11th February 2020 by Mark Aldis
Council Asset Valuation Audits – Successfully Navigating An Annual Review
Author: Guy Harbord
Each financial year it seems that the external audit process is becoming increasingly laborious. This is primarily down to increases in the requirements set to external auditors by the financial reporting council (FRC) resulting in the need to review expert opinions in far more detail than was the case in the past. This has led to some new challenges for Local Authorities who are experiencing additional benchmarking resulting in a more rigorous and thorough audit process.
In addition, since the Audit Commission was dissolved there are now several firms completing the external audit process. Whilst these all work to the central framework set out by the FRC, Local Authorities have to deal with varied ‘focus’ areas which are not always consistent between different audit firms and teams. For example, one firm may focus more on comparable evidence used during the valuation process and another may be more focussed on base input data or valuation methodology. This makes it a little more difficult to minimise the risk of challenges to the final set of accounts closed at financial year end.
The role of the Auditor in asset valuations
Ultimately an appointed Auditor is expected to assess the reasonableness of the process and resulting values adopted within the statement of accounts. They will look at the process the Valuer has followed and assess whether in their view this is in line with both market expectations and with the relevant legislation and guidance.
Auditors first and foremost tend to check base information supplied and the evidence trail that supports this. For example, in regard to ‘floor areas’ is there a floor plan or survey? If the property is leased, is there a copy of the lease document and how long is the lease period? They tend to arrive at their own view on yields within the format of an ‘acceptable range’ and cross reference this against what the Valuer has done and if this is not in line with their understanding, this can result in more probing questions.
Overcoming issues around infrequent asset valuations
Auditors are typically interested in frequencies of valuations. Whilst the guidance states that all assets within the portfolio should be valued and inspected at least once every five years there is also a comment in relation to ensuring that the Authority is valuing the assets with ‘sufficient frequency to ensure that the valuations remain current’ at each closing book date.
This sufficient frequency comment covers the full portfolio and by following the long-established practice of valuing say 20% of the assets within the portfolio (as part of a rolling programme) each year there can be a big question mark over how you can be sure the remaining 80% has not experienced material change in value. This in turn may lead to Auditors wanting to see an evidence trail proving that these remaining assets have not materially changed.
As a result, many of our clients at Wilks Head & Eve work on a more condensed rolling programme and in some cases they ask us to value ‘high value’ assets more regularly or even annually. This, combined with the market review document that we provide most of our clients with, can work to minimise the risk of assets experiencing material changes and aid the external audit assurance process ensuring that the valuations remain current for all assets within the portfolio.
Reporting and classification requirements
The Auditors will also check that the reporting processes as outlined within the guidance have been followed correctly and that the rules and regulations have been adhered to.
For example, has the property been classified in line with their interpretation of the guidance as either ‘property, plant and equipment or investment, asset held for sale or surplus, etc’ and has this classification been applied consistently across the portfolio. This is a subjective area of the guidance and Wilks Head & Eve often provide advice to clients in this regard.
When it comes to valuation methodology whilst the base valuation methods and approaches are defined within the RICS guidance / legislation, they are not fully prescriptive and do not set a standard template to follow. This allows the Valuer the flexibility to adopt their own interpretation and assumptions for arriving at the valuation figures whilst still meeting the guidance requirements.
External Auditors will want to understand the methodology behind how a particular Valuer has arrived at their valuation. This involves assessing reasonableness both for the valuation specific data adopted and the base input information adopted. Wilks Head & Eve work hard to provide a detailed explanation of the processes and assumptions employed within our methodologies and clearly outline the inputs adopted within the valuations with the aim of aiding this element of the external audit process.
In conclusion the external Auditor will be assessing reasonableness of the process adopted. For a Valuer to aid this process it is all about providing detailed information, consistency in approach, showing a competent understanding of the legislation and guidance and good communication from the beginning of the process through to the final opinion process of the external Auditor on the signed accounts.
If you want to find out more about how Wilks Head & Eve assist clients with council asset valuation audits, contact Guy Harbord now on firstname.lastname@example.org or call 020 7637 8471.