MPA draft accounts for period ended 31 March 2001

Report: 4
Date: 19 September 2001
By: the Treasurer

Summary

This report presents the Authority’s first set of draft accounts for the nine month period to 31 March 2001, subject to audit. Net revenue budgets were overspent by £7.9 million, chiefly on police overtime, supplies and services and information and communication technology, offset by underspendings on pensions, compensation and greater interest on balances, producing a General Reserve balance in hand of £13.5 million. Reserves and provisions and the policies supporting them are set out in the financial statements.

A. Recommendation

The Audit Panel is recommended:

1. to scrutinise the draft accounts and refer any comments it may have to the Finance, Planning and Best Value Committee.

B. Supporting information

Context for the accounts

1. This report presents and comments on the Authority’s draft accounts for the period to 31 March 2001. The MPA was established on 3 July 2000 and the accounts have accordingly been prepared for the nine months from 3 July 2000 to 31 March 2001, rather than the usual 12-month period.

2. The Accounts and Audit Regulations 1996 require the Authority to approve the final accounts for the year ending 31 March by the following 30 September, prior to the external auditor providing his opinion. However there are a number of unusual features in relation to the production of the MPA’ s accounts for 2000/01 (including the first set of accruals based accounts, a nine rather than a twelve month period, separation of the Inner London Magistrates Courts Service and Inner London Probation Service finances from the MPS, and a professional financial skills and capacity deficit). This has meant that it has not proved possible to have a set of statements of accounts, including accounting policies, revenue account and notes, balance sheet and notes and other required statements in a form that I was prepared to sign and recommend to the Authority at its scheduled meeting on 20 September 2001.

3. Accordingly I am requesting the Authority to agree to delegate approval of the accounts, exceptionally, to the Finance, Planning and Best Value Committee at its meeting on 4 October 2001. Although this is four days after the required date the District Auditor has indicated that, in the exceptional circumstances of the Authority’s opening year, he is not minded to challenge this point. It is therefore proposed that this Panel receive the draft statement of accounts for detailed scrutiny. The Panel’s views will then be conveyed orally to the FPBV Committee. The Panel should be aware that the accounts presented are still draft and that elements of the statements are still being actively reviewed. It is not expected that this review will result in material changes to the reported figures, but rather there may be changes of emphasis or content in the supporting notes to the statements.

4. The accounts are compiled and presented in accordance with the latest Statement of Recommended Practice - the Accounting Code of Practice issued by the Chartered Institute of Public Finance and Accountancy (CIPFA). This Code has statutory force as representing proper accounting practice.

5. The MPA is a new authority and for the first time the accounts have been prepared on an accruals rather than a cash basis, as under the previous Home Office regime. In order to account for expenditure and income attributable to the financial year, sums paid or received after 31 March 2001 for goods and services rendered during the nine months are included in the accounts.

6. In previous years the accounts of the MPS were under the control of the Receiver and incorporated the three bodies, MPS, Inner London Probation Service (ILPS) and the Inner London Magistrates Courts Service (ILMCS). The creation of the MPA required separation of these bodies and disaggregation of their financial assets and liabilities in order to provide an opening balance sheet. The opening balance sheet reported to the Finance, Planning and Best Value Committee in November 2000 (paper 00/42) reported the establishment of a General Reserve of £20 million. Further work undertaken since that date has enabled a more accurate allocation of shared assets and liabilities resulting in a revised opening General Reserve of £21.4 million, some £1.4 million higher.

7. The preparation of these accounts has taken place against a background of poor financial capacity to cope with the volume and complexity of closing a new set of accounts and a low skills base. A recruitment exercise is presently being undertaken which will provide the skills and appropriate staffing resource to enable a more timely and robust preparation of the statements of accounts in future years. The reliability of the financial and control systems have been the subject of a number of challenging internal and external audit reports. The draft accounts have been prepared in accordance with best practice but there may nevertheless be matters which come to light during the audit.

General reserve

8. Although the published accounts refer to the nine month period from 3 July 2000, the budget for the Metropolitan Police has been managed on a normal annual basis.

9. Net expenditure exceeded budget by £7.9 million, which is less than 0.5% of total budget. Detailed analysis of this overspending has been reported to the Finance, Planning and Best Value Committee (Paper FPBV/01/78) and is summarised in the appended Foreword to the Accounts. The net overspend reduces the balance on the General Reserve as at 31 March 2001 to £13.5 million, 0.7% of net budgeted expenditure .

Capital finance

10. Capital expenditure for the nine month period was £59 million, the full year review of outturn against budget reported a 6.3% overspend to Finance, Planning and Best Value Committee in June (Paper 01/79). The expenditure was financed by specific grant, borrowing and capital receipts.

Provisions and reserves

11. The Authority’s balance sheet is developing in terms of its reserves and provisions. Improvements were made in the opening balance sheet. However, in my report to the November 2000 meeting it was recorded that the larger metropolitan county police authorities have general reserves below the 2% level and for the MPA, a General Reserve of 1% (approximately £20 million) could be regarded as a minimum, if there were appropriate accounting provisions and ear marked reserves, reasonable insurance arrangements, a well funded budget and effective budgetary control. It will be essential to build the General Reserve back to this level as soon as is practically possible.

12. The pension reserve in the balance sheet in respect of the liability for officers who had achieved 30 years service had been set at approximately £8 million, which compares to the likely liability of £44 million. Furthermore, long term projections show an increase in pension costs with substantial additional numbers reaching retirement age in 2005/06 and subsequent years. The Authority has accepted a need to seek to make appropriate reserves for this future liability, but no provision has been made in this set of accounts. Other key areas where reserves have not been created against potential liabilities are: insurance and compensation, and transitional costs for the implementation of Airwave.

Conclusion

13. The Audit Panel is invited to scrutinise these draft accounts prior to referring on any comments to the Finance, Planning and Best Value Committee .

C. Financial implications

None other than referred to above.

D. Background papers

Previous reports referred to in the text.

E. Contact details

The author of this report is Peter Martin, Treasurer

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

MPA draft accounts

Foreword to the Accounts

These accounts are the first presented for the new Metropolitan Police Authority, established on 3 July 2000. The financial statements reflect the financial position of the Authority for the nine-month period ended 31 March 2001, rather than a twelve-month period. The accounts consist of:

• The Consolidated Revenue Account which shows details of expenditure and income;
• The Consolidated Balance Sheet which sets out the financial position of the Authority at 31 March 2001;
• A Statement of Total Movement in Reserves; and
• The Cash Flow Statement which summarises the inflows and outflow of cash.

The accounts are supported by the Statement of Accounting Policies and explanatory notes so that they can be more easily understood.

Revenue account

The budget was set by the Home Secretary under the previous regime and incorporated cash accounting rather than the accruals based accounting now introduced for the first time. Budget management has been delegated to the Commissioner by the Authority, with the Authority monitoring performance on a regular basis.

Net expenditure exceeded the budget by £7.9 million. The overspending was principally on: police overtime (£24 million offset by £7.3 million grant related expenditure), operational supplies and services (£19.4 million, mainly £3.9 million on the vehicle removal contract and £6.3 million on DNA related expenditure) and information and communication technology (£6.9 million). Underspendings were mainly: pensions (£17.5 million), compensation (£4.9 million), civil staff pay (£8.2 million), additional interest on cash balances (£5.3 million) and other income (£5.1 million).

The position on the net overspending did not become fully clear until after the end of the financial year, mainly due to the new complexities of dealing with the move from cash to accruals accounting and financial capacity issues within the organisation. Detailed scrutiny reviews have now been introduced to inform the budget setting process, and budgetary control will be improved with the substantial professional resource now being recruited to the finance function in the MPS.

The provisional opening balance sheet was approved by the Authority in November 2000 and a General Reserve of approximately 1 per cent of the budget requirement was approved. This was regarded as a minimum, provided that there were appropriate accounting provisions and ear marked reserves, reasonable insurance arrangements, a well-funded budget and effective budgetary control. The effect of the overspend is to reduce the General Reserve at March 2001 to £13.5 million (0.7%). The adequacy of the position on the General Reserve will be addressed as a matter of priority.

Capital finance

Capital expenditure for the period was £59 million, financed by specific grant, borrowing and capital receipts.

Conclusion

The Authority’s financial position during the year has depended upon drawing from the General Reserve in order to meet its day to day operations. This position will clearly not be sustainable indefinitely and measures are being put in place to improve the scope and capacity of the organisation to deal adequately with budget implementation and control. These include a number of major scrutiny reviews, realignment of operational and budgetary responsibilities and assurance that effective financial control arrangements are in place. Plans to strengthen the finance function are well advanced in this respect.

Statement of responsibilities for the Accounts

The Authority’s responsibilities

The Authority is required to:

• make arrangements for the proper administration of its financial affairs and to ensure that one of its officers has the responsibility for the administration of those affairs. In this Authority that officer is the Treasurer.
• manage its affairs to secure economic, efficient and effective use of resources and safeguard its assets.
• ensure that the statement of accounts is prepared in accordance with the Accounts and Audit Regulations 1996 and to approve the accounts within six months of the end of the period to which they relate.

The Treasurer’s responsibilities

The Treasurer is responsible for the preparation of the Authority’s Statement of Accounts in accordance with proper practice as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2000.

In preparing the accounts, the Treasurer has:

• selected suitable accounting policies and applied them consistently,
• made judgements and estimates that were reasonable and prudent,
• stated whether applicable accounting standards and the CIPFA/LASAAC Code have been followed, subject to any material departures disclosed and explained in the statement of accounts,

The Treasurer has also:

• kept proper records which were up to date,
• taken reasonable steps for the prevention and detection of fraud and other irregularities.

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