous reports from the
internal and external auditors.’
Confirm that all internal and external audit
reports have been placed before and
considered by the smaller body.
Confirm that there are no outstanding matters
from previous audit reports.
Copy of minute recording auditors’
report.
‘We are not aware of any litigation,
liabilities or commitments, events or
transactions, occurring either during
or after the end of the financial year
being reported, other than those
included in the accounts.’
Confirm that reserves are adequate and not
excessive.
Confirm that where there are any claims
against the smaller body, any uninsured
portion has been provided for.
Confirm smaller body has not borrowed any
money other than for financing capital
schemes.
Confirm no changes to existing capital
programmes.
Copy of analysis of reserves identifying
general fund and any earmarked
reserves.
Details of any provisions made or added
to in the year.
Copy of capital expenditure programme.
Copy of agreed action plans to carry out
recommendations.
Details of any loans outstanding or
applied for.
Details of any current or planned lottery
bids.
134 Governance and Accountability for Local Councils │ Appendix 5 Standing Guidance issued by the Audit Commission to External Auditors to
small bodies on the overall scope and approach of their audit
Governance and Accountability for Local Councils│ Appendix 6 - Annual
return for local councils for the year ending 31 March 2008 135
Appendix 6 - Annual return for local
councils for the year ending 31 March
2008
136 Governance and Accountability for Local Councils │ Appendix 6 - Annual
return for local councils for the year ending 31 March 2008
Governance and Accountability for Local Councils│ Appendix 6 - Annual
return for local councils for the year ending 31 March 2008 137
138 Governance and Accountability for Local Councils │ Appendix 6 - Annual
return for local councils for the year ending 31 March 2008
Governance and Accountability for Local Councils│ Appendix 6 - Annual
return for local councils for the year ending 31 March 2008 139
140 Governance and Accountability for Local Councils │ Appendix 6 - Annual
return for local councils for the year ending 31 March 2008
Governance and Accountability for Local Councils │Appendix 7 - Accounts
and Audit Regulations and Guidance 141
Appendix 7 - Accounts and Audit
Regulations and Guidance
Accounts and Audit Regulations 2003 – SI 2003
No 533 as amended by The Accounts and Audit
(Amendment) (England) Regulations 2006
SI 2006 No 564
http://www.audit-commission.gov.uk/practitionersguide
CLG Guidance Circular 03/2006
http://www.audit-commission.gov.uk/practitionersguide
142 Governance and Accountability for Local Councils
Governance and Accountability for Local Councils │Appendix 8 - Local
Government Investments - CLG guidance 143
Appendix 8 - Local Government
Investments - CLG guidance
144 Governance and Accountability for Local Councils │ Appendix 8 - Local
Government Investments - CLG guidance
Governance and Accountability for Local Councils │Appendix 8 - Local
Government Investments - CLG guidance 145
146 Governance and Accountability for Local Councils │ Appendix 8 - Local
Government Investments - CLG guidance
Governance and Accountability for Local Councils │Appendix 8 - Local
Government Investments - CLG guidance 147
148 Governance and Accountability for Local Councils │ Appendix 8 - Local
Government Investments - CLG guidance
Governance and Accountability for Local Councils │Appendix 8 - Local
Government Investments - CLG guidance 149
150 Governance and Accountability for Local Councils │ Appendix 8 - Local
Government Investments - CLG guidance
Governance and Accountability for Local Councils │Appendix 9 - An
approach to internal audit testing 151
Appendix 9 - An approach to internal
audit testing
1
The council will determine the scope and coverage of the work to be carried out
by internal audit in accordance with proper practices guidance. Internal audit
testing of internal controls will be sufficient for the proper completion of the annual
internal audit report. The annual internal audit report should provide an adequate
level of assurance for the council to complete assertions 2 and 6 in its annual
governance statement.
2
In completing the annual report at section 4 of the annual return, internal audit will
have planned and carried out the work necessary to give the assurances called
for. The ten key control tests in the annual report represent the minimum level of
internal audit coverage required. Additional testing and reporting should be
tailored to local circumstances.
3
Internal audit work always requires the application of judgement and should only
be carried out following risk assessment. The scope and frequency of testing
should reflect that assessment, and therefore should always be in proportion to
the likelihood of fraud, error or misstatement that could occur. It should be directly
related to the size and level of business activity of the council.
4
The following schedule suggests an approach to the testing of key controls to
provide assurance that the minimum level of coverage has been met.
,
Internal Control
Proper bookkeeping
a) standing orders
and financial
regulations adopted
and applied; and
b) payments controls
Risk management
arrangements
Suggested testing
•
•
•
•
•
•
•
•
•
•
•
•
•
Is the cashbook maintained and up to date?
Is the cashbook arithmetic correct?
Is the cashbook regularly balanced?
Has the council formally adopted standing orders and financial
regulations?
Has a Responsible financial officer been appointed with specific
duties?
Have items or services above the de minimus amount been
competitively purchased?
Are payments in the cashbook supported by invoices, authorised and
minuted?
Has VAT on payments been identified, recorded and reclaimed?
Is s137 expenditure separately recorded and within statutory limits?
Does a review of the minutes identify any unusual financial activity?
Do minutes record the council carrying out an annual risk
assessment?
Is insurance cover appropriate and adequate?
Are internal financial controls documented and regularly reviewed?
152 Governance and Accountability for Local Councils │ Appendix 9 - An
approach to internal audit testing
Internal Control
Suggested testing
Budgetary Controls
•
•
Income Controls
•
•
•
•
•
Petty cash
procedures
•
•
•
Payroll Controls
•
•
•
•
Assets controls
Bank Reconciliation
•
•
•
•
•
•
•
Year-end procedures
•
•
•
Has the council prepared an annual budget in support of its precept?
Is actual expenditure against the budget regularly reported to the
council?
Are there any significant unexplained variances from budget?
Is income properly recorded and promptly banked?
Does the precept recorded agree to the Council Tax authority’s
notification?
Are security controls over cash and near-cash adequate and
effective?
Is all petty cash spent recorded and supported by VAT
invoices/receipts?
Is petty cash expenditure reported to each council meeting?
Is petty cash reimbursement carried out regularly?
Do all employees have contracts of employment with clear terms and
conditions?
Do salaries paid agree with those approved by the council?
Are other payments to employees reasonable and approved by the
council?
Have PAYE/NIC been properly operated by the council as an
employer?
Does the council maintain a register of all material assets owned or
in its care?
Are the assets and Investments registers up to date?
Do asset insurance valuations agree with those in the asset register?
Is there a bank reconciliation for each account?
Is a bank reconciliation carried out regularly and in a timely fashion?
Are there any unexplained balancing entries in any reconciliation?
Is the value of investments held summarised on the reconciliation?
Are year end accounts prepared on the correct accounting basis
(Receipts and Payments or Income and Expenditure)?
Do accounts agree with the cashbook?
Is there an audit trail from underlying financial records to the
accounts?
Where appropriate, have debtors and creditors been properly
recorded?
Governance and Accountability for Local Councils │Appendix 10 - An
executive checklist for financial year-ends 153
Appendix 10 - An executive checklist for
financial year-ends
This checklist is provided for use by the Chair as a final check for completeness of the
council’s annual accounting and reporting cycle.
Answering ‘Yes’ to the questions below should provide assurance that the necessary steps
have been taken during the year and that the process is now complete and may be signed
off.
Any ‘no’ answers indicate that further work may need to be carried out.
References to relevant sections of the Practitioners’ Guide are included.
Governance
1
During the year, has the council reviewed its system of internal
control, including internal audit, risk management and measures
designed to prevent fraud and corruption, and assessed it as
adequate and effective? (See Practitioners Guide (PG)
paragraph 2.79)
2
Has the council only done what it has the legal powers to do and in
doing so acted in accordance with the codes of conduct and practice it
has agreed to abide by? (PG Appendix 1)
3
Has the council appointed a responsible financial officer who has
ensured that the council’s accounting system has been observed and
that the accounts and supporting records have been maintained in
accordance with proper practices and kept up to date? (PG 1.24)
4
Has the council arranged for internal audit to be carried out and
reported upon? (PG 2.58)
5
Has the council reviewed its income and spending against the
approved budget during the year and as at 31 March?
(PG 2.15, 3.29 to 3.33)
The accounts
6
Has the cashbook been balanced? (Bank balance at end of previous
year plus total receipts less total payments equals bank balance at
end of current year after adjusting for unpresented cheques and
credits). (PG 3.59)
7
Have the bank balances in the Accounts been reconciled with the
bank statements at 31 March? (PG 3.50 – 3.58)
8
Have the Accounts been prepared on the proper basis (income and
expenditure over £200,000) and is this consistent with last year?
(PG 3.68 – 3.79)
9
Have all debtors, creditors, receipts in advance, payments in advance
and accruals been accounted for? (income and expenditure only)
(PG 3.72 – 3.79)
YES
NO
154 Governance and Accountability for Local Councils │ Appendix 10 - An
executive checklist for financial year-ends
Governance
10
Are the accounts in balance and has all the necessary information
been included in any supporting notes?
11
If the council’s income or expenditure is approaching a threshold
(£200,000 or £1,000,000) have the implications of this been
considered and acted upon? (PG 2.6-2.7, 3.68-3.79)
The annual return
12
Has Section 1 of the Annual Return been completed, signed by the
Responsible financial officer, adopted by the Council and signed by
the Chairman, including the minute reference and date? (PG 2.4)
13
Has a copy of the bank reconciliation at 31 March been included
with the Annual Return? (PG 2.28)
14
Has a written and full explanation of any significant variances
between last year’s and this year’s figures, or any unusual or
unexpected amounts shown in the statement of accounts on
section 1? (PG 2.15)
15
Do the figures in section 1 of the annual return balance? (Balance
b/fwd plus all receipts/income less all payments/expenditure equals
balance c/fwd.) (PG 3.68)
16
Has the Annual governance statement (section 2) been completed
and approved by the Council, signed and dated by the Chairman and
Clerk and the minute reference recorded? (PG 2.37)
17
Has internal audit work been completed and the Certificate signed
(section 4 of the Annual Return)? (PG 2.58)
18
Has the Council considered and acted on any items appearing on the
internal audit report for the financial year just ended? (PG 2.58)
19
Has the Council considered and acted on any items appearing on the
external auditor's report for the previous year? (PG 2.46)
If any ‘no’ answers appear above
20
Does the clerk of the council/RFO need further advice or help in
finalising the annual return? (contact SLCC/NALC audit help)
Checklist carried out by
Date
YES
NO
Governance and Accountability for Local Councils │Glossary 155
Glossary
Accounts and Audit
Regulations 2003 –
SI 2003 No 533
Secondary legislation governing the arrangements
for preparing and auditing the accounts of local
authorities.
Accounts and Audit
(Amendment)
(England) Regulations
2006 SI 2006 No 564
Secondary legislation amending the Accounts and
Audit Regulations 2003 introducing new thresholds,
deadlines and review requirements.
Annual governance
statement
A statement by the council which forms part of the
annual return and sets out several representations or
assertions which are intended to give the public
assurance about the way in which the council has
exercised key aspects of corporate governance.
Annual return
The return, specified by the Audit Commission, as
the means by which local councils report to the
public their statement of accounts, provide a annual
governance statement in relation to key financial
aspects of corporate governance and present the
external auditor’s opinion on the annual return. In
addition the annual return includes a report from the
council’s internal auditor (this does not have to be
published).
Appointed auditor
The external auditor appointed by the Audit
Commission.
Audit Commission Act
1998
Primary legislation covering the accounts and audit
requirements of local councils.
Balances
In financial statements the amounts in each item of
account. Commonly used to refer to the sum of all
cash and near cash held by the council for future
use. See ‘reserves’.
Code of Audit Practice
Prepared and issued by the Audit Commission, this
Code is laid before Parliament at least every five
years and provides the framework within which
external auditors must carry out their audits.
Contingency
A provision (reserve) for the cost of an event or
liability that may happen at some time in the future
the true value of which is unknown.
Creditor
A person to whom a debt is owed.
Debtor
A person from whom a debt is owed.
Delegated authority
Formal approval by a council to officers and/or
members to act on the council’s behalf.
156 Governance and Accountability for Local Councils │ Glossary
Fidelity Guarantee
A type of insurance against the risk of theft or
defalcation by officers responsible for a council’s
assets, specifically cash and balances.
Governance
(Corporate
Governance)
The arrangements by which authorities direct their
functions and relate to their communities.
Internal audit
A function, within or procured by the council, which is
to review and report on the effectiveness of internal
controls.
Internal control
An activity, process, system or measure to ensure
that a local council’s activities are carried out
properly and as intended.
Internal control
environment
The overall framework of internal controls and a key
element in good corporate governance.
Local councils
See part 1 of the guidance for definitions.
Material/materiality
In the financial statements, information is material if
its omission or misstatement could influence or
mislead users of the financial statements. Materiality
depends on the size of the item or error judged in the
particular circumstances of its omission or
misstatement.
Opinion/Qualified
opinion
A statement of findings and assurance given by an
auditor following the completion of an audit process.
A qualified opinion means that the auditor’s
otherwise positive assurance has been modified in
some way usually to report non-compliance or other
failure or weakness in the accounts.
Precept
A legal demand by a local council on its District
Council (or other second tier body) for operating
funds to meet budget needs. The precept is
recovered from local taxpayers via council tax.
Representation
An assertion made within the annual return – see
annual governance statement.
Reserves
Refers to balances of cash held for specific future
purposes or generally to offset risks. Often referred
to as ‘balances’.
responsible financial
officer ('RFO')
The officer, usually, the clerk designated by the
council to ensure that the council maintains
adequate accounting arrangements. RFOs have
specific statutory responsibilities as set out in the
Local Government Act 1972.
Governance and Accountability for Local Councils │Glossary 157
Risk management
The arrangements which a council makes to identify
key business risks, evaluate these and put in place
to measures to reduce the risk or manage the
consequences of its occurrence.
Significance
In the financial statements refers to a measure of
relative importance or having special meaning.
Statement of accounts
The section in the annual return which summarises
the financial results of the council.
Tender
A bid to provide goods and/or services to the council.
Invited from potential suppliers in accordance with
Standing orders and Financial Regulations.
Ultra vires/Intra vires
Any activities which are beyond the powers of the
local council, and so unlawful, are said to be ultra
vires. Intra vires refers to activities which are within
the legal powers of the council and therefore lawful.
Virement
Approved transfers of expenditure from one budget
head to another.
Governance and Accountability for Local Councils 158
Governance and Accountability for Local Councils│ Index 159
Index
A
Accountability framework
Intro 1-7
Accounts - Approval deadline
2.10, 3.100
- Audit arrangements
1.18-1.21
- Changing basis
2.7, 3.67, 3.83-3.92
- General
3.1-3.3, 3.80-3.82, see
also annual return
section 1
- Income and expenditure basis
2.6, 3.72-3.79
- Receipts and payments basis
2.7, 3.68-3.71
Annual return - General
Intro 2, 1.33 – 1.35, 2.1,
Appendix 6,
- Section 1
2.4-2.14
- Section 2
2.37-2.49
- Section 3
- Section 4
2.50-2.57
See Internal Audit
- Short form
1.15
Audit - Proper practices
1.36-1.37
- Requirements
1.18-1.21, 3.100
- Fees
2.12, Appendix 2: para
23-24
Audit report
See annual return section 3
Auditors - General
1.28, Appendix 2, see
also annual return section 3
- Standing guidance
Appendix 5
160 Governance and Accountability for Local Councils │ Index
B
Bank reconciliation - General
- Balancing the cash book
Box 7 and 8 variance
2.28-2.36, 3.50-3.58
3.59-3.60
2.24
Budgets
3.29-3.33
C
Capital receipts
3.32-3.33
Cash book - general
3.7 - example 1 p100
3.34-3.42
3.14-3.15
- receipts
Chairman - role and responsibilities
- signing annual return
- appointment as RFO or clerk
1.22, 1.48, 2.56
2.9
3.5
Charitable trust - Bank accounts
1.46
- General
1.38-1.49, 2.49
Checklist
Appendix 10
Clerk - General
- As RFO
- Employment of
1.5, 1.48
1.24, 3.5
3.22-3.25
Code of audit practice
Appendix 4
Contingencies
3.31 - points 5 and 6
in table
Councils - Charter trustees
1.12
Creditors
- City Councils
1.9
- Joint committees
1.16-1.17
- Local councils – definition
1.1 -1.3
- Parish Councils
1.4 – 1.8
- Parish Meetings
1.13-1.15
- Roles and responsibilities
1.22-1.28
- Town Councils
1.9
2.24, 3.76, 3.78 - 3.82
Governance and Accountability for Local Councils │Index 161
D
Debtors
2.24, 3.19-3.21, 3.783.82
E
Electors - Rights to inspect records
Intro 7, 3.93 – 3.100
Employment
See salaries
Employees
See salaries
F
Fidelity guarantee
see insurance
Financial Regulations
2.63, 3.9, 3.11, 3.29
Fixed Assets - Capital receipts
- Definition of
- General
- Register
- Trusts
- valuation of
3.32,
3.61
3.7 - example 2 p101
3.61-3.67
1.49
3.67
G
Glossary
Appendix 11
Grants
3.7 - example 3 p103
162 Governance and Accountability for Local Councils │ Index
I
Insurance - General
- Fidelity guarantee
3.26-3.28
3.17, 3.26
Internal audit - General
Appendix 9
- Review effectiveness of
requirement
1.27
- Review effectiveness of guidance
2.79-2.96
- Annual return Section 4
2.58-2.78
Internal control - legal requirement
- Objectives
- Risk management
- Reporting
1.26 - 1.28,
2.72-2.73
2.46, 2.57
2.42
Investments - accounting for
2.28-2.36,
see also bank
reconciliation
3.43-3.49, Appendix 8
- guidance for
L
Legislation - Accounts and Audit Regulations
1.18 – 1.21, Appendix
7
- Audit Commission Act 1998
1.18 -1.21
- Local Government and Public
involvement in Health Act 2007
1.10- 1.11
M
Meetings - As trustees for charities
- Number per year
1.47 - 1.48
1.23
P
Payment authorisation
3.9-3.13
Petty cash
3.18
Powers - General
1.3-1.5, Appendix 1
Precept
- Reserves
2.25
- Ultra vires
- Well being
1.2
1.10
1.6, 3.29
Governance and Accountability for Local Councils │Index 163
R
Reserves
2.25-2.26
RFO - appointment of
- signing of accounts
- clerk acting as
- members responsibility to
1.24-.1.25
2.4-2.5,
3.5
3.6
Risk management
1.26, 2.42-2.43, 2.46,
2.97-2.112
S
Salaries - remuneration
- self employed status
3.23
3.24-3.25
Self employed
See salaries
SORP accounts
Intro 3, Part 4
Staff
See salaries
Standing orders
2.63, 3.9
Statement of governance
See annual return
section 2
V
Variances - explanation of
- Guidance on
2.15-2.27
3.87-3.92
Y
Year end close down procedures
3.4-3.28
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