The Committee noted the progress made by the Council on its Corporate Governance Improvement Plan and Section 24 Action Plan, the Government's decision not to renew the Council's Best Value Notice, and progress updates on internal audit and counter fraud work. The Committee noted that Ernst & Young (EY) would be issuing a disclaimer of opinion¹ for both the 2021/22 and 2022/23 Statement of Accounts, and that the disclaimer opinion would also likely be required for the 2023/24 accounts. The Committee approved the 2021/22 and 2022/23 Statement of Accounts for both Middlesbrough Council and the Teesside Pension Fund. Finally, the Committee noted the Audit Committee Work Programme, and agreed that a report on treasury management would be added to it.

Backstop progress on the 2021/22 and 2022/23 Statement of Accounts approval

The Committee received an update from the Head of Finance and Investment on progress made on the 2021/22 and 2022/23 Statement of Accounts audits, which had been delayed due to both national and local issues.

These issues included a national backlog in local authority audits, an extended audit of the 2020/21 accounts, issues regarding compliance with the CIPFA code of practice, and additional work that was required on the valuation of both the Council's property assets and the Council's liabilities in respect of the Local Government Pension Scheme. In addition, following the commencement of the audit of the 2022/23 accounts, the Director of Finance had requested a review of the methodology underpinning the bad debt provision of council tax and business rates and, as a result of this review, the 2021/22 and 2022/23 financial statements had to be restated.

The Accounts and Audit (Amendment) Regulations 2024 came into force in September 2024. These regulations established a backstop date of 13 December 2024 by which all local authority audits up to and including 2022/23 must be completed. As a result of this imposed deadline, EY reported to the Committee that they would be issuing a disclaimer of opinion for both the 2021/22 and 2022/23 Middlesbrough Council accounts.

EY's view was that the backstop date and the wider requirements of the local audit system reset meant that EY did not have the required resources available to complete the detailed audit procedures that would be needed to obtain sufficient appropriate audit evidence to issue an unmodified audit report on both sets of financial statements.

The Committee noted that, whilst the disclaimer of opinion was unsatisfactory, it is a consequence of the backlog of national audits and the back stop arrangements needed to clear these.

The Committee also heard from EY that, despite the disclaimer of opinion, they had still been able to complete their audit work in respect of the Council's Value for Money arrangements and the Teesside Pension Fund accounts. The outcome of the Value for Money work was reported at the meeting of the Committee held on 25 July 2024.

The Committee heard that the financial statements for both 2021/22 and 2022/23 had been recertified by the Director of Finance on 24 September 2024, with updated versions being published on the Council website, and that EY was confident that the disclaimer of opinion reports and reports on the Teesside Pension Fund accounts would be finalised for the meeting of the Committee to be held on 5 December 2024.

The Committee noted that the disclaimer of opinion was likely to apply to many other local authorities and it may take several financial years to move from a disclaimed audit opinion to a true and fair view² on the financial position, with the backstop date for the 2023/24 financial year being 28 September 2025.

Forvis Mazars progress report – 2023/24

The Committee heard from Forvis Mazars, the Council's new external auditor, on progress being made on the audit of the Council's 2023/24 accounts.

Forvis Mazars reported that EY, as predecessor auditor, intended to issue disclaimed opinions on the 2021/22 and 2022/23 accounts by the backstop date of 13 December 2024 and that, as a result of this and the limited time available, a disclaimer of opinion would also be required for the 2023/24 accounts.

The Committee noted Forvis Mazars' intended approach to building assurance and moving towards an unmodified opinion on the Council's accounts.

Draft Statement of Accounts and Annual Governance Statement 2023/24

The Committee considered the Council's draft Statement of Accounts and Annual Governance Statement for the 2023/24 financial year.

As with the previous two years' accounts, the 2023/24 accounts should have been published by 31 May 2024 but, as a result of the national backlog in audits, very few local authorities had been able to meet this statutory deadline.

The Committee heard that the S151 Officer had requested a review of the Council's methodology for its Collection Fund bad debt provision in response to a change to the relevant international accounting standard (IAS 37).

Prior to this review, the methodology used by the Council to calculate the bad debt provision was based upon the profile of aged debt outstanding and the assumption that 72% of debt outstanding would not be collected. Following the review, the Council adopted a new methodology which is based on historical evidence and actual debt recovery levels informed by actual collection performance data.

As a result of the new methodology being applied, the amount of bad debt provision has been reduced, freeing up £8.3 million to be used by the Council for budgeting purposes in 2024/25.

The Committee noted that, although the draft accounts for 2021/22 and 2022/23 had not yet been audited, they had been recertified and reissued on 24 September 2024 following the conclusion of EY's work on the bad debt provision. In addition, the Committee noted that the draft accounts for 2023/24 had been certified by the Director of Finance as a true and fair view of the Council's financial position, were open for public inspection from 30 September 2024 for a period of 30 days, and were available on the Council website.

Members' attention was drawn to some of the significant differences between the Council's financial statements and its management accounts, with two of the most significant being the presentation of reserves and the net worth of the Council's Balance Sheet.

The total value of usable reserves as at 31 March 2024 was £75.702 million, much higher than the £12.055 million reported as part of the budget monitoring process, with the difference being largely due to the value of capital grants being rolled forward to future year capital schemes (£51.76 million).

The net worth of the Council's Balance Sheet as at 31 March 2024 was a positive £279.3 million, with the value of assets exceeding the value of liabilities. This represents a decrease from the prior year of £130.1 million, which was predominantly related to retirement benefits under IAS 19 and a change in the discount rate applied to the liabilities that formed part of the local government pension scheme.

The Committee also noted:

• The significant increase in the number of employees in receipt of an annual salary over £50,000 was due to the latest pay award;
• That the statutory override was still being applied to the valuation of roads; and
• That they would receive further information on the total cost of the latest pay award and associated pension costs, the loss of income from planning fees to the Middlesbrough Development Corporation, the costs associated with the Best Value Notice, and the value and location of The Crown building on the Balance Sheet.

Corporate Governance Improvement Plan and Section 24 Action Plan progress report

The Committee considered a progress report on the Council's Corporate Governance Improvement Plan and Section 24 Action Plan.

The Corporate Governance Improvement Plan and Section 24 Action Plan were developed by the Council to address the significant weaknesses in the Council's governance arrangements identified as part of the audit of the Council's 2020/21 accounts. The Council was also issued with a Best Value Notice in January 2023 in relation to these governance weaknesses, which was subsequently extended for a further 6 months in January 2024.

The Committee heard that, excluding activities that had not yet commenced, 99% of the planned activities under the Corporate Governance Improvement Plan had been delivered or were on-track for delivery, with the only off-track activity being the development of a new model of finance. In relation to this, further information was awaited from [Grant Thornton](https://www.grantthornton.co.uk/).

In addition, the Committee heard that all of the activities under the Section 24 Action Plan were on-track for delivery or had been delivered, including the recruitment of two senior officers.

The Committee noted that the Senior Management Review had not yet been completed, but that it would be undertaken following agreement with the Mayor on the target operating model.

It was noted that the impact trend in relation to the cultural transformation of the Council was reported as Worse, with this being attributed to an increase in the number of agency staff, particularly within waste services and public health.

The Committee was also informed that the budget setting process for 2024/25 to 2026/27 had commenced and that proposals would be presented to the Executive in December 2024.

In concluding their consideration of the report, the Committee noted that, whilst the Government had decided not to renew the Best Value Notice, the report upon which that decision had been made, which had been produced by Grant Thornton, had not yet been received by the Council.

Best Value Notice – update

The Committee received an update from the Chief Executive on the Government's decision not to renew the Council's Best Value Notice, which had been issued to the Council in January 2023.

The Committee heard that, as a result of the progress made by the Council in addressing the governance weaknesses that led to the notice being issued, the Government had decided that it would not be renewed. The Committee acknowledged the work that had been undertaken by the Council, and the Chief Executive agreed to provide further information on the associated financial costs.

In addition, the Committee heard that work would continue with the Improvement Board until March 2025, and that the Chief Executive would provide the Committee with updates on the Council's financial position.

Internal Audit and Counter Fraud progress report

The Committee received a progress report from the Head of Internal Audit on the delivery of internal audit and counter fraud work.

The Committee heard that it was anticipated that the final report into agency staff within Children’s Services would be completed within the following few weeks.

It was also noted that the report included a new category of audit opinion, ‘Opportunity’.

In addition, the Committee noted that all 6 outstanding previously agreed audit actions had new dates for delivery agreed.

Following a question from a member of the Committee, the Auditor agreed to check with officers to see where there was capacity to add an audit of officers' interests to the work programme.

The Committee heard that Home to School Transport had been classified as a category 3 priority for audit, with the Auditor agreeing to provide the findings of this work to scrutiny.

The Committee was provided with an update on counter-fraud activity, including work with external partners to promote awareness of fraud and investigation into the misuse of blue badges. As part of this, checks had been made on 53 blue badges in Middlesbrough town centre during the annual National Blue Badge Day of Action, which took place in May 2024, with two penalty charge notices being issued. Four blue badge misuse investigations had been completed, which resulted in warnings being issued to three people.

The Committee heard that, as a result of counter-fraud activity, £70,000 of losses due to fraud, error and debt evasion had been identified in 2024/25, with the Council recovering £68,000 of those.

The Committee noted the progress report.