Meeting documents

Financial Health and standing

1.1 The Authority experienced continued financial pressures in 2002/03 and these show no sign of weakening in the current year. The Authority continues to face a number of financial risks including rising superannuation costs, pressures on budgets, substantial backlog maintenance costs and the potential costs associated with the Bath Spa project. In view of this, it is essential that the Authority maintains strict budgetary control during 2003/04.

1.2 In spite of the budget pressures the Authority has nevertheless been able to maintain a reasonable level of earmarked reserves and working balances in recent years. In accordance with good practice the Authority has recently estimated its required minimum level of reserves at £5.1m, by quantifying the potential cost of the key risks in the corporate risk register. In our view this represents sound and prudent financial management and provides the Authority with some flexibility to deal with unexpected increases in expenditure. Whilst the level of earmarked reserves and working balances are in accordance with best practice we would however emphasise the importance of keeping the level of balances and reserves under review as part of the annual financial planning process.

Trading operations

1.3 The Authority operated a number of trading operations during 2002/03, which in overall terms incurred a trading loss of £0.727m. The most significant deficits were incurred by the leisure and catering operations amounting to £0.412m and £0.329m respectively. A deficit of £0.260m was also incurred by the Authority's Linear Way workshops. Whilst the Authority has addressed the losses made by Leisure services through externalisation of services in July 2003 there is a need to consider opportunities for cost reductions for its remaining trading operations and also a need to keep the level of subsidy provided under review. In addition it will be important to ensure that their financial performance continues to be closely monitored in 2003/04 to ensure that they satisfy the requirements of delivering services efficiently and effectively.

Capital expenditure & Prudential Code

1.4 The Authority has in recent years consistently under performed in respect of the achievement of its capital programme. There was a further underspend during 2002/03, with slippage of £3.808million (12%) on capital schemes in spite of the overspend on the Bath Spa project. The introduction of the prudential code of capital will completely change the way that local government both finances and accounts for capital. The new system will move the emphasis from statutory regulation to self-regulation. It is important that strong controls are in place for the identification and monitoring of capital expenditure and the capital budget continues to be subject to close scrutiny.

1.5 The introduction of the Prudential Code on the 1^st April 2004 will remove many of the restrictions of the current capital controls regime, which controls the Authority's external borrowing activity. The Authority will be able to enter into external borrowing up to levels that it considers to be financially sustainable. The Authority is currently debt free due to the considerable capital receipts earned from the sale of its housing stock in 1999. However, management anticipate that the Authority will need to start borrowing externally by the end of 2003/04. Whilst this new freedom to control its level of external borrowing will provide the Authority with the opportunity to achieve many new capital projects this new freedom may also pose a significant future threat to the Authority's future financial standing. The Authority should remember that external borrowing is a means of deferring payment for goods and is not in essence `free money'.

New Financial Management System

1.6 The Authority has been planning the implementation of a new financial ledger system and the first stage of this was implemented on 1 July 2003. We reviewed the project controls in place in May, and found weaknesses in the arrangements in place. We were concerned that there was a significant risk to the successful implementation of the first stage. Following our report, the Council acted quickly to put right the immediate issues prior to implementation. We are currently carrying out a review of the FMS implementation as a whole. Although the first part of the implementation is complete, there is still much to do to ensure that the investment in FMS realises tangible benefit for the Council. We will keep developments under review

Internal audit arrangements

1.7 In overall terms the Internal Audit function provides a valuable service to management in the areas of controls assurance, risk management, prevention and detection of fraud and corruption and ad hoc consultancy style reviews. Our review of the work performed by internal audit found it to generally be of a high standard with good processes in place for executing and following up reviews. We did however note that there had been a lack of willingness by some service areas to accept and respond to key recommendations made by internal audit. We also identified that neither the annual audit plan or out turn report for 2002/03 were formally considered by members. We understand that this was due to the change in political arrangements, which were particular to 2002/03. We consider that in order to enhance overall governance arrangements within the Authority that there is a need to address these issues as a matter of priority.

Accounts Production Process

1.8 In our first year as auditors, we have assessed the extent to which the annual accounts comply not only with the minimum requirements set out in statute, but best practice in local government financial reporting. The original accounts submitted to us for audit required some significant adjustments particularly in relations to items of disclosure and the bases for accounting estimates (bad debt provisions) made in the accounts. We have agreed with the Resources Director a number of areas where there is scope to improve the quality of the accounts in future years. In particular it will be important to ensure that the draft accounts fully reflect the requirements of the Local Authority Statement of Recommended Practice and applicable UK Accounting Standards and an annual review of all significant accounting policies and accounting estimates should be undertaken to ensure that they are the most appropriate to the Authority's circumstances.

1.9 Our audit work identified material unreconciled differences between the Authority's financial management system and schools' bank reconciliations, the National Non-Domestic Rates system and the Council Tax system. Officers have worked to reduce these unreconciled differences; however, differences still remain. These are not considered to be material to the accounts. The Authority should review the processes that it adopts for system reconciliations. Reconciliations should be performed on both a regular and timely basis. This is of particular importance given that the Authority will be preparing the 2003/04 statement of accounts from a new Financial Management System.

1.10 Many of the working papers presented to us for audit were of poor quality and were incomplete. This experience appears to be shared with the experience of central finance officers when trying to obtain accurate and complete information from service areas for the purpose of internal management reporting. The Authority needs to focus on ensuring that the statement of accounts are prepared in accordance with best practice and current requirements and that supporting working papers are of sufficient quality for audit and provided on a timely basis.

1.11 `The Accounts and Audit Regulations 2003' present a revised timetable for the preparation and approval of local government financial statements from the current deadline of the 30th September to 30th June over the next three years. The Authority will need to examine the accounts closedown procedures to identify elements of the process that will require modification in order to enable the Authority to prepare and approve its annual statement of accounts within the shorter future timescales.

Performance indicators

1.12 A robust performance management framework is necessary to enable the Authority to demonstrate the achievement of continuous service improvement. Accurate and timely performance information is an essential element in such a framework. Our audit identified a number of weaknesses in the quality of the performance information produced for the BVPP and a large number of amendments were made to the the performance indicators contained within the BVPP as a result of our audit.

1.13 Going forward it will be important for the Authority to ensure that appropriate arrangements are put in place within all departments to collect robust and reliable performance information. The Authority also needs to improve its internal quality assurance and procedures for performance indicators.

Overall performance

1.14 Our analysis of the Authority's performance indicators identifies that Bath & North East Somerset Council continues to be a high performing Authority . The most up-to-date audited information indicates that during 2001/2002 the Authority performed particularly well and had 38% of the national BVPI indicators in the best performing quartile, 52% of indicators in the middle two quartiles and 10% in the lowest t performing quartile. Our analysis also identified that performance on 59% of indicators that can be mapped over time was improving,16% where performance was static and 25% where performance had declined.. Our review also identified target setting as an area where there was scope for some further improvement. . A major challenge for the Authority going forward will be to improve its approach to target setting to help deliver continuous targeted improvement.

Management capacity

The Authority has in recent years embarked on an ambitious and significant capital programme and at the same time entered into a number of service reengineering projects to generate efficiencies and improve service delivery. These initiatives have highlighted the need to develop and enhance project management procedures within the Authority and also the need to procure external project management expertise for major projects. In addition they have and will continue to require substantial time commitments from Management. It will be important during this ongoing period of significant change and increased risk to keep management capacity under review and to ensure that underlying internal controls and procedures are maintained.