Eastbourne councillors clash over long-awaited audit

Last month, Eastbourne Borough Council finally received its external audit report for the 2018/19 financial year after a delay of several years.

According to the external auditor Deloitte, the delay had primarily been due to uncertainty around a transaction involving the council-owned Investment Company Eastbourne (ICE) and a property in Leicester.

As part of this, ICE is acting as the principal guarantor of a £48m refinancing loan to a private company, with the council being the ultimate guarantor. ICE is also providing a rental guarantee in respect of shortfalls of rental income, again with the council being the ultimate guarantor. 

The circumstances of the transaction had been identified as a ‘significant risk’ by Deloitte, meaning it required special consideration as part of the firm’s audit work. 

While Deloitte did not end up withholding a full value for money opinion as a result of the transaction it did highlight a number of “areas for improvement”.

These included ensuring clarity of the accounting and budgetary impact ahead of entering into  such a transaction, ensuring clear consideration of downside risks, and transparent consideration of changes in transactions from initial approvals.

It also required that a £2m payment the council received for acting as the guarantor be spread over several years, resulting in a change to  the final reported reserves for 2018/19.

The report said: “Following review of documentation and interviews with management, as well as review of the report of internal audit on the governance of the transaction, we concluded that it is not necessary to include an exception to our value for money conclusion in respect of this matter.

“We note that the final contractual structure entered into in 2018 was not the same as that initially consulted on and approved by council in 2017, and would view it as good practice for a major transaction for the updated transaction structure to have been reported.

“We have identified other control recommendations in respect of complex transactions in our findings.”

Deloitte’s findings have seen criticism leveled against the council’s Liberal Democrat leadership by its Conservative counterpart. 

Consevative councillor Kshama Shore said: “This Liberal Democrat-led council, either wilfully, or more likely, through ignorance, entered into the arrangement without understanding the detailed accounting implications for Eastbourne Borough Council.

“At the time of the audit, it became apparent that there was no clear audit trail of the transaction.

“Furthermore, the final contractual structure entered into in 2018 was not the same as that initially consulted on and approved by council in 2017.

“Unless the governing party fully understands the balance of risk and reward, how can we be satisfied that there is strong governance? Due diligence was carried out, but did the governing party understand it? Where were the internal warning systems?

“Why was it that in a quarterly report from our internal auditors in March 2021 only one out of 23 audits received full assurance, even the main accounting system did not get the full assurance, this is a disgrace.”

Conservatives also criticised the council over its financial transparency and the long delay to the external audit. The party also argued the investment was like ‘playing Russian roulette’ given the council’s level of reserves.

However, Cllr Shore’s comments came in for some criticism from Liberal Democrat council leader David Tutt. 

He said: “Cllr Shore wasn’t a member of the council when we entered into the transaction, which may explain why the councillor is unaware of what took place on this matter.

“We undertook extensive consultation.  The Conservative group had every opportunity to object.

“Cllr Shore also conveniently neglects to mention that at a time when the Conservative government stopped funding local councils, the arrangement has paid over £2m into council coffers and continues to generate very positive returns for local public services. 

“The council will also part own a highly valuable asset at the end of the transaction.”

…………

While Deloitte attributed the delays to the report to its concerns around the ICE transaction, it should be noted that several local authorities have experienced long delays to recent audits.

According to a recent report by the National Audit Office (NAO), only 45 per cent of local authorities were able to publish audited accounts by the 2019/20 statutory deadline. This was down from 57 per cent in 18/19 and 87 per cent in 17/18.

Some councils – including Lewes District Council – are even still waiting for audit opinions for 2018/19.

Issues with the local authority audits were recently examined as part of an independent inquiry commissioned by the government.

Published last year, the Redmond Review concluded that the local authority audit system is under strain and not performing as well as it could.

One key recommendation from the review was to increase the fees which accounting firms can charge for public sector audits. This, the review said, would ensure the firms had sufficient resources to carry out their work and could attract new firms to the sector.