6 - 2016/17 – Material, late changes in the revised
draft accounts
Unusually, five weeks after the deadline for objecting
to the accounts, at the 19th 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 19th 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.
