In previous articles we have referenced the fact that Luton Borough Council’s (LBC) external auditors, Ernst & Young (EY), have still not signed off on the LBC accounts for 2018/19, due to concerns on how it values London Luton Airport. At the Audit & Governance meeting of LBC on the 1st September, EY filed a report detailing their areas of concern.
In 2019 they reported that the paper trail on the financial activities between LBC and its wholly owned airport company London Luton Airport Ltd/Luton Rising (LR) was not clear and obvious enough for Elected Members of LBC, or the general public to follow.
It would appear that the obstinacy of LBC to provide them the detail they need on these matters, has led them to consider their only course of action left, is to report LBC to Secretary of State for Department for Levelling Up, Housing and Communities (DLUHC).
The full report can be found on the LBC website under the link at the end of this article. EY have five concerns which cover:-
1-The Valuation of Luton Airport
LBC has used various financial methods to increase the value of the airport, so that when the next Concession negotiations take place in 2032, it will appear a better proposition for the next operator. The other reason LBC/LR have shown this supposed massive increase in airport value, is to hide the huge debt leverage they have on the airport, as the current real time debts vastly outweigh the theoretical value projected for ten years’ time.
2-Accounting for the costs incurred on the Development Consent Order (DCO) for airport expansion
After evaluation of the costs involved in this DCO, EY have concluded the following. The material value of the expenditure incurred and disclosed at the end of 2018/19 on the DCO, £20.3 million at that date, in the LBC group financial statements does not meet the recognition criteria under IAS 40 Government guidelines, as an investment property under construction. No sufficient or appropriate evidence has been forthcoming that these DCO costs are eligible or attributable to Phase one of the proposed expansion under this DCO application, that being the passenger throughput increase from 18 to 21.5 million per annum. Therefore, they are unable to conclude whether any of the capitalised costs, £20.3 million, has been reliably measured and accounted for as Capital Asset in the LBC Group Accounts.
Despite these critical observations on the LBC/LR accounting for this project, LBC have willingly carried on with this flawed concept. Those costs have at least doubled in those three years, which leads us to believe that the requirements requested by EY have not been provided, as it would have meant that this funding stream would have had to stop in 2019, and that could not be allowed to happen.
3- Accounting for Infrastructure Assets
This issue is on how Local Authorities are not writing out the gross costs and accumulated depreciation on highways infrastructure assets when a major part/component has been replaced or decommissioned in line with the requirements of The Code of Audit Practice. Once again, LBC have not provided their auditors with sufficient and appropriate audit evidence to support the gross and net book values that LBC have assigned. This is because LBC do not maintain accurate and current records to support the application of the Code of Practice on Local Authority Accounting. This Code requires Councils to derecognise the gross cost and accumulated depreciation on infrastructure assets, when a major part or component of that asset has been replaced or decommissioned.
We believe this refers to the LR DART project. This link between the airport and Parkway Station, was due to open for passengers in March 2021, but as yet is still under test conditions, and is now due to accept its first paying customer in December this year. Once the first passenger is carried, DART moves from an asset under construction, and therefore starts to depreciate.
Is DART the reason why there are issues? S We have reported recently that LR have detailed a write down of circa £187 Million on this project over its operational lifetime, and could not questions now be asked as to why that is the case?
4- This point regarded Pension Provision within LBC, so is outside our remit to give a comment on
5- Adequacy of accounting adjustments and disclosures in the revised 2018/2019 Financial statements
A revised version of the 2019/2019 accounts were presented to EY in August 2022. Unsurprisingly to those of us that live in Luton, or have to deal in the everyday with LBC/LR, there are still issues. EY list seven significant concerns on these accounts, and four others that will impact their audit reporting on these accounts.
Our opinions on these five points are just that, our opinions, and as we have stated before we do not have financial backgrounds within our group. However, two of the biggest auditing companies in the world, have in the last six months expressed concerns over the financial operations of LBC/LR. PWC announced their resignation as auditors after auditing the accounts of LR for 2020/2021. The reason, the LR revaluation of Luton Airport. EY are now voicing those same concerns with respect to LBC.
Can these two giants of their profession both have got things so spectacularly wrong?
Here are the closing comments from this report from EY:-
“The Council’s Chief Financial Officer acknowledged at the Audit and Governance Committee on the 28th July 2022 that significant capacity and capability challenges still remain in the Council’s finance team. Based on our current position with the audit of the Council’s financial statements, we can see that this is the case and we believe applies to the level of appropriate resource available and the ability to prioritise high quality financial reporting. Given the matters set out in this update, we have serious concerns over the Council’s ability to produce revised 2018/19 and subsequent years accounts that properly reflect the applicable financial reporting framework, professional accounting standards and provide sufficient and appropriate information and explanations to substantiate critical accounting judgements, estimation risks and uncertainties, particularly those relating to the Council’s ownership and exposure to London Luton Airport Limited. In the event of a disclaimer of our audit opinion, urgent steps will need to be taken by management to address our concerns and remove the limitations which are preventing us or any other external auditor being able to form the basis of an opinion on the Council’s financial statements. We are considering writing to the Secretary of State of Department for Levelling Up, Housing and Communities (DLUHC) under our statutory powers within the Local Audit and Accountability Act 2014 setting out our audit position and concerns, and our view of the improvements that the Council needs to make urgently to their financial reporting arrangements”