Annual report 2020-21

WICS annual report on performance, accountability and financial statements 2020-21

Published

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Accountability report

Corporate Governance report 

Director’s report

The Board

Our Board is responsible for the overall direction and performance of our organisation, including our efficiency and effectiveness as a public body. Members come from a variety of business backgrounds and bring with them a wealth of knowledge and expertise.

Our Board currently comprises Donald MacRae (Chair), three further non-executive members, and the Chief Executive, Alan Sutherland. Members of the Board are appointed by Scottish Ministers. The length of appointments may vary to ensure continuity of membership but is usually three or four years. There is the possibility of a further term, subject to evidence of effective performance and satisfying the skills, knowledge and personal qualities required on the Board at the time of re-appointment. The membership during the year is detailed below.

Name

Position

Initial appointment

Re-appointment

End date

Donald MacRae

Chair

01/07/2016*

-

30/04/2022

Jo Armstrong

Member

01/07/2016

01/07/2020

30/06/2024

Ann Allen

Member

01/07/2020

-

30/06/2025

Robin McGill

Member

01/01/2020

-

31/12/2024

*Appointed as Chair on 1 May 2018

Directors

The Directors during the year were Alan Sutherland and Ian Tait. As well as being the Chief Executive and Accountable Officer, Alan Sutherland is also an executive member of the Board of WICS.

Interests held by the Board

We ask our Board Members and Directors to complete a declaration of interest and we publish a register of interests on our website. During the year, neither the Board members nor directors held interests in other bodies with which WICS has dealings. 

Auditors

Under the Public Finance and Accountability (Scotland) Act 2000, our independent auditors are appointed for the Auditor General by Audit Scotland. Audit Scotland has been appointed as WICS’ external auditors for a five-year period from 2016-17 to 2020-21. The appointment is undertaken in accordance with the Code of Audit Practice approved by the Auditor General.

The fees paid to Audit Scotland in respect of the independent statutory audit for the financial year 2020-21 are £13,670 (2019-20: £13,340).

As a result of the significant disruption resulting from Covid-19, the Auditor General for Scotland and the Accounts Commission have extended the current audit appointment by one year.

All relevant audit information has been made available to our auditors, and the Accountable Officer has taken steps to ensure that the auditors are aware of any relevant audit information.

Other information

In the year to 31 March 2021, we did not have any notifications of data breaches to the Information Commissioner’s Office.  

Significant events since the end of the financial year

There is one significant event that requires disclosure under the terms of IAS 10: events after the reporting period, details of which can be found in note 3.5.11, relating to the audit of WICS expenditure on a European Commission funded project in 2018-19. In accordance with the requirements of IAS 10, events are reviewed and considered up to the date on which the financial statements are authorised for issue. This is interpreted as the date on which the Independent Auditor’s report is signed.

Statement of Accountable Officer’s responsibilities

Under the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005, Scottish Ministers have directed WICS to prepare for each financial year a statement of accounts in the form and on the basis set out in the Accounts Direction.  The financial statements are prepared on an accruals basis and must give a true and fair view of the state of affairs of WICS and its income and expenditure, statement of financial position and cash flows for the financial year.

In preparing the financial statements, the Accountable Officer is required to comply with the requirements of the Government Financial Reporting Manual (FReM), and to:

  • Observe the Accounts Direction issued by Scottish Ministers, including the relevant accounting and disclosure requirements, and apply suitable accounting policies on a consistent basis.
  • Make judgements and estimates on a reasonable basis.
  • State whether applicable accounting standards, as set out in FReM, have been followed, and disclose and explain any material departures in the financial statements.
  • Prepare the financial statements on a going concern basis.

The Permanent Secretary has appointed the Chief Executive as Accountable Officer of WICS. The responsibilities of an Accountable Officer, including responsibility for the propriety and regularity of the public finances for which the Accountable Officer is answerable, for keeping proper records and for safeguarding our assets, are set out in the SPFM published by Scottish Ministers.

So far as the Accountable Officer is aware, there is no relevant audit information of which WICS’ auditors are unaware. The Accountable Officer has taken all the steps that he ought to have taken to make himself aware of any relevant audit information and to establish that our auditors are aware of that information.

The Accountable Officer confirms that the annual report and accounts are fair, balanced and understandable and that he takes personal responsibility for the annual report and accounts and the judgments required for determining that it is fair, balanced and understandable.

Governance Statement

The Governance Framework

WICS is a non-departmental public body. The broad framework in which we operate is set out in a Framework Document, which also defines key roles and responsibilities which underpin the relationship between WICS and the Scottish Government. While this document does not confer legal powers or responsibilities, it forms a key part of our accountability and governance framework.

Non-departmental public bodies are directed by Scottish Ministers to comply with the SPFM. The SPFM provides guidance on the proper handling of public funds to ensure:

  • Compliance with statutory and parliamentary requirements.
  • Value for money.
  • High standards of propriety.
  • Effective accountability and robust systems of internal control.

The SPFM is issued by Scottish Ministers to provide guidance to the Scottish Government and other relevant bodies on the proper handling and reporting of public funds. It sets out the relevant statutory, parliamentary and administrative requirements, emphasises the need for economy, efficiency and effectiveness, and promotes good practice and high standards of propriety.

The Accountable Officer is responsible for maintaining a sound governance framework that supports the achievement of the organisation’s policies, aims and objectives set by Scottish Ministers, while safeguarding the public funds and assets for which he is personally responsible, in accordance with the responsibilities assigned to him.

The purpose of the governance framework

The governance framework comprises the systems and processes, and culture and values, by which we are directed and controlled. It enables us to monitor the achievement of our strategic objectives and to consider whether those objectives have led to the delivery of appropriate, cost-effective services.

The system of internal control is a significant part of that framework and is designed to manage risk to a reasonable level. It cannot eliminate all risk of failure to achieve policies, aims and objectives and can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an on-going process designed to identify and prioritise the risks to the achievement of our policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically.

The governance framework has been in place at WICS for the year ended 31 March 2021 and up to the date of approval of the annual report and accounts.

The Board

The role of the Board is to provide strategic leadership, direction, support and guidance to ensure that we deliver and are committed to delivering our functions effectively and efficiently and in accordance with the aims, policies and priorities of Scottish Ministers.

Board members have corporate responsibility for ensuring that WICS fulfils its statutory duties, meets any targets agreed with Scottish Ministers and for promoting the efficient and effective use of staff and other resources in accordance with the principles of Best Value.

The Board meets regularly and during 2020-21 met ten times for regular meetings and met with the Audit and Risk Committee in November to discuss strategic risks. At each regular meeting the Board has a mandate to focus on strategic issues relating to monitoring Scottish Water’s performance, the SRC and developments in the retail market.

A full description of our Board’s role and responsibilities is detailed within its Scheme of Delegation. Additionally, Board members are required to comply with the Code of Conduct for Members of the Board. Board members discharge their duties in accordance with the guidance set out in appointment letters and in On Board – A Guide for Board Members of Statutory Boards.

As well as attending Board meetings and strategy meetings, Board members carry out non-executive engagement with stakeholders. Reports of engagement activity are provided at each subsequent Board meeting to ensure that the activity is noted and to give members and management the opportunity to discuss issues arising from this activity. 

Corporate Plan

Our Corporate Plan reflects our strategic aims and objectives as agreed by the Scottish Ministers. The plan should include the key objectives and associated key performance targets for the period covered by the plan, and the strategy for achieving those objectives. It should also set out how these will contribute towards the achievement of the Scottish Government’s primary purpose and how they align with the National Performance Framework. We have developed a comprehensive plan for the next regulatory period (2021-27). This plan is published on our website and outlines the specific measures against which we will measure and report on our success against our objectives.

Risk management

All bodies to which the SPFM is directly applicable must operate a risk management strategy in accordance with relevant guidance issued by Scottish Ministers. The general principles for a successful risk management strategy are set out in the SPFM and we have used this to derive our own risk management strategy.

As part of the Corporate Plan for 2021-27, we have identified the risks associated with the delivery of the objectives set out in the Plan. During the year, the Board assessed the strategic risks facing the organisation and set the risk appetite for the organisation.

Following this exercise, we reviewed our risk management strategy to ensure it was appropriate to manage the risks identified as part of this exercise. The risk management strategy aims to identify things that might prevent us from delivering our statutory purpose and to identify appropriate controls to manage the risk to a tolerable level. The risk management framework seeks to (i) understand the threats, (ii) identify and prioritise risks (iii) identify controls to reduce or mitigate the risk and (iv) monitor the risk until it has been reduced to a tolerable level. 

Our risk management strategy makes clear the roles and responsibilities for achieving an effective control framework. The focus of our strategy is a risk register which identifies potential or actual risks to the achievement of the objectives set out in our Corporate Plan.

Risks are assessed in terms of the likelihood of them occurring, the impact they would have if they did occur.

The Board is responsible for defining the organisation’s risk appetite. The risk register is populated by contributions from all staff, and each risk is scored and set a realistic target to reduce the level of the risk. The action plans in place to reduce risk ratings are subject to continual review.  They are monitored by staff internally and reviewed by WICS’ Audit and Risk Committee (ARC) on a quarterly basis.  The Accountable Officer also reviews the register prior to its submission to the ARC. The Board is informed of significant changes to the register or new risks.

Audit and Risk Committee (ARC)

The Board has appointed the ARC to assist in fulfilling the Board’s statutory and fiduciary responsibilities by reviewing the comprehensiveness and reliability of assurances on governance, risk management, the control environment and the integrity of financial statements and annual report. Members are appointed to the ARC by the Board. The ARC is governed by its Terms of Reference and remit. 

The ARC meets to receive reports from internal and external auditors and WICS staff.  The internal and external auditors may attend all meetings of the ARC. In addition, they may contact the Chair of the ARC at any time to express specific concerns identified during audit work.

The ARC meets at least four times a year. During the year the ARC was chaired by Ross Finnie until his appointment ended on 30 June and he was replaced by Robin McGill. There are a further three non-executive members. The non-executive members are appointed by the Board based on the breadth of skill, knowledge and experience they can bring to the ARC.

The ARC operates independently and reports to the Board. The ARC presented the annual report of the ARC to the December 2021 Board meeting, which outlined the work undertaken by the ARC to review WICS’ control systems and financial reporting processes to measure and manage the risk inherent in the delivery of the organisation’s objectives. The report did not highlight any material issues or concerns.

Internal audit

Internal audit has been provided by Grant Thornton since April 2018. At the start of the appointment, we agreed a three-year internal audit workplan to provide assurance that key risks are being managed effectively and value for money is being achieved. It is a risk-based plan, taking into account our risk management framework, our strategic objectives and priorities, and the views of senior managers and members of the ARC.

Before each audit, the scope of work is approved by the senior management team and the ARC. The auditors prepare a report for the ARC following each audit. We produce a quarterly report for the ARC explaining progress with management actions.

The reviews undertaken by the internal audit team during the year are discussed below.

International activities

We are required to support the Scottish Government Hydro Nation vision, captured in the Water Resource Act 2013.  In recent years our international activities have grown and continue to be developed.  Our work in the international arena is captured within our Corporate Plan for the period 2021-2027.  Our first significant project was EU funded work in Romania, which was subject to a previous internal audit.  During 2020-21, we  delivered projects in New Zealand, which formed the subject of this internal audit review.  

The summary of findings concluded that “partial assurance was obtained with improvement required”, containing 4 recommendations, of which one was classified as higher risk, two medium risk and one low risk. The recommendations included adopting defined project management disciplines, the interface of international work with risk management and establishment of a formal strategy.

We have integrated these recommendations into our annual workplan for 2021-22 and plan to establish a formal project board for each international project. Our international work has been fully integrated into the business-as-usual activities of the office and, with regards to risk and reporting, we will manage this work as we do all our other activities.

Graduate recruitment

One of the nine outcomes included within our Corporate Plan 2021-27 is “sustaining a high-performing team, with a focus on continuous improvement.”  The Corporate Plan outlines the aim of building a permanent analytical team of 10 – 12 people, which will be driven by graduate recruitment.​ The internal audit team reviewed our graduate recruitment strategy and the process that is in place.

The review resulted in a rating of “reasonable assurance with some improvement required, with one medium, two low and one advisory recommendations. The recommendations made were around formalising our panel interviews to ensure a consistent approach is taken for all candidates and feedback is accurately recorded and that a formal assessment of diversity and inclusion should be conducted as part of the process.

We have already taken steps to address the issues identified and had made changes to our recruitment process to ensure consistency and transparency at all stages of our graduate recruitment activities.  We are committed to providing equal opportunities in employment. We agree that diversity and inclusion data monitoring is important to ensure we are considering potential barriers and protected characteristics of applicants. 

Retail administration

WICS is the licensing authority within the market, responsible for assessing licence applications and where appropriate, granting licences. These licences allow retailers to compete in the market by offering water and sewerage services to non-household customers.

The objective of this audit was to test the design and operation of controls in place for the Licence Provider application process, granting of licences and subsequent billing of providers. This report was rated as “reasonable assurance” obtained with two advisory recommendations. 

The review recommended that documents in relation to the licensing process should be retained electronically. We are planning to carry out an exercise to convert existing paper records to an electronic format and have made changes to the process that require electronic versions of all documentation.

The review also recommended a brief bad debt policy to be included within our financial procedures, which will be considered as part of the next formal review of the policies.

Overall opinion

The overall opinion of internal audit for the period, based on the scope of reviews undertaken, is “that reasonable assurance with some improvement required can be given on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control”.

Significant governance issues

There have been no governance issues identified during the year that are significant in relation to  WICS’ overall governance framework.

Review of effectiveness

As Accountable Officer, I have responsibility for reviewing the effectiveness of the systems of internal control. My review of the effectiveness of these systems is informed by the work of the internal auditors and the executive managers within the organisation. The executive managers have responsibility for the development and maintenance of the internal control framework. I also rely on the comments made by the external auditors in their management letter and other reports. I have been advised on the effectiveness of the systems by the ARC. The ARC has kept me informed of plans to address any weaknesses discovered in internal control systems.

Remuneration and Staff report

Remuneration policy

The Board and Chief Executive’s remuneration packages are agreed within the parameters set by the Scottish Government’s pay policy. The Scottish Government approves the daily fee to be paid to the Chairs and members, as well as approving the Chief Executive Remuneration packages.

Board members contribute at least one day per week in support of WICS’ activities. The Chair devotes at least two days per week in support of WICS’ activities.

There is no separate Remuneration Committee and remuneration related issues are brought to the attention of the Board as they arise. No performance payments were made in 2020-21 in accordance with the Scottish Government pay policy.

The rest of this Remuneration and Staff report is subject to audit.

Directors’ salary and pension entitlements

The total remuneration of the Chief Executive in the year was £171,502 (2019-20: £164,416). The total remuneration of the Directors was as follows:

 

 

Gross salary £(000)

 

Pension benefits £(000)

 

Total

£(000)

 

Gross Salary

£(000)

 

Pension benefits

£(000)

 

Total

£(000)

Alan Sutherland, Chief Executive

170 - 175

9

180 - 185

165 - 170

9

170 - 175

Ian Tait, Director

115 - 120

58

175 – 180

100 - 105

41

140 - 145

Katherine Russell, Director*

-

-

-

25 - 30

3

30 - 35

*Retired in June 2019.

The accrued pension benefits have been calculated as the real increase in pension multiplied by 20 plus the real increase in any lump sum less the contributions made by the individual. The real increases exclude increases due to inflation or any increase or decreases due to a transfer of pension rights.

The Directors’ normal retirement age is 67, which is the earliest date at which the member can take full benefits without consent and without reduction. There are no additional benefits to which the Directors would become entitled on early retirement.

No bonus payments or benefits in kind were paid to the Chief Executive or Director during 2020-21 (2019-20: £nil). The total remuneration of the Chief Executive and other Director was £355k-£360k (2019-20: £315k-£320k). The Director is also an ordinary member of the Falkirk Council Pension Scheme. The Chief Executive withdrew from the Scheme on 31 March 2017.

Retirement benefits of the Directors are as follows:

 

Accrued pension as at 31 March 2021 and related lump sum £(000)

Accrued pension as at 31 March 2020 and related lump sum

£(000)

Change in pension net of inflation and related lump sum

£(000)

CETV At 31 March 2021

£(000)

CETV At March 2020

£(000)

CETV Increase net of members’ contributions £(000)

Alan Sutherland

30 – 35

plus, lump sum of

30 – 35

30 – 35

plus, lump sum of

25 – 30

0 – 2.5

plus, lump sum of

0 – 2.5

 

570

 

505

 

60

Ian Tait

 

35 – 40

plus, lump sum of

30 – 35

30 – 35

plus, lump sum of

30 – 35

2.5 - 5

plus, lump sum of

0 – 2.5

 

633

 

563

 

56

*The cash equivalent transfer value (CETV) is the actuarially assessed value of the retirement scheme benefits accrued by a member at a point in time.

Board remuneration

The remuneration of the Board members, other than the Chief Executive, was as follows:

 

2020-21 Total £(000)

2019-20 Total £(000)

Donald MacRae

35 – 40

35 – 40

Ross Finnie

0 - 5

10 – 15

Jo Armstrong

15 – 20

10 – 15

Robin McGill

15 – 20

10 – 15

Ann Allen

15 – 20

-

Libby Gawith

-

10 – 15

Board Members are not members of the pension scheme. WICS did not pay any amounts on behalf of Board Members in the year in respect of PAYE and National Insurance contributions due on travel to work expenses in 2020-21 (2019-20: £382).  No benefits in kind were paid in the year.

Fair pay disclosure

The range of staff remuneration within WICS is £20k-25k  to £170k-£175k (2019-20: £20-25k to £165-£170k). Reporting bodies are required to disclose the relationship between the remuneration of the highest paid director in their organisation and the median remuneration of the organisation’s workforce.

The remuneration of the highest paid Director of WICS for the year to 31 March 2021 was £171,502 (2019-20:  £165,174).  This was 4 times the annualised median remuneration of the workforce, which was £38,872 (2019-20: £37,164). The highest paid Director of WICS is the Chief Executive.

 

2020-21

2019-20

Highest paid Director’s total remuneration (£)

171,502

165,174

Median total remuneration (£)

38,872

37,164

Ratio

4.4

4.4

Average number of persons employed

The average number of full-time equivalent persons employed during the year was 25 (2019-20: 22), including the Chief Executive.  These were employed in the following areas:

 

Year ended

31 March 2021

Year ended

31 March 2020

Chief Executive and Directors

2

2

Other employees

23

20

All employees are employed on permanent contracts.

Staff composition

At the end of the financial year, the number of employees of each sex was as follows:

 

Male

Female

Total

Directors

2

-

2

Other employees

13

12

25

Staff costs are outlined in note 3.5.4 of the financial statements.

Exit packages

There were no voluntary exit packages or compulsory redundancies in the year.

Health, safety and well-being

It is our policy to safeguard the health, safety and welfare of all employees by providing healthy and safe working conditions. We consider a positive health and safety culture to be an essential part of the way in which we conduct our business. We acknowledge that, as a business, we also have a responsibility to suppliers and other stakeholders in relation to health and safety matters. Our health and safety policy outlines the responsibilities WICS has towards employees and provides guidance on health and safety issues within the office.

Our employee handbook outlines the procedures in place for managing staff in a supportive way. We are committed to supporting employees who are absent due to sickness, and we have flexible policies relating to the return to work for employees who have been absent for health and other personal reasons or following maternity or paternity leave.

We actively encourage education and training for all employees. Our performance management and development policy are used to identify training needs and opportunities for development.

Sickness absence

The average length of time that each employee was absent due to sickness was 2.6 days (2019-20: 6 days).

Parliamentary Accountability report

Funding

WICS has a Corporate Plan in place, agreed with Scottish Ministers and published on our website. We agree with the Scottish Government the issues to be addressed in the plan and the timetable for its preparation and review. The finalised plan reflects our strategic aims and objectives as agreed by Scottish Ministers, indicative budgets and any priorities set by Scottish Ministers.

Under the 2002 Act as amended by the 2005 Act, WICS is funded by a levy paid by Scottish Water. Following approval by Scottish Ministers of our Corporate Plan, the Sponsor Directorate instructs Scottish Water to pay the amount determined to us on a monthly basis. In addition, fees are payable by licensed providers on a cost recoverable basis, sufficient to meet the costs we incur in exercising our functions relating to water services and sewerage services.

The Corporate Plan, or elements thereof, is updated between Strategic Reviews as and when considered necessary and a copy is provided to the sponsor unit prior to the start of the Strategic Review period.   

Losses and special payments

There were no losses or special payments in the year (2019-20: £nil).

Gifts

No gifts were made during the year.

Contingent liabilities

A contingent liability has been recognised in relation to EU funding received in 2018-19. See note 3.5.11 for more information. In the prior year a contingent liability was recognised relating to Guaranteed Minimum Pensions Equalisation, which has now been reflected in the accounts liability as at 31 March 2021.

Independent auditor’s report

Independent auditor’s report to the members of the Water Industry Commission for Scotland, the Auditor General for Scotland and the Scottish Parliament 

Reporting on the audit of the financial statements

Opinion on financial statements 

I have audited the financial statements in the annual report and accounts of the Water Industry Commission for Scotland for the year ended 31 March 2021 under the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005. The financial statements comprise the Statement of Comprehensive Net Expenditure, the Statement of Financial Position, the Statement of Cash Flows, the Statement of Changes in Equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union, and as interpreted and adapted by the 2020/21 Government Financial Reporting Manual (the 2020/21 FReM). 

In my opinion the accompanying financial statements: 

  • give a true and fair view in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005 and directions made thereunder by the Scottish Ministers of the state of the body’s affairs as at 31 March 2021 and of its net expenditure for the year then ended; 
  • have been properly prepared in accordance with IFRSs as adopted by the European Union, as interpreted and adapted by the 2020/21 FReM; and
  • have been prepared in accordance with the requirements of the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005.and directions made thereunder by the Scottish Ministers. 
Basis for opinion 

I conducted my audit in accordance with applicable law and International Standards on Auditing (UK) (ISAs (UK)), as required by the Code of Audit Practice approved by the Auditor General for Scotland. My responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of my report. I was appointed by the Auditor General on 26 January 2018. The period of total uninterrupted appointment is four years. I am independent of the body in accordance with the ethical requirements that are relevant to my audit of the financial statements in the UK including the Financial Reporting Council’s Ethical Standard, and I have fulfilled my other ethical responsibilities in accordance with these requirements. Non-audit services prohibited by the Ethical Standard were not provided to the body. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Conclusions relating to going concern basis of accounting

I have concluded that the use of the going concern basis of accounting in the preparation of the financial statements is appropriate. 

Based on the work I have performed, I have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the body’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from when the financial statements are authorised for issue.

Risks of material misstatement

I report in a separate Annual Audit Report, available from the Audit Scotland website, the most significant assessed risks of material misstatement that I identified and my judgements thereon. 

Responsibilities of the Accountable Officer for the financial statements 

As explained more fully in the Statement of Accountable Officer's Responsibilities, the Accountable Officer is responsible for the preparation of financial statements that give a true and fair view in accordance with the financial reporting framework, and for such internal control as the Accountable Officer determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Accountable Officer is responsible for assessing the body’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless deemed inappropriate.

Auditor’s responsibilities for the audit of the financial statements 

My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. I design procedures in line with my responsibilities outlined above to detect material misstatements in respect of irregularities, including fraud. Procedures include: 

  • obtaining an understanding of the applicable legal and regulatory framework and how the body is complying with that framework; 
  • identifying which laws and regulations are significant in the context of the body;
  • assessing the susceptibility of the financial statements to material misstatement, including how fraud might occur; and
  • considering whether the audit team collectively has the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations.

The extent to which my procedures are capable of detecting irregularities, including fraud, is affected by the inherent difficulty in detecting irregularities, the effectiveness of the body’s controls, and the nature, timing and extent of the audit procedures performed.

Irregularities that result from fraud are inherently more difficult to detect than irregularities that result from error as fraud may involve collusion, intentional omissions, misrepresentations, or the override of internal control. The capability of the audit to detect fraud and other irregularities depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. 

A further description of the auditor’s responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website. This description forms part of my auditor’s report. 

Reporting on regularity of expenditure and income

Opinion on regularity 

In my opinion in all material respects the expenditure and income in the financial statements were incurred or applied in accordance with any applicable enactments and guidance issued by the Scottish Ministers.

Responsibilities for regularity 

The Accountable Officer is responsible for ensuring the regularity of expenditure and income. In addition to my responsibilities to detect material misstatements in the financial statements in respect of irregularities, I am responsible for expressing an opinion on the regularity of expenditure and income in accordance with the Public Finance and Accountability (Scotland) Act 2000.

Reporting on other requirements

Opinion prescribed by the Auditor General for Scotland on audited part of the Remuneration and Staff Report 

I have audited the parts of the Remuneration and Staff Report described as audited. In my opinion, the audited part of the Remuneration and Staff Report has been properly prepared in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005 and directions made thereunder by the Scottish Ministers.

Statutory other information

The Accountable Officer is responsible for the statutory other information in the annual report and accounts. The statutory other information comprises the Performance Report and the Accountability Report excluding the audited part of the Remuneration and Staff Report.

My responsibility is to read all the statutory other information and, in doing so, consider whether the statutory other information is materially inconsistent with the financial statements or my knowledge obtained in the audit or otherwise appears to be materially misstated. If I identify such material inconsistencies or apparent material misstatements, I am required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work I have performed, I conclude that there is a material misstatement of this statutory other information, I am required to report that fact. I have nothing to report in this regard.

My opinion on the financial statements does not cover the statutory other information and I do not express any form of assurance conclusion thereon except on the Performance Report and Governance Statement to the extent explicitly stated in the following opinions prescribed by the Auditor General for Scotland.

Opinions prescribed by the Auditor General for Scotland on Performance Report and Governance Statement 

In my opinion, based on the work undertaken in the course of the audit:

  • the information given in the Performance Report for the financial year for which the financial statements are prepared is consistent with the financial statements and that report has been prepared in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005 and directions made thereunder by the Scottish Ministers; and
  • the information given in the Governance Statement for the financial year for which the financial statements are prepared is consistent with the financial statements and that report has been prepared in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005 and directions made thereunder by the Scottish Ministers. 
Matters on which I am required to report by exception

I am required by the Auditor General for Scotland to report to you if, in my opinion:

  • adequate accounting records have not been kept; or
  • the financial statements and the audited part of the Remuneration and Staff Report are not in agreement with the accounting records; or
  • I have not received all the information and explanations I require for my audit.

I have nothing to report in respect of these matters.

Conclusions on wider scope responsibilities

In addition to my responsibilities for the annual report and accounts, my conclusions on the wider scope responsibilities specified in the Code of Audit Practice are set out in my Annual Audit Report.

Use of my report

This report is made solely to the parties to whom it is addressed in accordance with the Public Finance and Accountability (Scotland) Act 2000 and for no other purpose. In accordance with paragraph 120 of the Code of Audit Practice, I do not undertake to have responsibilities to members or officers, in their individual capacities, or to third parties.

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Stephen O’Hagan

 

Stephen O’Hagan
Audit Scotland
4th Floor, The Athenaeum Building
8 Nelson Mandela Place
Glasgow, G2 1 BT

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