Accounting Errors at CCC - Post 6/15 in a series - Material Late Changes/Revised Draft Accounts

6 - 2016/17 – Material, late changes in the revised draft accounts

Unusually, five weeks after the deadline for objecting to the accounts, at the 19^th September 2017 meeting of the A&A Committee, CCC finance presented a revised draft set of financial statements to committee members - See Appendix to Item 6 at foot of page.

It was presented late, denying members the statutory five working days to read it before the meeting.  The main difference was a wholesale revision of the accounting treatment for City Deal.  According to BDO’s September 2017 interim report to those charged with governance (ISA 260 report), which was also presented late to the meeting, CCC had revised its accounting treatment of City Deal “in response to recommendations made last year” (see Appendix 1 below).  Presumably those recommendations came from BDO, but there is no evidence of them in any document on the A&A Committee webpages.  The revised draft accounts treated the five annual grants as a single £100m grant, which contradicts the discrete annual grant figures clearly set out in the determination documents.  BDO’s audit findings and conclusion in its ISA 260 report state:

“We concluded that the grant income awarded to the Council in relation to the City Deal in 2015/16 (£100m, to be paid in 5 annual instalments of £20m) did not have any conditions attached regarding its use.  The Code requires that grants should be recognised immediately as income unless any conditions have not been met.  In the absence of such conditions, the grant should have been recognised in full in the year the grant was awarded.” 

This is how BDO’s comments were translated in CCC’s second draft set of accounts:

This set of accounts can be found on the webpage of the 19^th September meeting of the A&A Committee in the Appendix to Agenda Item 6 at the foot of the page.

The council was re-writing the previous year’s accounts, which BDO had signed off as correct in October 2016, and which had correctly shown £20m as the City Deal grant revenue receivable in that financial year, reflecting the contents of that year’s grant determination document MHCLG sent to CCC, the accountable body.

The revised 2015/16 accounts, in this second draft at least, embellished the prior year revenue by £80m (none of which was receivable in that financial year) to reflect BDO’s incorrect new interpretation of the City Deal grant.

To offset that imaginary extra revenue, two debtors were created, one short term, one long term, to reflect the grant cash receivable within 12 months (i.e. £20m in 2016/17), and the remaining £60m receivable in the years to 2019/20.

The amendment also produced £80m of virtual “reserves”, which had to be accounted for somehow.  CCC decided to put them into the “Capital Grants & Contributions Unapplied Reserve”, which forms part of usable reserves and thus made those reserves look £80m healthier than they in fact were.

 CCC’s Capital Grants & Contributions Unapplied Reserve is defined in the notes to the accounts.  It has existed at CCC at least as far back as 2012/13, and the wording of its definition has not changed since then:

“this reserve includes all capital grant income credited to the Comprehensive Income and Expenditure Statement, and subsequently reversed out of the General Fund Balance in the Movement in Reserves Statement.  It is designed to show the position when a capital grant has been received, and conditions of its award met, but is yet to be used to finance capital expenditure.  Amounts in this reserve are transferred to the Capital Adjustment Account once they have been applied to fund capital expenditure.”

 As the highlights show, this reserve is designed for grants that have been received, and for which the conditions have been met.  The £80m worth of future City Deal grants posted to that reserve had not been received, and their conditions had not been met in 2015/16, because the four future, conditional grants of £20m each were not awarded in 2015/16.  They were due to be awarded in the four years that followed 2015/16, subject to CCC continuing to comply with the conditions clearly set out in the grant determination documents.

CCC’s accounting trick that BDO recommended is analogous to the council anticipating the receipt of the next four years’ worth of Council Tax income all in the current year, and thus recognising a massive windfall revenue surge, along with a corresponding rise in usable reserves which cannot be called upon because they simply do not exist.  Using the same trick any council could make any sized hole in their reserves magically disappear, and make their balance sheet look substantially healthier to users of the accounts, including central government, local taxpayers or other councils who might consider lending money to it, based on its apparent liquidity. 

With this revised interpretation of City Deal, CCC was claiming two contradictory things.  It was saying that in year one of the arrangement, the remaining four annual grants had already been received (the £80m added to the capital grants unapplied reserve), but at the same time they had not been received because the £80m was also categorised as debtors.  In any event, the non-existent additional revenue and the non-existent reserves clearly did not give a true and fair view of the council’s financial position.  Instead, the overstatements materially misstated that position.  But things were about to get even worse.