Accounting Errors at CCC - Post 7/15 in a series - The Additional £17.8m Accounting Blunder

7 – The additional £17.8m accounting blunder

In making the above prior-period adjustments to the 2015/16 accounts, CCC overlooked an important detail.  In 2015/16 the council did not just receive that year’s £20m City Deal grant.  It also received the £17.779m in advance, representing 89% of the following year’s City Deal grant (see sections 4 and 5 above).  In the 2015/16 accounts that grant received in advance was correctly accounted for as a creditor.  The credit balance was correctly reversed out in the draft 2016/17 financial statements, and taken to that year’s revenue account (Dr Creditors £17.8m, Cr Revenue £17.8m).  But that journal entry is inconsistent with BDO’s new interpretation, in which all £100m of City Deal 1 revenue was supposed to be recognised in year one (2015/16).  Under that model there should be no City Deal creditor to reverse out the following year, because all £100m grant revenue had already been recognised in 2015/16.

Therefore, on top of the prior-period adjustments shown above, an additional adjustment was needed to remove the superfluous 2015/16 creditor.  Also, because £37.8m of the £100m City Deal grants (20+17.8) had physically been received in 2015/16 and duly debited to the bank account, the “true” City Deal debtor position under the false BDO model should have been £62.2m, not the £80m (20+60) shown in the table of prior period movements above.  So, the additional “tweak” needed on top of the above adjustments to make the 2015/16 accounts consistent with the new revenue frontloading model would be to reduce both the creditor and the debtor balances by £17.8m – i.e. Dr Creditors £17.8m, Cr short term debtors £17.8m.

As the prior period adjustments in CCC’s final, audited 2016/17 accounts show, that is not what CCC did.  The final, audited version published on the council’s website on 12^th October 2017 “correctly” debited the creditor balance, but instead of crediting the debtor balance, it credited Revenue in the Comprehensive Income & Expenditure Statement, thus overstating 2015/16 revenue by £97.8m instead of merely by £80m.  Had the correct journal been added, the net effect on reserves (over and above the initial prior period adjustments shown above (from Sept 2017), would have been zero.  But because the debtor balance was not reduced in the final tweak, it was overstated by a further £17.8m, which meant the Capital Grants & Contributions Unapplied Reserve was similarly overstated by £17.8m to £97.8m.  The screenshot below, taken from page 98 of the final, audited accounts published on 12^th October 2017 shows the effect of the supplementary tweaks on the

September 2017 prior-period adjustments:

 

These are the prior-period adjustment figures that made it to CCC’s final accounts that were signed off and certified as true and fair by the CFO (Chris Malyon) on 12^th October 2017 (page 21) and were approved by the Vice Chair of the Audit & Accounts Committee (Cllr Rogers) on 11th October 2017 (page 22).  

They were also signed off with an unqualified (“true and fair”) audit opinion by BDO’s audit partner Lisa Clampin.  Those final accounts can be found here under the link “ SoA 2016-Final inc audit opinion and signatures”.  

Nobody appears to have noticed the incorrect final adjusting journal that raised the already overstated revenue, debtors and reserves by a further £17.8m.  That £17.8m in itself exceeded BDO’s final materiality thresholds for 2015/16 and 2016/17 of £14.935 and £16.5m respectively.

In the following years of the City Deal 1 regime, the debtors and usable reserves would taper down by £20m each year, whilst the revenue account in the CIES would be understated by £20m each year because it had all been recognised prematurely in year one – 2015/16.  The table overleaf summarises the material misstatements for each year in which CCC applied the incorrect revenue-frontloading accounting treatment for City Deal 1: